Moody’s: The double ‘gift’ from the ECB to Greek banks

Her Eleftherias Kourtalis

The European Central Bank will tomorrow proceed with the previously announced increase in its key interest rates by either 25 or 50 basis points and will reveal details of the new mechanism to limit the widening of euro zone sovereign spreads. Moody’s expects southern European banks to be the main beneficiaries of both measures.

The interest rate increase will be the first in the eurozone in the last 11 years. The ECB has previously said it will raise interest rates again in September, and the bank believes further increases could follow. Higher interest rates will significantly benefit the net interest margins and overall profitability of all European banks, but the effect will be gradual and vary across countries.

Moody’s expects regional banks to reap greater benefits than northern European banks. Since a higher proportion of bank loans in these countries carry variable interest rates, an increase in central bank interest rates will lead to a larger and sharper increase in bank income. In contrast, the supportive effect on revenues will be more gradual and modest in banking systems with mainly fixed-rate loans such as those of France, Germany, Belgium and Sweden.

Southern European banks also generally have lower loan-to-deposit ratios and higher liquidity reserves than their Northern European counterparts. As a result, they will receive greater income benefits from higher returns on their liquid assets and will not experience significant increases in funding costs thanks to their strong deposit bases, which are not particularly sensitive to interest rate movements.

According to the company’s data, the Greek banks they have the highest “liquidity cushion” (cash and cash balances), at 19% of total assets, while the loan-to-deposit ratio is at 61%, the lowest in the region and also in relation to the banks of the North.

In addition to raising interest rates, the ECB will tomorrow present details of its new anti-fragmentation tool, which is designed to limit the widening of spreads, Moody’s points out. The yield on government bonds of over-indebted euro zone countries such as Italy has risen in recent weeks relative to German bonds, reflecting concerns about the economic impact of slowing growth and rising inflation. The anti-fragmentation tool will also primarily benefit southern European banks, which hold large volumes of domestic government bonds that are highly sensitive to volatility in spreads.

At the end of 2021 Italian banks held just under €300 billion of domestic government bonds, while Spanish banks €246 billion, Portuguese banks €42 billion and the Greek banks 30 billion euros.

The ECB argues that measures to limit widening spreads – which will likely include buying government bonds – are justified by the need to protect the effective transmission of monetary policy. This is because without such a “transmission protection mechanism”, rising government bond yields beyond the level justified by economic fundamentals could lead to higher interest rates for companies and households.

This, Moody’s points out, could create distortions that would prevent the central bank from fulfilling its mandate to maintain price stability and fuel concerns about the eurozone’s financial stability. The ECB is also concerned that the high exposure of banks in some countries to volatile government bonds could over time damage their creditworthiness and limit their ability to provide credit to the economy.

It is worth noting that, in another positive development for Greek banks, the rating agency S&P upgraded the outlook of systemic banks to positive from stable as, as he pointed out, they managed to “clean up” about 50 billion euros of NPEs from 2019, reducing the stock of non-performing assets (NPAs) to 19.4 billion euros, or 15.9% of gross loans, at the end of 2021 “This allows banks’ provisioning costs to level out and profitability to gradually improve, although each bank will proceed at a different pace,” the house noted.

Specifically, S&P upgraded the outlooks to positive from stable on Alpha Bank, Alpha Services and Holdings, Eurobank, Eurobank Holdings, National Bank and Piraeus Bank, while maintaining a stable outlook on Piraeus Financial Holdings.