New strong vote of confidence from Moody’s in Greek banks

Of Eleftheria Kourtali

The prospects of the European banking system are shaped by the Russia-Ukraine crisis, as Moody’s notes in a new report where it examines and re-evaluates the banking sectors of the countries in the region, distinguishing that of Greece. As the house points out, the outlook for most European banking systems is stable, with the outlook for the Baltic countries (Estonia, Latvia, Lithuania) being negative and only the banks in Greece and Norway having positive outlook. Most European economies will continue to recover from the shock of the pandemic, but at a slower pace, as Russia’s invasion of Ukraine boosts inflation and further disrupts supply chains.

Moody’s emphasizes that it maintains the positive outlook it has set for the Greek banking system despite the difficult economic conditions and inflationary pressures, which are likely to limit economic growth in 2022, but with a possible recovery in 2023. Greek banks continue to be able to fully implement exposure reduction plans on non-performing loans, which will further improve the quality of their assets.

The strong corporate credit demand will continue, as he estimates, supporting the quality of assets and the basic profitability of Greek banks, while the need for loan loss forecasts will be significantly lower. At the same time, capital levels will stabilize as banks take on most of the losses on NPEs securitization up front in 2020-2021, while financing and liquidity will remain healthy as customer deposits increase. “The positive outlook reflects our expectation that Greek banks will continue to improve their asset quality and profitability despite financial challenges, with stable capital and liquidity,” the house said.

Moody’s reiterates that it estimates that growth in Greece this year will move to 3% and in 2023 to 4.3%, noting that the operating environment for banks will be difficult, but economic growth and credit demand will remain strong. The Greek economy entered dynamically in 2022 and with a steady recovery before the Russian invasion of Ukraine. The military conflict has caused a significant rise in commodity prices, which could be a significant constraint on growth in 2022. However, significant EU funds. through the Recovery Fund will help increase credit flows and mitigate risks over the next 12-18 months.

The quality of loans will be further improved as banks continue to reduce NPEs

Greek banks significantly reduced NPEs in 2021, mainly through securitizations, and plan to continue this practice in 2022 with the “Hercules” plan having significantly contributed to the accelerated reduction of NPEs. The NPE index decreased to about 10% in December 2021, according to the house estimate, from 33% at the end of 2020 and from 49% in December 2016. Despite the decline, the NPE index of Greece remains one of the highest in the euro area and some vulnerabilities remain from the net inflows of NPEs that come mainly from the old problem loans. All Greek banks are aiming for a single-digit NPE index over the next 12-18 months, Moody’s points out, with two of the largest banks already reporting rates around 7% as of December 2021. Recently announced additional government support measures will help mitigate the negative effects of inflationary pressures on vulnerable borrowers. In addition, new lending to companies is gaining ground and will also help maintain the improvement in the quality of banks’ assets.

Capital levels will stabilize

The firm expects the industry’s capital levels to be generally stable, remaining above regulatory requirements. The four systemic banks reported a weighted average Common Equity Tier 1 (CET1) average of around 14% and a capital adequacy ratio of 16.6% in December 2021, supported by capital increases, leverage and the sale of non-core assets / businesses in recent years. However, the high level of deferred tax receivables will continue to undermine the quality of the capital of Greek banks, because they are more than half of CET1, the house points out.

Profitability will increase after significant losses in recent years

At the same time, Moody’s points out that Greek banks are gradually turning their attention to improving structural profitability, which depends to a large extent on net interest income (NII). Despite the expected pressure on banks ‘profit margins and NIIs from NPE sales, it expects new borrowing, higher commission income, cost containment and lower provisions for loan losses which will support banks’ profits over the next 12-18 months. All banks aim to achieve a return on equity (ROE) of close to 10% by 2024, with some having already achieved an ROE of 6% -7% by 2021. An increase in ROE will allow banks to start paying dividends after from more than a decade of “abstention”.

The financing structure and liquidity will remain sound as deposits increase

Moody’s also expects the continuation of relatively favorable financing and liquidity conditions with increased customer deposits and favorable financing from the European Central Bank. There were strong increases in customer deposits during the period 2020-21 (14% in 2020 and 10% in 2021) significantly reducing the loan / deposit ratio to less than 70%, while ECB funding was used as Greek government bonds were acceptable as collateral. The four systemic banks reported an average liquidity ratio of 195% in December 2021. At the same time, they were able to access the international capital markets from 2019, mainly drawing senior preferred bonds, which will allow them to gradually meet the minimum requirements for equity. and eligible liabilities (MREL) until 2025.