Moody's downgrades the ratings of Greek banks

From Global Credit Research - 23 Sep 2011

Limassol, September 23, 2011 -- Moody's Investors Service today downgraded the long-term deposit and senior debt ratings of eight rated Greek banks by two notches. National Bank of Greece SA (NBG), EFG Eurobank Ergasias SA (Eurobank), Alpha Bank AE (Alpha), Piraeus Bank SA (Piraeus), Agricultural Bank of Greece (ATE) and Attica Bank SA downgraded to Caa2 from B3. Emporiki Bank of Greece (Emporiki) and General Bank of Greece (Geniki) downgraded to B3 from B1. All of the banks' long-term deposit and debt ratings carry a negative outlook.

The main factors driving the rating actions on domestically owned Greek banks are as follows:

(1) The impact of recent impairments of Greek government bonds (GGBs), and the increasing risk of significant additional impairments of GGBs, on banks' capital levels.

(2) The expected impact of the deteriorating domestic economic environment on non-performing loans (NPLs) and potential additional provisioning costs from the upcoming diagnostic asset quality study, initiated by BoG and to be conducted by external consultants (BlackRock).

(3) Declines in deposit bases and still fragile liquidity positions, as illustrated by limited remaining eligible collateral for funding from the European Central Bank (ECB) and the recent activation of Emergency Liquidity Assistance (ELA) by the Bank of Greece (BoG).

First, Greek banks' direct holdings of GGBs, which in most cases exceed 150% of Tier 1 capital, expose system capital levels to the risk of material reductions. All Greek banks have indicated their intention to participate in the Institute of International Finance (IIF) debt-exchange by recording impairments of up to 21% (net present value loss estimated by the IIF) in their half-year 2011 results. Consequently, all rated Greek banks reported significant losses in the first half of the year, which further strains their overall financial position.

Although the capital position of Greek banks appears adequate (Tier 1 ratio of 11.1% for the system at the end of March 2011, prior to recording the above impairments), Moody's believes that solvency levels are at risk from further write-downs on their GGB holdings. As indicated by the Ca rating assigned to Greece, the government faces significant solvency challenges and historical experience shows that small sovereign debt restructurings have often been followed by larger sovereign defaults. Moody's believes that private creditors may incur substantial economic losses on their GGB holdings beyond the terms of the current debt exchange and that any possible unfavourable developments regarding the implementation of the EUR109 billion second support package from the Troika (consisting of the European Commission, ECB and the IMF) would have further negative repercussions on the banking system's solvency.

Second, the deteriorating operating environment, with a deeper-than-expected recession now forecast, is likely to further increase the level of non-performing loans (NPLs) in the system, which stood at an already high 11.5% at the end of March 2011. The Greek economy declined by 7.3% year-on-year in the second quarter of 2011, while unemployment currently stands at 16%. In line with our recent revision of GDP growth projections to -5.4% for 2011, from -3.4%, Moody's expects operating conditions to continue to exert significant pressure on banks' profitability and asset-quality metrics.

Moreover, the diagnostic asset quality study initiated by BoG with the assistance of external consultants (BlackRock) could lead to additional provisioning requirements for Greek banks, due to either higher level of problematic exposures detected in their books, or increased estimated credit losses from their existing NPLs.

Finally, liquidity and funding positions of Greek banks are increasingly fragile. Further funding from the European Central Bank (ECB), which amounted to EUR96.3 billion at the end of July 2011 (24% of system liabilities), is constrained by banks' limited remaining eligible collateral. As a result of tightening liquidity conditions, BoG recently activated the Emergency Liquidity Assistance (ELA) mechanism, which has been used by certain Greek banks. Moody's expects that more Greek banks will make use of the ELA for their funding needs in the near-term.

Underlying the above trends are the system's declining deposit bases. Despite a slowdown of deposit outflows since the announcement of the IIF exchange proposal on 21 July 2011, private-sector deposits have declined by 10% in the first seven months of the year, and by 23% since December 2009. Moody's expects that banks' deposit balances will remain vulnerable to a loss of confidence among depositors and the drawdown of savings in the current severe recessionary environment. Moody's believes that further adverse developments at the sovereign level could lead to a rapid acceleration of deposit outflows.

Read more:

http://www.moodys.com/research/Moodys-downgrades-the-ratings-of-Greek-banks-concluding-review-initiated--PR_226069