Moody’s maintains stable outlook on the Greek banking system amid improved profitability prospects, balanced by still very high problem loans

Moody’s Investors Service is maintaining its stable outlook on the Greek banking system, reflecting the rating agency’s expectation of some improvement in banks’ profitability and loan quality in 2017-18, balanced by very high level of problem loans. The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in Greece over the next 12-18 months.

“Problem loans remain a severe challenge for Greek banks, but we expect that they will start to decline from around 45% of gross loans at end-2016 over the outlook period,” says Nondas Nicolaides, Vice President and Senior Credit Officer at Moody’s. “We also expect banks to remain marginally profitable in 2017-18.”

Moody’s notes that Greek banks will face a significant challenge to meet the nonperforming exposure (NPE) reduction target of around 40% by end 2019, set by the European Central Bank’s Single Supervisory Mechanism and the Bank of Greece. While each bank has committed to a quarterly reduction plan, an ineffective legal framework and depressed property prices will make it hard for banks to reduce their NPE stock by the approximately €40 billion required.

Moody’s says that the operating environment for Greek banks will remain challenging, and highly contingent on the Greek government’s ability to receive funding from its official creditors in a timely manner. Moody’s projects real GDP growth of 1.5% in 2017 and 2% in 2018, up from 0% in 2016. Consumer spending and new investments will be limited, with unemployment remaining high — at 23.5% in December 2016 — and still depressed property prices.

Banks should remain marginally profitable over the outlook period. The rating agency expects some improvement in banks’ normalised pre-provision income as net interest margins benefit from the lower cost of ECB and inter-bank funding as banks’ shift away from more expensive emergency liquidity assistance (ELA) funding and from cost-cutting initiatives.

While capital ratios are sound — with common equity Tier 1 (CET1) ratio of around 17% at end-2016 — deferred tax assets (DTAs) undermine their quality. Around half of capital is in the form of DTAs, which Moody’s considers lower quality given that their eligibility for conversion into cash or bonds is contingent on the Greek government’s creditworthiness.

Finally, dependence on central bank funding is likely to remain high, as the political and economic landscape remains fragile, undermining banks’ efforts to attract deposits back into the banking system. The rating agency notes, however, that funding from both the ECB and the Bank of Greece has declined to around 20% of total banking assets in March 2017 from 32% at September 2015.

Source: Moody’s report, entitled “Banking System Outlook: Greece; profitability Prospects Have Improved But Problem Loans Remain a Severe Challenge” is available on www.moodys.com.

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