Moody’s reports stable outlook for Greek banks

The outlook for Moody’s rated Greek banks is stable, reflecting their strong financial performance and their good business growth prospects in both their domestic market and the South-East European (SEE) region, Moody’s Investors Service said in its
new Banking System Outlook for Greece. These positive factors are somewhat counterbalanced, however, by the banks’ elevated risk profile arising from high credit growth and increasing operations in riskier operating environments.

Moody’s notes that, in recent years, Greek banks have intensified their efforts to expand their market share in their domicile, strengthen and diversify their overall franchise and enter new markets, primarily in SEE. To complement their domestic operations, the banks have been expanding into neighbouring countries, aiming for greater geographical diversification and developing new revenue sources to counterbalance the likely future slowdown in the Greek banking system.

“We expect this process to continue unabated, resulting in banks with stronger and more diversified franchises and defensible positions in their domicile, complemented by expanding regional operations with a growing profit contribution,” said Constantinos Pittalis, Vice-President – Senior Analyst and author of the report.

Nevertheless, such regional expansion is exposing the banks to a new set of risks, highlighting the need to have commensurate risk controls and managerial resources and oversight.

The Greek economy continues to expand at a good pace (faster than the EU average), driven by robust consumption and public investment. Moody’s believes that the economy should continue to grow at a similar pace over the medium term due to increasing domestic consumption and Greece‘s strategic location within the Balkans.

Nevertheless, to sustain the growth rate, Greece has to maintain the ongoing structural reforms process in order to improve the competitiveness of its economy and to achieve real term convergence with Eurozone countries. Despite the high credit growth witnessed during recent years, credit penetration remains lower than the EU average, and this is offering good growth opportunities for Greek banks.

The combination of increased revenues due to rapid business expansion, wide interest margins, higher fee and commission income and contained operating expenses is helping Greek banks to report, on average, higher earning power and profitability compared to their European peers. Moody’s expects the banks to enjoy similarly high profitability over the medium term, supported by healthy (albeit declining) interest margins, further efficiency gains, good business growth in their domicile and greater revenue contribution from their overseas operations.

Although starting from a low base compared to other EU countries, Moody’s notes that rapid credit growth in Greece raises concerns about future asset quality problems.

Rapid credit expansion is elevating the risk profile of Greek banks, especially for those institutions that have not fully developed the necessary credit vetting skills or do not have the appropriate information systems in place to monitor loan quality.

“Although the leading banks have invested heavily in strengthening their risk management process, this credit expansion has been taking place in a time of benign economic conditions, and the robustness of the banks’ credit portfolio has not been tested by an economic slowdown,” Pittalis cautioned. In Moody’s view, success in the areas of risk management and competitiveness will set the leading banks apart from their weaker peers over the medium term.