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The outlook for the Greek banking system has been changed to stable from negative, reflecting expectations of a return to growth of the domestic economy in 2014-15 after six years of contraction, Moody's Investors Service said in a new report.
The gradual economic recovery, coupled with Greek banks' recapitalisations and regained access to inter-bank and international capital markets, will further ease funding pressures and lead to a gradual recovery of pre-provision profitability in 2015, the rating agency said. In addition, the outlook also takes into account the expected deterioration in asset quality and capital metrics in 2014, although at a much reduced pace than before.
The rating agency considers that — despite continued weak domestic demand in the wake of wage cuts and a still elevated unemployment rate — the operating environment for Greek banks will gradually improve, signalling the re-emergence of more normalised financial metrics over the 12-18 month outlook horizon.
It said that the stable outlook is consistent with the stable outlook on most rated banks' deposit and debt ratings, as well as with the stable outlook on the sovereign rating.
Moody's forecasts gradual economic recovery — with real GDP growth of 0.3% in 2014 and 1.2% in 2015 — led by tourism and exports, as structural reforms are progressively transforming Greece into a more competitive export oriented economy from a consumer-led growth model. Despite still weak labour markets and demand, the rating agency considers that the current GDP growth path will create more sustainable business opportunities for banks, while the economies of scale resulting from the significant sector consolidation in 2012-13 will better position banks to benefit from efficiencies.
Moody’s also expects funding pressures on banks to stabilise further, as dependence on central bank funding will continue to ease against the background economic recovery. Greek banks have been able to access both the interbank repo market, as well as the international capital markets, as evidenced by the recent senior debt issuance by two banks. Moody's also noted that banks' recapitalisation in June 2013 and the resulting access to the interbank repo market has reduced funding requirements from the European Central Bank and Emergency Liquidity Assistance from the Bank of Greece to 19% of total assets at end-December 2013 from 34.6% in December 2012. However, customer deposits will remain fragile and will take time to replenish the sizeable loss of deposits in the system since 2010.
Against this background, Moody's expects a gradual improvement in profitability in 2015 as banks' pre-provision income will progressively increase; however, banks will remain loss-making in 2014 because of the still elevated loan-loss provisions.
In addition, whilst Moody's notes the sustained slowdown in the formation of new non-performing loans, the rating agency predicts that reported NPLs will peak at 37% of gross loans at end-2014 or early 2015 from 31.7% as of December 2013, owing to the lagged effect of economic recovery. Moreover, loan-loss reserves are insufficient to cover expected losses, as NPLs have risen faster than provisions and banks' ability to foreclose on residential properties remains somewhat constrained.
The rating agency estimates around EUR 7.5 bln of further capital needs stemming from the banks' loan-book losses alone, provided there are no losses imposed on sovereign securities. This is broadly consistent with the EUR 6.4 bln estimated capital needs for banks under the "baseline" scenario announced by Bank of Greece in March.
Although that magnitude of capital would be within the Hellenic Financial Stability Fund's current buffer (of EUR 11.4 bln as of December 2013) to provide further support, the new capital is likely to be sourced largely from private investors, as demonstrated recently by the successful rights issues from two Greek banks.
