Greek banks’ recent trends justify continued negative outlook – Moody’s

The continued weak and deteriorating asset quality and funding conditions among Greek banks continue to justify a negative outlook on the Greek banking sector as well as on the banks' standalone ratings, Moody's Investors Service said in a new market update on Monday.
"The recent release of macroeconomic statistics for Greece, as well as Greek banks' Q2 results indicate a trajectory that is broadly in line with Moody's expectations and therefore also with the ratings and outlooks that are currently held by Greek banks," said Constantinos Kypreos, senior analyst at Moody's. However, the rating agency cautioned that Greek banks' non-performing loans (NPLs) remain at the upper end of expectations and that continued deposit outflows could potentially increase the likelihood of negative rating actions.
Moody's new report highlights that macroeconomic conditions in Greece (rated Ba1) remain extremely challenging, with GDP down 3.7% in Q2 2010 and increased unemployment (to 12% in May) adversely affecting the banking sector. NPLs have risen to 9.0% of total loans in H1 2010, and the banking sector has become loss-making overall, although Greece's Big Four banks continue to outperform smaller banks. Additionally, deposit outflows — amounting to EUR 31 bln since the start of the year, or 11% of total deposits — and Greek banks' continued exclusion from the bond and money markets are exerting funding pressures on the sector. Although these pressures are currently addressed by the banks' access to ECB funding, Moody's noted that the temporary nature of ECB support means that the system still needs to "fix" its funding structure and drastically reduce ECB funding over the medium term, as and when market confidence towards Greek risk is restored.
Moody's views positively the strong start that Greece has made with its Economic Adjustment Programme (EAP), which underpins the EUR 110 bln support package from the ECB and IMF. Moreover, the rated Greek banks (with the exception of Agricultural Bank of Greece) have enough capital to absorb some additional loan losses in addition to those they have incurred to date, as the July CEBS stress-testing results have demonstrated. As an extra buffer, additional capital is available to under-capitalised banks following the establishment of the EUR 10 bln Hellenic Financial Stability Fund, a component of the EC/ECB/IMF support package.
However, Moody's points out that investors remain concerned about a potential restructuring of Greek government debt — a risk that Moody's considers low as indicated by its rating but not immaterial — and the impact of a government bond write-down on the banking sector, which could render some of the banks technically insolvent.