Greece banking outlook still negative, says Moody’s

The outlook for Greece's banking system remains negative, unchanged since 2010, Moody's Investors Service said in a new report, due to the stressed operating environment, combined with still-high sovereign exposures that will continue to erode banks' asset quality, capital, profitability and funding.
Moody's said that the deep and prolonged economic contraction will further increase already high levels of non-performing loans (NPLs), exerting additional pressure on the stressed banking system.
Declining domestic purchasing power and liquidity, compounded by the impact of government spending cuts and increasing unemployment, will continue to weaken the repayment capacity of banks' retail and corporate customers. Moody's said it expects that NPLs will likely exceed 30% of gross loans by end-2013 (from 24.6% in December 2012); and the banks will remain loss-making in 2013 and in 2014.
Further downside risks stem from the banks' sizable portfolios of Greek Government securities. Although the banks have reduced these holdings to EUR18.5 bln in December 2012 from EUR44.9 bln in December 2011, these securities still comprise 87% of the banking system's pro-forma Tier 1 capital. Greece's government bond rating of C indicates that the probability of a Greek sovereign re-default remains elevated, which could imply further substantial losses for the banks.
Moody's also noted that despite the sector's recent EUR 40 bln recapitalisation by the state Hellenic Financial Stability Fund (HFSF), which raised the banking system's pro-forma Tier 1 capital ratio to 9.5% as of December 2012, the rating agency's scenario analysis indicates that additional capital could be required. Moody's "central" scenario, which assumes continued economic contraction, estimates EUR 8 bln of further capital needs stemming from the banks' loan book losses alone.
The rating agency said Greek banks' funding and liquidity profiles will remain weak, as they still lack access to market funding and remain heavily dependent on central bank funding. Despite some deposit inflows since June 2012, outstanding private sector deposits are down 31% from their December 2009 peak. Moody's believes that in the wake of developments in Cyprus, depositors' confidence will remain highly vulnerable to any negative political or economic developments.