Moody’s Investors Service on Tuesday revised its outlook on Greece’s banking system to stable from negative. The stable outlook reflects the rating agency’s expectation of funding and profitability improvements for Greek banks balanced against sizeable problem loans and limited lending opportunities. The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in Greece over the next 12-18 months.
“We expect banks in Greece to return to marginal profitability in 2016-17 on the back of significantly lower loan-loss provisions, decreased funding costs and contained operating expenses,” said Nondas Nicolaides, Vice President and Senior Credit Officer at Moody’s and author of the report.
Greek banks have been able to regain access to the inter-bank repo market, reducing their emergency liquidity assistance (ELA) balances and improving their funding and liquidity profiles. However, Moody’s noted that they are likely to remain highly reliant on central bank funding over the outlook period. Banks in Greece will also continue to face significant challenges in tackling their huge stock of problem loans. Moody’s expects the volume of non-performing exposures (NPEs) to remain high at more than 40 pct of total lending by year-end 2017 from around 45 pct in June 2016.
In addition, despite a modest pick-up in growth, economic activity, consumption and new investments are likely to be limited, constraining the banks’ loan and revenue growth, in Moody’s view. The rating agency’s sovereign team expects real GDP growth in Greece of 1.8 pct in 2017, up from a forecasted zero rate for full-year 2016.
Furthermore, while capital ratios are sound — the rating agency estimates Greek banks’ weighted-average common equity Tier 1 (CET1) ratio at around 17 pct as of June 2016, which comfortably meets regulatory requirements — around half are in the form of deferred tax assets (DTAs), which Moody’s considers to be lower quality capital. This is due to the fact that their eligibility to be converted into deferred tax credits (DTCs) and ultimately into tangible assets, is contingent on the Greek government’s creditworthiness that is currently weak as indicated by the sovereign rating of Caa3 (stable).
Finally, Moody’s does not expect banks in Greece to benefit from any government support going forward. The government has limited financial strength and its heavy reliance on official creditors’ funding displays its minimal capacity to support the banking sector, according to the rating agency.