Moody’s changed its deposit rating on Greek banks Alpha, Eurobank and National to positive from stable, citing expectations of further improvement in asset quality, the ratings agency said on Tuesday.
Moody’s said stronger than 2 percent annual economic growth in the coming years would support banks’ efforts to reduce their large stock of sour loans.
The long-term deposit ratings of Alpha Bank, Eurobank and National Bank currently stand at ‘Caa1’.
Bad loans or so-called non-performing exposures (NPEs) are the biggest challenge facing Greek lenders, the legacy of a multi-year debt crisis that shrank the economy by a quarter and drove unemployment to a high of nearly 28 percent in 2013.
Banks’ NPEs amounted to 45.2 percent of gross loans at the end of the first quarter, down from 48.6 percent in March 2018.
Moody’s said the banking system’s problem loans were likely to decrease to around 34 billion euros or 21.2 percent of gross loans by the end of 2021 from 82 billion euros in December last year.
“Today’s rating action is primarily driven by our expectation of further improvements in asset quality, funding and profitability in 2019-20, benefiting from a more supportive operating environment,” senior credit officer Nondas Nicolaides said.
He said the recent change in government in Greece was likely to speed up growth-friendly economic policies, helping banks to implement their strategic plans and improve financial performance.
Shrinking the pile of bad loans was also likely to be helped by an asset protection scheme (APS) proposed by Greece’s bank rescue fund HFSF.
The scheme calls for setting up special purpose vehicles (SPVs) that would issue bonds with a government guarantee for senior tranches, similar to Italy’s GACS model.
The Greek central bank’s proposal to transfer about 40 billion euros of bad loans to an SPV, along with part of the deferred tax credits held by banks, would also help banks.
“These proposals have been submitted to the European Union’s Directorate-General for Competition (DG Comp) for approval and are among the new government’s top priorities,” Moody’s said.
Moody’s sees Greek banks improving their core profits in the next 12-18 months from weak levels now via lower provisioning costs, reduced operating expenses and higher net interest income as they gradually increase lending.