In an updated report on the Greek banking system – «Bank Industry Risk Analysis: The Hellenic Republic» – published yesterday, Standard & Poor’s considers that the Greek banking system will remain subject to higher credit risks in the medium term, compared with most of the other EU financial systems as its transformation is yet to be completed. This view is currently captured in the ratings assigned by Standard & Poor’s to the five major Greek banking groups (all in the ‘BBB’ rating category), which are lower than most ratings assigned to banks in other EMU countries. «Although Standard & Poor’s considers that the operating environment enjoyed by Greek banks currently remains fairly isolated from the global economic doldrums, the creditworthiness of the Greek banking system will remain challenged over the medium term to control the potential risks emanating from rapid credit expansion and intermediation flows,» said Standard & Poor’s credit analyst Walter Pompliano. «In the long term, however, the sector should benefit if the government is able to implement the tougher structural reforms necessary to support sustainable economic stability,» he added. The Greek banking system benefited in a wave of consolidation and restructuring from 1998 through 2001, which was characterized by several mergers and acquisitions, as well as privatizations, and resulted in a higher concentration in the top five commercial banks and a shift from the sector’s dominance by the former state-controlled institutions. Cost synergies from the recent combinations are being realized, with further efficiency gains emanating from ongoing investments in technology over the medium term. «Despite loan growth, the Greek banking system remains under-leveraged by most measures, including loans-to-GDP, household indebtedness (net creditors), and loans to total balance sheet assets, compared with EU peers,» noted Standard & Poor’s credit analyst John Gibling. «The key strategic targeted area of growth for most institutions remains retail banking, where margins are consistently higher,» he added. Although the sector’s performance has significantly declined from heights attributable to market peaks in 1999 and convergent gains in 2000, the sector is characterized by a trend in improving core profitability and strong and stable liquidity. Standard & Poor’s believes, however, that core capital strength, as measured by its adjusted common equity (ACE), is likely to weaken due to increased lending and reduced earnings retention.