Our views on the Greek banking sector remain positive and we should expect rating upgrades from low levels in the near term. The economic recovery, the banks’ rapid asset-quality cleanup and the good evolution of the funding and liquidity position of the sector will continue supporting the operating environment for Greek banks, despite risks from supply chain constraints and rising input costs. Also, any improvement of the Greek sovereign could be positive for the ratings of the banks.
On asset quality, we expect that the sector’s impaired loan ratio will decline to below 10% by end-2022 (from 21% at end-June 2021, based on our estimations) as banks execute their plans to securitize impaired loans using the Hellenic Asset Protection Scheme (Hercules). Impaired loan inflows from the pandemic should be contained in 2022, although some risks persist from the more vulnerable borrowers that still benefit from state support (i.e. Gefyra program) or forbearance measures.
On the normalization of the impaired loan ratios, we could expect a further reduction to levels more in line with the European average by 2024 based on the banks’ strategic plans. However, as we have seen in some other Southern European countries, we believe some legacy issues will make it difficult to close the gap completely.
The asset-quality cleanup will further reduce the encumbrance of capital by problem assets, which is still a rating weakness for the banks, and the sector will maintain modest capital buffers as capital-enhancement actions and improving organic capital generation will offset forthcoming losses from planned securitizations and other negative impacts.
We expect some normalization of structural profitability in 2022, in particular for the banks that are more advanced in the asset-quality cleanup. The improvement should come from lower recurring credit losses, healthy growth in fee income and reduced operating costs from ongoing restructuring programs. Pressures on margins and the deconsolidation of impaired loans will reduce banks’ net interest income but we expect good growth in new lending derived from NGEU funds and an improvement in households’ financial position.
Despite the better prospects, we believe that the banks remain challenged by a low structural profitability and the need to rebuild their business models, in particular the capacity to diversify revenues (i.e. fee-income related business and/or via growing in international markets where the entities are already present) while deploying capital to enhance banks’ digitalization capabilities.