Greek bank recaps may stabilize funding, raise ratings, says Fitch

The completion of the recapitalization process for Greek banks should contribute to their funding stability, Fitch Ratings says. If they can achieve sufficient private-sector participation, it could send a signal of improved investor confidence and eventually provide opportunities for them to access capital and wholesale funding markets. This development would be positive for their credit profile.

However, a significant extension of the end-April deadline for the four largest banks (NBG, Eurobank, Alpha Bank and Piraeus Bank ) to complete their recapitalization plans could prolong the correction of the sector’s funding imbalances and its recovery. The bank recapitalizations involve raising equity and issuing contingent convertibles to private investors.

The final capital needs estimated by the Bank of Greece total 40.5 billion euros and arise mainly from losses on Greek sovereign debt and projected credit losses on domestic loan portfolios based on an external stress test. The central bank also assessed each banks’ profitability, deleveraging and capital plans.

If the banks are unable to raise private-sector equity to meet the 10% threshold set under the recapitalization framework, it will be important that the Greek authorities cover banks’ capital needs. The banks should also focus on achieving restructuring and synergy targets, especially in view of recent mergers and acquisitions, and manage asset-quality pressures. This should enhance their chances of attracting potential investors.

The banks’ ‘f’ Viability Ratings (VRs) could be upgraded if they achieve better solvency and funding profiles. Fitch will reassess the banks’ VRs when their stand-alone credit profiles are clearer, and take into account recent acquisition activity and revised restructuring/recapitalization plans. However, VRs are likely to remain at a deeply speculative-grade level in the medium term because of weak credit fundamentals in the poor domestic operating environment. In addition, the four major banks face increased short-term risks from the restructuring and integration of recent acquisitions.

Consolidation of the Greek banking sector could reduce excess capacity and improve financial stability in the longer term, but it also brings many challenges. The most significant transaction – the NBG-Eurobank merger – has been suspended, but will prove challenging due to the size of both banks if it eventually proceeds.

Greek banks’ Long-Term IDRs of ‘CCC’ remain linked to the sovereign. Their IDRs could at some point be driven by their VRs.

The largest four Greek banks received bridge capital under the IMF/EU support framework, temporarily restoring capital levels until their capital-raising plans are completed. The share issues are fully underwritten by the Hellenic Financial Stability Fund, which has received EUR50bn under the international bailout program. Private shareholders will retain control of the banks provided they subscribe to at least 10 percent of the new issue, and will be granted warrants to buy the Fund’s shares. [Reuters]

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