Greek banks still burdened by problem loans, Fitch says

Greek banks remain burdened by large problem loan portfolios, despite boosting capital and progress with their integration and restructuring plans, Fitch Ratings has said.

“This means that EU-wide stress tests could reveal additional capital shortfalls, especially if on-going restructuring measures are not fully incorporated,” Fitch said in a statement carried by Reuters on Wednesday.

Bellow is the rest of the statement:

“The four large Greek banks – National Bank of Greece (NBG), Piraeus, Eurobank and Alpha – raised substantial capital through two rounds of recapitalizations from both public and private sources. Capital will also benefit from recent deferred tax asset (DTA) changes, which allow for conversions of DTAs into actual tax credits from the state. This follows similar actions in other southern European countries and aligns tax treatment of impairment provisions better with practices in northern European banks.

However, changing practice at a time when bank earnings are weak means that the realization of tax credits is likely to be some time away and may not be straightforward. The large amounts of unreserved problem loans leave the four major banks’ balance sheets vulnerable to developments in an improving but still very weak economy.

Problem loans (impaired plus unimpaired 90 days past due) are high, at between 29.7 percent for the lowest, NBG, and 45.6 percentage for the highest, Alpha, at end-2013. Meanwhile, reserve coverage is low, below 47 percent at the same date.

The property market continues to trend downwards, potentially further depressing collateral valuations. Further de-risking envisaged in banks’ restructuring plans, including downsizing of foreign operations and sales of non-core domestic assets, would support capital.

The ECB’s comprehensive assessment could reveal further capital needs for Greek banks, especially if potential benefits from on-going restructuring measures are not fully incorporated. Our base-case is that banks will fill any gaps privately, as was the case in 1H14 following the Bank of Greece’s stress test exercise, rather than tapping the Hellenic Financial Stability Fund, which still has in excess of EUR11bn available.

Given the banks’ already very low ratings of ‘B-‘, we do not anticipate any ratings actions following the comprehensive assessment results. But should any material capital shortfalls emerge from the asset quality review that we believe cannot realistically be addressed in the short term through restructuring measures, there may be negative rating actions.

Tackling legacy problem loans remains the primary challenge for these banks. Banks’ recovery units have been internally enhanced, in part explaining the lower new problem loan formation in 1H14. Credit weakening is likely to continue, but more slowly as the economy has bottomed out and is set to slowly recover.

We forecast GDP growth of 0.5 percent in 2014 and 2.5 percent in 2015. Mortgage foreclosure bans were partially lifted early this year. Remaining restrictions could be lifted soon as part of plans to reinforce private debt resolution regimes. These measures should assist with arrears recoveries, although they may involve forbearance and repossessions that could drive further provisioning. Greek banks’ profit generation will remain heavily challenged by high impairments. Returns will remain weak, despite lower deposit spreads and efficiency gains from the restructurings.” [Reuters]

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