ECONOMY

Fitch downgrades Alpha Bank, NBG

LONDON – Fitch, the international rating agency, has downgraded the individual ratings of Alpha Bank (Alpha) and of the National Bank of Greece (NBG) to C from B/C, removing them from Rating Watch Negative. At the same time, the short-term, long-term and support ratings of both banks have been affirmed at ‘F2’, ‘A-‘ and ‘2’ respectively. The outlook on the long-term rating for both banks is stable. The rating action reflects the impact of a tougher domestic operating environment on Alpha’s and NBG’s profitability, but also expected pressure on asset quality and capitalization resulting from strong lending growth. Greece’s entry into the EMU in January 2001 has influenced operating conditions, and the convergence of interest rate toward EU levels in the last two years have led to falling interest rates, enabling the Greek banks to boost profitability by realizing substantial capital gains from the sale of government bonds. Bonds held to maturity have helped support interest margins during this period. The banks also benefited from the booming domestic stock exchange in the late 1990s. However, gains from government securities are not sustainable, and sharp falls in prices on the Athens Stock Exchange (ASE) in the past two years have dented profitability (in particular Alpha’s performance). Therefore the banks now rely on their core activities, i.e. mainly lending, to sustain their underlying profitability. Increased competition, the race for market shares, and external growth resulted in strong pressure on margins and higher restructuring and integration costs, further burdening profitability. While the integration of the Ionian and Popular Banks (Ionian) within Alpha appears well under way, the branch network requires further restructuring and modernization. NBG started a strategic review in 1996, aiming at rationalizing the group’s activities, strengthening the capital base and improving asset quality. Although this has already started to bear fruit, the bank needs to focus on enhancing revenue generation and cost containment, rationalizing its branch network and reducing staff. NBG’s asset quality remains a concern, although the bank has started to implement credit risk management tools and improved credit policies; non-performing loans have come down but remain at a high level and further provisioning may be necessary. Alpha benefits from good credit monitoring systems and rapidly addressed Ionian’s poor asset quality by major write-offs; however, reserve coverage appears low. Most of the Greek banks reported strong lending growth, partly reflecting the underdeveloped consumer lending market but also the banks’ aggressive expansion strategy. Like their domestic peers, both Alpha and NBG are targeting retail customers and small- and medium-sized enterprises (SMEs) seeking higher margins. However, the risk of this strategy is a potential deterioration in asset quality, particularly in consumer lending where there is limited track record of mass-market lending and it is difficult to predict how consumer portfolios will perform in a market downturn. Alpha and NBG still have sizable government bonds portfolio but the banks have been selling these, realizing large capital gains. Smaller government bond portfolios and strong lending growth are expected to result in an accelerated shift in asset mix toward lending, leading to a deterioration of capital ratios. Alpha’s capital ratios have also weakened following the acquisition of Ionian. To face domestic competition, but also to become a player at the European level, Alpha and NBG announced their merger in autumn 2001. At that time, Fitch affirmed the short-term and long-term ratings of both banks. It is expected that the merger will be legally completed by April 2002; the new bank will be named National Bank of Greece and will adopt Alpha’s logo. Fitch believes that the merger process will be particularly challenging, with the current unfavorable operating environment putting pressure on earnings, and both banks already involved in their own ongoing restructuring. A major task will be the rationalization of the branch network, implementation of a common IT system and the reduction of staff (which is limited by Greece’s strict labor laws and therefore can only occur via a voluntary exit scheme), but also the ability of the merging entity to keep ongoing business. Labor Ministry’s 8.8-percent raise