ECONOMY

Fitch sees potential in banks

Fitch Ratings says in a special report released yesterday that it expects the major Greek banks to continue posting solid performance in 2006, with upward rating potential in selected cases. Fitch expects continued healthy growth in retail banking, both in Greece and, to a lesser extent, in Southeast Europe, to be the main drivers behind the banks’ results in 2006. «The Greek economy, where most of the banks’ operations are centered, is forecast to perform well, and it is difficult to envisage a sudden drop in business volumes or in profitability for the full year 2006,» says Paolo Fioretti, associate director on Fitch’s financial institutions team. In addition, operating expenses should remain in check as banks have worked hard to contain their cost base. However, in Fitch’s view there are also challenges that will need to be overcome to ensure sustainability in their earnings and credit risk profile. As competition intensifies, the sustainability of wide loan spreads, on which Greek banks remain more reliant relative to their European peers, is limited. Greek banks will thus need to continue to make efficiency gains and expand auxiliary services to counteract margin pressure. It will be equally important to monitor credit risk as lending continues to grow strongly (including their operations abroad) and continue investing in upgrading risk management and IT systems. All the banks generated sharp revenue growth in 2005, thanks to rising volumes of mortgage and consumer lending, driven by sound domestic economic growth and the banks’ expanding position in fast-growing southeastern European markets. The continuing change of the asset mix on their balance sheets toward higher-yielding retail lending allowed them to use customer deposits more productively and underpin their wide net interest margins. Most banks also generated good growth in fees from payment services, asset management and brokerage. In all the banks costs tended to rise less than revenues, reflecting positively on cost-to-income ratios in 2005. Rapid growth in loans sent loan impairment charges higher, which in turn helped to sustain reasonable coverage ratios. A general decline in impaired loans helped improve asset quality indicators. Despite the fast-growing loan books, Tier 1 capital ratios increased slightly at most banks during 2005, mainly due to strong internal capital generation. Fitch regards Greek banks’ capital adequacy as satisfactory for the risks they face. However, continued rapid loan growth may cause capital ratios to fall or the proportion of lower-quality hybrid capital to rise if the banks cannot maintain high levels of internal capital generation. (Reuters)