Out­look for Greek bank­ing sys­tem is ‘neg­a­tive’

Financial Mirror (Cyprus) - - FRONT PAGE -

The out­look for the Greek bank­ing sys­tem is neg­a­tive, pri­mar­ily re­flect­ing the acute de­te­ri­o­ra­tion in Greek banks’ fund­ing and liq­uid­ity, Moody’s In­vestors Ser­vice said in a new re­port. Th­ese pres­sures are un­likely to ease over the next 12-18 months and there is a high like­li­hood of an im­po­si­tion of cap­i­tal con­trols and a de­posit freeze.

Moody’s noted that sig­nif­i­cant de­posit out­flows of more than EUR 30 bln since De­cem­ber 2014 have in­creased banks’ de­pen­dence on cen­tral bank fund­ing. In our view, the banks are likely to re­main highly de­pen­dent on cen­tral bank fund­ing, as on­go­ing un­cer­tainty re­gard­ing Greece’s sup­port pro­gramme con­tin­ues to com­pro­mise de­pos­i­tors’ con­fi­dence. Greek banks do not have ac­cess to the in­ter­bank repo mar­ket, as for­eign banks min­imise their ex­po­sure to Greece. Con­se­quently, Moody’s es­ti­mates that fund­ing from the Euro­pean Cen­tral Bank and the Emer­gency Liq­uid­ity As­sis­tance from the Bank of Greece in­creased to about 32% of to­tal as­sets for the sys­tem at the end of April from about 12% at the end of Septem­ber 2014.

Greece’s press­ing fi­nanc­ing needs and un­cer­tainty re­gard­ing its sup­port pro­gramme have also neg­a­tively af­fected eco­nomic ac­tiv­ity. Moody’s fore­casts a lower growth tra­jec­tory than pre­vi­ously an­tic­i­pated, of 0.5% in 2015 and 1.5% in 2016, with risks to this fore­cast skewed to the down­side.

Although the per­form­ing loans for­ma­tion of new non(NPLs) slowed down in 2014, Moody’s ex­pects re­ported NPLs to in­crease to about 38%-40% of gross loans by the end of 2015 from 34.2% of gross loans as of De­cem­ber 2014.

This re­flects the weak eco­nomic con­di­tions, and in­creased re­pay­ment de­faults and loan reschedul­ing de­lays as bor­row­ers hope to ben­e­fit from the gov­ern­ment’s pro­posed pro-bor­rower mea­sures. While loan-loss re­serves rose in 2014, they re­main in­suf­fi­cient to cover ex­pected losses, par­tic­u­larly as banks’ abil­ity to fore­close on res­i­den­tial prop­er­ties re­mains con­strained.

Moody’s said it con­sid­ers that Greek banks will likely re­quire ad­di­tional cap­i­tal over the out­look hori­zon. Fol­low­ing two rounds of re­cap­i­tal­i­sa­tion in 2013 to 2014, the rat­ing agency es­ti­mates that banks’ weighted-av­er­age Com­mon Eq­uity Tier 1 ra­tio in­creased to 13.7% as of De­cem­ber 2014 from 12.0% in De­cem­ber 2013. How­ever, about 55% of this cap­i­tal is in the form of de­ferred tax as­sets, which are low­erqual­ity cap­i­tal, given that their el­i­gi­bil­ity to be con­verted into de­ferred tax cred­its - and ul­ti­mately into tan­gi­ble as­sets - is con­tin­gent on the Greek gov­ern­ment’s cred­it­wor­thi­ness. Fur­ther­more, banks’ cap­i­tal base will re­main at risk from very high loan-loss pro­vi­sions over the out­look pe­riod.

Moody’s neg­a­tive out­look on the Greek bank­ing sys­tem is con­sis­tent with the neg­a­tive out­look as­signed to the rated Greek banks’ long-term de­posit and debt rat­ings.

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