Fitch Ratings-Barcelona/London-10 February 2015: Fitch Ratings has placed Greece-based National Bank of Greece S.A. (NBG), Piraeus Bank, S.A. (Piraeus), Alpha Bank AE (Alpha) and Eurobank Ergasias S.A.’s (Eurobank) Long-term Issuer Default Ratings (IDR) of ‘B-‘ and Viability Ratings (VR) of ‘b-‘ on Rating Watch Negative (RWN). The banks’ Short-term IDRs of ‘B’ have also been placed on RWN. A full list of rating actions is at the end of this rating action commentary.
The RWN reflects downside rating potential due to rising funding and liquidity risks, as Fitch assumes that the negotiations between the Greek government and its official creditors will be very challenging. In Fitch’s view, this will likely translate into continued deposit outflows for Greek banks that could potentially trigger imposition of capital controls, in particular if access to emergency funding was at any time restricted by the European Central Bank (ECB).
KEY RATING DRIVERS – IDRS, SENIOR DEBT AND VRS
NBG’s, Piraeus’s, Alpha’s and Eurobank’s IDRs and senior debt ratings are based on their standalone credit profiles, as captured in the VRs. The ratings are highly influenced by the banks’ weak asset quality, exceptionally challenging economic and operating conditions, and weak funding and liquidity profiles, on which there is heightened pressure while the recently-formed Greek government seeks a new agreement with official creditors.
Non-performing loan (NPL) ratios were a high 23.4% for NBG, 33% for Eurobank, 33.6% for Alpha and 39% for Piraeus as of end-3Q14. Unreserved NPLs remained well above their capital, putting solvency at risk under any further stress; and most of these banks also retained sizeable stocks of loans in arrears that may become NPLs in light of the weak economy. Add-on risks to Greek banks’ asset quality may come from any delays or discontinuation around the implementation of reforms to facilitate asset recoveries, and/or exposure to the Swiss franc appreciation.
The banks’ ‘B-‘ ratings indicate that a material default risk is present, but that a limited margin of safety remains as they are able to access central bank funds. In December 2014, the system lost EUR4bn of deposits (or 2.4% of the total as of end-November 2014) and interbank repo markets, which most of the banks used heavily until December to secure funds against EFSF bonds, have become unreliable. As a result, ECB funding increased to EUR56bn (14% of system assets) by year-end. We believe deposit withdrawals accelerated in January and assume deposit levels now to be at least 8% lower than at end-November 2014.
We view the ECB’s decision on 4 February 2015 to accelerate the termination of the collateral eligibility waiver in respect of both government bonds and bank-issued government-guaranteed bonds as negative because i) emergency liquidity assistance (ELA) funding from the Bank of Greece can be relatively quickly curbed or prevented by the ECB if specific ELA procedures are not met, creating event risk; and ii) it signals that the ECB may adopt a strict approach to applying relevant policies and procedures. We also believe that switching to ELA may increase Greek banks’ funding costs, potentially affecting their earnings, especially if negative deposit trends are prolonged over time.
Nonetheless, Fitch understands that the ELA capacity has been increased to offset the reduction in ECB facilities. We estimate that ELA usage will increase to at least approximately EUR50bn once funding switches from the ECB on 11 February, on top of which EUR38bn of EFSF debt instruments remain eligible at the ECB.
The banks’ ratings assume that the ECB will allow ELA funding to be provided by the Bank of Greece for as long as i) there is a reasonable probability of Greece reaching an agreement with its official creditors, which is Fitch’s base case; and ii) deposit flight does not make banks’ ELA reliance so heavy as to contradict ELA procedures, which include that ELA is only made available to solvent banks facing temporary liquidity problems.
The senior debt ratings are aligned with the banks’ IDRs and have ‘RR4’ Recovery Ratings. This reflects Fitch’s assumptions so far that recoveries in the event of a default are likely to be average.
RATING SENSITIVITIES – IDRS, SENIOR DEBT AND VRS
The RWN on the banks’ IDRs, VRs and senior debt ratings reflects Fitch’s opinion that rising funding and liquidity risks mean there is a heightened probability of the ratings being downgraded.
Fitch believes that even if the upcoming meetings of the European Council and Eurogroup succeed in establishing a framework for negotiations between the Greek government and its official creditors, reaching a new agreement is likely to be a protracted and complicated process. This represents a heightened risk to the stability of the banks’ deposit levels (and hence liquidity profiles) that could eventually jeopardise the continued approval of ELA funds and/or force the authorities to impose restrictions on the banking sector to curb deposit outflows.
The ratings and Recovery Ratings of senior debt issued by the banks and/or their respective issuing vehicles have also been placed on RWN to highlight the risk of a downgrade if funding and liquidity pressures result in a higher level of assets pledged, higher collateral constraints and/or weaker recovery prospects. Recovery prospects for senior debt are also likely to be affected by depositor preference in view of the implementation of the Bank Recovery and Resolution Directive (BRRD).
The RWN is likely to be resolved upon further clarity around the outcome of the political negotiations and the impact on banks’ funding and liquidity profiles.
KEY RATING DRIVERS – SUPPORT RATING AND SUPPORT RATING FLOOR
Greek banks’ Support Ratings of ‘5’ and SRFs of ‘No Floor’ reflect our expectation that while future support from the state is possible, it cannot be relied upon given the limited resources at Greece’s disposal.
RATING SENSITIVITIES – SUPPORT RATING AND SUPPORT RATING FLOOR
In Fitch’s opinion, Greek banks’ SRs and SRFs are unlikely to be revised upwards given the limited ability of the Greek authorities to provide support. In addition, Fitch believes there is intent to reduce the propensity of state support for financial institutions in the EU, as evidenced by a series of legislative, regulatory and policy initiatives, including the BRRD and the Single Resolution Mechanism.
KEY RATING DRIVERS AND SENSITIVITIES – SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital instruments issued by NBG, Alpha and Eurobank are notched down from these banks’ VRs of ‘b-‘, in accordance with Fitch’s assessment of each instrument’s non-performance and relative loss severity risk profiles. The banks’ subordinated debt is notched twice from VRs due to weak recovery prospects, as reflected by the affirmation of the ‘RR6’ Recovery Rating. The ‘CC’ rating on these instruments has also been placed on RWN, in line with the VRs.
Hybrid capital, which is currently not performing, has been affirmed at ‘C’/’RR6’ to reflect the fact that loss absorption has been triggered and, if they return to performing status, economic losses are likely to be/have been severe.
The ratings of subordinated debt and hybrid capital are sensitive to changes to the banks’ VRs and performing status. Recovery Ratings are primarily sensitive to valuation and availability of free assets and the breakdown between unsecured and secured liabilities.
KEY RATING DRIVERS AND SENSITIVITIES – STATE GUARANTEED DEBT
The state-guaranteed debt of NBG, Alpha and Eurobank has been affirmed at ‘B’, in line with Greece’s Long-term IDR (B/Negative). The state-guaranteed debt issuances are senior unsecured instruments that bear the full guarantee of the Greek state. Consequently, their ratings are the highest of the issuer’s Long-term IDR and Greece’s Long-term foreign currency IDR. These banks’ state-guaranteed debt ratings are sensitive to any changes to Greece’s sovereign ratings.
The rating actions are as follows:
NBG:
Long-term IDR: ‘B-‘; placed on RWN
Short-term IDR: ‘B’; placed on RWN
VR: ‘b-‘; placed on RWN
Support Rating: affirmed at ‘5’
SRF: affirmed at ‘No Floor’
Senior notes: ‘B-‘/’RR4’; placed on RWN
Short-term senior notes: ‘B’; placed on RWN
Hybrid capital: affirmed at ‘C’/’RR6’
State-guaranteed debt: affirmed at ‘B’
NBG Finance plc:
Long-term senior unsecured debt rating: ‘B-‘/’RR4’; placed on RWN
Short-term senior unsecured debt rating: ‘B’; placed on RWN
Piraeus Bank:
Long-term IDR: ‘B-‘; placed on RWN
Short-term IDR: ‘B’; placed on RWN
VR: ‘b-‘; placed on RWN
Support Rating: affirmed at ‘5’
SRF: affirmed at ‘No Floor’
Long-term senior unsecured debt rating: ‘B-‘/’RR4’; placed on RWN
Short-term senior unsecured debt rating: ‘B’; placed on RWN
Commercial paper: ‘B’; placed on RWN
Piraeus Group Finance PLC:
Long-term senior unsecured debt rating: ‘B-‘/’RR4’; placed on RWN
Short-term senior unsecured debt rating: ‘B’; placed on RWN
Alpha Bank:
Long-term IDR: ‘B-‘; placed on RWN
Short-term IDR: ‘B’; placed on RWN
VR: ‘b-‘; placed on RWN
Support Rating: affirmed at ‘5’
SRF: affirmed at ‘No Floor’
Long-term senior unsecured debt rating: ‘B-‘/’RR4’; placed on RWN
Short-term senior unsecured debt rating: ‘B’; placed on RWN
Market-linked senior notes: ‘B-emr’/’RR4’; placed on RWN
Hybrid capital: affirmed at ‘C’/’RR6’
State-guaranteed debt: affirmed at ‘B’
Alpha Credit Group PLC:
Long-term senior unsecured debt rating: ‘B-‘/’RR4’; placed on RWN
Short-term senior unsecured debt rating: ‘B’; placed on RWN
Subordinated notes: ‘CC’/’RR6’; placed on RWN
Eurobank:
Long-term IDR: ‘B-‘; placed on RWN
Short-term IDR: ‘B’; placed on RWN
VR: ‘b-‘; placed on RWN
Support Rating: affirmed at ‘5’
SRF: affirmed at ‘No Floor’
Senior notes: ‘B-‘/’RR4’; placed on RWN
Short-term senior notes: ‘B’; placed on RWN
Market-linked senior notes: ‘B-emr’/’RR4’; placed on RWN
Commercial paper: ‘B’; placed on RWN
Subordinated notes: ‘CC’/’RR6’; placed on RWN
Hybrid capital: affirmed at ‘C’/’RR6’
State-guaranteed debt: affirmed at ‘B’
ERB Hellas PLC:
Long-term senior unsecured debt rating: ‘B-‘/’RR4’; placed on RWN
Short-term senior unsecured debt rating: ‘B’; placed on RWN
State-guaranteed debt: affirmed at ‘B’
ERB Hellas (Cayman Islands) Ltd.:
Long-term senior unsecured debt rating: ‘B-‘/’RR4’; placed on RWN
Short-term senior unsecured debt rating: ‘B’; placed on RWN
State-guaranteed debt: affirmed at ‘B’
