Banks will have to issue bonds this year

Bad loans are not the only challenges Greek banks are facing, according to Fitch Ratings. Securitizations will mean banks will have to issue bonds while operating profits will stay weak, Pau Labro, director of Financial Institutions at Fitch, tells Kathimerini.

“The pandemic interrupted the positive trend of Greek banks, delaying banks’ plans to reduce their legacy problem assets and potentially increasing new inflows of impaired loans. For 2021, we expect that a moderate economic recovery in Greece and the banks’ de-risking plans will support the banking business environment, although the impact from the pandemic will continue pressuring certain business sectors, such as tourism, transport or construction,” he states.

He reminds that “Fitch’s current ratings reflect the already weak position of the systemic Greek banks to face the downside risks from the pandemic, particularly in terms of asset-quality, capitalization and profitability. We already discussed about the asset-quality trends so let me focus on the other two factors.”

“Capitalization remains vulnerable to asset-quality shocks in the current environment although the securitizations if successfully executed will materially lower capital encumbrance from unreserved impaired loans (as it was the case for Eurobank in June 2020). The securitizations will also result in significant one-off losses for banks, affecting the capital buffers of the sector,” Labro notes.

“Capital buffers will also be negatively affected by regulatory impacts, most notably the continued phase-out of the IFRS 9 transitional adjustments. We expect banks to issue subordinated debt if market conditions are favorable, as some entities did in 2020, and continue implementing capital accretive actions to enhance total capital buffers, also bearing in mind that there is a stress test exercise this year,” he estimates.

“Excluding the negative impact from the securitizations, we also expect operating profitability to remain structurally weak in the medium term as the loan impairment charges will remain still high, despite some frontloading of provisions in 2020. Pressure on interest rates (particularly in the business segment) and lower interest accruals from impaired loans following securitizations will reduce the net interest income. On the positive side, we expect higher fee income from a recovery in activity, still significant trading gains benefiting from the accommodative monetary policy, and lower recurring operating expenses as the banks continue implementing restructuring programs. The provision of state guarantees could also be supportive for new lending volumes to businesses in 2021,” Labro points out.

He adds that “the funding and liquidity position of the banks is not currently a concern for our assessment since it has continued to strengthen supported by resilient deposit inflows from private sectors and other support initiatives at European level such as the new TLTRO and waivers on limitations of the use of Greek government bonds as collateral in credit operations. This is also reflected in the increase in the liquidity coverage ratio for the sector to 156% at end-September 2020 compared to 130% in 2019 and 48% in 2018.”