Possible risks to NPE reduction plan

Pau Labro Vila, Director of Financial Institutions at Fitch Ratings, told Kathimerini that nonperforming exposures of Greek banks will continue to decline to reach 25 percent by year-end, leading also to an improvement in the credit sector’s profitability. However Fitch sees execution risks to banks’ plans for the drop in the NPE rate to single digits in the coming years.
 
Is the recently approved "Hercules" Asset Protection Scheme enough or does Fitch think that more schemes should be applied ? In your opinion, is the zero-risk rating of the senior notes the Greek banks will issue, crucial?
 
The Hercules APS plan is an important positive step to accelerate the reduction of NPEs but should be complemented by a larger organic decrease in NPEs by banks (including more recoveries and lower re-default rates). Other system-wide solutions, including the proposal by the BoG, could also further accelerate the reduction of NPEs.
 
The APS provides guarantees of around 12 billion euros for the senior tranches, covering around 40 billion euros of NPEs, more than half of the current NPEs for the sector. Indeed, we understand that the risk-weighting of the senior tranches is still a key pending and sensitive element in the implementation of the APS. However, we are positive this will be addressed to the benefit of the success of the scheme, containing its impact on the banks’ capital ratios.
 
Are Greek banks’ plans, which aim to reduce NPEs in two to four years to single digits, achievable?
 
So far, the banks have announced they are planning to use around 8 billion euros of the APS guarantees [i.e. the state’s Hercules project] for NPE securitizations accounting for around 25 billion euros. Based on this use and other complementary measures, we estimate that the sector NPE ratio could reduce to around 25 percent at the end of this year, which is still significantly high by European standards. Currently, only Cypriot banks have a problem asset ratio above 20 percent.
 
We give credit to the banks’ NPE reduction plans to reduce the NPE ratios to single digits in two to four years, although there are execution risks. These plans are largely contingent on the stability of the operating environment  and the investor appetite for Greek distressed assets – which so far has been strong – as the NPE reduction plans are quite reliant on NPE sales and securitizations. Another important factor is the developments in the legal framework, particularly the impact of the extension of the primary residence protection law until end-April and the new insolvency law, which is expected in May.
 
Fitch rates Greece ‘BB’ with a positive outlook, but its ratings of Greek banks are much lower and at the 'CCC' range. Why do banks ratings remain so constrained?
 
The positive developments of the operating environment, reflected in the upgrade in the Greek sovereign rating to ‘BB’ with a positive outlook, are indeed important for the credit profiles and business prospects for banks. However, we still rate the four systemic banks in the ‘CCC’ category given the large stock of non-performing exposures and the fact that capitalization remains highly vulnerable to asset quality shocks.  A trigger for an upgrade of Greek banks ratings would be a significant reduction of stock of NPEs, without significantly undermining the capital buffers of the banks. The evolution of profitability –that is, internal capital generation–  as well as the liquidity position are also important factors in our assessment.
 
Do you expect improvement in Greek banks’ earnings this year and new lending, or will the pressure continue?
 
We do expect some improvement in the operating profitability of the Greek banks supported by cost-cutting measures and progress in the asset-quality clean-up. Contribution of fee income should also be positive thanks to the increase in the payment transactions and more cross-selling activity by the banks. In terms of new lending, we expect banks to increase loan disbursements mainly to the corporate segment, which should only partially offset the deleveraging of the stock of total loans. Despite these positive developments, operating profitability will remain low, affected by the still high loan impairment charges and the pressures from a low interest rate environment. In our view, it will take time for the Greek banks to reach satisfactory profitability levels.
 
Two of the four large systemic banks have raised Tier 2 capital in 2019 while Alpha Bank has also announced its intention to issue a similar instrument shortly. Do you expect banks to issue more debt in short/medium term and will the market be able to digest Greek banks supply?

Greek banks are indeed benefiting from improved access and more favorable conditions in the financial markets thanks to the recovery of investors’ confidence and appetite, and also helped by Greece’s return to wholesale markets. As you mentioned, two banks – NBG and Piraeus – issued Tier 2 notes in mid-2019 and Alpha is planning to do so in 2020. We expect banks to continue issuing or refinancing at lower rates this kind of instruments. We believe that the priority for the banks now is to build capital buffers that should help absorb the negative impact of the upcoming NPE sales or securitizations. We do not expect banks to issue unsecured senior debt to comply with the MREL requirements until they have meaningfully addressed their asset quality issues.