National Bank of Greece’s FSR Affirmed at C+

18:03 - 30 Ιουνίου 2016

Capital Intelligence Ratings (CI Ratings), the international credit rating agency, today announced that it has affirmed the Financial Strength Rating (FSR) of the National Bank of Greece (NBG) at “C+”. The Long- and Short-Term Foreign Currency Ratings (FCRs) remain on SD (Selective Default) due to the continued existence of capital controls, specifically those on deposit withdrawals.
The Support Rating is maintained at ‘5’, which reflects a low likelihood that further capital support would be forthcoming from the Hellenic Financial Stability Fund (HFSF) – despite the Bank’s systemic importance – because of the limitations imposed by the Greek law transposing the Bank Recovery and Resolution Directive (BRRD). Given the improved capital position, the Bank is expected to remain eligible for emergency liquidity assistance (ELA) through Bank of Greece, if necessary.
The Outlook on the FSR has been revised to ‘Stable’ from ‘Negative’. The revised Outlook reflects the restored capital base as well as the expectation that following recent reforms approved by the Greek Parliament and completion of the first review of the Third Economic Adjustment Programme (TEAP) the operating environment will gradually begin to improve, leading to a resumption of GDP growth in H2 2016 and a gradual return of banking system deposits, subject to a partial relaxation of capital controls.
The FSR is supported by NBG’s deposit franchise and more comfortable funding profile with lower dependence on Eurosystem funding than its peers. Capital is sound following the EUR4.7 billion capital increase in December 2015. Of this amount, EUR0.75 billion was raised through the sale of new shares, EUR0.7 billion through a voluntary liability management exercise (LME) and EUR0.15 billion through the mandatory conversion of securities. A further EUR0.4 billion was obtained through the conversion into common shares of preference shares held by the Greek State. State aid was provided by the HFSF, which contributed European Stability Mechanism (ESM) notes for EUR0.7 billion of common shares and a further EUR2 billion of temporary capital support in the form of CoCos. The latter will be redeemed by NBG, subject to Single Supervisory Mechanism (SSM) approval, using the net proceeds of the EUR3.6 billion sale of Finansbank (completed on June 15) – with a surplus left over for further reducing ELA.
The primary ratings constraint is the Bank’s modest operating profitability, which will settle at a lower level on divestment of Finansbank, even though funding costs and operating expenses in Greece are likely to continue on a downward trend. The FSR of ‘C+’ remains constrained by what is likely to remain a difficult operating environment with ongoing pressure on the Bank’s weak – albeit better than sector average – loan asset quality metrics. Although the CET1 ratio is sound following the capital increase last year and has improved by 740 bps following the sale of Finansbank, as with other Greek banks, NBG’s capital is susceptible to impairment because of the high level of Deferred Tax Assets (DTAs). Direct exposure to sovereign credit risk in both securities and loan portfolios is also a constraining factor.
The ‘C+’ FSR reflects limited capacity to withstand adversities and a highly volatile operating environment. Short term event risks are considered to remain high despite completion of the first TEAP review and include the risks of: (a) a reversal of progress by the Greek Government in meeting EU and IMF conditions due to social and political dissent, which would lead to a delay of the second review and of further disbursements; and (b) a disagreement between EU institutions and the IMF when the Debt Sustainability Analysis is updated prior to the IMF’s decision within 2016 to participate in TEAP. Even if the foregoing are avoided, the risk remains that TEAP might fail to generate sustainable economic growth. To date, attempts to resolve the Greek debt crisis by applying austerity policies aimed at increasing the primary fiscal balance have, if anything, exacerbated the debt burden. It remains to be seen whether the intention to also provide debt relief by adjusting the present value of debt servicing costs, rather than by an outright reduction in the nominal stock of debt, may be any more effective.
For the FSR to be raised, confirmation would be required that operating conditions and sovereign risk have improved.
NBG was the first Greek commercial bank to be established in 1841. The HFSF holds 40.4% of the Bank’s common share capital. A number of international institutional shareholders participated in the capital increases of 2014 and 2015, but none owns more than 5% of share capital. Domestic investors (mainly retail, with 8.1%) held 11.2%.
The sale of Finansbank to Qatar National Bank reduces NBG’s total assets by approximately 24% to EUR85 billion. However, NBG will maintain a systemic position within the Greek banking sector, where it holds a leading 33% market share of savings deposits. As part of its restructuring commitments with the European Commission, NBG is expected to reduce its network in South Eastern Europe. 
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