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Alpha Bank’s Financial Strength Rating Raised to ‘B’

Alpha Bank’s Financial Strength Rating Raised to ‘B’

Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, has announced that it has raised Alpha Bank’s (AB) Financial Strength Rating (FSR) to ‘B’ from ‘B-’. The upgrade reflects the decrease in Emergency Liquidity Assistance (ELA) and the positive trend in operating conditions, with non-performing loans (NPLs) expected to continue to be reduced. The Bank’s improving credit profile is also supported by its superior earnings and capital position. Asset quality, liquidity and sovereign risk are constraining factors. A ‘Stable’ Outlook is maintained.

The Long- and Short-Term Foreign Currency Ratings (FCRs) remain on ‘Selective Default’ (‘SD’) due to the continued existence of capital controls on cash withdrawals of deposits, albeit these have been considerably relaxed. In the absence of these controls and based on CI Ratings’ internal assessment of sovereign credit risk, the FCR would be in the ‘B’ range. The Support Rating is affirmed at ‘4’, reflecting a moderate likelihood that further capital support would be provided by shareholders or other investors, if required under extraordinary circumstances, as evidenced in the capital raise of 2015. Given the sound capital position, the Bank is expected to remain eligible for ELA through Bank of Greece, if necessary.

The FSR is supported by the Bank’s sound fully loaded CET-1 ratio. AB reinforced its capital base significantly with a EUR2.6 billion capital increase in November 2015 which was achieved without any state aid. Since then the Bank has been able to strengthen its capital position by continuing to deleverage risk weighted assets, and by strong positive internal capital generation in 2017. The CET-1 ratio improved and remains very sound proforma the full estimated impact of IFRS9. The regulatory risk of impairment or higher risk weighting of DTAs (albeit moderate in the case of AB) will remain a caveat in regard to the Bank’s sound capital position.

The Bank’s improved and peer group best operating profitability and cost-to-income ratio also support the rating. AB’s gross income generation lies well above peers. Gross income increased due to strong trading gains and other income, while net interest income was maintained despite deleveraging, as funding costs continued to be reduced. With economic conditions improving in 2018, increased credit activity should provide support against pressure on the Bank’s net interest income and sustain growth in fee income. Operating profit is therefore expected to grow, supported by savings expected from a new Voluntary Exit Scheme (whose benefits will be fully phased in by end 2019) and whose cost has already been provisioned.  Although loss provisioning expense is expected to remain high reflecting the cost of continued write-offs and gross inflows of new NPLs, recurring bottom line profit is seen to be on an improving trend.

NPL and coverage ratios are likely to remain very weak for some time, reflecting what are expected to remain very difficult credit conditions in an economy whose output has been reduced by 25% over the past 9 years. The weakness of both NPL and coverage ratios partly reflects the Bank’s very comprehensive classification, with large amounts of performing and less than 90 days past due loans which are impaired. NPLs are now expected to continue to decrease at a faster rate following a decline of 9% in 2017, due to reduced net inflows and sales. In January 2018 the Bank completed the disposal of EUR3.7 billion of on- and off-balance sheet unsecured NPLs in a capital accretive transaction.

The net loans to customer deposits ratio as well as utilisation of ELA in proportion to sources of funds remain higher than other banks which benefited from larger contributions of state aid. However, the funding profile is improving. Deleveraging of European Financial Stability Facility (EFSF) bonds, as well as a rise in deposits and completion of divestments including the Bank’s operations in Serbia have enabled the Bank to reduce its usage of ELA, releasing collateral eligible for borrowing by means of interbank repos. Additional medium-term funds were raised by securitizing SME loans and in the current year by means of a EUR500mn 5-year covered bond issue. Concurrently, as ELA was reduced in 2017 liquid assets decreased, placing a greater burden on monetising loan assets for raising additional funding, a trend which was observed across the sector.

Sovereign risk factors, although improving, also constrain the rating, with short-term event risk and some uncertainty as financing arrangements for Greece finalise later in August, particularly in relation to the extent of debt relief seen to be sufficient so that the Hellenic Republic may raise funds from market sources, opening the way for banks to return to capital markets. That said, completion of the fourth and final review of the financing program for Greece is expected to impact GDP and deposit growth positively as further disbursements are made and arrears of the government to the private sector are cleared.

Ratings in the ‘B’ range denote significant credit risk. In case of unexpected adversities the need for external support is likely. Capacity for timely fulfilment of financial obligations is therefore very vulnerable to adverse changes, particularly those due to the volatile operating environment.

Historically AB was primarily a wholesale corporate lender, but over the years the Bank has developed a universal banking model with a good balance between retail and corporate business. With total assets of EUR61 billion at end 2017, AB is one of the four systemically important banks in the Greek market. In February 2013 AB acquired Emporiki Bank and in 2014 it acquired Citibank’s wealth management and retail operations in Greece. The Bank operates subsidiaries in Cyprus and Romania.


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