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Invest Cyprus 30/04-30/03/2019

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Piraeus Bank’s Financial Strength Rating Affirmed

Piraeus Bank’s Financial Strength Rating Affirmed

Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed Piraeus Bank’s (BoP) Financial Strength Rating (FSR) at ‘B-’. The Outlook is maintained at ‘Stable’. 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 in Greece, albeit substantially reduced. 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 maintained at ‘5’.

The FSR of ‘B-’ is supported by the significant reduction in ELA and by the decrease in non-performing loans (NPLs), which is expected to continue as the operating environment improves. The Bank’s leading market share is also a supporting factor and it is expected that the Bank’s new management will improve BoP’s performance and overall financial condition. Very weak asset quality metrics (as is the case for other Greek banks), the decrease in BoP´s capital adequacy and a difficult outlook for profits following a large net loss in 2017 are constraining factors. As a result of reducing usage of ELA, liquid assets have decreased; combined with event risks and uncertainties as the financing programme for Greece draws to an end, this is also a constraining factor.

In 2017 NPLs were reduced by 9.5% due to higher write-offs and sales and to a lesser extent by net outflows. This trend is expected to continue in line with the Bank’s target to reduce end 2017 NPLs by 35% by end 2019. The gradual economic recovery and the improved legal framework regarding foreclosure and auctions should provide greater opportunities for further reduction of NPLs. However, the NPL ratio will be slow to decline as gross loan balances are likely to continue reducing. Coverage of the broadly defined non-performing exposures is likely to remain less than adequate requiring continued provisions to cover potential credit losses as NPLs are sold or written off.

Proceeds from the sale of European Financial Stability Facility (EFSF) securities, deleveraging of loans, and a private placement of a covered bond issue enabled the Bank to significantly reduce dependence on ELA. In the current year, proceeds from the sale of NPLs, the Romanian and Serbian subsidiaries, and non-banking sector assets, as well as ongoing moderate growth of customer deposits should contribute to eliminate ELA altogether. However, the level of banking system deposits prior to the crisis of 2015 is not likely to be recovered. As a result, funding options and liquidity can only improve very gradually to the extent that the Bank monetises its loan portfolio and (over the long term) is again able to access unsecured funding from markets. A smooth exit by Greece from its financing programme in August is expected to improve the sovereign risk perception, opening the way for banks to rebuild their liquidity but that is still subject to some uncertainties.

The Bank’s capital position weakened in 2017 due to the net loss and a substantial increase in adjustments. Although at end 2017 the Bank met the SREP OCR for 2018 of 13.625%, the capital adequacy ratio decreased to 15.1% and lies below peers. Deferred tax assets (DTAs), which are susceptible to be impaired, increased significantly in 2017 as NPLs were reassessed and top up provisions taken. The estimated proforma impact of IFRS9 on FL CET-1 of 382 bps is substantial, and of these 24 bps must be taken in 2018. The Bank’s capital base will also need to be replenished in order to repay EUR2 billion of CET-1 eligible CoCo capital securities held by the Hellenic Financial Stability Fund (HFSF), which would depress the CET-1 ratio unless more common share capital is raised. However, CI’s base case assumption is that the results of the forthcoming stress test will not give rise to an immediate need for additional capital.

With flat operating profit and despite atypical net gains on leased property, the Bank made a large net loss due to a twofold increase in provisions and despite adding more than EUR1 billion to its DTAs. While the Bank continues to deleverage, improvement of profit at the operating level is not likely due to pressure on top line gross income, despite ongoing control of operating expenses. The outlook is for recurring profit to remain pressured although loan loss provisions should return to a normal level in 2018. Impairments of non-core assets and losses by associate entities are expected to continue until the Bank completes its downsizing and business is focused on core banking.

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.

With end 2017 total assets of EUR 67.4 billion, BoP has evolved to be the largest banking franchise in Greece, having played an active part in the consolidation process of the Greek banking sector. The HFSF holds 26% of BoP’s share capital. Amongst mainly foreign institutional investors Paulson Co. Inc. held more than 5% (9.1% indirectly).


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