Greek Banks’ ‘Challenging’ Profitability May Trigger Cut at S&P
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By Niklas Magnusson

March 19 (Bloomberg) -- Profitability at Greece’s largest banks may be “challenging” in coming years as the country’s economy deteriorates, which may trigger a cut of the lenders’ credit ratings, Standard & Poor’s said.

National Bank of Greece SA, the nation’s biggest lender, reported a net loss of 87 million euros ($118 million) in the three months through December as provisions for bad loans soared amid a 2.5 percent slump in gross domestic product. EFG Eurobank Ergasias SA said net income in the period slid 77 percent from the previous quarter, while Alpha Bank SA had its lowest profit in a year and Piraeus Bank SA reported a loss.

“We’re looking at a pretty negative economic environment for the next couple of years, with a sharper recession in 2010 and still negative GDP growth in 2011,” Angela Cruz, a director at S&P’s financial institutions team in Madrid, said by phone yesterday. “We expect a protracted recovery thereafter with below-potential growth, which is a very different scenario to what the Greek banks have been used to in the previous decade.”

Earnings at Greek banks may suffer as government measures aimed at slashing a fiscal deficit that reached 12.7 percent of GDP in 2009 curb loan demand and drive up defaults. S&P on March 16 cut its view of the strength of Greece’s banking system to 5 from 4 on a scale of 1 to 10, where 1 is the highest mark. That put Greece on par with countries such as Bahrain, Brazil, Kuwait, Oman and South Africa.

‘Higher Credit Costs’

“We expect funding costs to remain higher than in the past,” Cruz said. “It may coincide in time with a part of the cycle where banks are going through low growth and low business volumes, and higher credit costs because the credit cycle is not yet finished, and such a combination of pressure from different sides could present challenges for profitability in our view.”

Greek banks won’t have trouble raising funds this year amid slower loan growth, Cristina Torrella, a director at the financial institutions team at Fitch Ratings in Spain, said in a March 16 interview. Fitch on Feb. 23 reduced the long-term issuer default ratings of Eurobank, National Bank, Alpha and Piraeus one step to BBB from BBB+, with a negative outlook.

S&P on Dec. 17 cut its long-term credit ratings on Eurobank and Alpha one step to BBB, the second-lowest investment grade rating, from BBB+. The firm has a BBB+ recommendation on National Bank, and a BBB rating on Piraeus, as well as a short- term rating of A-2 on all four lenders. The outlook for all the ratings is negative.

Loan-Loss Provisions

“If credit losses were to exceed our expectations and rise more meaningfully than what we currently anticipate, or if there is a combination with a scenario where we see more pressure on profitability than what we have anticipated, we may lower our ratings,” Cruz said. Any significantly eroded earnings generation may also trigger downgrades, she added.

Loan-loss provisions at National Bank of 323 million euros in the fourth quarter exceeded the average analyst estimate of 277 million euros in a Bloomberg News survey. Impairment losses at Alpha Bank’s Greek operations swelled 28 percent to 513.6 million euros last year. At Eurobank, 2009 loan losses in Greece totaled 725 million euros.

To contact the reporter on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net