Greek Banking Outlook Stays Negative

The outlook on Greece's banking system remains negative, due to the banks' stressed operating conditions stemming from a deepening recession and the ongoing Greek government debt crisis.

The banking sector's solvency, funding and financial performance will remain under acute pressure, says Moody's Investors Service in a new Banking System Outlook.

Moody's expects that the ongoing deterioration in operating conditions will continue over the next 12-18 months and will impact the following areas.

BANK SOLVENCY

Moody's believes that the banking system's massive Greek debt exposure (exceeding €50bn) will trigger impairments rendering most Greek banks economically insolvent. A 50% haircut on Greek debt - together with additional loan loss provisioning charges - would generate capital needs of €20bn-€30bn (compared to system Tier 1 capital of approximately €27bn). The sheer size of recapitalisation requirements suggests neither shareholders nor the Greek authorities can meet those needs. In Moody's view, the recapitalisation support would likely come from the IMF and the EU, possibly via the Hellenic Financial Stability Fund, which will effectively lead to widespread nationalisations in Greece.

FUNDING

Moody's expects that Greek banks will remain locked-out of wholesale debt markets and see further deposit outflows over the outlook period. Moody's believes that the Greek banks will remain highly reliant on funding from the European Central Bank (ECB) and emergency liquidity assistance (ELA) from Bank of Greece, to replace additional deposit outflows and maturing market funding.

ECB funding peaked at €103bn in June 2011 and was gradually reduced to €78bn in September. During this period, the ELA mechanism was activated but the amount of funding provided is not publicly available. As of September, Moody's estimates this at between €30bn-€40bn.

FINANCIAL PERFORMANCE

Stressed operating conditions will continue to exert significant pressure on asset quality and profitability. Non-performing loans (NPLs) will likely rise to 15%-16% by end-2011 and exceed 20% over the outlook horizon. The banking sector will also remain loss-making in 2011-12, even before taking into account Greek government debt haircut losses. High provisioning requirements and the upcoming debt haircut will weigh on net profits, while increased funding costs and asset deleveraging will lead to lower business volumes, affecting revenues.

The report - Banking System Outlook: Greece - is available on www.moodys.com