Moody's outlook for Greece's banking system is negative

The outlook for the Greek banking system is negative, primarily reflecting the acute deterioration in Greek banks' funding and liquidity, says Moody's Investors Service in a new report published recently. These pressures are unlikely to ease over the next 12-18 months and there is a high likelihood of an imposition of capital controls and a deposit freeze.

The new report: "Banking System Outlook: Greece", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

Moody's notes that significant deposit outflows of more than EUR30 billion since December 2014 have increased banks' dependence on central bank funding. In our view, the banks are likely to remain highly dependent on central bank funding, as ongoing uncertainty regarding Greece's support programme continues to compromise depositors' confidence. Greek banks do not have access to the interbank repo market, as foreign banks minimise their exposure to Greece. Consequently, Moody's estimates that funding from the European Central Bank and the Emergency Liquidity Assistance from the Bank of Greece increased to about 32% of total assets for the system at the end of April 2015 from about 12% at the end of September 2014.

Greece's pressing financing needs and uncertainty regarding its support programme have also negatively affected economic activity. Moody's forecasts a lower growth trajectory than previously anticipated, of 0.5% in 2015 and 1.5% in 2016, with risks to this forecast skewed to the downside.

Although the formation of new non-performing loans (NPLs) slowed down in 2014, Moody's expects reported NPLs to increase to about 38%-40% of gross loans by the end of 2015 from 34.2% of gross loans as of December 2014. This reflects the weak economic conditions, and increased repayment defaults and loan rescheduling delays as borrowers hope to benefit from the government's proposed pro-borrower measures. While loan-loss reserves rose in 2014, they remain insufficient to cover expected losses, particularly as banks' ability to foreclose on residential properties remains constrained.

Moody's considers that Greek banks will likely require additional capital over the outlook horizon. Following two rounds of recapitalisation in 2013 to 2014, the rating agency estimates that banks' weighted-average Common Equity Tier 1 ratio increased to 13.7% as of December 2014 from 12.0% in December 2013. However, about 55% of this capital is in the form of deferred tax assets, which are lower-quality capital, given that their eligibility to be converted into deferred tax credits - and ultimately into tangible assets - is contingent on the Greek government's creditworthiness. Furthermore, banks' capital base will remain at risk from very high loan-loss provisions over the outlook period.

Moody's negative outlook on the Greek banking system is consistent with the negative outlook assigned to the rated Greek banks' long-term deposit and debt ratings.