DBRS Morningstar Assigns First-Time Public Ratings to Piraeus Bank; ‘B’ LT Issuer Rating, Stable

DBRS Ratings GmbH (DBRS Morningstar) assigned first-time public ratings to Piraeus Bank S.A., including a Long-Term Issuer Rating of “B” and a Short-Term Issuer Rating of “R-4”. The Bank’s Long Term Critical Obligations Rating is BB (low), two notches above the “B” Intrinsic Assessment (IA). The trend on all ratings is Stable. The Support Assessment is SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

Piraeus Bank S.A. (the Bank) is the main operating entity of the Piraeus Financial Holdings Group (Piraeus or the Group), which is one of the four systemic banking groups in Greece. Following the corporate transformation completed on December 30, 2020, the Bank is a 100% subsidiary of Piraeus Financial Holdings S.A., a financial holding company listed on the Athens Stock Exchange.

The Bank’s “B” IA reflects the Group’s robust domestic franchise in retail and corporate banking, and the significant progress the Group has made in reducing the level of non-performing exposures (NPEs). However, the IA also incorporates the still high level of NPEs which remains material when compared to the European average, the subdued credit demand and moderate business diversification. Furthermore, although the Group has improved underlying profitability, the high cost of risk continues to weigh materially on the Group’s earnings power and will likely remain elevated in the near term as the Group continues to de-risk. We deem the Group’s funding and liquidity position to be sound, although it does potentially remain vulnerable to shocks, should Piraeus struggle to restore profitability and improve its risk profile further.

The Stable trend reflects that the Group’s risks are broadly balanced at the B rating level. We expect that the Group will continue to reduce NPEs through the de-risking process, and therefore it should be able to manage deterioration in asset quality due to COVID-19. This view incorporates the moderate level of new NPE inflows experienced so far from expired moratoria, the modest amount of loans still subject to debt moratorium, and the additional government and bank-specific measures which we expect to support regular debt repayment from customers. Capital ratios are currently comfortably above regulatory minima, and should be able to withstand the negative impact from additional de-risking and new NPE inflows, although we note the sizeable deferred tax assets which we view as a weaker form of capital.

The Critical Obligations Rating (COR) addresses the risk of default of particular obligations/exposures at certain banks that have a higher probability of being excluded from bail-in and remaining in a continuing bank in the event of the resolution of a troubled bank than other senior unsecured obligations. The BB (low) Long-Term COR reflects the Bank’s importance in the Greek banking environment, as demonstrated by being one of only four major banks.
 
RATING DRIVERS

An upgrade would require a further improvement in underlying profitability and continued progress in the reduction of NPEs, while maintaining sufficient capital buffers.

A downgrade would be driven by a material formation of new NPEs, potentially resulting from the end of current support measures, or if Piraeus were unable to further improve underlying profitability. A downgrade would also occur in the event of a deterioration in capitalisation.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Weak / Very Weak

Piraeus is one of the four systemic banking groups in Greece with total assets of EUR 75.4 billion at end-September 2021 and a leading domestic market position. After a prolonged restructuring process following the global financial crisis and the Greek sovereign debt crisis, the Group aims to enhance its revenue sources and operational efficiency, improve its asset quality, strengthen capital buffers, and increase lending volumes to support the country’s economic recovery from the pandemic. DBRS Morningstar notes that Piraeus has made significant progress in de-risking in the current operating environment affected by the COVID-19 global pandemic with a substantial reduction in the level of NPEs, however, in our view, the Group’s franchise strength remains constrained by the still high level of NPEs, the subdued credit demand and moderate business diversification.

Following the capital increase of around EUR 1.4 billion completed in April 2021, the Hellenic Financial Stability Fund (HFSF) remains the Group’s main shareholder with an equity stake of 27%, significantly down from 61.3% as of January 2021, when the ECB’s missed authorisation to pay the coupon on the EUR 2.04 billion Contingent Convertible instruments (CoCos) resulted in the conversion of the CoCos to ordinary shares.

Earnings Combined Building Block (BB) Assessment: Very Weak

In recent years Piraeus was making progress towards restoring profitability, however the higher cost of risk due to COVID-19 in 2020 and the accelerated de-risking in 9M 2021 resulted in the Group reporting further losses. In 9M 2021 the Group reported a pre-tax statutory loss of EUR 2.9 billion, significantly up from a pre-tax statutory loss of EUR 133 million in 9M 2020. However, we note that core banking income was up 2% YoY in 9M 2021, driven by the rebound in net fees which were affected by the lockdowns in 9M 2020. The Group's cost-to-income ratio was 38% in 9M 2021, down from 48% in 9M 2020, supported by higher revenues which, however, included sizeable non-recurring trading gains. On an underlying basis, the cost-to-income ratio was 45% in 9M 2021. Loan impairment charges totalled EUR 4.1 billion in 9M 2021, significantly up from EUR 726 million in 9M 2020, mostly due to the accelerated de-risking. We expect the Group’s core profitability to progressively improve, supported by the recovery in the economy which should entail higher lending demand, as well as by higher contributions from fee income, a key element of the strategy. However, in our view the Group's net profitability remains vulnerable to high credit costs which might be required from continued de-risking, as well as restructuring costs.

Risk Combined Building Block (BB) Assessment: Very Weak

Piraeus’s asset quality indicators have improved substantially in 9M 2021, primarily due to the sale and/or securitisation of NPEs, however by international standards they remain very weak. As of end-September 2021, gross NPEs totalled EUR 5.9 billion, down 74% compared to end-2020 and down 84% from the peak level reported in Q3 2015. However, this translates to a still material gross NPE ratio of 16% (or 15% incorporating the already agreed sale of a shipping NPE portfolio for EUR 0.4 billion), down from 45% at end-2020. The majority of debt moratoriums have expired, with only around EUR 400 million still active as of end-September 2021, representing approximately 1.3% of total net loans. Deterioration from expired moratoria has been less than the Group’s initial estimate of around EUR 1 billion of new gross NPE inflows. The remainder of expired moratoria have returned to regular debt repayment or are continuing to benefit from either the government-subsidised "Bridge" programme on retail and corporate mortgage repayment ("Gefyra 1" and "Gefyra 2") or bank-specific step-up solutions. In our view, these support measures should continue to prevent a sizeable build-up of new NPEs, considering the incentive for borrowers to meet the debt repayment. We believe that the extension of the Hellenic Asset Protection Scheme (HAPS) until October 2022 will also help the Group to achieve its gross NPE ratio target of around 9% by early 2022.

Funding and Liquidity Combined Building Block (BB) Assessment: Moderate / Weak

DBRS Morningstar considers that the Group’s funding profile has improved recently, driven by the increase in customer deposits during the pandemic (up 11% YoY as of end-September 2021), as well as continued recourse to ECB sources, and enhanced access to capital markets with the first green senior preferred bond issuance in October 2021. Customer deposits remain the main source of funding for Piraeus, accounting for 77% of total funding as of end-September 2021, followed by ECB funding at 20% and debt securities at 2%. As a result of the increase in deposits, and the reduction in the loan portfolio as a result of the asset sales, the net loan-to-deposit ratio reduced to 64% at end-September 2021. Regulatory ratios remain sound, with a Liquidity Coverage Ratio (LCR) of 199% and a Net Stable Funding Ratio (NSFR) of 123% as of end-September 2021, and the Group’s debt maturities in 2022, mainly covered bonds, are manageable. Nonetheless, we consider the funding and liquidity profile to remain potentially vulnerable to shocks should the Group struggle to restore profitability and improve risk profile further.

Capitalisation Combined Building Block (BB) Assessment: Very Weak

Despite the issuance of Tier 2 and Additional Tier 1 instruments, and the capital increase, which were required to support the Group's accelerated de-risking, DBRS Morningstar views the capital position of the Group as very weak. As of end-September 2021, and pro-forma for the Risk-Weighted Asset (RWA) relief that will arise from the Sunrise 2 NPE securitisation and the cards merchant acquiring business carve-out and sale, Piraeus reported phased-in CET1 and Total Capital ratios of 11.3% and 15.9% respectively, down from 14.1% and 16.1% one year earlier. As a result, the current capital buffers were 197 bps and 165 bps respectively over the SREP minimum requirements for CET1 and Total Capital ratios, excluding the ECB's relaxation of minimum requirements until end-2022. We expect that the planned capital enhancement actions should be able to absorb the negative impact from upcoming NPE securitisations and sales, however considering the current high encumbrance of unreserved NPEs on the Group’s capital, we would see potential risk of deterioration in capitalisation if Piraeus failed to improve its ability to absorb credit losses arising from any additional de-risking. Moreover, the Group’s capital structure remains weak due to sizeable deferred tax credits accounting for 99% of pro-forma CET1 Capital as of end-September 2021.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/390697

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

DBRS Morningstar notes that this Press Release was amended on January 13, 2022, to incorporate the correct rating attributes.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

The sources of information used for this rating include Morningstar Inc. and Company Documents, Piraeus 9M 2021 Report, Piraeus 9M 2021 Results Press Release, Piraeus 9M 2021 Results Presentation, Piraeus 9M 2021 Financial Factsheet, Piraeus 2017-2020 Annual Reports, and Piraeus Sustainability & Business Report 2020. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This rating concerns a newly rated issuer. This is the first DBRS Morningstar rating on this issuer.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/390696.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Andrea Costanzo, Vice President - Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director - Global FIG
Initial Rating Date: January 13, 2022
Last Rating Date: Not applicable as there is no last rating date

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