DBRS Morningstar Upgrades Piraeus Bank’s Long-Term Issuer Rating to BB, Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) upgraded the long-term credit ratings of Piraeus Bank S.A. (the Bank), including the Long-Term Issuer Rating to BB from B (high). Concurrently, DBRS Morningstar upgraded the Bank’s Long-Term Deposit Rating to BB (high), which is one notch above the Intrinsic Assessment (IA), reflecting the legal framework in place in Greece which has full depositor preference in bank insolvency and resolution proceedings. The trend on all ratings is Stable. The Bank’s IA has been upgraded to BB from B (high) and its Support Assessment remains SA3. See a full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

Piraeus Bank S.A. 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 in 2020, the Bank is a 100% subsidiary of Piraeus Financial Holdings S.A..

The upgrade reflects the sustained improvement in the Group’s risk profile, stemming from a further reduction in the stock of legacy non-performing exposures (NPEs) and a contained new NPE formation. However, the Group’s asset quality metrics still remain relatively weak by international standards. DBRS Morningstar expects new NPE inflows to increase in the coming quarters due to higher interest rates, higher cost of living, and slowdown in economic activity. Nevertheless, Piraeus’s risk profile should remain stronger than in the past thanks to further de-risking, more robust NPE coverage, and support to loan expansion from projects connected with the European Recovery and Resilience Facility (RRF) funds.

The upgrade also takes into account the Group’s strengthened capital buffers on the back of sustained internal capital generation as well as a lower burden from NPEs. Piraeus has demonstrated an improved track record in generating recurring earnings in recent times, and DBRS Morningstar expects this trend to remain broadly in place. However, some margin compression, possibly higher operating expenses in the foreseeable future due to high inflation and digital investments, as well as an increase in credit costs due to potential new asset quality risks might curb the momentum.

The credit ratings continue to take into account the Group’s robust domestic franchise in retail and corporate banking, and its stable funding and liquidity position. Nonetheless, the credit ratings also incorporate the moderate diversification of Piraeus’ business model and revenue streams, as well as the high level of deferred tax credits (DTC) included in the Group’s capital structure which we view as a weaker form of capital.

CREDIT RATING DRIVERS

An upgrade of the credit ratings would require further strengthening in Piraeus’s risk profile and capitalisation while maintaining the improved underlying profitability levels on a sustained basis.

A downgrade of the credit ratings would result from a material worsening in Piraeus’s capital levels or asset quality. A significant deterioration in Piraeus’s profitability might also contribute to a downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Moderate

Piraeus is one of the four systemic banking groups in Greece with total assets of around EUR 79 billion at end-September 2023 and a leading domestic market position. The Hellenic Financial Stability Fund (HFSF) remains the Group’s main shareholder, holding 27% of its share capital, however HFSF aims to dispose of all its shares in the Greek systemic banks before 31 December 2025. After a deep restructuring process, Piraeus is aiming to enhance and diversify its revenue sources as well as to improve its operational efficiency and asset quality further, increase lending volumes, and maintain adequate capital buffers. Nonetheless, DBRS Morningstar views the Group’s franchise strength as constrained by a moderate business diversification.

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

Piraeus’s underlying profitability has improved in recent times, mostly driven by higher interest rates as well as cost savings, and reduced loan loss provisions (LLPs). In DBRS Morningstar’s view, some of the Group's improved core earnings power is likely to be offset by spread compression due to higher competition for loan volumes and higher funding costs, as well as higher operating expense, and increasing LLPs in the foreseeable future. At the same time, our expectation is that initiatives to diversify revenue sources and achieve further cost optimisation, remain important strategic levers to support the Group’s profitability. Piraeus reported a net profit of EUR 575 million in 9M 2023, down 26% Year-On-Year (YOY), or more than double YOY when excluding one-off items in both periods. Total revenues were down 6% YOY in 9M 2023, however this was mainly due to sizeable non-recurring trading gains and other non-interest income posted in 9M 2022. A significant pass-through of higher interest rates to the Group’s loan book coupled with limited increase in deposit funding costs, has contributed to boost net interest income (NII) by 59% YOY in 9M 2023. Net fees, including rental income and other income from non-banking activity, were up 14% YOY in 9M 2023, despite the volatility in the financial markets. Piraeus’s cost-to-income ratio was strong at 32% in 9M 2023 on an underlying basis, down from 48% in 9M 2022. The Group’s annualised cost of risk remained sizeable at around 160 bps in 9M 2023, down from around 190 bps in 9M 2022, however it was around 90 bps in 9M 2023 excluding provisions for de-risking, up from around 80 bps in 9M 2022, reflecting higher concerns around future asset quality trends.

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

Piraeus’s asset quality metrics have improved further, however they remain relatively weak by international standards. As of end-September 2023, gross NPEs were EUR 2 billion, down 39% YOY, and the gross NPE ratio was 5.5% (or around 3% net of provisions), down from 8.8% one year earlier (5.3%). The Group’s NPE cash coverage has increased to 57.3% from 48.9% in the same period, based on total loan loss reserves. Stage 2 loans (loans where credit risk has increased since origination) represented 9% of gross loans at end-September 2023, down from 10% at end-2022. New loan generation was down 1.5% YOY in 9M 2023, mainly due to higher interest rates and high repayments by corporates. Nonetheless, net credit expansion in the performing loan book was around EUR 0.8 billion in 9M 2023, mainly driven by corporate activity, including projects connected with the RRF funds where Piraeus reported a 40% market share of new disbursements. The renewal of the Hercules Asset Protection Scheme (HAPS) for one year until December 2024 might contribute to further de-risking, although to a lesser extent in DBRS Morningstar’s view given its less favourable conditions compared to the previous versions.

The Group’s securities portfolio totalled around EUR 13.6 billion at end-September 2023, or 17% of its balance sheet. It almost entirely consisted of debt securities, mainly Greek sovereign bonds which represented 11% of Piraeus's total assets and 2.2 times its Common Equity Tier 1 (CET1) capital. Due to the classification of around 79% of total securities at Amortised Cost (AC) and the rapid increase in interest rates, the fixed income portfolio at AC has generated sizeable unrealised losses which, however, are unlikely to materialise given Piraeus's solid liquidity position.

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

DBRS Morningstar notes that Piraeus’s funding and liquidity profile has stabilised on sound levels, however the level of diversification in the Group’s funding mix remains moderate with customer deposits accounting for 84% of its total funding at end-September 2023, followed by ECB sources (8%), interbank market (5%), and debt securities issued (3%). Deposits are primarily granular, raised from retail clients, and 76% of total domestic deposits were savings and sight deposits at end-September 2023, down from 83% one year earlier as customers are increasingly seeking for deposit solutions with higher remuneration. ECB funding was EUR 5.5 billion at end-September 2023, down 62% YOY, following TLTRO III early repayments and maturities, and compares with EUR 12.7 billion of cash and balances with central banks. The Group’s Liquidity Coverage Ratio (LCR) and its Net Stable Funding Ratio (NSFR) were 242% and 139% respectively at end-September 2023, and no bond maturities are envisaged in 2024, however Piraeus has the option to early redeem a EUR 400 million Tier 2 bond in June 2024.

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

Piraeus’s capitalisation has strengthened over the last twelve months, driven by sustained internal capital generation as well as a lower burden from NPEs. Nonetheless, the quality of the Group’s capital remains relatively weak due to the sizeable level of DTCs accounted for in its capital structure. As of end-September 2023, Piraeus's fully loaded CET1 and Total Capital ratios were 12.8% and 17.4% respectively (or 12.9% and 17.6% pro-forma for the RWA relief from the NPE sales to be completed in the forthcoming period and including an accrual for a 10% dividend pay-out subject to regulatory approvals), up from 10.4% and 15.1% one year earlier. As a result, the capital buffers were 306 bps for the CET1 ratio and 288 bps for the Total Capital ratio above regulatory minimum requirements at end-September 2023, or 315 bps and 302 bps on a pro-forma basis. The EBA 2023 Stress Test implied improved results for Piraeus compared to the exercises carried out in 2018 and 2021 in terms of maximum depletion as well as level of the CET1 ratio in the final year of the adverse scenario (9.1% at end-2025). DTCs represented a high 84% of CET1 capital at end-September 2023.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/424991.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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 https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (4 July 2023).

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations (22 June 2023). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for this credit rating include Morningstar Inc. and Company Documents, Piraeus 9M 2023 Report, Piraeus 9M 2023 Results Press Release, Piraeus 9M 2023 Results Presentation, Piraeus 9M 2023 Financial Factsheet, Piraeus 2019-2022 Annual Reports, Piraeus H1 2023 Pillar 3 Report, and Piraeus Sustainability & Business Report 2022. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and credit 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: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/424990.

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

Lead Analyst: Andrea Costanzo, Vice President – European Financial Institutions
Rating Committee Chair: Elisabeth Rudman, Managing Director – Global Fundamental Ratings
Initial Rating Date: January 13, 2022
Last Rating Date: December 7, 2022

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