Morningstar DBRS Assigns First-Time Public Ratings to National Bank of Greece; BBB (low) LT Issuer Rating, Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) assigned first-time public credit ratings to National Bank of Greece S.A. (NBG or the Bank), including a Long-Term Issuer Rating of BBB (low) and a Short-Term Issuer Rating of R-2 (middle). The Bank’s Long-Term Critical Obligations Rating is BBB (high), two notches above the Bank’s Intrinsic Assessment (IA). The trend on all credit ratings is Stable. The Bank’s IA is BBB (low) and its Support Assessment is SA3. A full list of rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The BBB (low) IA reflects NBG’s leading franchise in retail and corporate banking in Greece despite a deep restructuring process required to turn the Bank around after the global financial crisis and Greek sovereign debt crisis. Morningstar DBRS also notes the continued progress the Bank has made in strengthening its balance sheet by reducing its stock of legacy non-performing exposures (NPEs) and increasing NPE coverage levels. Furthermore, Morningstar DBRS takes into account that NBG’s core earnings power has improved on the back of higher interest margins as well as cost savings and overall reduced credit costs. This has resulted in the Bank accumulating sustained levels of capital organically and, in turn, in more robust buffers over supervisory requirements.

The credit ratings also incorporate NBG’s stable funding and liquidity position which mostly benefits from a large and sticky deposit base. Nonetheless, Morningstar DBRS’s credit ratings reflect the moderate diversification in the Bank’s business model, revenue mix and funding structure as well as the high level of deferred tax credits (DTCs) accounted for in its capital structure.

The Stable trend takes into account that while the high interest rate environment is likely to add risks to asset quality, in Morningstar DBRS’s view the benign prospects for the Greek economy relative to the European average as well as the expected support to credit expansion prompted by projects connected with the European Recovery and Resilience Facility (RRF) funds, together with further de-risking should help mitigate the negative implications for NBG’s risk profile. These risks also remain balanced by its stronger loan coverage levels and capital buffers. In addition, the Bank’s core profitability should remain sound in the near future despite some interest margin compression, higher digital investments, and potentially higher credit costs.

NBG’s Long-Term Senior Debt and Long-Term Deposits credit ratings are both positioned in line with the sovereign rating of the Hellenic Republic. Morningstar DBRS sees it unlikely for NBG to be rated above the sovereign, given its business concentration in the domestic market and its significant exposure to Greek sovereign bonds. The Stable trend is also in line with the trend on Morningstar DBRS’s sovereign rating on the Hellenic Republic (BBB (low) / R-2 (middle) / Stable).

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 BBB (high) Long-Term COR reflects the Bank’s importance in the Greek banking environment, as demonstrated by being one of only four major banks.

CREDIT RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require an upgrade of the Hellenic Republic’s sovereign rating and the Bank to maintain its improved underlying profitability and asset quality on a sustained basis while preserving adequate capital buffers. An improvement in the Bank’s funding diversification and quality of capital could also contribute to an upgrade.

A downgrade of the credit ratings would result from a downgrade of the Hellenic Republic’s sovereign rating or a material deterioration in the Bank’s asset quality and underlying profitability.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Moderate
NBG is a systemically important bank in Greece with around EUR 75 billion in total assets at end-2023, a network of 314 domestic branches and 61 branches abroad. NBG’s footprint has significantly shrunk domestically and internationally, in line with the restructuring plan agreed with the supervisory authorities to turn the Bank around after the global financial crisis and Greek sovereign debt crisis. The Hellenic Financial Stability Fund (HFSF) remains a core shareholder, holding around 18% of its share capital, however HFSF aims to dispose of its shares before 31 December 2025. While NBG maintains its strong domestic market shares, in Morningstar DBRS’s view the Bank’s business model diversification remains moderate.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
NBG’s profitability has improved in recent times, mainly driven by higher core revenues (net interest income or NII, and net fees), sizeable trading gains and profits from the sale of non-core assets, cost savings, and reduced credit costs. However, Morningstar DBRS sees part of the recent improvement in core earnings power to be likely offset by some interest margin compression as well as higher operating expenses, and potentially higher credit costs due to new risks to asset quality. NBG reported net attributable income of EUR 1.1 billion in 2023, down 1% Year-On-Year (YOY), however excluding trading and other income, net income was 2.5 times higher than in 2022. Total revenues were up 17% YOY in 2023, primarily boosted by higher NII, up 65% YOY, mainly reflecting the repricing of loans and securities, and despite higher funding costs and the interest rate cap in place for Greek systemic banks on performing variable rate domestic mortgages. While still representing a moderate 14% of the Bank’s total revenues in 2023, net fees were up 10% YOY in 2023, driven by improvements across all business lines. NBG’s cost-to-income ratio was strong at around 36% as calculated by Morningstar DBRS on core revenues, down from 54% in 2022. The cost of risk (CoR) was 78 bps in 2023 as calculated by Morningstar DBRS, up from 61 bps in 2022 mainly driven by provisions frontloaded to support further de-risking. However, CoR was 64 bps in 2023 as reported by the Bank on an underlying basis, down from 70 bps in 2022.

Risk Combined Building Block (BB) Assessment: Moderate
NBG’s asset quality metrics have improved significantly in recent years, and they are more in line with international peers. Gross NPEs totalled around EUR 1.3 billion at end-2023, down 28% YOY and down 88% compared to end-2019. This translates into a gross NPE ratio of 3.7% at end-2023, down from 31.3% at end-2019. Net of total loan loss reserves, NPEs amounted to around EUR 0.2 billion at end-2023, embedding a NPE cash coverage of 87.5%. Stage 2 loans (loans where credit risk has increased since origination) represented around 9% of gross customer loans at end-2023, down from around 14% at end-2019. Morningstar DBRS expects new NPE inflows to increase in the foreseeable future mainly due to high interest rates, however NBG should be able to maintain its overall improved asset quality profile, thanks to the expected benign economic performance in Greece relative to the European average, as well as further de-risking, robust NPE coverage and some support to credit expansion from RRF-driven projects. The renewal of the Hercules Asset Protection Scheme (HAPS) until end-2024 could help mitigate asset quality deterioration albeit to a lesser extent given its less favourable conditions compared to the previous versions.

The Bank’s securities portfolio totalled around EUR 17.2 billion at end-2023, accounting for 23% of its total assets and predominantly consisting of sovereign bonds, mostly issued by the Greek government. Total sovereign bonds represented around 2.2 times NBG’s Common Equity Tier 1 (CET1) capital, of which 1.2 times attributable to Greece. Due to the classification of around 78% of total securities at Amortised Cost (AC) and the rapid increase in interest rates, the fixed income portfolio at AC has generated unrealised losses which, however, are hedged to a large extent and are unlikely to materialise given NBG's solid liquidity position.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
NBG’s funding and liquidity profile has recently been supported by customer deposit accumulation as well as continued access to central banks, and a progressive enhanced presence in the interbank market and capital markets. Nonetheless, the Bank’s funding mix remains moderately diversified. Customer deposits, mostly consisting of current and savings deposits raised from individuals, were up 3.5% YOY in 2023 and they account for over 90% of NBG’s total funding. The Bank’s exposure to the ECB, consisting of TLTRO III funds due by end-2024, amounted to around EUR 1.9 billion at end-2023, down 77% YOY and comparing with around EUR 10 billion aggregate cash and balances with central banks, and net interbank position. With the aim to fulfil its MREL requirements, the Bank’s issuance activity has ramped up since Q4 2022, including senior and subordinated instruments, however debt securities issued represented around 4% of its total funding at end-2023. NBG had an excess cash position of around EUR 8 billion at end-2023 assuming full TLTRO III repayment, as well as a net loan-to-deposit ratio of around 60% as calculated by Morningstar DBRS, a Liquidity Coverage Ratio (LCR) of around 262% and a Net Stable Funding Ratio (NSFR) of around 150%.

Capitalisation Combined Building Block (BB) Assessment: Moderate/Weak
NBG has recently strengthened its capitalisation on the back of improved earnings generation, de-risking, and capital management actions. Nonetheless, the quality of the Bank’s capital remains relatively weak considering the still high, albeit reduced, level of deferred tax credits (DTCs) accounted for in its capital structure. NBG's fully loaded CET1 and Total Capital ratios were 17.8% and 20.2% respectively at end-2023 (including profit for the period and an accrual for a 30% dividend pay-out subject to regulatory approvals), significantly up from 12.8% and 13.7% at end-2019. As a result, the capital buffers over the 2024 supervisory requirements stood at around 820 bps for the CET1 ratio and 590 bps for the Total Capital ratio at end-2023. NBG ranked 5th best among 70 EU banks participating in the EBA 2023 Stress Test, based on the cumulative CET1 depletion over the 3 year period to 2025 under the adverse scenario. DTCs represented 55% of NBG’s fully loaded CET1 capital at end-2023.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/432060.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Credit rating actions on the Hellenic Republic are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of the Hellenic Republic are discussed separately at https://dbrs.morningstar.com/issuers/17484.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (23 January 2024).

Morningstar DBRS notes that this press release was amended on April 30, 2024, 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 https://dbrs.morningstar.com/research/431155/global-methodology-for-rating-banks-and-banking-organisations (15 April 2024). In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors. (23 January 2024).

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

The sources of information used for this credit rating include Morningstar, Inc. and company documents, NBG FY 2023 Results Press Release, NBG FY 2023 Results Presentation, NBG 2010-2023 Annual Reports, NBG 9M 2023 Pillar 3 Report, and NBG 2022 ESG Report. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

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

Morningstar DBRS 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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/432061.

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

Lead Analyst: Andrea Costanzo, Vice President – European Financial Institution Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director – Global Financial Institution Ratings
Initial Rating Date: April 30, 2024
Last Rating Date: Not applicable as there is no last rating date.

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