Morningstar DBRS Assigns First-Time Public Credit Ratings to Eurobank S.A.; Long-Term Issuer Rating at BBB (low), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) assigned first-time public credit ratings to Eurobank S.A. (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 its 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 credit rating actions is included at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The Bank is the main operating entity of the Eurobank Holdings Group (Eurobank or the Group), one of the four systemic banking groups in Greece. Following the corporate transformation completed on 23 March 2020, the Bank is a 100% subsidiary of Eurobank Ergasias Services and Holdings S.A., a financial holding company listed on the Athens Stock Exchange.

The BBB (low) IA reflects Eurobank's leading domestic franchise in retail and corporate banking and its degree of diversification outside Greece despite the turnaround it has been subject to because of the global financial crisis and Greek sovereign debt crisis. The Group has significantly reduced the risks inherent in its balance sheet in recent years on the back of a massive loan clean-up process and the strengthening of its loan coverage levels. At the same time, Morningstar DBRS notes that Eurobank's ability to generate recurring earnings has improved, driven mainly by higher interest margins as well as a leaner cost structure and reduced loan loss provisions (LLPs). As a result, Eurobank can rely on more robust capital buffers over its minimum requirements despite the planned dividend distributions that will resume soon.

The credit ratings also incorporate Eurobank's stable funding and liquidity position, which mostly benefits from a large and sticky deposit base. Nonetheless, Morningstar DBRS' credit ratings reflect the moderate diversification in the Group'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 Morningstar DBRS' view that the potentially higher-for-longer interest rate environment is likely to add pressure to the Group's risk profile. However, Eurobank should be able to preserve good asset quality metrics by leveraging some mitigating factors, including the expected benign prospects for the Greek economy relative to the European average as well as the expected support for credit expansion prompted by projects connected with the European Recovery and Resilience Facility (RRF) funds and lower rates, and potential further de-risking actions. Furthermore, while Morningstar DBRS expects part of the recent improvement in earnings generation to be offset by some interest margin compression, higher digital investments, and potentially higher credit costs, Eurobank's overall profitability should remain at a relatively good level. This, along with the sound loan coverage levels and capital buffers, provides further protection to potential downside risks.

Morningstar DBRS will continue to monitor the developments around Eurobank's ongoing tender offer for Hellenic Bank's residual shares in Cyprus after having already secured a majority stake of more than 55%. Based on preliminary estimates, Morningstar DBRS' understanding is that the impact of the acquisition should be broadly neutral to most of the Group's credit fundamentals in the short-term with a manageable negative impact on its capitalisation. However, if successful, the acquisition would further strengthen the Group's presence in one of its core foreign markets, and could also lead to some positive implications in the medium-term, driven by synergies resulting from the combination of the two entities. Nonetheless, execution risks around the transaction have to be considered given the size of Hellenic Bank, which accounts for around 25% of the Group's total assets.

The Bank's Long-Term Senior Debt and Long-Term Deposits are positioned in line with the sovereign rating of the Hellenic Republic (BBB (low) with a Stable trend). Morningstar DBRS deems it unlikely that the Bank would be rated above the sovereign at this stage, 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' sovereign rating on the Hellenic Republic.

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 its 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 Eurobank to maintain its improved underlying profitability and asset quality on a sustained basis while preserving adequate capital buffers. An improvement in Eurobank'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 Eurobank's asset quality and underlying profitability.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Moderate
Eurobank is one of the four systemically important banking groups in Greece with around EUR 79 billion in total assets at end-March 2024, a network of 539 branches and business/private banking centres, and approximately 10,800 employees. The turnaround to which the Group has been subject after the global financial crisis and Greek sovereign debt crisis required Eurobank to shrink its footprint significantly. While the Group maintains its strong domestic franchise and shows some diversification in Bulgaria, Cyprus, and Luxembourg, Morningstar DBRS considers the diversification in Eurobank's business model as moderate. Eurobank was the first Greek systemic banking group to be privatised following the Hellenic Financial Stability Fund's disposal of its stake in October 2023 and, at end-2023, more than 90% of the Group's share capital was held by foreign institutional investors.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
Eurobank's earnings power has improved recently, driven mainly by higher core revenues (net interest income (NII) and net fees), sizeable trading gains and profits from the sale of non-core assets, a leaner cost structure, and reduced LLPs. Morningstar DBRS expects part of the recent improvement in earnings generation to be offset by a compression in net interest margin (NIM) as well as by higher digital investments and potentially higher LLPs, should new asset quality risks materialise. Eurobank reported a net attributable income of EUR 287 million in Q1 2024, up 21% Year-On-Year (YOY) or up 50% YOY when excluding restructuring costs. Total revenues were up 28% YOY in Q1 2024, driven primarily by higher trading income and higher NII, which was up 14% YOY, mainly reflecting a higher contribution from loans and securities despite higher funding costs and the interest rate cap in place for Greek systemic banks on performing variable rate domestic mortgages. Net fees were up 5% YOY in Q1 2024, supported by network transactions, credit cards, and asset management, despite lower fees from lending. However, net fees accounted for just around 14% of total revenues in Q1 2024. The Group's cost-to-income ratio, as calculated by Morningstar DBRS, was around 45% in Q1 2024, up from 36% in Q1 2023, however, it was strong at 29%, excluding restructuring costs, in Q1 2024, down from 35% one year earlier. The annualised cost of risk was 68 basis points (bps) in Q1 2024, significantly down from the average level of around 200 bps reported in 2019-23.

Risk Combined Building Block (BB) Assessment: Moderate
Eurobank's asset quality metrics have improved materially in recent times and are now more in line with international peers. Gross non-performing exposures (NPEs) totalled around EUR 1.3 billion at end-March 2024, down 13% compared with end-2023 and down 90% compared with end-2019. This translates into a gross NPE ratio of 3% at end-March 2024, significantly down from 29.2% at end-2019. Net of total loan loss reserves, NPEs amounted to around EUR 0.1 billion at end-March 2024, embedding a NPE coverage of more than 90%. Stage 2 loans (i.e., loans where credit risk has increased since origination) accounted for around 12% of gross customer loans at end-March 2024, down from around 14% at end-2019. Morningstar DBRS expects that new NPE inflows will likely increase mainly because of still-high interest rates. Nonetheless, in Morningstar DBRS' view, Eurobank should be able to preserve good asset quality metrics, thanks to potential further de-risking, as well as robust NPE coverage, the expected benign economic prospects in Greece relative to the European average, and some support to credit expansion prompted by RRF-driven projects and lower rates. At end-March 2024, net customer loans were flat compared with end-2023, however, they were up 4% YOY, driven mainly by growth in the corporate loan book, with the latter representing around 61% of Eurobank's gross customer loans at end-March 2024. The renewal of the Hercules Asset Protection Scheme (HAPS) until end-2024 could represent an additional mitigating factor to asset quality deterioration, albeit to a lesser extent given its less favourable conditions compared with those in the previous versions.

The Group's securities portfolio totalled around EUR 15 billion at end-March 2024, accounting for 19% of its total assets and consisting predominantly of investment securities and, the rest as securities held for trading purposes. Total sovereign bonds represented around 1.3 times Eurobank's Common Equity Tier 1 (CET1) capital, of which 0.7 times is attributable to securities issued by the Greek government. Approximately 73% of total securities were classified at Amortised Cost (AC) at end-March 2024, and the fair value of the fixed-income portfolio at AC was lower than its carrying value due to the increase in interest rates. However, Morningstar DBRS does not expect these unrealised losses to materialise given Eurobank's solid liquidity position.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
Eurobank's funding and liquidity profile has recently benefitted from growth in customer deposits as well as access to central banks and a more active presence in the interbank and capital markets. Nonetheless, the diversification in the Group's funding mix remains moderate. Customer deposits, up 4% YOY at end-March 2024, mainly consist of savings and current accounts collected from individuals and small businesses and these accounted for over 84% of Eurobank's total funding. The Group's exposure to European Central Bank funding was down 64% YOY to around EUR 3 billion at end-March 2024 due to TLTRO III repayments, and compares with around EUR 11 billion of cash and balances with central banks. Eurobank has increased its debt issuance activity in the capital markets in recent years with the aim to fulfil its minimum requirements for own funds and eligible liabilities (MREL), however, the debt securities issued represented around 7% of its total funding at end-March 2024. Eurobank could rely on around EUR 17.4 billion of high-quality liquid assets at end-March 2024, while its net loan-to-deposit ratio, as calculated by Morningstar DBRS, was around 73%, its liquidity coverage ratio was around 179%, and its net stable funding ratio was around 128%.

Capitalisation Combined Building Block (BB) Assessment: Moderate/Weak
Eurobank's capitalisation is more robust than in the past as a result of improved earnings generation as well as a stronger balance sheet and capital management actions. Nonetheless, the Group's capital structure remains relatively weak considering the still-high, albeit reduced, level of DTCs. Eurobank's fully loaded CET1 and Total Capital ratios, including profit for the period, were 17.1% and 20.1%, respectively, at end-March 2024, significantly up from 14.6% and 17.1%, respectively, at end-2019. Pro-forma for a cash dividend payment of EUR 342 million (or 30% of the net income reported in 2023) that the Group has been recently authorised to resume after 16 years, the CET1 ratio would be equal to 16.4%. Eurobank's capital buffers over the supervisory requirements stood at around 690 bps for the CET1 ratio and 520 bps for the Total Capital ratio at end-March 2024, or 620 bps for the CET1 ratio pro-forma for the proposed dividend distribution. Eurobank reported a fully loaded CET1 ratio of 18% at end-2025 under the baseline scenario of the European Banking Authority 2023 Stress Test whereas the fully loaded CET1 ratio was 12.2% at end-2025 under the adverse scenario, marking a depletion of around 220 bps. DTCs represented 42% of Eurobank's fully loaded CET1 capital at end-March 2024.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://dbrs.morningstar.com/research/435986.

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 (23 January 2024) https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024) https://dbrs.morningstar.com/research/433881. 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 in its consideration of ESG factors.

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, Eurobank Q1 2024 Results Press Release, Eurobank Q1 2024 Results Presentation, Eurobank Q1 2024 Report, Eurobank 2010-2023 Annual Reports, Eurobank 2023-Q1 2024 Pillar 3 Reports, and Eurobank 2022 Business & Sustainability 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://dbrs.morningstar.com/research/435985.

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: July 10, 2024
Last Rating Date: Not applicable as there is no last rating date.

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