Morningstar DBRS Upgrades Piraeus Bank's Long-Term Issuer to BB (high), Changes Trend to Positive

DBRS Ratings GmbH (Morningstar DBRS) upgraded the credit ratings of Piraeus Bank S.A. (the Bank), including the Long-Term Issuer Rating to BB (high) from BB. Concurrently, Morningstar DBRS upgraded the credit rating on the Bank's Long-Term Deposits to BBB (low), 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 credit ratings was changed to Positive from Stable. The Bank's IA has been upgraded to BB (high) from BB and its Support Assessment remains SA3. See the 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. Since 2020, the Bank is a 100% subsidiary of Piraeus Financial Holdings S.A.

The upgrade reflects the Group's structurally improved ability to generate earnings on a recurring basis, supported by higher interest rates as well as cost control and lower credit costs. The upgrade also takes into account the continued progress Piraeus has achieved in de-risking its balance sheet, thanks to a reduction in the stock of legacy non-performing exposures (NPEs), as well as limited new NPE inflows and strengthening its loan coverage levels. The combination of these factors, coupled with additional capital management actions, has strengthened Piraeus' capital buffers over its supervisory requirements despite the resumption of dividend distributions and loan growth.

The credit ratings continue to take into account the Group's robust domestic franchise in retail and corporate banking, and stable funding and liquidity position, which relies on a large and sticky deposit base. Nonetheless, the credit ratings also incorporate the moderate diversification of Piraeus' business model, revenue streams, and funding structure as well as the still-high, albeit reduced, level of deferred tax credits (DTCs) included in the Group's capital structure.

The Positive trend reflects Morningstar DBRS' view that the Group's profitability and risk profile will likely remain sound in the foreseeable future despite some potential deterioration triggered by interest margin compression, higher investments for digitalisation, and potentially higher loan loss provisions (LLPs) if asset quality risks materialise in the current still-high interest-rate environment. The Group's strong operating efficiency as well as its more robust loan coverage levels and capital buffers represent key mitigating factors. This, combined with potential further de-risking, the expected more benign prospects for the Greek economy relative to the European average, and some support for credit expansion stemming from the European Recovery and Resilience Facility (RRF) funds and lower rates should help Piraeus face any potential downside risk.

CREDIT RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require further improvement in Piraeus's quality of capital while maintaining its improved profitability levels, asset quality and capital buffers on a sustained basis.

Given the Positive trend, a downgrade of the credit ratings is unlikely at this time. However, the trend could be changed to Stable in the event of a material deterioration in Piraeus's capitalisation or asset quality or should Piraeus's profitability revert to substantially weaker levels.

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 77 billion at end-June 2024 and a leading domestic market position. Nonetheless, Morningstar DBRS views the Group's business model as still being constrained by only moderate diversification. Since March 2024, Piraeus has been fully privatised following the Hellenic Financial Stability Fund's disposal of its 27% equity stake. The Group has been investing more in information and technology infrastructure as well as in digitalisation, and its online bank "snappi" has recently received a full banking license with the aim to be launched in the next six to nine months in Greece.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
Piraeus's profitability has improved in recent times, mainly driven by higher net interest income and net fees as well as cost control and reduced LLPs. However, in Morningstar DBRS' view, some of the Group's improved earnings generation will likely be offset by interest margin compression due to the expected reduction in interest rates, higher competition for loan volumes, and higher funding costs, as well as by higher operating expenses because of digital investments and possibly by higher LLPs in view of new risks to asset quality. Piraeus reported a net profit of EUR 564 million in H1 2024, up 89% year on year (YOY). Total revenues were up 6% YOY in H1 2024, reflecting higher interest rates as well as higher loan and fixed-income security volumes, limited pass-through of higher rates to deposit funding, and good momentum in most fee activity segments, also helped by some initiatives and partnerships in the cards business. The Group's recurring cost-to-income ratio was 29% in H1 2024, down from 34% in H1 2023. Piraeus' annualised cost of risk remained at a sizeable 54 basis points (bps) in H1 2024, albeit significantly down from 200 bps in H1 2023.

Risk Combined Building Block (BB) Assessment: Moderate/Weak
Piraeus's asset quality metrics have improved further, and they compare more favourably with European peers while remaining relatively weak by international standards. Gross NPEs totalled EUR 1.3 billion at end-June 2024, stable compared with end-2023 but down 50% since end-2022. The gross NPE ratio was 3.3% at end-June 2024 (or 1.8% net of provisions), down from 5.5% one year earlier. The Group's NPE cash coverage increased by 2% to 59% in the same period, based on total loan loss reserves. Stage 2 loans (loans where credit risk has increased since origination) represented 8% of gross loans at end-June 2024, down from 9% at end-2023. Unlike most European peers, Piraeus reported net credit expansion in the performing loan book of around EUR 1.2 billion in H1 2024, supported by sustained new loan volumes mainly in the corporate business, including RRF-related projects, and, despite higher interest rates, by high corporate repayments and some slowdown in the economy.

The Group's securities portfolio exceeded EUR 15 billion at end-June 2024, or 20% of its balance sheet. It mainly consisted of Greek sovereign bonds and other European sovereign bonds. Notwithstanding that around 87% of total securities were classified at Amortised Cost (AC) at end-June 2024, and their fair value was lower than their carrying value because of the increase in interest rates, Morningstar DBRS does not expect these unrealised losses to materialise given Piraeus's solid liquidity position.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
Piraeus's funding and liquidity profile has benefitted from growth in customer deposits as well as enhanced access to the interbank and capital markets. Nonetheless, the level of diversification in the Group's funding mix remains moderate with customer deposits representing 90% of its total funding at end-June 2024. Deposits are primarily granular, raised from retail clients, and 77% of total domestic deposits were savings and sight deposits, flat YOY as customer demand for products carrying higher remuneration has gradually stabilised. Debt securities in issue represented around 5% of Piraeus's total funding at end-June 2024 while ECB funding totalled EUR 1 billion, down 71% compared with end-2023 as a result of TLTRO III repayments, which compares with EUR 8.8 billion of cash and balances with central banks. The Group's liquidity coverage ratio and its net stable funding ratio were 215% and 133% respectively at end-June 2024, while its net loan-to-deposit ratio was 63%.

Capitalisation Combined Building Block (BB) Assessment: Weak/Very Weak
Piraeus' capitalisation has strengthened further in recent times as a result of improved earnings generation as well as a stronger balance sheet and capital management actions, and despite resumed dividend distributions and loan growth. Nonetheless, the quality of the Group's capital remains relatively weak considering the still high, albeit reduced, level of DTCs accounted for in its capital structure. As of end-June 2024, and including an accrual for a 30% dividend pay-out, Piraeus's fully loaded CET1 and Total Capital ratios were 13.9% and 18.6%, respectively (or 14.2% and 19.4% pro forma), up from 13.2% and 17.8% at end-2023. As a result, the capital buffers over the 2024 supervisory requirements amounted to around 400 bps for both CET1 and Total Capital ratios at end-June 2024, or 440 and 480 bps on a pro forma basis. DTCs represented a still-high 68% of CET1 capital at end-June 2024, albeit down from 76% at end-2023.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/440546.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance 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 Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

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 Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 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, Piraeus H1 2024 Report, Piraeus H1 2024 Results Press Release, Piraeus H1 2024 Results Presentation, Piraeus H1 2024 Financial Factsheet, Piraeus 2020-2023 Annual Reports, Piraeus Q1 2024 Pillar 3 Report, Piraeus 2023 Sustainability & Business Report, and Piraeus 2023 TCFD Report. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

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/440547.

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: 13 January 2022
Last Rating Date: 6 December 2023

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