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Rating Action:

MOODY'S CONFIRMS THE D- FINANCIAL STRENGTH RATING OF AGRICULTURAL BANK OF GREECE; OUTLOOK NEGATIVE

17 Nov 2005
MOODY'S CONFIRMS THE D- FINANCIAL STRENGTH RATING OF AGRICULTURAL BANK OF GREECE; OUTLOOK NEGATIVE

Limassol, November 17, 2005 -- Moody's Investors Service has confirmed the D- financial strength rating (FSR) assigned to Agricultural Bank of Greece SA (ABG). At the same time, Moody's has affirmed the Baa1/Prime-2 foreign currency deposit ratings assigned to ABG and the Baa3 subordinated debt rating of ABG Finance International. The outlook for the deposit and debt ratings is stable, while the outlook for the FSR is negative.

This rating action concluded a review process initiated to assess the possible negative impact of the legislation regarding the systemic restructuring of borrowers' bank debts (the "Panotokia Law") on ABG's financial fundamentals. According to the Panotokia Law (introduced in August 2004), borrowers' long-outstanding debt that had multiplied due to past high interest rates had to be restructured and rescheduled over seven years with a two-year grace period. The law provided that the total amount of loans outstanding extended by Greek banks, including ABG, should not exceed specified limits, with amounts beyond these limits having to be written off.

PANOTOKIA LAW HAS COST ABG €400 IN ADDED PROVISIONS

According to ABG's management, 85,000 customers with €1.3 billion of on-balance sheet loans were affected, necessitating an approximate €800 million write-off or a €400 million hike in already existing loan loss reserves.

ADDITIONAL IFRS ADOPTION CHARGES INCURRED

In addition to the €400 million provision charge related to the Panotokia Law, ABG was required, as part of the IFRS adoption, to boost its loan-loss reserves by another €500 million and to take a €293 million charge relating to the shortfall in its auxiliary pension fund scheme.

FRESH INJECTION HAS RESTORED EQUITY AND PREVENTED AN FSR DOWNGRADE

To absorb these charges and to restore its equity, ABG made a rights issue of about €1.25 billion during the first half of 2005. As a result, the bank's equity (on a consolidated basis) was topped up to €1.4 billion in June 2005, accounting for about 7% of total assets. Moody's explains that the restoration of the bank's equity position was the main factor preventing an FSR downgrade in the rating review process.

CURRENT MANAGEMENT IS MAKING POSITIVE CHANGES

However, Moody's views positively the current management's efforts to transform ABG from a state-supported agricultural bank into a profitable, commercially-driven, universal bank by expanding its business with the non-farming sector. Accordingly, the bank has reorganised its branch network and is in the process of rebranding branches, has upgraded its IT systems and is launching new products to existing and new clients.

NEGATIVE OUTLOOK REFLECTS MOODY'S CONCERNS

Moody's notes that the outlook for ABG's D- FSR is negative and reflects challenges that need monitoring.

TIME IS NEEDED TO BUILD UP A TRACK RECORD

In Moody's view, ABG faces challenges going forward, some of which are beyond management's control. One of the key issues ahead is how successful ABG will be in winning a desirable quality of business with non-agriculture-related customers, as its new strategy stipulates. Furthermore, ABG's recent incursion into the household sector has been taking place in tandem with benign economic conditions in Greece, suggesting that the resilience of its credit portfolio, as well as the adequacy and the appropriateness of its credit risk management systems, remain to be tested. Finally, the transition in ABG's role will require a major change in the perception and expectations of its existing customers.

FUTURE PERFORMANCE OF RESTRUCTURED LOANS NEEDS TO BE MONITORED

The process of implementing the Panotokia Law involved the signing of restructuring agreements with customers throughout 2005. Although Moody's views positively the fact that through this restructuring a number of borrowers will have the opportunity to normalise their relationship with ABG, the poor past payment record of the farmers -- the bank's main though declining customer segment -- suggests that the future post-restructuring performance of these loans may remain uncertain for some time. Moody's believes that the restructured loan portfolio may have a loss content that cannot be quantified at present, and will monitor its progress.

IMPROVEMENTS IN EARNING POWER NEED TO BE SUSTAINABLE

Although ABG reported improved profitability during the first half of 2005, the bank's earning power remains relatively low, while a heavy provisioning burden continues to pressure bottom-line profitability.

NON-PROVISIONED NPLs WEAKEN ECONOMIC CAPITAL

Furthermore, though improving, ABG's credit quality remains relatively poor with a high level of problem loans. According to management, non-performing loans (NPLs) (loans overdue by more than six months) accounted for 19% of gross loans, with loan-loss reserves covering 66% of NPLs and non-provisioned NPLs accounting for 56% of June 2005 equity. Hence, despite the rights issue, Moody's estimates that the bank's economic capitalisation remains weak, pressuring its FSR. Furthermore, Moody's believes that the bank's provisioning coverage remains low compared to internationally accepted levels, especially when taking into account ABG's lax classification criterion and the uncertainty as regards the future performance of recently restructured loans.

Going forward, the FSR could slip if (a) the level of NPLs were to increase, leading to higher provisioning requirements and hence, poor profitability, and (b) the bank's economic capital were to weaken further or the level of non-provisioned NPLs increase significantly. On the other hand, the FSR could benefit from higher equity levels, better NPLs provisioning coverage and/or reduced NPLs, and higher and more sustainable profitability.

The Baa1/Prime-2 deposit ratings and Baa3 subordinated debt ratings were affirmed, based on strong implied support reflecting the bank's majority ownership by the Hellenic Republic and its importance within the Greek banking system and economy.

Agricultural Bank of Greece is headquartered in Athens, Greece, and had June 2005 total assets of €19.9 billion (based on IFRS).

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
Constantinos Pittalis
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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