Limassol, December 04, 2018 -- Moody's Investors Service (Moody's) has today changed to positive from
stable the outlook on Eurobank Ergasias S.A. (Eurobank)
long-term deposit ratings, which have been affirmed at Caa2.
At the same time, Moody's also affirmed the bank's B3(cr)/NP(cr)
Counterparty Risk Assessment and all other outstanding ratings,
as well as its caa2 standalone baseline credit assessment (BCA).
The positive outlook takes into consideration the bank's recently
announced transformation plan, which, if executed successfully,
will improve its capital adequacy and asset quality. The list of
ratings affected by today's rating action is at the end of this press
release.
RATINGS RATIONALE
-- POSITIVE OUTLOOK
The primary driver of the positive outlook is the transformation plan
announced by Eurobank on 26 November, which envisages a merger with
Grivalia Properties REIC AE (Grivalia), the second largest real-estate
company in Greece, and the deconsolidation of approximately €7
billion of nonperforming exposures (NPEs) through the set-up of
a holding company structure and a special purpose vehicle (SPV) that will
securitise these NPEs. Both of these moves are expected to enhance
the bank's tangible common equity and asset quality, exerting
positive pressure on its standalone credit profile and BCA of caa2.
Merger with Grivalia improves Eurobank's capital adequacy
The merger with Grivalia will be carried out with no cash involved and
the issuance of new Eurobank shares to the existing shareholders of Grivalia,
including Fairfax Financial Holdings Limited (Fairfax, Baa3 stable).
Fairfax, which is a Canadian insurance group, will become
the largest shareholder in the combined entity with a 32.9%
stake given its current stakes of 18.2% in Eurobank and
51.4% in Grivalia. The merger is likely to be completed
by the end of April 2019 and is subject to approvals from the general
shareholder meetings of the two entities and from the regulatory authorities.
The immediate impact from the merger will be on the bank's capital
base, with an additional €943 million of new common equity
Tier 1 (CET1) capital enhancing its pro-forma fully-loaded
CET1 ratio to 13.8% from 11.7% reported in
September 2018, and its phased-in CET1 ratio to 16.6%
from 14.6%. Concurrently, the bank's
total capital adequacy ratio will also increase to 19% from 17.1%
in September 2018, and will be the highest among all rated Greek
banks.
Moody's considers that the stronger regulatory capital ratios will
be credit positive for the bank, although the higher capital figures
will be driven by relatively illiquid assets as the bank will add to its
balance sheet around €1 billion of real estate assets comprising
of 117 commercial properties. Accordingly, the bank will
hold in total around €2.2 billion of real estate assets,
comprising around 3.7% of its total assets, constraining
somewhat its liquidity management.
In addition, a large proportion of the bank's CET1 capital
is in the form of deferred tax credits (DTCs), which Moody's
considers as low quality capital due to the government's weak credit
standing (Government of Greece, B3 positive). However,
as a result of the merger, the proportion of DTCs in the bank's
phased-in CET1 capital will decline to around 62% from around
70% as of September 2018, which to some extent improves its
tangible capital position.
Deconsolidation of NPEs accelerates the bank's asset quality improvement
plan
The second part of Eurobank's transformation plan envisages the
transfer of approximately €7 billion NPEs (out of €17.7
billion in total as of September 2018) into an SPV and their subsequent
securitisation, which will eventually be deconsolidated from the
banking entity that will be set-up. The bank aims to form
a holding company structure and transfer its core banking operations (all
assets and liabilities) into a separate banking subsidiary that will hold
the group's banking license in Greece. Accordingly,
the bank expects that this transaction will reduce its NPE ratio to around
15% by the end of 2019 from 39% reported in September 2018,
which will pave the way for further reduction to less than 10%
by 2021.
Moody's notes that despite the balance sheet de-risking following
the de-recognition of a significant part of deeply delinquent and
denounced NPEs, Eurobank will retain the senior securitised notes
to be issued, while the mezzanine and junior notes will be either
distributed to the holding company's shareholders or auctioned to
the market. Accordingly, the bank will retain certain level
of credit risk through these senior notes, although the potential
first loss from these NPEs will be absorbed by the other note holders.
The transaction will occur at fair value, which could cause some
additional losses for the bank impacting its capital base, although
the bank aims for a fully-loaded CET1 ratio of at least 12%
by 2020 down from a pro-forma 13.8% as of September
2018 incorporating the merger.
The rating agency considers the execution risk for the bank's quite
ambitious transformation plan above to be relatively high. Any
potential delay or problems in implementing the bank's transformation
plan could trigger a revision of Eurobank's rating outlook back
to stable.
-- RATING AFFIRMATION
The affirmation of Eurobank's deposit and senior debt ratings at
Caa2 considers its relatively weak BCA of caa2, but also the rating
agency's advanced Loss Given Failure (LGF) analysis that assesses
the potential loss for each creditor class in case the bank is resolved.
The LGF analysis for Eurobank is mainly driven by its gradually increasing
pool of deposits in Greece, and results in no rating uplift from
its BCA for depositors and senior creditors.
Eurobank's BCA reflects the still-challenging, but improving,
economic conditions in Greece, as well as the immediate challenge
to reduce its high stock of NPEs. Additional challenges for the
bank include its ability to eliminate its emergency liquidity assistance
(ELA) balance (€1.2 billion as of 9 November 2018) and attract
more customer deposits.
WHAT COULD MOVE THE RATINGS UP/DOWN
Over the next 12-18 months, upward pressure on the bank's
ratings could arise following a successful implementation of its recently
announced transformation plan. Tangible benefits in the bank's
asset quality, profitability and capital from its transformation
plan will positively affect its BCA. The return of more customer
deposits to the banking system combined with sustainable improvement in
the country's macroeconomic environment will also help the bank to fully
repay its ELA in 2019, improving also its funding profile.
Eurobank's deposit and senior debt ratings could be downgraded in the
event of political turmoil in the country for an extended period of time
that substantially affects domestic consumption and economic activity,
which have gradually been recovering from a very low base. In addition,
the deposit ratings could be downgraded if the sovereign rating is downgraded
or in case the bank is unable to reduce significantly its high stock of
NPEs by 2019-20.
Eurobank Ergasias S.A. is headquartered in Athens,
Greece, with total consolidated assets of €57.3 billion
as at 30 September 2018, which will increase to €58.3
billion following the merger.
LIST OF AFFECTED RATINGS
Issuer: Eurobank Ergasias S.A.
..Affirmations:
.... Adjusted Baseline Credit Assessment,
Affirmed caa2
.... Baseline Credit Assessment, Affirmed
caa2
.... Long-term Counterparty Risk Assessment,
Affirmed B3(cr)
.... Short-term Counterparty Risk Assessment,
Affirmed NP(cr)
.... Short-term Counterparty Risk Rating,
Affirmed NP
.... Long-term Counterparty Risk Rating,
Affirmed Caa1
.... Short-term Deposit Rating,
Affirmed NP
.... Other Short-term, Affirmed
(P)NP
.... Subordinate Medium-Term Note Program,
Affirmed (P)Caa3
.... Senior Unsecured Medium-Term Note
Program, Affirmed (P)Caa2
....Backed Senior Unsecured Medium-Term
Note Program, Affirmed (P)B3
.... Backed Other Short-term,
Affirmed (P)NP
.... Long-term Bank Deposits,
Affirmed Caa2, outlook changed to Positive from Stable
..Outlook Action:
....Outlook Changed To Positive From Stable
Issuer: ERB Hellas (Cayman Islands) Limited
..Affirmations:
....Backed Other Short-term,
Affirmed (P)NP
.... Backed Subordinate Medium-Term
Note Program, Affirmed (P)Caa3
.... Backed Senior Unsecured Medium-Term
Note Program, Affirmed (P)Caa2
..No Outlook assigned
Issuer: ERB Hellas Funding Limited
....Pref. Stock Non-cumulative
Preferred Stock, Affirmed C (hyb)
..No Outlook assigned
Issuer: ERB Hellas PLC
.... Backed Other Short-term,
Affirmed (P)NP
.... Backed Subordinate Multiple Seniority
Medium-Term Note Program, Affirmed (P)Caa3
.... Backed Senior Unsecured Medium-Term
Note Program, Affirmed (P)Caa2
.... Backed Subordinate, Affirmed Caa3
.... Backed Commercial Paper, Affirmed
NP
.... Backed Senior Unsecured Regular Bond/Debenture,
Affirmed Caa2, outlook changed to Positive from Stable
..No Outlook assigned
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
August 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Nondas Nicolaides
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
