DBRS Morningstar Upgrades Piraeus Bank’s Long-Term Issuer Rating to B (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) upgraded the long-term ratings of Piraeus Bank S.A. (the Bank), including the Long-Term Issuer Rating to B (high) from B. The trend on all ratings is Stable. The Bank’s Intrinsic Assessment (IA) has been upgraded to B (high) from B and its Support Assessment has been maintained at SA3. A full list of rating actions is included at the end of this press release.

KEY RATING CONSIDERATIONS

Piraeus Bank S.A. (the Bank) 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. Following the corporate transformation completed in 2020, the Bank is a 100% subsidiary of Piraeus Financial Holdings S.A.

The upgrade reflects the Group’s recent sizeable improvement in asset quality, whilst also noting that it still remains weak by international standards. Our view is that Piraeus should be able to maintain a stronger risk profile compared to the recent past, even when incorporating the expected pressure from high inflation and weaker economic growth, on the back of continued de-risking and net credit expansion as well as more robust coverage against non-performing exposures (NPEs). The upgrade also incorporates the strengthening in the Group’s capital position, and we expect the Group to continue with further internal capital generation supported by higher interest margins and lower credit costs given the improved risk profile. For the same reason, we anticipate stronger core earnings generation, reflecting improved operating efficiency following a deep restructuring process.

The ratings continue to take into account the Group’s robust domestic franchise in retail and corporate banking, and moderate business diversification. We consider the Group’s funding and liquidity position to be sound, although it does potentially remain vulnerable to shocks, should Piraeus struggle to continue to improve its credit fundamentals. The ratings also incorporate the high level of deferred tax credits (DTC) included in the Group’s capital structure which we view as a weaker form of capital.

RATING DRIVERS

An upgrade would occur if Piraeus is able to improve its current risk profile further, while strengthening its capital buffers and consistently demonstrating an improved track record in generating underlying profitability.

A downgrade would occur in the event of a material deterioration in capitalisation and asset quality.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Moderate/Weak

Piraeus is one of the four systemic banking groups in Greece with total assets of around EUR 83 billion at end-September 2022 and a leading domestic market position. The Hellenic Financial Stability Fund (HFSF) remains the Group’s main shareholder, holding 27% of its share capital. After a deep restructuring process due to the global financial crisis and the Greek sovereign debt crisis, Piraeus is aiming to enhance its revenue sources and operational efficiency, increase lending volumes, improve its asset quality, and strengthen capital buffers. Notwithstanding the recent progress, we continue to view the Group’s franchise strength as constrained by the still high, albeit reduced, level of NPEs, the subdued but recovering credit demand and a moderate level of business diversification.

Earnings Combined Building Block (BB) Assessment: Very Weak

Piraeus’s profitability has been very weak in recent years, pressured by lower revenues due to loan book deleveraging and low diversification, as well as restructuring charges and elevated credit costs. This was further exacerbated by the impact from COVID-19 and accelerated de-risking. However, the Group seems to have reversed this trend, reporting a net profit of EUR 780 million in 9M 2022, which compares with a net loss of EUR 3.1 billion in 9M 2021. Excluding one-off items in both periods, net profit would have gone up 72% YoY in 9M 2022. Notwithstanding reduced net interest income due to de-risking, and the volatility in the financial markets, total revenues were up 6% YoY in 9M 2022, underpinned by higher net fees, and sizeable other non-interest income, including the gain on the disposal of the merchant acquiring business. In 9M 2022, the Group's cost-to-income ratio was 48% on an underlying basis, up from 45% in 9M 2021. Loan impairment charges were EUR 512 million in 9M 2022, markedly down from EUR 4.1 billion in 9M 2021, although still implying a sizeable annualised cost of risk of 190 bps. We see the Group's profitability as progressively improving, against the backdrop of higher interest rates and a reduction in cost of risk due to the improved risk profile.

Risk Combined Building Block (BB) Assessment: Weak/Very Weak

Piraeus’s asset quality metrics have improved significantly in recent years, mainly through NPE sales and securitisations under the Hercules Asset Protection Scheme (HAPS), however they remain weak by international standards. As of end-September 2022, gross NPEs were EUR 3.3 billion, down 44% YoY, and down 85% compared to end-2020. Nevertheless, this translates to a still material gross NPE ratio of 8.7% as of end-September 2022, down from 16.6% one year earlier. We consider positive the increase in the Group’s NPE cash coverage to 49.4% as of end-September 2022 from 38.9% one year earlier, based on total loan loss reserves. Also, the Group’s new loan generation was above expectations, up 46% YoY in 9M 2022, mostly driven by corporate activity and projects connected with the European Recovery and Resilience Facility (RRF) funds program, a trend we expect to continue.

Net NPE formation remained negative in 9M 2022, as manageable new NPE inflows were more than offset by NPE outflows, sales, and write-offs, despite the expiry of the pandemic-related support measures. Our view is that new NPE inflows could increase in the coming quarters due to the deterioration in the operating environment. Nonetheless, our expectation is that Piraeus should be able to preserve a stronger risk profile compared to its recent past, on the back of continued de-risking and net credit expansion as well as more robust NPE coverage.

Funding and Liquidity Combined Building Block (BB) Assessment: Moderate

DBRS Morningstar considers that the Group’s funding profile has improved recently, driven by increasing customer deposits, up 9% YoY as of end-September 2022, as well as recourse to ECB sources and to the interbank market, and enhanced access to capital markets, including the issuance of a EUR 350 million senior preferred bond completed in November 2022. However, funding diversification remains only moderate, with customer deposits accounting for 77% of Piraeus’s total funding as of end-September 2022, followed by ECB funding (19%), debt securities issued (3%), and interbank market (1%). The loan book deleveraging coupled by deposit accumulation led to a reduction in the net loan-to-deposit ratio to 63% at end-September 2022. The Group’s Liquidity Coverage Ratio (LCR) and its Net Stable Funding Ratio (NSFR) were 192% and 129% respectively as of end-September 2022, and upcoming bond maturities are manageable. Nonetheless, we consider the funding and liquidity profile to remain potentially vulnerable to shocks should Piraeus struggle to continue to demonstrate structural improvements in its credit fundamentals.

Capitalisation Combined Building Block (BB) Assessment: Weak/Very Weak

Despite the recent improvement thanks to restored organic capital generation and capital management actions, we still view the Group’s capital position as relatively weak, due to the impact from massive de-risking. As of October 1, 2022, and pro-forma for a bond portfolio reclassification from Fair Value Through Other Comprehensive Income (FVOCI) to Amortised Cost (AC), Piraeus reported phased-in CET1 and Total Capital ratios of 12.2% and 16.8% respectively, up from 9.9% and 14.4% at end-September 2021. As a result, the capital buffers were 271 bps and 257 bps respectively over the SREP minimum requirements for CET1 and Total Capital ratios, excluding the ECB’s relaxation of requirements which will end on January 1, 2023. We see the reduction in the Group’s Pillar 2 Requirement (P2R) for 2022 by 25 bps to 3% as a testament to its overall strengthened credit profile. On a pro-forma basis, fully loaded CET1 and Total Capital ratios were 10.7% and 15.4% respectively, implying buffers of around 120 bps. We see the Group’s capitalisation as set to benefit from more sustained internal capital generation going forward, on the back of higher interest rates, reduced credit costs, and a lower burden from unreserved NPEs. The Group’s capital structure, however, remains weak due to sizeable deferred tax credits representing 94% of CET1 Capital as of end-September 2022.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/407009

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

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

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022), in its consideration of ESG factors.

The sources of information used for this rating include Morningstar Inc. and Company Documents, Piraeus 9M 2022 Report, Piraeus 9M 2022 Results Press Release, Piraeus 9M 2022 Results Presentation, Piraeus 9M 2022 Financial Factsheet, Piraeus 2018-2021 Annual Reports, and Piraeus Sustainability & Business Report 2021. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the 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. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/407007

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

Lead Analyst: Andrea Costanzo, Vice President – Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG - Global FIG
Initial Rating Date: January 13, 2022
Last Rating Date: January 13, 2022

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