Greek banks have significantly improved their asset quality over the past year, and short-term risks appear manageable, according to analysts.

All four of Greece's four largest lenders — National Bank of Greece SA, Piraeus Financial Holdings SA, Eurobank Ergasias Services and Holdings SA and Alpha Services and Holdings SA — reduced their nonperforming exposure ratios to single-digit figures in the second quarter, from between 13% and 26% a year earlier, continuing a yearslong process of removing bad loans from their balance sheets.

There is still room to cut these ratios further, but "the vast amount of the difficult work" of reducing nonperforming exposures, or NPEs, is now behind these banks, Alex Boulougouris, co-head of research at financial services firm Wood & Co., told S&P Global Market Intelligence.

NPEs are loans that are 90 days past due, as well as others defined as "unlikely to pay."

Hercules' task nears end

The banks have been deleveraging NPEs through securitizations under the government's Hellenic Asset Protection Scheme, or HAPS, also known as the Hercules Scheme.

Some deals are expected to complete this year, such as Piraeus' Sunrise III and Solar securitizations, and NBG's Project Frontier II. But the program is largely complete, Boulougouris said.

"Thus we do not think that the Hercules scheme is at risk due to the current market environment," Boulougouris said.

Bad loans outlook

Cost of risk is expected to be less of a burden for Greek banks over the coming 12 to 18 months, S&P Global Ratings said in a July 19 report. Disruption from the Russia-Ukraine conflict and the cost of living crisis are likely to lead to some new nonperforming loan formation, but this should be manageable, the rating agency said.

An expected solid tourism season will support GDP, which is likely to average more than 3.0% from 2023 to 2025. Ratings upgraded its outlook on Alpha Bank, Eurobank and National Bank of Greece to positive from stable and affirmed its stable outlook on Piraeus.

The formation of material new NPEs is not expected in 2022 amid strong GDP growth, Boulougouris said, although there could be an uptick in bad loans in some segments such as retail and some small and medium-sized enterprises.

Asset quality in 2023 will depend on various external factors such as the gas supply into Europe and potential recessions in other eurozone countries. Greek banks have some significant offsetting factors, including long deleveraging for more than 10 years and support from the EU, Boulougouris said.

* Access a country risk summary for Greece on CapIQPro. * Access aggregate asset quality data for Greece's banks on CapIQPro.