Bancherul - BANCI / ENGLISH / Fitch Downgrades Eurobank's IDR to 'A-' and Individual Rating to 'B/C'; Outlook Negative

Fitch Ratings has today downgraded Greece-based EFG Eurobank Ergasias's (Eurobank) Long-term Issuer Default Rating (IDR) to 'A-' (A minus) from 'A', reflecting the adverse impact of an increasingly difficult operating environment.

The Short-term IDR was downgraded to 'F2' from 'F1' and the Individual rating to 'B/C' from 'B'. The Outlook on the bank's Long-term IDR has been revised to Negative from Stable.

At the same time, Fitch has affirmed the bank's Support rating at '2' and Support Floor at 'BBB'. Eurobank's senior debt was also downgraded to 'A-' (A minus) from 'A' and subordinated debt to 'BBB+' from 'A-' (A minus). The agency has also downgraded the bank's perpetual non-cumulative preferred securities to 'BBB' from 'BBB+' in line with Fitch's notching criteria for capital instruments

The downgrade reflects the negative effects on Eurobank of the abrupt adjustments of the operating environment in its core markets of Greece and, most notably, of weaker south east Europe (SEE). While management is proactively addressing the situation, the Negative Outlook on its Long-term IDR reflects the challenges posed by the more difficult operating environment to defend the bank's financial performance and risk profile given recent rapid loan growth in unseasoned retail markets in Greece and abroad as well as risks (including market, funding and political risks) of operating in SEE.

On a positive note, these negative trends are balanced by Eurobank's strong domestic franchise, its diversified business and revenue base, good management and still satisfactory asset quality and capitalisation. Eurobank will shortly receive EUR950m in preference shares from the Greek government under the Greek bank support plan which will strengthen its Tier 1 ratio to around 10%, which is sound in Fitch's view. Stress tests performed by Fitch on Eurobank's foreign assets (around 25.8% of group total assets at end-2008), notably in Poland, Romania and Bulgaria, show that Eurobank is relatively resilient to a sharp downturn in those markets. Anticipated increases in credit costs should be absorbed by its good earnings capacity and financial flexibility without affecting capitalisation significantly.

Eurobank's pre-impairment operating profitability remained healthy in 2008 mainly due to a good, albeit narrowing, net interest margin helped by still strong loan growth (22.4% in 2008) and wider spreads in SEE operations. Net interest revenue grew strongly by 19% despite higher funding costs. Other non-interest revenues benefited from some gains on hedging instruments and sales from securities, which were set aside for pre-emptive loan loss provisions in Q408. Growth in revenues mitigated high but decelerating cost increases (15% in 2008) from recent expansion in SEE. This allowed Eurobank to grow 16% in pre-impairment operating profit and maintain its good cost/income at 46%.

In spite of some deterioration, Eurobank's asset quality remained satisfactory with an impaired/total loans ratio (according to commonly used IFRS definition) of 3.9% at end-2008 (3.19% at end-2007) and loan impairment coverage of around 63% (above 100% if collaterals are taken into account).

Eurobank's liquidity is supported by a strong customer deposit base (around 80% of total loans at end-2008), balanced wholesale funding sources, increased liquid assets and the Greek government support scheme. In addition, Eurobank has funding gaps in its foreign subsidiaries, which, by following a self-funded loan growth policy, are being managed down.

Eurobank is the second-largest bank in Greece by assets. In Greece, it is the leader in consumer, small business lending, funds management and capital markets. It also has banking operations in Serbia, Romania, Bulgaria, Turkey, Poland, Cyprus and Ukraine. Eurobank is part of the EFG Group, whose ultimate parent EFG Bank European Financial Group, a Swiss bank, is ultimately controlled by Latsis family interests.