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S&P: Greek banks are making gradual progress

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S&P Global Ratings believes that Greek banks will continue to make progress in improving funding, asset quality, and profitability, but are still far from a full recovery. 

"Since mid-2016, the Greek banking sector has been making some progress in addressing what we consider to be its main weaknesses: an imbalanced funding structure and weak liquidity profile, very poor asset quality, and low profitability prospects," said S&P Global Ratings credit analyst Regina Argenio. "We expect the Greek banks to continue on this gradual upward path, but in our view meaningful improvements are still a long way off." 

We expect credit losses to remain extremely high over the next two-to-three years, at about 10.3% of loans, as the banks continue to recognize losses embedded in their nonperforming exposures. About 51.6% of banks exposures were nonperforming as of September 2017, and we think they will struggle to achieve a material reduction in the absence of more supportive conditions. 

The sectors ability to turn itself around and consolidate progress will require a sustained improvement in the economic and political environment and a consequent return to confidence of depositors and investors.
 
Nonetheless, 2018 will be a particularly important year for Greece and its banking sector, in our opinion. Greece is expected to exit the third economic adjustment program in August. Successful completion of the program will represent an important milestone in restoring confidence, in our view, even assuming post-program conditions remain severe. 

We expect real GDP growth of 1.3% for 2017, after three positive quarters of growth during the year, and 2.4% on average over 2018-2021. This growth follows a long period of contraction--we estimate that the Greek economy is about 25% smaller in 2017 than it was in 2008. Our forecast is conditional on a period of relatively stable policymaking. A reversal of reforms could put further debt relief at risk, threaten European Central Bank funding for Greek banks, and weigh on medium-term growth prospects. 

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