Greek banks close gap with Europe on profitability and capital

Greek banks, some of which are also operational in Cyprus, are moving closer in line with European peers after restoring capital adequacy, ranking among the most profitable in Europe and consistently outperforming the euro area average, according to sector data and central bank and supervisory reports covering the opening months of 2026. The sector has maintained strong profitability, robust liquidity and solid capital buffers, while asset quality continues to improve, gradually narrowing the gap with European benchmarks. According to a recent European Central Bank (ECB) report, the findings of which were highlighted by Greek business outlet Newmoney, Greek banks continue to outperform the European average across several key indicators, including profitability, efficiency and liquidity. Return on equity increased by 8.73 per cent in the first quarter, compared with 4.7 per cent in Europe, highlighting stronger earnings momentum. Organic profitability reached 4.82 per cent, compared with 2.77 per cent for European systemic banks. Efficiency metrics also remain significantly stronger, with the cost-to-income ratio at 36 per cent, compared with 55 per cent in Europe, while profitability levels stood at 11 per cent versus 10 per cent across the euro area. Liquidity indicators continue to show a clear advantage, with the loans-to-deposits ratio at 65 per cent, compared with 102 per cent in Europe, and liquidity coverage at 189 per cent, compared with 154 per cent. The Bank of Greece also highlighted further improvements in its latest monetary policy report, pointing to sustained capital strength and operational resilience. Return on equity stood at 10.7 per cent, well above the euro area average, reflecting improved operational efficiency despite credit expansion and capital distribution to shareholders. The Common Equity Tier 1 ratio reached 14.9 per cent, while the total capital ratio remained close to 20 per cent, underlining the sector’s ability to absorb external shocks. Greek banks also maintained strong access to international capital markets. In 2025, they raised €2.7 billion through AT1 instruments and €0.9 billion through Tier 2 bonds, with momentum continuing into 2026 through additional capital and senior bond issuance. Green bond issuance has accelerated, with €1.2 billion raised since the start of the year, signalling a growing role for banks in financing the green transition. Asset quality continues to improve steadily. The non-performing loan ratio stood at 3.4 per cent in the first quarter of 2026, broadly stable compared with the end of 2025, and still above the euro area average, though convergence continues. The Stage 2 loan ratio fell to 6.8 per cent, below the European average, reflecting stronger borrower behaviour and fewer new inflows of problem loans. This has also reduced credit risk provisions, supporting stronger underlying earnings. Liquidity remains one of the strongest features of the sector. The liquidity coverage ratio stood at 187.7 per cent, well above regulatory requirements and euro area averages, while the loans-to-deposits ratio reached 72.5 per cent, compared with around 100 per cent in the euro area. Greek banks also passed recent stress tests conducted by the International Monetary Fund, which described them as resilient and well capitalised. Investment banks remain broadly positive. Morgan Stanley said valuations remain attractive, with Greek banks trading at around 10 per cent lower price-to-earnings ratios than European peers, despite recent share price gains. It added that further upside could come from Greece’s potential reclassification to developed market status by STOXX and FTSE in September, and by MSCI in 2027. UBS maintained buy recommendations for systemic banks, citing credit growth, acquisitions and strong profitability as continued support for valuations. It also said the investment case remains intact despite geopolitical tensions in the Middle East. The sector currently trades at a price-to-earnings ratio of 8.1 times for 2027, around 13 per cent below European banks. Deutsche Bank said Greek and Cypriot banks continue to benefit from a stronger macroeconomic environment than much of Europe, supported by resilient growth, rising investment and sustained corporate lending. Jefferies also remains positive, saying Greek banks still have upside potential and trade at around a 15 per cent discount to European peers despite stronger fundamentals. It added that Greece has moved beyond post-bailout recovery into a phase of sustainable growth. In a broader strategic outlook, UBS said Greek banks are entering a new phase focused on shareholder returns rather than balance sheet repair. It highlighted strong credit expansion, excess capital deployment and higher dividend payouts as key drivers of future performance. It expects Greece’s economy to grow at around 2 per cent over the coming years, supported by recovery fund inflows and a solid fiscal position, creating favourable conditions for further lending growth, particularly to businesses. UBS said the key shift is the transition from cleaning up balance sheets to deploying capital more effectively, including dividends and selective acquisitions. Net interest income has stabilised, while loan growth and fee income are expected to become the main drivers of earnings. Non-performing exposures have returned to normalised levels, keeping credit risk costs low and supporting profitability. The report concluded that despite strong recent gains, Greek banks still trade at attractive valuations compared with European peers, leaving room for further re-rating of the sector.