Fresh headwinds for Greek banks

Greece banks

Greece's banking system, still in the clutches of capital controls, is facing fresh headwinds.

On Monday, credit rating agency Moody's slapped a negative label on Greek banks after a drop in deposits for a second straight in January due to growing uncertainty amid Greece's deadlock with creditors.

The resumption of talks between the Greek government and lenders - euro zone counties and the International Monetary Fund - last week has created hopes that a deal could be soon in a development that would provide a boost to banks, said Moody's.

Some 40 billion euros of Greek bank deposits fled the system in 2015 when Greece nearly went bankrupt and flying out of the euro, leaving lenders heavily reliant on more emergency liquidity provided by the Greek central bank. The return of this money is vital for the banks to secure their long term financing ability, added Moody's.

An increase in the reliance of emergency liquidity to offset falling deposits would increase financing costs and reduce their profitability, harming confidence and could keep capital controls in place for longer, it added.

After being recapitalised three times in recent years, it has been a tough start to the year for Greek banks.

Non performing loans, the biggest problem faced by the sector, rose again in the first few months of the year after dipping for several quarters in 2016. This is likely to prompt them to up provisions - money set aside - for bad loans in the last quarter of 2016, eating into their meager profits, analysts says. This comes as the legal framework allowing Greek banks to better manage the 110 billion euros on bad loans on their balance sheets further snags, preventing their getting them off their books.

Greece's top four banks are expected to unveil fourth quarter earnings in coming weeks.