Banks operating in Cyprus, including Eurobank and Alpha Bank Cyprus through their Greek parent groups, stand to benefit from improving conditions in the Greek banking sector, as separate assessments by Fitch Ratings and UBS pointed to stronger growth prospects, resilient profitability and further lending expansion despite lingering structural risks.

Fitch said its decision to upgrade Greece’s operating environment score to ‘BBB’ from ‘BBB-‘ reflects improved business prospects for banks, resilient economic growth and favourable funding conditions.

The ratings agency explained that the stronger operating environment supported its recent upgrades of the National Bank of Greece and Eurobank to BBB with stable outlooks, while also underpinning the positive outlook assigned to Piraeus Bank, which remains rated BBB-.

The agency, however, cautioned that structural weaknesses persist, particularly the large stock of legacy distressed assets that remain outside the banking system and pockets of risk within retail banking.

Greek banks are expected to continue outperforming much of Europe, with Fitch forecasting economic growth of just over 2 per cent annually between 2023 and 2025 despite geopolitical tensions and global trade uncertainty.

Growth is expected to ease slightly in 2026, mainly because of the impact of the conflict in the Middle East, although the economy should continue to benefit from the final year of investment funding under the NextGenerationEU programme.

Over the medium term, Fitch expects Greek income levels to continue converging towards those of the eurozone, while estimating potential economic growth at around 2 per cent, supported by stronger household finances, continued employment growth and higher investment.

The agency also expects loan growth to remain in the high single digits during 2026 and 2027, following growth of 10 per cent in 2025, driven primarily by corporate lending.

Corporate borrowers are generally considered financially healthy, with moderate leverage, although banks remain significantly exposed to sectors including energy, shipping, manufacturing, services and tourism.

Retail lending is also showing signs of recovery from a low base, with mortgage lending expanding for the first time since 2008.

Fitch said lending standards remain broadly appropriate, supported by binding measures introduced by the Bank of Greece, although underwriting criteria are somewhat less stringent under government-backed lending schemes, with associated risks remaining manageable.

The agency also highlighted the growing importance of fee-generating activities, with banks strengthening their positions in wealth management and insurance through acquisitions and strategic partnerships.

Assets under management have increased largely because customers have shifted deposits into fixed-income investment products, while lenders have gradually expanded their range of more sophisticated investment offerings.

According to Fitch, the major Greek banks are well placed to capitalise on these trends thanks to their strong domestic franchises and are expected to maintain an operating profit-to-risk weighted assets ratio of at least 3.5 per cent during 2026 and 2027.

Despite the positive outlook, Fitch warned that challenges remain.

Household incomes continue to lag behind those of many European countries, while unemployment, although declining, remains relatively high.

The agency also identified the slow resolution of securitised distressed assets managed by loan servicers, equivalent to around 30 per cent of Greece’s gross domestic product, as an ongoing structural issue that continues to keep many borrowers outside the banking system.

Even so, Fitch said this has not prevented the recovery in demand for retail lending, adding that faster rehabilitation of these borrowers and possible repurchases of distressed assets by banks could support medium-term credit growth.

The agency also pointed to a recent court ruling concerning the calculation of interest on loans covered by the Katseli law, saying it could create legal uncertainty and affect payment discipline.

Additional risks remain linked to older mortgage loans with rising instalments and loans denominated in Swiss francs.

Nevertheless, Fitch believes the overall impact will be contained because banks have already built sufficient provisions and now possess stronger credit profiles that should enable them to manage these risks while maintaining structurally higher profitability.

UBS also struck an optimistic tone, saying market expectations for Greek banks continue to improve, while in some cases the investment bank is even more optimistic than broader market consensus on future earnings and shareholder distributions.

In its latest review of the European banking sector, UBS replaced Eurobank with the National Bank of Greece in its list of top European banking picks, saying the latter offers greater upside potential.

The bank maintained a buy recommendation on the National Bank of Greece with a target price of €18.20, implying upside of around 16 per cent and an estimated total potential return of about 20 per cent when expected dividend income is included.

UBS also observed that upward revisions to European banks’ earnings forecasts resumed in June.

Alpha Bank was among the banks recording the largest increases in market earnings forecasts for 2027.

For the National Bank of Greece, UBS believes there is still scope for further upgrades, with its own 2027 earnings forecast standing around 6 per cent above market consensus.

While UBS remains more cautious than the market on Alpha Bank’s earnings outlook, it is significantly more optimistic regarding shareholder distributions, estimating that 2027 dividends could be as much as 44 per cent higher than consensus expectations.

For Eurobank, UBS’s profitability forecasts are broadly in line with market expectations, although its dividend forecasts are up to 35 per cent higher than consensus for 2027.

The investment bank also expects the National Bank of Greece to deliver earnings per share around 5 per cent above market expectations in 2027, while its forecasts for Piraeus Bank remain broadly aligned with consensus for both earnings and shareholder distributions.

Looking more broadly across Europe, UBS maintained an overweight stance on the banking sector, pointing out that bank shares have outperformed the wider market by around 10 percentage points since the start of the year.

The investment bank said improving macroeconomic expectations, stronger revenue forecasts ahead of second-quarter results and attractive valuations continue to support the sector, with European banks still trading at roughly a 30 per cent discount to the wider market based on price-to-earnings multiples.

UBS expects investors to focus during the current earnings season on merger and acquisition prospects, competition for lending and deposit margins, possible upgrades to banks’ 2026 guidance, political developments in countries including Greece, France and the United Kingdom, as well as the outlook for interest rates.