ATHENS- Greek banks have a large share of their loans subject to payment freezes, leaving them at risk in the future of increased provisioning and a deterioration in profitability, the EU Commission said on Wednesday.

The EU's eighth surveillance report serves as a basis for the Eurogroup of finance ministers to decide on the release of the next set of policy-contingent debt measures for Greece, worth 767 million euros ($909.5 million).

These measures, agreed with the Eurogroup in June 2018, include the transfer to Greece of funds stemming from central banks' holdings of Greek government bonds under the Securities Markets Programme.

"While accommodative monetary policy conditions have allowed Greek banks to benefit from favourable liquidity conditions, the economic effects of the pandemic are expected to squeeze banks' already low profitability going forward," the EU enhanced surveillance report said.

It said the reduction of banks' non-performing loans continued in the first half of 2020, supported by moratoria on loan repayments which are set to expire at the end of this year.

The ratio of non-performing loans (NPLs) fell to 36.7% in June but remained the highest in the euro zone.

Loan payment moratoria, coupled with a temporary supervisory flexibility, were instrumental in shielding banks' balance sheets from the impact of the pandemic on the credit risk of their loan books, the report said.

"Banks have started to adjust their NPL reduction strategies but loan-loss provisions booked so far might only partially capture the eventual effect of the pandemic on asset quality," the report said, noting that banks' internal capacity to viably restructure loans "remains a challenge."

Greek banks' return on equity remained one of the lowest in the euro zone in the first half of 2020.

(Reporting by George Georgiopoulos;Editing by Elaine Hardcastle) ((george.georgiopoulos@thomsonreuters.com; +30210 337 6437; Reuters Messaging: george.georgiopoulos.thomsonreuters.com@reuters.net))