BUSINESS

No end seen to local credit crunch yet

Return to normal conditions may take longer than many businesspeople and other professionals think By Dimitris Kontogiannis

The core Greek banks have strengthened their balance sheets by proceeding with sizable share capital increases to meet the capital shortfalls identified in stress tests conducted by the Bank of Greece in cooperation with BlackRock. But businessmen and others expecting bank credit to quickly start flowing back to the private sector are bound to be disappointed. The return to normal credit conditions will likely be slow and may take longer than many businessmen and other professionals think.

National Bank is the latest among the country’s big four credit institutions to secure 2.5 billion euros and satisfy the capital needs identified by the Greek central bank’s stress tests last February. Eurobank has successfully raised 2.8 billion in a share capital increase while Piraeus Bank and Alpha Bank raised 1.7 billion euros and 1.2 billion euros respectively. Alpha used 940 million euros to redeem its preference shares held by the state.

The four banks raised more than 8 billion euros in total in share offerings in a relatively short period of time.

Under the base scenario of the stress tests, Eurobank’s capital shortfall was estimated at around 2.9 billion euros, National Bank’s at around 2.2 billion, Piraeus’s at 425 million and Alpha’s at about 400 million euros. The total bill for the banking sector, including non-systemic Attica Bank and Panellinia Bank, amounted to about 6.4 billion euros.

Readers are reminded that the base scenario in the Greek central bank/BlackRock stress tests projected a contraction of the gross domestic product to the tune of 4.2 percent in 2013, a modest recovery of 0.6 percent in 2014 and annual growth rates of 2.9 and 3.7 percent in 2015 and 2016 respectively. The gap is much bigger under the adverse scenario, which sees the economy contracting by 2 percent this year and 0.3 percent in 2015 before growing by a meager 1 percent in 2016.

Encouraged by the banks’ success in boosting their capital bases and liquidity by selling bonds to foreign investors as well as Greece’s market access, many local businessmen and others, such as real estate agents and advisers, expect banks to loosen credit criteria and provide billions of euro in loans to the private sector. This has not been the case so far. According to the latest central bank data, credit institutions continued to provide less new money in loans than is being repaid. The balance of funding to private companies and households stood at about 215.9 billion euros last March, falling 4.1 percent year-on-year, compared to 216.6 billion in February and 228.4 billion in March 2013. This is in line with the banks’ deleveraging.

Government officials and others have repeatedly said insufficient liquidity constitutes one of the main hurdles on the road to recovery and economic growth.

“How can the economy grow if financially sound firms have limited access to bank credit? For how long can I continue to finance my clients if the banks do not become more accommodating?” a businessman asked us a few days ago.

He was not the only one, since others, such as real estate executives who think only a rise in mortgages can change the fortunes of the residential property market, share the same view.

Of course, this is one side of the story. If we believe bank executives, loan demand from financially healthy firms has been very weak and mainly comes from borrowers with poor creditworthiness standing. Most requests concern working capital and not investment funding, they say. In general, a firm’s working capital falls along with the sales during a recession so it is usually not a good sign for a company to need more working capital since it would want to fund operating expenses. This is more so when nonperforming loans (NPLs), that is loans past due 90 days, stood at 30 percent of gross loans at end-2013, and are bound to head further north this year.

Although the completed share capital exercises have strengthened core banks’ balance sheets and provided more visibility into their bad loans, the latter will have to be ready for the outcome of the asset quality review (AQR) and stress tests of the European Central Bank later this year. They cannot be sure that the ECB’s AQR will not identify higher capital needs than the independent audit of BlackRock and the Greek central bank’s tests. So it is normal for banks to adopt a wait-and-see attitude before the ECB results become known in the autumn. In the meantime, it is likely they will continue their efforts to further boost their capital position by other means, such as sticking to deleveraging.

In this kind of environment, it is not rational to expect Greek banks to loosen their credit criteria before the end of the year or even further into 2015. Even if the ECB stress tests turn out to be benign, local credit institutions will likely wait and see how the economy performs and nonperforming loans evolve before loosening up the credit criteria gradually. Perhaps it is more realistic to anticipate small declines in lending rates as long as Greek bond yields come down, deposit interest rates fall and signs of economic stabilization are confirmed in the second half of the year.

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