The effective tackling of nonperforming loans, getting credit expansion moving again and completing the return of the banking sector to private hands are the three main objectives of local lenders following the successful completion of the second stage of their recapitalization.
Having collected funds of 37 billion euros within 12 months, from both the state and the private sectors, domestic banks are now among Europe’s most robust in terms of capital adequacy. According to Euroxx data, at the end of 2013 Alpha Bank’s Core Tier 1 capital adequacy ratio stood at 16.1 percent, while Piraeus’s was 13.9 percent, Eurobank’s was 11.3 percent and National’s 11.2 percent.
Their capital bases are set to be further strengthened as all banks are implementing restructuring programs that include the sale of assets, among other measures. Therefore, by the end of 2014, National’s capital adequacy ratio will have exceeded 18 percent while Eurobank’s will be over 17 percent.
A strong capital base is absolutely necessary for banks to get nonperforming loans under control. While bad loans elsewhere in Europe come to an average of 6.1 percent of all credit, in Greece they climbed to 33 percent in the first quarter of the year – over five times more. Senior officials at local lenders say that effective management of NPLs can make the difference.
Banks expect NPLs to increase further within 2014, albeit at a declining rate, and reach their peak since the start of the financial crisis. In 2015 they are seen posting a small drop, while a substantial decrease is forecast for 2016. By 2017 they are expected to have fallen below their current level.
The second major challenge for the credit sector, which will also determine the declining rate of bad loans, is the return to an increase in the issue of loans. Banks estimate that the drop in the sum of loans to the private sector will continue through the first half of 2014 but that it will stabilize in the third quarter and post a slight increase in the last quarter of the year.
On an annual basis, banks expect negative credit expansion of 3 percent for the whole of 2014. Therefore, in the period from 2010 to 2014, the sum of loans will have declined by a total of about 50 billion euros, or 18 percent.
That period is expected to come to an end in 2015, when loans to enterprises and households will start picking up again. As senior bank officials say, the sooner Greece achieves this return to credit expansion, the sooner bad loans will begin to drop.
The other crucial front for lenders, and the local economy in general, is the banks’ return to the private sector. The Hellenic Financial Stability Fund (HFSF) is already examining alternative options in a bid to accelerate the utilization of shares committed to the warrants issued during the recapitalization process. The aim is to denationalize the banks as soon as possible – as the country’s bailout agreement with its creditors also dictates – taking advantage of the favorable climate generated by the economy’s apparent return to a course of growth.
Once the systemic banks are back in private investors’ hands, the HFSF will be able to return part of the funds used for the 2013 recapitalization earlier. The HFSF is already set to cash in all the funds invested in Alpha (3.96 billion euros) and Piraeus (6.8 billion) as well as a considerable part of the capital used for National and Eurobank.
Today the holdings of the HFSF in the four banks total 15 billion euros. Adding the unused stock of 11 billion euros from the recap budget, the HFSF may soon be able to return over 26 billion euros to the state.