Wednesday April 16, 2014 Search
Weather | Athens
19o C
13o C
Survival Guide
Greek Edition
Banks should act now to get cleaned up

 Credit sector must take advantage of the best international market conditions since 2007 to woo investors
It may be better for Greek banks to bite the bullet and take all the provisions for non-performing loans now, even if it means going for new share capital increases in the first quarter of 2014.

By Dimitris Kontogiannis

The Greek economy needs local banks to be strong and well-capitalized so that they can perform their role as intermediaries and support the recovery effort. Although the recapitalization and mergers that took place last summer have gone a long way to this end by addressing capital shortfalls, the time may have come for core banks to frontload the brunt of future provisioning losses and fully clean their balance sheets even if this leads to new share capital increases in the months ahead. This way, they can take advantage of favorable market conditions abroad and attract enough private capital in the process to remain under private control.

The banking system paid dearly for the biggest-ever restructuring of sovereign debt by suffering losses close to 38 billion euros from bonds and state loans subject to the terms of the PSI (Private Sector Initiative). The estimated losses amounted to 28.2 billion for the four pillar banks Piraeus, Alpha, National and Eurobank. In addition, banks sustained losses from loan portfolios hit by the protracted recession and a loose credit policy in the past.

To fill the capital gap identified by the Bank of Greece, which in turn relied on the diagnostic tests of loan books conducted by BlackRock Solutions in 2011, more than 40 billion euros was provided for resolutions, restructuring and the recapitalization of local banks. This amount came out of nearly 50 billion euros allocated for the recapitalization of the banking system under the countrys bailout program.

The end result was an oligopoly with four core banks dominating the market and capital adequacy ratio (Core Tier I) close to or above 9 percent of their risk-weighted assets. Eurobank was the only exception among the four banks, featuring a Core Tier I ratio below 9 percent, which explains why it initiated the process for a new share capital increase.

Although progress has been made on some fronts, a lot of work remains to be done. Undoubtedly, the most important issue is the management of non-performing loans (NPLs). Banks continue to suffer losses as companies and individuals find it increasingly difficult to service their loans with the economy contracting for a sixth consecutive year. Moreover, they will have to face the so-called strategic defaulters, namely individuals who fail to pay even though they can afford to do so.

Analysts expect Greek banks to continue recording losses from bad loans in 2014 even if forecasts calling for real GDP growth of 0.3 to 0.6 percent prove correct. This is because there is a time lag between the formation of NPLs and economic activity but more importantly unemployment. Bad loans are continuing to rise, albeit at a declining rate, and market consensus wants Greek NPLs to peak next year, somewhere between 30 and 35 percent of total loans. Lending to the private sector stood at 219.2 billion euros in October from 227.1 billion at end-2012.

At this point, the market expects the results of the second round of diagnostic tests on loan portfolios conducted by BlackRock (BlackRock II) to be announced soon and the Greek central banks verdict on the capital needs of each core bank in early 2014. The outcome is unknown but past press reports suggest that total capital needs should range between 4.5 and 6 billion euros. Eurobank was supposed to be the only credit institution requiring a share capital increase of 2 billion euros or more to meet the capital adequacy ratio requirement. The other three core banks could rely on non-core asset disposals and liability management exercises, and Piraeus Bank along with Alpha Bank on their fat Core Tier I ratio to absorb some losses.

But their capital needs could turn out to be greater if banks are asked to clean their loan books sooner rather than count on expected profits in coming years to lighten the burden. This will likely lead to a new round of share capital increases. Kathimerini understands that talks are under way between the Greek side and the European Central Bank (ECB) on this issue so there may be some news relatively soon.

Although there are prose and cons for either option, it may be better for local banks to bite the bullet and take all the provisions for NPLs now even if it means going for new share capital increases in the first quarter of 2014.

The ECB has an incentive to support such a capital-enhancing exercise because it will not have to demand local banks to do so after it conducts its own stress tests at some point into 2014. In addition, investors always like clear solutions and tend to reward banks with clean portfolios. This means that there should be considerable demand for Greek bank shares if investors feel confident there are no more skeletons in their closets. This would contribute to the successful conclusion of the share capital increases and help keep banks in private hands. The favorable international market conditions and a strong appetite for risk, the prospects for a return to economic normalcy in Greece and banks attractive valuations also support this argument.

On the other hand, some of the existing shareholders will see their stakes diluted if they cannot participate in the new share capital increases. Also, local banks will not have the opportunity to prove that they can turn around their franchises without resorting to fresh share capital increases.

Undoubtedly, there are no easy choices. However, it is in the best interest of the Greek economy that banks frontload the brunt of future provisioning losses and completely clean their balance sheets by taking advantage of the best international market conditions since 2007. , Sunday December 22, 2013 (21:23)  
IBM to open new center in Athens for big data analytics
Benefits to all single-parent families and new unemployed
Supermarket chains sense worst is yet to come
Cost of borrowing via T-bills drops to pre-bailout levels
PASOK plays down coalition row over scheme for homeless
PASOK remained tight-lipped on Monday about a row that broke out with its coalition partner, New Democracy, late on Monday after Prime Minister Antonis Samaras announced the creation of home...
Greeces new public sector wage structure ready in September
A new wage structure for civil servants will be ready in September, Administrative Reform Minister Kyriakos Mitsotakis said on Tuesday. The new scheme will contain financial incentives for p...
Inside News
Defense lets Olympiakos down at Madrid
Olympiakos played second fiddle to Real Madrid in a rather spectacular game in Spain on Tuesday going down 88-71 to trail 1-0 in the best-of-five quarterfinal series with the Spanish giant. ...
Apollon is relegated, Xanthi to face survival play-off
Apollon followed Aris to the second division and Xanthi will contest a relegation play-off, as the end of the regular season of the Super League on Sunday produced predictable results that a...
Inside Sports
Empty vessels
US satirist and journalist Patrick Jake ORourke once said about American politics, The Republicans are the party that says government doesnt work and then they get elected and prove it. ...
National targets
The official news regarding Greeces present fiscal state of affairs appears to be very good indeed and is paving the way for serious negotiations with the countrys creditors and partners r...
Inside Comment
1. Defense lets Olympiakos down at Madrid
2. IBM to open new center in Athens for big data analytics
3. Benefits to all single-parent families and new unemployed
4. Supermarket chains sense worst is yet to come
5. Cost of borrowing via T-bills drops to pre-bailout levels
6. Eurobank reaps major investor interest
more news
This Week
1. Greece's market return mirrors return of tourists
2. GD lawmaker hails Hitler, condemns homosexuality in interview
3. Suspected smuggler dies after trying to ram Coast Guard vessel off Kos
4. New Democracy to confirm list of candidates for Euro elections
5. Anchor investors bid for chunk of Greek Eurobank's share offer
6. Greek far right fires up Athens election campaign
This Week
1. Bomb explodes outside Bank of Greece
2. Time to take a hard look at debt sustainability, says OECD chief
3. For faith and country
4. CCTV footage from Nigrita Prison shows signs of inmate torture [Video]
5. Samaras sees no need for third bailout
6. Car bomb explodes outside Greek Central Bank building, no one hurt [Update]
Find us ...
... on
... on Facebook
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright 2014, H KAΘHMEPINH All Rights Reserved.