Wednesday November 26, 2014 Search
Weather | Athens
12o C
9o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
NPL handling is key to banks future

 Credit sector requirements will depend on economic growth, the course of bad loans and their management

By Dimitris Kontogiannis

Greek banks should be overcapitalized to sustain sizable credit losses from the massive stockpile of nonperforming assets accumulated during the 2008-13 recession. Whether the new capital increases and other corporate actions planned by the four core banks in the aftermath of stress tests conducted by the Bank of Greece will be enough remains to be seen. The outcome will largely depend on the countrys economic performance in 2014 and beyond and the banks own ability to manage their loan arrears.

The capital needs of the Greek banking sector stood at about 6.4 billion euros or 5.8 billion for the four core banks (Alpha, Eurobank, National and Piraeus) according to the recent stress tests conducted by the Bank of Greece. The tests took into account the diagnostic test on the loan portfolios of all banks performed by BlackRock Solutions and were based on the baseline scenario, reflecting macroeconomic projections in IMFs fourth review back in July. It should be noted that the capital needs for the four core banks amounted to 8.8 billion euros under the adverse scenario, which forecasts a further sizable GDP contraction.

The International Monetary Fund has made it clear Greek banks need more capital to cope with anticipated credit losses this year and beyond. Also, Standard & Poors said last week Alpha and Piraeus will need more capital than planned in the next two years to meet the minimum regulatory capital adequacy ratio defined as Basel III fully loaded core Tier 1, at 8 percent as of year-end 2015. S&P pointed out the two banks will continue to benefit from capital support from the Hellenic Financial Stability Fund and liquidity support from the European Central Bank.

In contrast to the IMF and S&P, most Greek bankers and analysts think local banks will be sufficiently capitalized to address future capital needs, following announced actions to address the 6.4-billion-euro shortfall under the central banks stress tests. The latter are also confident the results of the stress tests to be conducted by the ECB later this year will not deviate at all or much from the outcome of the BoG tests. However, at least one senior banker we talked to admitted local credit institutions will need extra capital in coming years if they are to extend sufficient credit to the Greek economy. He said he was confident banks will be able to raise it from private investors if the economy returns to normal.

Whether Greek banks will be able to sustain hits from the expected credit losses from the large stock of nonperforming assets and vulnerable restructured loans, which are neither recognized as nonperforming loans (NPLs) nor provisioned against according to S&P, in coming years will depend on two factors: their profitability, which is tied to the course of the economy, and their own management of NPLs.

It is reasonable to expect Greek banks to boost their profitability before provisions that is the amount of capital set aside to provide against loans losses in 2014 and beyond. The main drivers should be improving net interest margins and cost synergies from mergers. Local credit institutions managed to raise their lending rates to better reflect risks during the last few years but also saw their own cost of funding rise sharply and interest income from Greek government bonds almost erased. Although banks may be unable to charge corporations and households higher interest rates, they should continue to benefit from falling funding costs. Interest rates on time deposits will continue to ease as liquidity conditions improve while banks regain access to capital markets like Piraeus did with the three-year bond and substitute expensive funding (ELA) from the Greek central bank with ECB or/and market funding.

But the biggest challenge will come in NPL management. Greece did not follow the example of Ireland and Spain to set up a state-run bad bank which in turn would buy troubled assets from commercial banks at a heavy discount. Instead, Greek banks have set up internal bad bank units to deal with the large stockpile of NPLs. The challenge is big since loans past due 90 days are seen peaking around 35 percent of total loans or higher at the end of 2014 or 2015 from 6 percent before the crisis. Moreover, the coverage ration that is, provisions set aside against credit losses stands around 50 percent in Greece compared to 60 percent or more at the European level. It is encouraging the new arrears are declining but the task is still formidable, especially, if one also takes into account the restructured loans, estimated around 7 to 10 percent of total loans, which are not recorded as NPLs.

Banks will be much better positioned to manage NPLs if the economy recovers, benefiting from write-backs as income and asset prices rise. They will also be able to reduce their high NPL ratio further once they start providing more loans. An improvement in the NPL ratio, defined as nonperforming to total outstanding loans, could come from dealing with strategic defaulters that is, people who can but do not pay. Perhaps selling some loans to distressed funds could ease the pressure further but that may have to wait for the economy to recover.

It looks, however, like the most drastic solution to dealing with the legacy of NPLs will be a combination of write-offs and the restructuring of loans. This seems to be the approach banks favor, but entails execution and other risks. No doubt the restructuring process will be complex and lengthy. However, this process along with operational profitability will determine whether banks are sufficiently capitalized to satisfy the capital adequacy ratio and also provide credit to their financially healthy customers.

ekathimerini.com , Sunday March 23, 2014 (21:24)  
Debtors snap up offer for easier settlements
Belgium gas firm said to be eyeing DESFA
OLP approval paves way for investment in Piraeus
Airport tender exceeds expectations
Hundreds of migrants on crippled ship off Crete
Ships from Greece rushed to help after a crippled freighter crammed with hundreds of migrants floundered for hours Tuesday in gale-force winds and high waves in the Mediterranean Sea, offici...
Policemen suspected of working at Piraeus bar where shooting took place
At least three serving policemen are thought to have been working at the bar in Mikrolimano, Piraeus, where a 31-year-old man opened fire with an AK-47 early on Saturday, resulting in 15 peo...
Inside News
SOCCER
Atletico eyes last 16 berth against Olympiakos
Greek champion Olympiakos faces a tough task if it is to prevent last season's beaten finalist Atletico Madrid sealing its passage into the last 16 of the Champions League at the Vicente Cal...
SOCCER
EPO ends soccer suspension, Super League resumes
Soccer action will resume this weekend after the Super League convened on Monday, elected a new president and alternate president and sent a letter to the soccer federation that assures it t...
Inside Sports
COMMENTARY
Beware of the fallen idols
Akis Tsochatzopoulos, a legendary figure of the Greek socialist movement, a man who came very close to taking over the party that governed the country for half of the time following the fall...
EDITORIAL
The hard truth
The coalition government must tell the truth to the Greek people, even if this entails admitting to mistakes made over the last few months. The countrys citizens are fully aware of how cruc...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
RECENT NEWS
1. Hundreds of migrants on crippled ship off Crete
2. Atletico eyes last 16 berth against Olympiakos
3. Debtors snap up offer for easier settlements
4. Belgium gas firm said to be eyeing DESFA
5. OLP approval paves way for investment in Piraeus
6. Airport tender exceeds expectations
more news
Today
This Week
1. Anastasiades to undergo heart surgery in the US on Dec 4
2. Cargo vessel carrying hundreds of migrants adrift southeast of Crete
3. Trade deficit widens by 8.7 percent during Jan-Sept period, says ELSTAT report
4. Two police officers among 9 arrested for drug trafficking
5. Fraport, Copelouzos offer highest bid for Greek regional airports
6. Stop Mediterranean becoming vast migrant cemetery, Pope tells Europe
Today
This Week
1. Double quake on Atalanti fault line rattles Greek capital [Update]
2. Give Greece a chance
3. Biden heads to Istanbul amid tension over Cyprus EEZ violation
4. Every age has its collaborators
5. Carlsberg takes control of Greek brewer Olympic Brewery [Update]
6. Scientists expand excavation of ancient Amphipolis
Find us ...
... on
Twitter
... on Facebook
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright 2014, H KAΘHMEPINH All Rights Reserved.