By Dimitris Kontogiannis
Greece’s four core banks have received a second round of capital injections in the last few months to address capital shortfalls identified by the Bank of Greece’s stress tests. However, an increasing number of investors are concerned that some of the lenders may be called upon to further boost their capital to deal with problem assets and extend credit to the economy following the ECB’s stress tests in the autumn. Although the IMF and others contend that the banking sector will need several billion euros more to clear its loan book, some Greek bankers and analysts dispute this, arguing that the tests will show no material capital needs, requiring new share capital increases. It is not certain who is right or wrong. Nonetheless, the fact that there is a question mark does not bode well for the economy and bank stocks.
The four systemically important banks have been able to capitalize on favorable international market conditions, improving macroeconomic fundamentals and expectations for a turnaround of the Greek economy to raise 2.25 billion euros by issuing senior bonds since April. They have also been able to raise a total of 8.3 billion by selling common equities to predominantly foreign investors in a sign of confidence in the banks’ ability to produce strong profits and handle a large amount of problem loans.
So, the poor performance of their stocks on the Athens bourse lately has raised some eyebrows. Bank shares were battered on the Athens Exchange last week and the banking stock index is now down more than 6 percent since the start of the year with the shares of National Bank and Eurobank falling by more than 30 percent over the same period. In contrast, the shares of Alpha Bank and Piraeus Bank have gained 8 and 4 percent respectively year-to-date.
Their losses may be partly explained by exogenous factors such as recent events in the banking system of Bulgaria and the trimming of positions in europeriphery equities by hedge funds. However, it looks as though concerns about the outcome of the ECB’s AQR (Asset Quality Review) and stress tests (via the EBA), expected to be announced in late October, dominate.
Some observers point to the release of the latest IMF review on the Greek economy and its reference to the banking sector as the ringing alarm. The Fund said the banking system will likely require additional capital if it is to deal effectively with high nonperforming loans (NPLs) and support economic recovery. It warned that the Greek banks have one of the highest NPL-to-loan ratios worldwide, far higher than levels seen in systemic crises in other countries. NPLs stood at 33 percent of all loans at end-2013 and analysts estimate they jumped to 38 percent in the first quarter of this year. The IMF reckons the high level of NPLs could harm GDP growth in the years ahead by stemming credit expansion in an economy which is not yet competitive as stagnant non-tourism exports show.
The IMF thinks the four core banks should have been recapitalized under the adverse rather than baseline macroeconomic scenario in the Bank of Greece/BlackRock stress test. Moreover, it finds some of the assumptions made overly optimistic and estimates additional capital needs to the tune of at least 6 billion euros under the adverse scenario. The latter amount is explained by estimates for bigger losses on residential loan portfolios on the back of a larger drop in the value of collateral, i.e. apartments, and the banks’ policy of deferring full provisioning to the time when the loan is written off rather than upfront when a default occurs.
It is noted that the Bank of Greece stress test concluded the four banks needed 5.8 billion euros under the baseline scenario, encompassing the economic adjustment program’s GDP growth estimates, and 8.8 billion euros under the adverse scenario. The four banks may have raised 8.3 billion but used 1.7 billion to repurchase their preference shares from the state.
On the other hand, the critics of the IMF counter that all four banks are overcapitalized. They say three out of the four banks were recapitalized under the adverse scenario, excluding forthcoming corporate actions to further boost their capital. They add that the Greek economy has faced tremendous stress in the last six years with a cumulative output loss of over 23 percent but all leading indicators point to a recovery.
Critics also point out banks have been able to raise capital and debt at increasingly favorable terms and would not have been able to do so if investors thought they would lose money. Instead, they accuse the IMF of “scaring investors and interrupting this virtuous cycle.” Some Greek bankers and analysts even seem to believe the goal may be to force banks to tap the 11 billion euros from the 49 billion earmarked for bank resolution and recapitalization in the program and make it more likely for the country to request a third bailout loan to fill the projected funding gap of 12.6 billion.
No one knows at this point what the ECB stress test will show for Greek banks in the fall. So, we have to wait until then to see which camp is right. However, investors on the Athens bourse seem to take more seriously into consideration the view that the banks may need to raise more capital to deal with the NPLs and avoid deleveraging. This is something the top brass at local banks cannot ignore, especially if it continues, and it certainly does not bode well for the economy.