Higher provision rates for bad loans put small banks at risk

Speaking before a parliamentary committee on Thursday, Bank of Greece Governor Nicholas Garganas referred to the endurance that the Greek banking system displayed under the «huge shock» of the crash of the Athens Stock Exchange, noting that its creditworthiness index, on the basis of 2002 nine-month results, still stands above the eurozone average, at 11.6 percent. Nevertheless, one day earlier, on Wednesday, the governor presented to the heads of commercial banks changes in the provision rates against bad debts which are used for overseeing purposes and for the assessment of banks’ capital adequacy; the provisions are to be raised by 10 percent. Banking sources said the governor’s changes found the banks – at least the biggest ones – in agreement, and this was the result of compromises whereby the provision rates for mortgages remained unchanged. The agreement of the large banks is largely understandable because the changes merely add points of difficulty and will have little impact on them. By contrast, they are considered likely to bring some small banks to their knees. Garganas said that banks’ creditworthiness index has recovered after dipping close to 10 percent early in 2002. The recovery was helped by two bond loans, Tier 1 and Tier 2, which boosted banks’ capital base. In total, four banks raised 1.18 billion euros in order to boost their capital adequacy in 2002. National Bank raised 750 million euros in January 2002, of which only 210 million were used for boosting its adequacy ratio by 2.5 points, most of the rest being used to pay off a previous bond loan. Alpha Bank raised 200 million euros through Greece’s first ever «hybrid» bond loan in November, to secure Tier 1 capital funds. Also in November, Egnatia Bank issued a 30-million-euro bond loan, and Agricultural Bank followed in December with a 200-million-euro loan. The General Bank is now said to be preparing an issue of over 100 million euros. Although such loans cost banks more than usual (on average 120-140 basis points above Euribor), at present they were the only appropriate solution. Apart from improving their capital adequacy, the loans also covered banks’ obligations for provisions. The fourth largest banks, which account for 75 percent of the banking system, seem to have met such obligations well enough, but, curiously, no one is dismissing rumors of a serious problem with inadequate provisions in the smaller banks, which will logically intensify with the new higher provision rates. The central bank said it took into account three factors in raising these rates: the swift credit expansion since the first application of provision rates in 1999, the structure of banks’ loan portfolios and the categories of loans where delays in servicing are more likely to develop into bad debts. The aim of the Bank of Greece is to buttress the banking system against bad loans. At the same time, however, the new rules also lead to a dampening of credit expansion, mainly by those banks that are in greater need of it in order to improve profitability. The fact that the obligation to raise provisions does not affect profitability but is a criterion for evaluating capital adequacy does not mean it has less importance. As bankers point out, profits may not suffer but the auditors who sign balance sheets will include this factor in their notes. And the bond loans may have created security «cushions» at least for the first year. But this is not sufficient; it has to be supplemented by an expansion of business, a further boost to core profitability along with reductions in operating costs. This means an intensification of competition, particularly in certain areas, which is likely to create additional difficulties and perhaps marginalize the smaller banks which have access to capital markets under less favorable terms. Meanwhile, it erodes their negotiating power if they seek alliances with stronger partners.

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