Foot-dragging by banks is being punished by investors

Greek banks have been making the same mistake the state has in assuming things will get better as time goes by, and apparently they are wrong as well.

Local banks now have little choice but to bite the bullet, recognize the losses from bad loans and Greek bonds, cut costs and recapitalize. If they do not do it, the market will do it for them.

A look at the share prices of Greece?s major listed banks is speaking volumes. The stock price of the National Bank of Greece, the country?s largest credit institution, has lost 33 percent in the last six months and 50 percent in the last 12 months. It recently fell below the level of 5.0 euros where the last rights issue took place.

The stock price of Alpha Bank has fallen 24.4 percent in the last six months and 30 percent in the last 12 months, whereas the share price of EFG Eurobank has dropped 22 percent and 33 percent respectively. The stock performance of Piraeus Bank has also been poor since it has fallen 39 percent in the last six months and 62 percent over a year. Postal Savings Bank, a candidate for privatization, has seen its stock price fall 10 and 20 percent respectively over the same period.

By all accounts, Greek banks have been paying a high price because of the public sector?s severe problems and not the other way around, as is the case in other countries such as Ireland. However, this does not mean they should not be held responsible for other mistakes that they have made on their own.

Extending generously consumer and other forms of credit to their retail customers to go on vacation and fulfill other desires was one of them. It helped banks boost their profits and earned hefty bonuses to their top managers, but ultimately left them with a legacy of non-performing loans they have to cope with today at a time when the Greek economy is contracting.

The same holds true for their relationship with the state. Greek banks, some more than other, were able to earn significant income from doing business with the public sector, including government bonds. This is not to say that they should have turned the blind eye at a time when their home turf needed help, but it is fair to say that their shareholders are now paying the price of their past choices.

It therefore comes as little surprise that the stock market is penalizing Greek banks by driving their stock prices and capitalization down to levels unseen since the second half of the 1990s.

Investors are clearly disappointed by the failure of the state to push through with privatizations and an overhaul of the public sector, controlling primary expenditures while at the same time realizing that heavy taxation has brought even the vital private sector to a difficult position. This has not helped the country?s image and has hurt local banks.

To be fair, investors do not really hold to much esteem the economic policy program (memorandum) Greece signed with its eurozone partners and the IMF Greek bond yield spreads tell the story. But stock market investors are also particularly disappointed by the local banks? tendency to kick the can down the road much like the state and avoid taking the bitter pill.

Market participants are fully aware of the widespread practice of local banks to extend the maturities of loans that seem problematic to facilitate the borrowers. However, as long as there are no signs of the Greek economy turning around, these loans become candidates for write-offs, as investors know very well.

The same is true for Greek bonds. Investors know that local banks hold the bulk of their Greek government bonds in the portfolios, whereas they are allowed to record them at acquisition price at a time when their prices in the thin secondary bond market have collapsed.

Just to illustrate the difference, the 10-year Greek bond price hovers at around 50 and 55 percent of its face value nowadays, compared to 70 and 80 percent a few months ago. If local banks had mark-to-market these bonds at the time, they should have been in better shape today since the market would have priced that in and perhaps some or all may have found ways to raise capital to boost their capital adequacy ratios.

By failing to act earlier and take the hit, Greek banks are now facing a much worse situation. So, even though they have tried themshelves to avoid taking the bitter pill by postponing some tough decisions thanks to the prevailing accounting rules, the stock market seems to be putting pressure on them to act by compressing their stock values.

There is no doubt that banks would have incurred big losses for existing shareholders if they acted as the stock market had asked them to. Still, choosing to wait, like they did before, may entail even greater costs to them and the national economy.

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