Greek banks brace for stress tests

LONDON – [Dow Jones] Greek banks are in the eye of the storm, to be closely watched in Friday’s Europe-wide stress tests, with particular attention on their vulnerability to sovereign debt as euro-zone debt crisis continues to drag down markets worldwide.

All six of the Greek banks have core Tier 1 capital ratios well above the 5% threshold, but the main concern is their exposure to Greek government bonds, especially following the European Banking Authority’s decision last month to include an element of sovereign default probability to the tests on economic and financial stresses.

And late Wednesday, Fitch added to the country’s woes, downgrading Greece’s long-term foreign and local currency issuer default ratings–down to CCC from B+. The ratings agency said the further downgrade «reflects the absence of a new, fully funded and credible EU-IMF program for Greece, coupled with heightened uncertainty surrounding the role of private creditors in any future funding, as well as Greece’s weakening macroeconomic outlook.”

Still, analysts and traders expect that 90%-state-owned ATEBank (ATE.AT) is the only bank likely to fail, and will do so despite its recent EUR1.26 billion capital increase, most of which came from the government.

“My feeling is that the stress tests will again be lackluster,» Nomura analyst Prathmesh Dave said. «But among the Greek and Cypriot banks, ATEBank is the one most widely tipped to fail and I would agree–I reserve comments on the other seven.» he added.

ATEBank was the only bank in the region that failed to reach the 6% threshold in last year’s tests. Its current ratio is 1.8%, or 10.8% including a EUR1.26 billion capital increase, as reported in first-quarter results. However, part of the bank’s restructuring costs on the recapitalization includes a repayment to the government of EUR675 million, the cash it put into the capital increase in return for preference shares. No one knows whether this will be factored into the stress test, but it will weigh on ATEBank, another analyst said.

Alongside ATEBank, NBG, Piraeus Bank and the two Cypriot banks have all boosted their ratios with recapitalizations since the beginning of the year. Meanwhile, Hellenic Postbank (TT.AT), which is 34%-owned and controlled by the government, reported a core Tier 1 ratio of 15.5% at first-quarter results. The bank is cash-rich in deposits and the government has said it wants to fully privatize the lender this year.

However, most of the banks are exposed to sovereign debt and, like their peers across Europe, are expected to take hefty haircuts, or losses, on bonds issued by governments at the heart of the euro zone’s financial crisis. Under prevailing market assumptions, Greece needs to repudiate around 40% of its sovereign debt.

The EBA’s revision to the stress tests means that banks must now factor in the likelihood of these potential losses on sovereign debt held in their trading books in their probability models for how much they would lose in the «adverse scenarios» that the EBA has laid out for the tests.

Analysts say that because banks typically hold most sovereign debt in their hold-to-maturity «banking books,» which won’t be directly tested against default.

“The Greek banks generally have a very small amount of bonds on their trading book portfolios–they do have a substantial amount on their banking book but this isn’t valued or realized in the profit and loss account,» one analyst said.

“NBG holds the most Greek government bonds, but has the highest capital ratio,» the analyst added.

[Dow Jones]