Greek banks feeling the heat

The Greek economy will not be able to function properly even after the country?s huge public debt is cut substantially under the expected restructuring plan if the local banks are not able to play their role and provide credit to the private sector. Consequently, banks will have to learn from and pay for their past mistakes and move on.

In some respects, local banks have behaved in a similar way to the Greek government during this crisis. They have tried to buy time, hoping things would get better down the road so they would be able to either avoid taking tough decisions or at least do so under better circumstances. As the Anglo-Saxons put it, they opted to kick the can down the road.

The result of this strategy cannot be manifested more clearly than the performance of their stocks on the Athens bourse. National Bank of Greece shares have lost about 58 percent of their value in the last three months and about 69 percent in the last six months. The market capitalization of the country?s largest commercial bank has fallen to 1.7 billion euros when the value of its Turkish subsidiary Finansbank is about 4.8 billion euros on the Istanbul Stock Exchange, meaning the investment community values the rest of its franchise in Greece and other countries at minus 3.0 billion euros.

The stocks of the other large banks have done even worse. The shares of Alpha Bank have fallen 64 percent in the last three months and 75 percent in the last six months, driving the market value of the bank down to 571 million euros. EFG Eurobank shares have fallen 73 percent in the last three months and 82 percent in the last six months, with the market capitalization standing at 403 million euros.

It is noted that Alpha Bank and Eurobank have announced ?a merger of equals? and seem determined to go ahead, with a Qatari company becoming the largest shareholder in the new entity provided some conditions are satisfied.

The shares of Piraeus Bank, which completed an 800-million-euro rights issue early this year, have dropped 68 percent in the last three months and 78 percent in the last six months, with its market capitalization standing at 327 million euros as of last Friday?s close. The stock price of state-controlled Hellenic Postbank (TT) has fallen 84 percent in the last three months and 88 percent in the last six months, with its market cap standing at just 107 million euros.

In other words, the market has done to the banks what they have refused to do for a long time – that is, recognize the losses from their bond holdings and bad loans.

In contrast to Ireland, where banks? reckless lending paved the way for a sovereign crisis, Greek banks have been victims of the state?s poor public finances. However, this does not mean their top management teams have acted in a prudent manner along the way.

Banks cannot stop a recession from taking place and therefore cannot be blamed for a good deal of the bad loans incurred, although some were often the result of their own lending standards and policies. However, banks are mostly being penalized for having too many Greek bonds in their portfolios and this is largely their own decision. It should be noted however that some banks have shown greater prudence than others in this area, with Alpha Bank?s portfolio at 4 billion euros or less compared to double this amount for some others with a similar or smaller amount of total assets.

Moreover, all bankers are fully aware of the capabilities of the Greek civil service and the mentality and prevalent culture in the public sector, and therefore they should have been able to predict the outcome of the economic adjustment program agreed with the European union and the International Monetary Fund. Namely, they should have marked to market their bond portfolios and revealed the true extent of nonperforming loans, taking the appropriate level of provisioning much earlier. This way it would have been better for their shareholders since the dilution from the ensuing large share capital increases would have been smaller and the general conditions for carrying them out would have been better, perhaps attracting some foreign interest.

At this point, things look much more difficult and challenging for local banks on all fronts. However, they have no choice. They will have to raise significant amounts of capital to cover their losses from bonds and bad loans and satisfy the capital adequacy requirement. This way they will be able to perform their intermediary role and provide credit to the private sector.

It would be great if local banks managed to raise the additional equity from private investors, both Greek and foreign, and avoid going to the Hellenic Financial Stability Fund set up under the EU-IMF program to recapitalize local banks. But if they are not able to find private investors to chip in, they should not hesitate to take the painful road to the Hellenic Financial Stability Fund, since it does not matter who controls a bank if the latter cannot give out loans.

Moreover, local banks should learn from their past mistakes and move fast to cut operating costs in their Greek operations even now. This way they might be able to attract capital from private investors and boost their shares on the Athens bourse to help ease the dilution of existing shareholders while being shielded from further potential adverse developments in the Greek economy down the road.

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