Returning to profit is the major ambitious target that local banks have set for 2016, following six long years of historically high losses for the sector. This is a challenge that depends primarily on the handling of nonperforming loans, and the performance of the economy in general.
Bank managers have promised their foreign investors that this year will mark the end of losses and a return to earnings and that even if general economic developments are below expectations, banks should at least post results close to zero, but no losses.
To secure profits this year, banks made particularly high provisions in 2015 so that they could cut them drastically in 2016. The four systemic banks recorded profits before provisions amounting to some 4 billion euros. However, the provisions they made (for the coverage of bad loans) amounted to 11.5 billion, leading to operating profits vanishing into thin air and final results recording very high losses.
Bank officials say that there are three points which could make a difference this year: the slowdown in bad loans, already reflected in the results of the last quarter of 2015, the further reduction of operating costs and the improvement of interest revenues. Since 2014 interest rates have been slashed, bolstering the relevant figures.
In any case, it’s the economy’s bailout review that will determine the course of banks this year. Bank officials note that, if successful, the review will considerably improve market sentiment, render Greek bonds acceptable by the European Central Bank as collateral for the supply of cheap cash to local lenders, open the way for the participation of Greek sovereign paper in the ECB’s bond-buying program, and accelerate the process for the withdrawal of capital controls.
Of course the review’s completion would also lead to the resumption of bailout payments to Greece, with 2 billion euros expected to go toward the immediate repayment of state debts to the private sector. The program’s 2016 target provides for the payment of debts to private parties amounting to 5 billion.
In contrast, banks are worried about any complications in the government’s agreements with the country’s creditors. If the uncertainty continues and the recession deepens, then nonperforming loans will continue to grow, eating into the banks’ capital again. Bank sources also note the risk of inefficient handling of the NPL stock, which currently exceeds 100 billion euros. They stress that if the legal loopholes stay open, providing protection to strategic defaulters and others, banks will remain in a weak position.