The bearish mood that has dominated the Greek stock market and led the banks index 42.47 percent lower over the last three months can be blamed on the absence of a coherent narrative to convincingly address the three main causes of investor concerns.
These three factors are the high targets set for the reduction of nonperforming exposures, the considerable problems faced by all bad-loan cutting instruments – such as auctions, the Katseli law and the extrajudicial debt settlement mechanism – and the increased capital requirements anticipated in 2019. It is for these reasons that investors are worried and selling off their bank sector holdings, as they can discern share capital increases on the horizon.
Although the recent stock market unrest can mostly be put down to short-selling, triggered by Piraeus Bank’s inability to drum up enough market interest in its 500-million-euro bond to boost its capital base, the truth is that the banking system is up against serious challenges that will put pressure on its strength both in the short and medium term.
The high capital adequacy Greek lenders enjoy is not disputed, and first-half figures show it remains at high levels: 18.5 percent for Alpha, 16.2 percent for National, 14.8 percent for Eurobank and 13.6 percent for Piraeus. The minimum level for capital adequacy stands at 12.875 percent and the Single Supervisory Mechanism is expected to raise it by 0.6 percent from the start of 2019.
Figures confirm that the four systemic lenders have a satisfactory capital cushion, but its maintenance, sources explain, requires the implementation of all their commitments with high accuracy. As the bad loan reductions have so far been mainly based on write-offs, any wrong move in the reduction effort will have an immediate impact on banks’ capital, while the solutions on the table include serious risks.
The new targets for halving NPEs by end-2021 from the current 88.6 billion euros are front-heavy, meaning rapid reductions in 2019 and 2020, when large package sales with high discount rates are likely to eat into the capital cushion. Meanwhile the auctions and the extrajudicial mechanism have not fetched the anticipated results.
The only way out is the creation of sources of profit via new loans to healthy enterprises, which could also bolster growth and demand for investment, but this is hampered by the high taxation policy.