Banks should stick to a conservative credit strategy toward ailing firms

It is known that a few well-known local companies face difficulties in servicing their loans and run the risk of even closing down if their major shareholders and their creditors, mainly banks, fail to agree on the terms of restructuring. This is more the by-product of the stock market bubble, managerial mistakes and sector-specific problems and may not therefore be a good indicator of future trends. Nevertheless, banks may have to become more cautious and take a more conservative approach to their lending practices and increase their loan loss provisions to preserve the credit quality of their loan portfolio in order to avoid future problems. Reports on local companies, listed and non-listed, facing a liquidity squeeze have increased in the last few weeks as workers have taken to the streets to protest against layoffs or the closing down of their factories. In the meantime, bankers and officials from a number of companies admit that more firms from a number of sectors have taken up a lot of debt and may have problems servicing them in the future if interest rates go up considerably or the economy slows down substantially, or both. A recent research report by BETA brokerage looking into the ability of listed companies to service their long-term bank loans found that several of them exhibited a high debt-to-equity ratio and a high net debt-to-EBITDA ratio, making them vulnerable to poor economic conditions. The report singled out a number of them, among them textile firms such as the Naoussa Spinning Mills, known to have problems, as well as others being mentioned in press reports as facing difficulties. It should be pointed out, though, that strong, profitable firms with sound fundamentals, such as Chipita, Elbisco and Delta in the food sector have also being categorized as high-debt firms although they service their loans comfortably given their strong cash flows. The majority of top bankers deny there is a general problem and attribute the recent cases either to sector-specific problems or misguided investments initiated during the stock market euphoria in the 1998-1999 period and afterward. This claim is well founded when it comes to the Greek textile sector, since local firms cannot easily compete against companies producing the same products in neighboring countries or China with much lower unit labor costs. Huge differences in unit labor costs and the abolition of subsidies after 1993 help explain the continuous decline of the Greek textile sector ever since and the migration of thousands of small local firms to Bulgaria and other countries in the last 10 years or so, costing thousands of jobs. To this extent, a few firms may fight a lost battle but the social and economic cost of unemployment is too high to ignore. Bankers also say some pharmaceutical companies are also loaded with debt, but rush to say this is the case because their clients, mainly public hospitals and other public sector companies, have failed to pay them, prompting them to borrow and build up debt. They say recently approved drug price increases also go toward alleviating their problem. Of course, the problem of prompt pubic sector payments is not limited to the pharmaceutical sector. The same is encountered in an unspecified number of small firms, spanning various sectors. All these have liquidity problems because they are not being paid on time by the state, including ministries and other public sector enterprises. Some hotel businesses have also borrowed heavily in the last few years to take advantage of low interest rates in order to upgrade their facilities as they prepared for the 2004 Olympics. Uncertainty over tourist trends and lower-than-expected foreign tourist arrivals have raised concerns over their ability to service their loans in the years to come. There is hope, however, tourism will pick from 2005 onward, enabling them to repay their loans and vindicate their investment choices. The completion of infrastructure projects related to the 2004 Olympics has raised eyebrows over the ability of construction firms to service their loans. However, the Greek construction sector is a two-tier sector with a few large healthy companies and many smaller ones which may or may not all survive in coming years. In this regard, the problem is limited to a number, perhaps many, small construction firms whose fate is unknown. Although euro interest rates are not expected to rise before the first quarter of 2005 at best, the expected mild economic slowdown may bring more cases of firms facing difficulties in repaying their loans to the surface. Banks have already tried to partially deal with problem by refinancing existing corporate loans to give their clients more breathing room. This, however, may not suffice and therefore banks will have to apply more stringent rules when it comes to lending, especially to corporations and individuals seeking consumer loans. By all standards, the Greek banking sector, mainly the five large banks, face no quality asset problem at this point. At the end of last year, the non-performing loan (NPL) indicators stood at 3.0 percent for Alpha Bank and 3.3 percent for EFG Eurobank and stood at 6.3 percent for the National Bank of Greece, with core NPLs at 1.6 percent according to Citigroup estimates. Alpha increased its provisioning charge by 35.2 year-on-year in the last quarter of 2003 even though total loans rose by 15 percent year-on-year, EFG Eurobank by 15.8 percent with total loans growing by 22.1 percent year-on-year and National Bank by 24 percent year-on-year even though its loan portfolio expanded by just 5.2 percent. Interestingly enough, National Bank’s considerably lower loan volume growth reflected a deliberate effort to reduce exposure to corporate loans. Undoubtedly, the five major Greek banks are well capitalized and have stepped up their provisioning effort in the last couple of years to deal with the reality of fast loan growth in retail banking, namely consumer credit and mortgages. The fact that the Greek economy is projected to grow at rates in excess of 3.0 percent rates in the next couple of years also works to their favor. Given this background, it is makes sense to accept the argument put forward by top bankers that the problem with debt-laden corporations facing difficulties in servicing their loans is manageable. It is equally true, however, that there is a chain of suppliers, customers and others behind each company and is therefore difficult to estimate what the consequences would be. To this extent, it makes sense for banks, especially those exposed more in corporate loans, to buy some extra insurance by adopting a more conservative policy on loan loss provisions, even if it hurts their earnings a bit.