Debt rating agencies have a positive view of the creation of a “bad bank” to handle nonperforming loans (NPLs) dragging down commercial banks’ profits and ratings.
The so-called Hercules plan to restructure the loans “is good but insufficient,” agency managers say, especially as the economic impact of the pandemic is expected to affect the volume of non-performing loans for the worse.
According to the latest Bank of Greece estimates, even after the implementation of the Hercules plan, with the securitization and sale of loans, NPLs will still exceed 25% of the total. This estimate, moreover, was made before the full extent of the effects of the pandemic was even suspected. We should note that Bank of Greece Governor Yannis Stournaras is the main proponent of a “bad bank” that would be saddled with all non-performing loans.
The idea of creating a bad bank, once widely scorned, has gained acceptance not only among credit agency experts but also international organizations, such as the Organization for Economic Cooperation and Development (OECD), which says the Greek government must urgently develop a more complete solution to the loans problem.
Pau Labro, Director in Financial Institutions at Fitch Ratings tells Kathimerini that “similarly to the ‘Hercules’ Asset Protection Scheme, the implementation of an Asset Management Company (i.e. a bad bank) would be an additional tool for the Greek banks to reduce the high stock of NPLs, which will be affected in the current environment. The economic fallout from the pandemic will lead to new inflows of impaired loans once government and bank support measures, particularly the moratorium on debt payments, expire.”
He goes on to note that other European countries “have successfully implemented similar mechanisms that accelerated the bank's asset-quality clean-up in the past. The proposal by the Bank of Greece aims at reducing the high portion of deferred tax credits in banks' capital while reducing the stock of NPLs and contemplates the participation of private investors in market-based transactions. In our view, sector-wide solutions to address weak asset quality are credit positive for Greek banks as long as any impact on capital is limited. However, we acknowledge there are execution risks (such as the timeframe to implement and investor appetite) amid the existing economic uncertainty”.
Nondas Nicolaides, a Moody’s Vice President and Senior Credit Officer points out that “any additional plans that would help accelerate the reduction of nonperforming exposures in the system, including the potential formation of a bad bank, would be credit positive for the banks as long as such measures do not compromise their capital base in any significant way. In doing so, utilizing part of banks’ deferred tax credits (DTCs) is in our view a feasible option, given the relatively comfortable regulatory capital metrics that the four largest systemic banks have, and the fact that we consider these DTCs as lower-quality capital.”
“Cleaning up banks’ balance sheets from their elevated NPEs in a controlled and systemic manner will go some way in improving their asset quality and enhance their lending capacity to the real economy, which in turn will give a boost to their recurring earnings capacity over the medium term. A combination of these potential improvements in banks’ underlying financial fundamentals, will be supportive to their ratings,” says Nicolaides to Kathimerini.
Jakob Suwalski, Associate Director of Public Finance at Scope Ratings records that Greek banks have made some progress on the NPL front, reducing the bad loan exposure from around 107 billion euros in 2016 to around €70 billion, still around to a very high 40% of total loans.
“The Hercules scheme is a good scheme based on securitization to accelerate the reduction, however, due to higher risk aversion on the securitization market and NPL market in general in the EU (not Greece specific only), the planned transactions are experiencing a delay at the moment. This is because of the likely low pricing which Greek banks would likely receive at the moment, due to the generally higher risk aversion,” he tells Kathimerini.
“In principle it is the same as if you would like to sell a real estate now (compared to pre-coronavirus), therefore waiting until circumstances are clearer, is warranted in my view. However, due to coronavirus impact, the NPL-level will likely increase again in the short term, and Greek banks remain burdened with the existing NPL already. Therefore, in addition to Hercules, Greek banks would benefit from a fast solution as well,” Suwalski argues.
“The central bank’s idea would in principle allow the Greek banks to transfer/to park an amount of NPL to the bad bank, which would provide a relief on the bank’s balance sheet. This would strengthen the Greek banks ability to support the national economy with liquidity However, to create a national bad bank, this would come at a cost to be paid for by the Greek taxpayer, while the Hercules bad loan scheme transfers the cost of the project to the investor and not to the Greek taxpayer,” says the Scope Ratings expert.
“It has to be noted that BoG recently clarified that any losses associated with existing bad loans will be exclusively covered by lenders and not the Greek taxpayer, up to the minimum capital adequacy ratio limit. This bad-bank kind of schemes were used in other countries, however, following the financial crisis, current EU regulations at the moment would not allow a bad bank like this, therefore Greece would need an exception to current EU regulations to set this initiative up,” he adds and concludes: “All in all, I think the central bank is on a good way, so far, what I heard, there are also some advisers to be appointed soon on this project, so a very important initiative.”