Bad debts a nightmare for banks

The banking sector is due to report 2001 financial results in the coming days. General Hellenic Bank and Alpha Bank already did so last week. The banks’ balance sheets are expected to show the impact of the stock market’s negative performance, substantially limiting their revenues from trading activities and commission-based operations. It is clear that banks are making efforts to improve their operating results, and even more manifest that they are trying to boost their organic growth and at the same time convince the market that their portfolio is healthy. One of the first things that investors do is to go through a bank’s balance sheet, examining the size of the provisions that the bank has made for non-performing loans. The question is, how close to reality are the figures recorded on the balance sheet? It is truly impressive that banking executives themselves talk about «visible and invisible portfolios relating to bad debts.» The visible portfolio refers to overdue loans which are characterized as non-performing loans and for which banks have made the corresponding provisions. More interesting is the invisible portfolio of bad debts, which are, however, regarded as regular loans which are serviced by the borrower and thus the bank is not required to make provisions. Furthermore, it does not affect their profits. Banking executives say the practice is well known and popular with a number of banks. Of course, not all banks follow this strategy. And for those who do, the practice does not apply to all loans nor does it pertain to all categories of clients. Banking executives say non-performing loans included in the invisible portfolio are usually large loans given out to companies or loans given out to businessmen who present their share holdings as collateral. The latter is believed to be substantial and is estimated at between 500 to 600 billion drachmas (1.5 to 1.8 billion euros). Of course, compared with the amount of loans given out by the banking sector, this is considered a minor sum. However, more than 90 percent of these non-performing loans were given out by the major banks to a few of their big, selected clients. This means that the risks are concentrated among just a few banks. Well-informed sources say the majority of these loans were given to businessmen in order to help them out during share capital increases. Banks in turn ensured that the shares acquired as collateral were at least worth twice the value of the loan given out. But this was the case during the stock market boom. Since then, the stock market has gone into a slump, share prices have plunged and the banks’ share collateral has taken a beating. For example, a bank which acquired share collateral worth 20 billion drachmas (58.7 million euros) in exchange for a 10-billion-drachma (29.34 million euros) loan would today see the value of the stock fall to 7-8 billion drachmas (20 to 23.5 million euros). This means the collateral does not even cover the capital given out. In other words, the bank is trapped. Cashing in the stock would lead to a loss for the bank and at the same time have a negative impact on the borrower and his company. There is almost unanimous agreement that few of these loans are being serviced. Banking executives admit that «loans backed by stocks are in effect frozen.» Nevertheless, it is in a bank’s interest to treat them as regular loans. This is because banks cannot circumvent all market regulations and also because of fears of action by the Bank of Greece. What happens is that just before the expiry of the maximum time limit of 12 months before a loan is considered a non-performing loan, banks normally call on the borrowers to repay part of the interest, leading to a restructuring of the loan. This method has led to the renewal of many loans backed by stocks. In a number of cases, some banks have even given a year’s grace to the borrowers, hoping that the stock market would recover. There is a risk that banks could end up as major stakeholders or even the principal shareholders in some companies, in a repeat of a similar situation in the 1980s. Banks and companies are thus directly linked to each other, with losses suffered by one side affecting the other. What is significant in this dilemma is not the tricks used by banks regarding non-performing loans but how creditworthy is the borrower, who is usually a manager of a company, and how healthy is his business. Or could it be that both lender and borrower are trapped in a vicious cycle? In Athens, new office space is expected to become available in the coming months, both in prime and developing areas. Property developer Babis Vovos is scheduled to open new buildings along Kifissias Avenue at the Attiki Odos intersection, in Halandri and in Ambelokipi. Hermes Real Estate is also due to open new office buildings along Soutsou Street in central Athens and at Plato’s Academy in western Athens.

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