Bad loans, the time bomb that banks are trying to sidestep
The anticipated downturn in the Greek economy and neighboring countries, where the country’s largest banks have a significant presence, is bound to have an adverse impact on their loan quality book. This could turn out to be bigger than many analysts estimate if banks are asked or forced to give up the traditional methods used to convert bad loans into properly served ones at home and loans in arrears soar in Southeastern Europe. The message is gloomy from employees working at bank departments responsible for dealing with loans in arrears. A growing number of borrowers are unable to meet their payments of interest and principal after 90 days or more. A good portion of these are consumer loans but a similar trend, though smoother, exists in mortgage loans. By strict definition, these loans should have been categorized as nonperforming and banks should have taken the proper provisions. However, this is not the case. This means the announced proportion of nonperforming loans (NPL) as a percentage of total average loans is less than the true number, which in turn means that the credit of at least some large Greek banks is worse than is actually being reported. A loan is defined as nonperforming when the payments of interest and principal are past due by 90 days or more. This is more so if one takes into account the fact the NPL ratio announced by Greek banks in their quarterly financial statements differs from the NPL ratio reported to the central bank. As a matter of fact, the NPL ratio reported to the Bank of Greece is usually higher than that released with their quarterly results. This explains why analysts at foreign investment houses covering local banks usually insist on being informed of the reported central bank NPL figures. Greece is perhaps the only country in Western Europe in which two figures for the NPL ratio exist at the same time. It should be noted that the NPL ratio reported to the central bank by the Greek banking sector has improved in the last few years. Nonperforming loans stood at 6.3 percent of total loans in 2005 and fell to 5.4 percent in 2006 and 4.5 percent at the end of 2007. This is largely due to the Greek central bank’s requirement that they clean up their credit books by making more provisions as well as bigger writeoffs for NPLs. However, this downward trend came to a halt and then started to rise again in 2008. It stood at 4.8 percent at the end of last September and is expected to rise further when the financial statements for the fourth quarter of 2008 are announced. This is the result of higher interest rate costs for borrowers and the sharp deterioration in the Greek market and neighboring economies. It should be noted that the National Bank of Greece provided loans of 20 billion euros to customers in Southeastern Europe or 30.5 percent of total group lending based on 9-month financial results. Alpha Bank extended loans of 10.75 billion euros or 21.2 percent of the total group’s loans and EFG Eurobank gave out loans worth 15 billion euros or 26.7 percent of the total in Southeastern Europe, including Poland. Bank of Piraeus’s loans at foreign branches amounted to 8.1 billion euros at the end of September 2008, accounting for 20.8 percent of the group’s loans. This means Greek banks’ exposure to loans in Southeastern and Central Europe is relatively low but not insignificant, especially if the economies of these countries fall into recession, in which case, nonperforming loans may end up being a high proportion of the total loans granted in those countries. Based on past recession episodes, the NPL ratio could range from 20 to 80 percent depending on the country. However, past history may not bear any similarity to the present, as many these economies have been transformed and some are now even members in the European Union. Still, bankers are saying in private that even if economic conditions in the neighboring countries do not deteriorate as much as some fear, Greek banks will have their hands full at home. Local banks have been busy refinancing loans that should be listed as nonperforming to avoid boosting their NPL ratio, taking the proper loan loss provisions and writing off bad loans. In so doing, they violate a law that requires that they must first list these loans as nonperforming and then proceed with their refinancing. Bankers, in private, are saying that the NPL ratio would have been much higher if this law were applied. They add that Greek banks are not alone in doing so, since other EU banks do the same. Still all this raises questions about the true NPL ratio in the banking sector and further complicates the calculation of the impact of the expected economic slowdown or decline on asset quality.