The Bank of Greece yesterday sought to dismiss rumors of weaknesses in the Greek banking sector, saying such reports were not based on facts. In common with other European banks, Greek banks have been hit hard by the slump in equity markets in recent years, while attention has also focused on their capital adequacy level and the quality of their credit expansion. Stock prices of Greek banks have tumbled on suspicions that the sector might be hiding more problems than it is disclosing. Since the beginning of the year, the five largest banks in the country have seen their share price fall by an average of 42 percent against a 30 percent decline in the general share index. Commercial Bank has been hardest hit by negative investor sentiments, with its equity down by 57 percent while even EFG Eurobank, which has received glowing reviews for its financial strength and strong growth potential, has seen its stock fall by 27 percent. Speculation that the Greek banking sector could be more severely exposed to all these problems than expected is «ungrounded and due to ulterior motives,» Nicholas Garganas, governor of the Bank of Greece, said. Pointing to the continued boom in consumer credit, up by 32 percent in the first half of the year, he said growth had slowed by 10 percentage points since the beginning of the year. The sharp jump in retail lending has eroded the sector’s capital adequacy ratio, said Manos Giakoumis, banking analyst at P&K Securities. «Greek banks in the past used to have higher capital adequacy ratios, which are now lower due to their expansion in retail lending,» he said. Unrealized capital losses from banks’ securities portfolio have also aggravated the problem. Shrinking profits in the sector have also diminished investor confidence. The five major Greek banks reported a 44 percent year-on-year drop in earnings before tax in the first half of the year. Investors should, however, take heart from the fact that declining profitability has been due to the stock market slump rather than a deterioration in core banking activities. Greeks’ headlong rush to pile up debt has sparked fears that banks’ equally enthusiastic response could see the sector accumulate a mountain of bad debts. Based on what the banks are saying, there does not seem to be a problem as yet, said Giakoumis, although he said it was only logical that non-performing loans would increase in terms of absolute numbers as the banks’ loan portfolio grows. Citing its concerns regarding the impact of the falling domestic equity market on Greek banks’ revenues, international investment bank UBS Warburg yesterday lowered its price targets for the five major banks. The move unnerved investors, resulting in a 0.49 percent drop in the bank index yesterday, with Alpha Bank and Commercial Bank shares taking a hit.