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| Improvements could soon be made to the resolution framework in Greece |
The Greek government is expected to win approval from the Troika this month to improve the resolution framework for non-performing loans in the country, a move that would enable the country’s four main banks to better tackle one of the main drags on profits and stability.
The Troika is expected to give a green light to the proposals during a formal review meeting in Athens between September 22-30, essentially allowing for a faster and clearer resolution framework to be put in place.
Greek banks not only have one of the highest NPL levels in Europe at €75 billion, but the average length of time for foreclosure proceedings in Greece is also the second highest in the Europe.
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| Greek banks focus on the present |
Worryingly, Greece’s top four banks – Alpha Bank, Eurobank Ergasias, National Bank of Greece and Piraeus Bank – have already raised a combined €8 billion of equity capital this year to help cushion against loan losses but according to SNL Financial, they may require more.
“Before the capital increases, NPLs comfortably exceeded capital and reserves,” say SNL’s David Brierley and Saad Sarfraz. “The capital needed to lift reserves to 60% of impaired loans, a figure broadly seen as acceptable by European banks, would have amounted to some €20 billion at 2013-end. On this pro forma basis, there would remain a €12 billion hole in the Greek banking system post-rights issues.”
The IMF suggested in June that there might be a €6 billion hole, but Poul Thomsen, IMF mission chief for Greece, admitted on June 10 that NPL recovery is “the key issue”.
The precise details on resolution proposals are thin but the main thrust is found in the Bank of Greece’s latest published code of ethics, specifically dealing with high bank NPLs.
In the business loans category, the latest revised code proposes transferring company shares to creditor banks, or even demanding administration changes if companies fail to cooperate over NPLs. The code will also allow banks to initiate foreclosure procedures over home loans if debtors are uncooperative, according to the Bank of Greece.
Such proposals, if approved by the Troika, would provide a further boost to Greece’s four largest banks.
“A faster and more certain recovery mechanism could improve investor returns and draw more demand [to the Greek banking sector]” says Alberto Gallo, head of European credit research, Royal Bank of Scotland.
Kiri Vijayarajah, European banks analyst at Barclays, says any such legislative move should “gradually enhance NPL recovery rates, as the Greek banks catch-up with standard practice elsewhere in Europe.”
Ronit Ghose, head of European banks research at Citi, is more confident and says: “Greek banking is potentially at a major turning point.”
Ghose and his team forecast that gross Greek bank NPL levels will increase to just under 35% of total loans at the end of 2014 – from around 32% at the end of last year – but should then start to decline to 23% in 2018.
“Based on the historical relationship between unemployment and bad debts, we would expect the outlook for gross NPLs to improve faster: using the IMF forecasts for unemployment would lead to a forecast c15% gross NPL ratio by 2018,” says Ghose. “Using the IMF’s GDP forecasts, we would anticipate a rapid drop in gross NPLs between 2013 and 2015 followed by a leveling out of bad debt declines.”
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Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank’s first half and second quarter results, all reported at the end of August, show the progress they are making on this front. NPL levels have continued to increase, but the pace is slowing.
Alpha, which reported after tax profits of €267.4 million for the first half of the year, said its NPL ratio nudged up to 33.6% in the second quarter, but that there were €158 million of new NPLs during this time versus €228 million in the first three months of the year.
By comparison, Eurobank reported a net loss of €301 million in the second quarter, said its NPL ratio also rose to 31.8% in the second quarter, but that NPL formation fell 50% in Greece alone to €299 million as a result of what it called “remedial management initiatives”. New formation of NPLs, including its international business, fell to €382 million from €681 million in the first quarter – the lowest since 2008.
NBG group NPL ratio stood at 23.2% at the end of June – up from 23% at the end of March – while Piraeus’s NPL ratio hit 38.5% in the first half, although in the second quarter the percentage of NPL formation declined to 0.7% from 1% in the first three months of the year.
NBG, the country’s largest bank by assets, reported first-half net profits of just over €1.1 billion, helped by lower funding costs, a strong contribution from its Turkish banking business Finansbank, lower bad loan provisions and a deferred tax benefit of €994 million.
Greece’s second largest bank by assets, Piraeus, trailed NBG but still reported a profit of €164 million in the second quarter – a positive swing from the €247 million loss it reported at the end of March.
“Piraeus has the greatest gearing, of the four large Greek banks, to the Greek banking market as a percentage of its overall business: over 90% of the assets, deposits and NPLs are located in Greece, and the rest are largely in neighbouring South East European markets,” says Ghose.
He adds that while Piraeus’ group NPL ratio is higher than its peers, and is therefore a risk in terms of higher loan provisions, this does provide “upside from any decline in Greek NPLs later in 2014 or early 2015.”