Greek Business File, June-July-August 2020, No 126
By Dimitris Kontogiannis
Greek banks face an uphill battle, bad bank proposed
Banks have gone back into survival mode following the coronavirus pandemic amid concerns it would trigger another wave of bad loans. The economic fallout is expected to be big this year, cutting into banks’ profitability as they have to take more loan-loss provisions and suffer lower fee income.
Greece appears to have managed successfully the Covid-19 pandemic so far but the short term macroeconomic outlook is bleak with the majority of analysts forecasting a recession between 4.0 and 10 percent in 2020. This is bound to hurt bank profitability and boost problematic loans. In this regard, the Bank of Greece has come out in favor of a holistic solution to deal with the sector’s legacy loans, namely a national bad bank.
The banks’ eff orts to reduce bad loans have also been hampered by measures to help affected business and households cope with the crisis. The government has extended the payment deadlines of existing debt settlement schemes for already submitted applications under the Household Insolvency law, the Primary Residence Protection law and the Out of Court Workout law. In addition, they extended the existing deadlines for the submission of new applications for the Primary Residence Protection law until end of July 2020.
Moreover, all enforcement proceedings have been halted, including e-auctions as trials were temporarily suspended, from March 13 to April 27, 2020 due to the lockdown measures. Likewise, the operations of debt-collecting and debt-servicing agencies were suspended for as long as the confinement measures shall remain in force.
The severity of the recession is likely to turn a good chunk of performing loans into non-performing exposures (NPEs). However, it is not easy to estimate the new NPEs. According to a presentation by the Bank of Piraeus in March, 35 to 40 percent of current loans are severely or moderately affected by the crisis and could be placed under the moratorium. Some of these loans could become NPEs when the moratorium is lifted. In addition, some legacy book loans may re-default. Some bankers estimate the new NPEs could range between 3 and 10 billion euro this year.
It is noted that Greek banks reported NPE balances of about 69 billion at end2019 or 41 percent of gross loans, down by about 40 billion from their peak in March 2016. They relied mainly on sales and write-off s to reduce the stock of bad loans in 2019 and hoped the long awaited “Hercules” Asset Protection Scheme (HAPS) would help them accelerate the process.
But three core banks have signaled their intention to move their securitizations to 2021 and only Eurobank is set to proceed with its Project Cairo of cumulatively 7.0 billion euro in securitizations this year. “Hercules” depends on multiple market-based securitization transactions which have become more expensive in the current environment.
A window of opportunity
Bank of Greece officials, most notably governor Yannis Stournaras, think this challenging period may off era window of opportunity to deal with the sector’s legacy loan book faster and more decisively, namely a national bad bank. They reckon the HAPS plan may not be sufficient to tackle the problem given its magnitude under the current circumstances. They argue that Greek banks may compete more intensely with foreign credit institutions in bad loan sales and potentially suffer a bigger hit to transfer prices, putting pressure on book values. They are reportedly working on a bad bank scheme to be unveiled in the next few weeks.
There are previous examples of national bad banks such as the Spanish Sareb and the Irish NAMA. However, there was state participation in their equity to allow for deep haircuts to transfer prices, classifying them as state aid. This means the European Commission’s DG Comp will have a say and may not be forthcoming.
A pan-EU solution for bad loans
Although it is still too early, there are some voices in the EU, favoring a pan-EU solution to deal with the bad loans linked to the Covid-19 crisis. However, such bad bank, if it ever comes, is not expected to be operational before 2021 at the earliest and may be ready in 2022. This is normal because borrowers have the incentive to renege on their payments, hoping for a haircut on their loans from the bad bank. On the other hand, the Greek bad bank envisaged by the Bank of Greece appears to be focusing on legacy loans prior to the crisis, potentially leaving the room open for the local banks’ participation in a potential pan-EU bad bank to deal with non-performing loans tied to the Covid-19 crisis.
On a positive note, Greek banks strengthened their capital adequacy ratios in the last six to eight months by issuing Tier 2 securities and selling non-core assets and their NPL management units. They also recorded large trading gains in Greek government bonds. Moreover, the regulators also lowered their minimum overall capital requirement and further relief was provided by the BIS on the gradual phase-in of IFRS 9. This means Greek banks have larger capital buffers to absorb loan losses even if things turn ugly.
Still, a big chunk of their capital base is made of Deferred Tax Credits (DTC). The European Central Bank considers DTC core capital. According to the Greek DTC law, a bank would have to proceed with an equity issue equal to the DTC if it reports a loss-making year. The banks would like to see an am672558endment to the above law so that they would not have to issue new common shares to the state and dilute their shareholders when they report losses. They want to take advantage of the European Commission’s temporary framework for state aid, but it is uncertain whether the EU will agree to it.
Although one cannot rule out the possibility that a bank may register a loss in 2020 due to large loan-loss provisions, it is still a remote one. With deposit growth outpacing lending expansion, Greek banks can employ their excess liquidity to provide state guaranteed loans to companies and increase positions in Greek government bonds to boost income. The provision of state loan guarantees, interest loan subsidies and support to affected individuals and businesses by the government will also mitigate near-term asset-quality deterioration. However, large credit losses could eventually show up if the economic fallout from the Covid-19 crisis is long lasting.