Greek banks face tough battle as they eye the post bailout era

Business File, November-December 2017, No. 113

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The probability of a comprehensive assessment of their assets has diminished but the upcoming stress tests continue to haunt Greek banks. Uncertainty over the outcome of the stress tests and regulatory actions have hurt bank shares on the Athens bourse. However, the market wants to see a rapid reduction in problematic loans so they do not continue to be a drag on growth in the post programme era.

Greece hopes to leave the bailout era behind in August 2018 but find it difficult to grow at a satisfactory rate if the
banking sector is not able to provide the necessary credit. In this regard, reducing the high stock of bad loans has become a priority for the Greek and EU authorities, the ECB and the IMF.
The Greek banking system continues to depend on expensive emergency liquid- ity assistance (ELA) but it has reduced its reliance aided by improving liquidity
conditions on the back of a pick up in deposits and the banks successful re-entry in the medium-term funding markets for the rst time since 2014 by issuing 3-year covered bonds at 2.9-3.0% yields. The covered bonds are secured on prime residential mortgages. The upper limit of ELA was cut further to 26.9 billion euros in early November as opposed to more than 100 billion euros in 2015.
However, capital controls are still in place and it could take quite some time
before they are fully removed. Moreover, the nancial system continues to remain a drag on economic growth with a non-performing loans (NPLs) ex- posure across the sector at 49%.
The high stock of NPEs have to be reduced fast
Although all agree the high stock of NPEs (non-performing exposure) and NPLs will have to be reduced fast, the matter became a source of disagreement between the ECB, the European Commission, the Bank of Greece and others on one hand and the IMF on the other.
In approving in principle a new stand- by arrangement (SBA) of 1.6 billion euros for Greece last July, the IMF stated that “the supervisory authorities should take additional steps, including under- taking an updated AQR and stress test, to ensure that banks are adequately capitalised before the end of the programme”. The programme is scheduled to end in August 2018.
The IMF requested a comprehensive review but the ECB objected. Finally, the ECB had its say, pointing to the EU-wide stress tests to be held in 2018, supervisory on-site reviews and the IFRS 9. The ECB and the IMF nally agreed to bring forward the stress tests and undertake targeted asset reviews instead of a thorough asset quality review (AQR).
The IMF’s repeated request for an AQR, the upcoming stress tests, the regulatory actions such as the implementation of accounting standard IFRS 9, which is going to replace IAS 39 from January 2018, and TRIM (targeted review of internal model) weighed heavily on bank stocks. The ECB’s plans to ask Eurozone banks to set aside more money to increase coverage of new NPEs to 100% from January 2018 onwards made things worse.
No one can be sure about the impact of all these actions on the capital adequacy ratio of Greek banks. It is no surprising that opinions di er, with the optimists arguing banks will have to take additional impairments but they will continue to have a capital bu er and no credit insti- tution will be recapitalised as they did in 2015. The pessimists think one or more banks may have to be recapitalised.
Back in 2015, banks raised the sum of 14.4 billion euros to cover a capital deficit under the AQR and adverse stress test scenario. Private investors put in 5.27 billion euros and the Hellenic Financial Stability Fund (HFSF) injected about 5.4 billion while the remaining capital came from other sources.
The bank index on the Athens bourse lost about 35% of its value in the last three months to mid-November, with Bank of Piraeus shares dropping the
most with 55%. Many pundits attributed the sell-off  to fears of earnings dilu- tion, stemming from the above factors.
The German factor
In addition to the above mentioned factors, pundits think concerns about the stance of the new German government on the remaining reviews of the third bailout programme and debt relief measures also had an impact. The likely participation of the liberal FDP party in the new government is raising concerns in view of its leader’s statements on Greece. Christian Lindner, FDR’s leader, has said his party will continue supporting Greece via ESM bailout loans as long as the IMF participates, ensuring the country’s public debt is sustainable.
Uncertainty for the stress tests
Although the likelihood of an AQR has diminished, the uncertainty over the out- come of the stress tests has not gone away. The tests will likely be conducted from late February through May 2018. The period is long by stock market standards and many predict stock market volatility.
If one compares the assumptions about the performance of the Greek economy incorporated in the baseline scenario in the 2015 AQR with the actual outcomes, it turns out the assumptions were more pessimistic during the 2015-2016 recession period but seems to be more optimistic about 2017.
The baseline scenario called for the economy to grow by 2.7% in 2017 while
most forecasts put it between 1.5 and 2.0%. Needless to say, the AQR assumptions in the adverse scenario were o by a much bigger margin. The same holds true about the unemployment rate, which is widely accepted to be a good indicator of consumer and mortgage loan servicing.
It should be noted that all Greek banks nalised their NPE/NPL reduction strategies with Bank of Greece and SSM, the supervisory arm of the ECB, in September. The plan calls for an aggregate reduction in NPEs of 38% or 40.2 billion euros by 2019 and 49% or 38.1 billion euros in NPLs. During the January-June 2017 period, the Greek banks managed to reduce their NPEs by 3.0 billion euros and their NPLs by 3.1 billion to 101.8 billion and 72.8 billion respectively.
Non-performing loans account for lo- ans past due 90 days or more; non-performing exposure include all NPLs and restructured loans which are performing than less than a year.
Creditors eager for e-auctions
The local banks and the country’s creditors are eager to have the e-auctions of foreclosed properties to start in late November in a bid to reduce NPEs/NPLs. They count on convincing the so-called strategic defaulters-individuals who have the ability to service their loans but do not do it, betting on generous write-off  to reach an agreement with their banks on loan restructuring or risk losing their property.

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