The four systemically important Greek financial institutions reduced the total of bad debts (NPE) from 68.5 to 47.4 billion euros last year.
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(Foto: Bloomberg)
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Athens The program has a big name: “Hercules” is what George Zavvos called the plan that is supposed to help Greek banks clean up their balance sheets, which are burdened with massive credit risks. As Deputy Finance Minister, Zavvos is responsible for banking and insurance in the Greek cabinet.
His concept, named after the muscular man of antiquity, is having an effect: In the past year, the four systemically important Greek financial institutions – Alpha Bank, Eurobank, National Bank of Greece (NBG) and Piraeus Bank – the total of bad debts (NPE) reduced from 68.5 to 47.4 billion euros.
While three years ago every second loan granted was non-performing or at acute risk of default, the NPE ratio fell to 30.2 percent at the end of 2020, according to the Greek central bank. However, that is still ten times the European industry average of 2.8 percent. The banks want to push the quota below ten percent by the end of 2022.
The further the consolidation of the loan books goes, the more clearly a dangerous side effect of the restructuring concept becomes apparent: it costs the banks more and more equity capital. The cleanup of the loan books could ultimately require new capital increases after the Greek banks had to be recapitalized three times since the beginning of the sovereign debt crisis in 2010.
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The Hercules program, introduced in 2019, enables banks to outsource problem loans. The bad debts are bundled in asset-backed securities, which can then be sold to investors. The state guarantees around twelve billion for a third of the securitized claims, namely the senior papers. The state-guaranteed claims can thus remain in the bank balance sheets.
Most of the equity is accounted for by tax credits
Nevertheless, the securitisations and write-offs of the problem loans consume equity. With a core capital ratio (Tier 1) of 14.3 percent as an industry average, the Greek banks easily meet the minimum requirements, but there is a structural problem: A large part of the equity is accounted for by deferred tax credits from loss carryforwards. In 2012, the state granted the banks compensation for the losses from the haircut.
At Alpha Bank, these tax credits currently make up 54 percent of equity, at Eurobank and Piraeus Bank each over 60 percent and at NBG even 75 percent. With increasing depreciation, the proportion of this “soft” capital component increases. A dilemma that the head of the Greek central bank, Yannis Stournaras, has warned of several times.
As a solution, Stournaras proposes the creation of a national bad bank in addition to the Hercules program. Problem loans and deferred tax claims are to be allocated to it. This would improve the quality of the banks’ core capital. However, Stournaras has so far not been heard in the Ministry of Finance for his plan. With the approval of the EU competition watchdog, the government has now extended its Hercules program until October 2022.
Bank bosses hope for better times
The Piraeus Bank, which at the end of 2020 was the worst among the four institutions with an NPE ratio of 45 percent, has to strengthen itself with a capital increase of one billion euros. That was decided by an extraordinary general meeting last week. At the same time, the bank intends to push the NPE quota below ten percent within the next twelve months and to three percent in the medium term. Piraeus CEO Christos Megalou has given the show of strength the optimistic name “Sunrise”.
The boardrooms of the other three institutes are also hoping for better times. Nobody utters the word capital increase there, out of consideration for the share price and the shareholders. It is hoped to be able to close the resulting capital gaps in a different way, for example by disposing of assets or with future profits.
For the time being, Greece is still deep in the corona recession. It not only diminishes the profit prospects of the financial institutions, but also gives them new credit risks. The banks have suspended repayments and interest payments on loans of around € 20 billion to accommodate debtors affected by the lockdown. The regulation will gradually expire this spring. Industry experts fear that after the end of the moratorium, loans with a volume of up to five billion euros could become non-performing. Gerd Höhler
More: How Greece wants to modernize itself with the billions from the EU construction fund.
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