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Coronavirus could derail Greek banks' bad-debt reduction plans

Greek banks can expect the novel coronavirus outbreak to deal a blow to their ongoing efforts to reduce portfolios of toxic assets, analysts say.

Only just a few months ago, the signs of an economic recovery were encouraging as was a new government scheme to encourage bad-debt securitizations. Greek banks had good reason to be hopeful that 2020 would be the year that they would at long last make deep reductions to the bad debts that piled up on their balance sheets during the financial crisis of 2008-2009. But that was before the pandemic hit.

Greece, which imposed a social lockdown March 22 to combat the virus, has reported relatively few COVID-19 fatalities, at 101 as of April 14. But the prospect of a prolonged economic downturn is leaving the country bracing for another period of financial pain.

For Greek banks, a prolonged period of coronavirus fallout could be a double whammy as not only would their soured-asset reduction plans come under pressure, but they also could be faced with a new wave of defaults.

Cleanup stalled

Greece's big four banks, Alpha Bank AE, Piraeus Bank SA, National Bank of Greece SA and Eurobank Ergasias Services and Holdings SA, had some €55.29 billion of problem loans between them as of the end of 2019, down from €67.75 billion a year previously.

"The four major Greek banks had been making good progress in reducing their [nonperforming exposure] stock and the improving economic sentiment in recent quarters had also resulted in improving asset quality trends and strengthened net earnings," Lito Chousiada, assistant vice president, European financial institutions at DBRS Morningstar, said in an email.

Greek banks looked well on their way to continue pursuing those reductions. One reason for such optimism was the Greek government's new scheme, Project Hercules, which enables banks to make use of state guarantees on the least risky tranche of bad debt securitizations. Looking to Italy's successful GACS scheme, Project Hercules was expected to help banks turn to securitization to clean up their balance sheets, rather than pinning their hopes on large debt sales to individual buyers.

The other reason for optimism, both in terms of running off bad loans and writing new business, was a nascent rebound in the Greek economy. In late 2019, economists and analysts had seen Greece moving into an economic "sweet spot" in 2020. Scope Ratings at the end of last year. forecast GDP growth of 2.3% in 2020, up from an estimated 1.8% in 2019 as its macroeconomic fundamentals improved, the real estate market recovered and tourism, which accounts for around 25% of Greek GDP, was enjoying record-breaking performance.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

But within weeks, however, the bullish mood darkened.

Greek Finance Minister Christos Staikouras said earlier in April that he expected the country's economy to contract by between 3% and 4% during 2020, a downward revision from a zero percent growth forecast made in March.

Amid a shrinking economy, banks may also need to rethink securitization strategies, Chousiada noted.

"For some parts of these securitizations, there are binding agreements with set dates in place with the investors and as such execution risk on these should be lower," she said. "However, for the securitizations that are in a less-advanced stage, there is a strong likelihood that there will be delays compared to the original timelines, given current market conditions."

Among the plans unveiled earlier this year, Piraeus Bank said in February that it was aiming to securitize €7 billion of NPEs in two transactions this year.

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Hit to tourism

But the fortunes of Greece's tourism sector could impact such plans.

Piraeus as of the end of 2019 had €1.9 billion of exposure to the tourism industry. The bank said that some €8.8 billion of its loan book stood to be "severely affected" by the pandemic.

The extent of the impact on Greek banks depends largely on how long the lockdown lasts, Jonas Floriani, a director at Cyprus-based AXIA Ventures Group and a frequent commentator on Greek banks, said in an interview. If lockdowns and travel restrictions in Greece and other countries ease before the summer tourism season ends, the Greek economy will be somewhat spared, he said.

"We may see a bit of local tourism coming back. But this is a very bad situation for, say, hotels that have made big investments," he said.

Part of solution

Yet Greece's banks are heading into this crisis in reasonably good shape from a capital perspective, and unlike the financial crisis 10 years ago, when the banking sector was in the eye of the storm, Floriani said.

"This is not a banking crisis. The banks are institutions needed by the government to support the economy at this time, and there is a common understanding that the government will support them as much as possible," he said.

Given their relatively good level of capitalization, and the relaxation of capital rules, "mathematically, Greek banks should be OK for now," Floriani said.

The big four's common equity Tier 1 ratios at the end of 2019 ranged from 14.05% at Piraeus to 17.89% at Alpha Bank. National Bank of Greece's ratio was 16.09%, while Eurobank's was 16.70%.

Banks are also now pivotal in helping to soften the blow to the wider economy. Under an EU-approved plan, the Greek government is set to provide guarantees on €2 billion of working capital loans to Greek businesses.

"Everything looks taken care of, on paper. Of course, that's not always how things work out in reality," Floriani said.