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Green shoots in the Greek banking sector as toxic loans fall, deposit base grows

Greece's "big four" banks made solid progress in the second quarter of 2019 on two problem areas that have loomed large since the 2009 global financial crisis: high levels of nonperforming loans and a weak deposit base.

National Bank of Greece SA, Piraeus Bank SA, Eurobank Ergasias SA and Alpha Bank AE all reported a reduction in toxic loans and an increase in deposits during the period, which industry observers say bodes well for the recovery of the country's troubled financial sector.

NPL reduction: a Herculean task

Greece still has the highest NPL ratio in the EU, at 41.41% as of the end of the first quarter of 2019, according to the European Banking Authority, although this is down from a peak of 47.1% at the end of September 2016. The country's NPL pile stood at €84.3 billion as of the end of the first quarter.

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Of the big four, Piraeus Bank has the highest level of gross impaired loans — €26.7 billion as of the end of the second quarter, down from €28.0 billion at the end of 2018.

So far in 2019, Greek banks have tackled their NPL problem using a mix of portfolio sales, auctions of foreclosed homes, restructuring of soured debt and — in the case of Piraeus — a partnership with a large international loan servicer.

All of these are "positive steps in the right direction," Jakob Suwalski, sovereign analyst for Greece at Scope Ratings, said in an email. In particular, securitization of NPLs looks set to be a useful tool in getting bad loans off Greek banks' balance sheets quickly and efficiently, freeing them up to return to lending, he added.

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Eurobank took the plunge in June this year with the securitization of €2 billion of nonperforming residential mortgage loans, dubbed Project Pillar.

Nikolaos Antypas, a lecturer in finance at Henley Business School, University of Reading, said he thinks banks are reducing NPLs at a "commendable" pace.

"In general, bankers are self-motivated with respect to offloading bad loans so that they can seek new customers and projects," he said in an email.

But Greece's NPL ratio is still well above those of other European banking sectors such as Spain, Portugal, Ireland and Italy, all of which battled with stubbornly high levels of soured debt in the wake of the global financial crisis — much of it linked to real estate.

The volume of NPLs in Italy — roughly €145 billion — dwarfs that of Greece, but the former's NPL ratio of 8.25% at the end of the first quarter is much lower since its banking system dwarfs that of Greece, and performing loans outnumber the nonperforming ones.

Deposit growth and the end of capital controls

Capital flight was a major concern for Greek banks in the years following the global financial crisis, as businesses and individuals concerned about the fragility of the economy got their money out of the country. Deposits plummeted to €133.6 billion in April 2015, from €160.3 billion at the end of 2014.

The government imposed capital controls to stem the flow, imposing a daily withdrawal limit. The controls were lifted in their entirety on Sept. 1, 2019, in a move that central bank governor Yannis Stouranaras said marked "a return to normality and growing confidence."

Indeed, business and household deposits across the Greek banking sector rose in July for the fifth month in a row, according to the most recent data from the Greek central bank, increasing to €138.64 billion from €136.94 billion in June. All the major banks saw deposits increase in the second quarter, with Eurobank registering the biggest year-over-year rise.

The Greek economy relies mainly on domestic bank credit, rather than international capital markets, for financing economic activity, so sustained deposit growth has been a pre-condition for the complete lifting of capital controls, Suwalski said.

It appears that lifting the capital controls has not led to significant outflows, suggesting a stabilizing funding situation for Greek banks, he said.

Antypas said funds that have migrated to other asset classes, or overseas, are likely to return, and that "the seamless transfer of funds across businesses will stimulate economic activity, which may create domino effects on economic growth."

Increasing deposits have helped Greek banks increase their lending to the corporate sector, Suwalski said, although credit to private individuals has been contracting. It seems that deleveraging still has some way to go, he said.

As of July, the annual growth rate of credit to corporations extended by Greek banks stood at 2.8%, up from 2.2% a month previously, according to data from the Greek central bank. Credit to individuals and private nonprofit institutions had an annual growth rate in July at negative 2.3% compared with negative 2.0% the previous month.