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Greek banks tested by political limbo

The futurefor Greek banks remains overshadowed by severe political and economic concerns.

"Sincethe recapitalization of the Greek banks [in late 2015], the main challenges havebeen the political environment, the agreements with the [international creditor]institutions and the implementation of reforms," a bank analyst said in aninterview, speaking on condition of anonymity.

Greecefaces not only a review this month of its bailout by the ECB, the European Commission,the European Stability Mechanism and the IMF, but also the human and political dramaof the migrant crisis. Some 50,000 migrants are marooned in Greece after its Balkanneighbors closed their borders to Greece, France's Le Figaro newspaper stated March 30.

Officially,Berlin denies that there is a link between the bailout process and migration. Yet,as Germany's Handelsblatt pointed outMarch 31, the sheer costs involved mean there is a connection and one that has seenGerman Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble adopt moreconciliatory tones toward Greece on budgetary consolidation and pension reform demandedunder the bailout. Schäuble has even signaled willingness to talk about debt reduction.

Moving closer

Greeceand Germany are apparently moving closer together. Following an agreement with theEU, Turkey is to reduce the number of migrants entering Europe, particularly Greece,and accept all those migrants to Greece that do not qualify for asylum. This agreementis being tested by rising arrivals in Greece, local press reported March 30.

Despitethe signs of European rapprochement, Heiko Peters, an economist at Deutsche Bank,said in an interview that the situation "continues to be extremely fraught.There are the negotiations which have to achieve a great deal. [In terms of] pensionreforms, much has to be done and the participation of the IMF [in future] dependson a large debt write-down on the part of the Europeans."

He addedthat he does not believe that it is possible to achieve this by extending the debtrepayment period, "but that has still to happen."

It hadbeen suggested that the bailout review could conclude in February yet the bank analyst warned of furtherprobable delays. This is not surprising given that the reforms Greece is being askedto pursue are deeply unpopular locally and could endanger the "fragile"Athens government led by Alexis Tsipras. Yet the Greek government could be lookingto exploit an improving negotiating position.

"Everytime when we expect to hear news on [nonperforming loans], pensions and reforms,it gets delayed. The April deadline could be pushed back to June or July becausethe Greeks expect a better deal given the possibility of Brexit [as the U.K. votesin a June referendum about whether it should leave the EU]," the analyst said.

The delaysleave the banks in limbo. A successful conclusion to the review would result inmuch cheaper funding, the analyst said, not least because the banks could use Greeksovereign bonds as collateral with the ECB.

Tough times

It isclear that 2015 ranks as a terrible year for Greek banks. As Citi analysts notedMarch 21: "[In 2015] GDPcontracted 0.7% year over year. The Greek banking system made almost €8 billionof losses and around €3.9 billion losses in the fourth quarter of 2015 alone."

Althoughthe banks have strengthened their capital and are, according to Citi, guiding fora profitable year in 2016, asset quality remains a significant problem.

Figuresfrom SNL Financial (part of S&P Global Market Intelligence) show in 2015 thatthe four leading Greek banks — PiraeusBank SA, Alpha Bank AE,Eurobank Ergasias SA andNational Bank of Greece SA— held Tier 1 capital ranging between 15% and 17% while problems loans representedbetween 38% and 53% of gross customer loans, equating to between 119% and 148% oftangible equity and reserves.

Giventhat NPL formation has slowed and that capital is strong, the analyst said the bankscould "stand still for some time." He cautioned, however, that the banksneed to clean their balance sheets; that they had rather ambitiously promised tocut NPLs to 15% or 17% of loans in two to three years; that the quality of the loancollateral was uncertain; and that a great deal depended on the outlook for thewider economy.

Peterssaid he expected that the Greek economy would decline by 1.0% in 2016, recoveringto 1.6% growth in 2017 whereby the positive figure hinges on the bailout agreement.While the analyst observed that the banks had expected NPL formation to peak aroundnow, he admitted political and economic stress could take their toll. However, heemphasized that the Greek economy had performed better than expected during theEuropean banks' stress test and growth was now the key to the banks making progress.It is clearly commercially challenging to run a bank where nearly half its loansare nonperforming.

Citianalysts commented: "The sector could double from current levels if there isevident economic recovery. We, however, remain cautious on the political outlookand the high execution risks to reduce the high level of NPLs."