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Long-awaited house-price rebound to help Greek banks with bad-debt cleanup

A long-awaited rebound in Greek real estate prices will boost the country's banks as they work to clean up their bad debts, according to analysts.

Nonperforming exposures made up 46.7% of the entire Greek banking sector's gross loans as of September 2018, and much of this is either linked to defaulted mortgages or is secured against residential properties. A gentle improvement in the Greek economy and an influx of foreign investment in property, particularly from Chinese buyers, has helped to stimulate demand for real estate and should continue to do so at least in the short to medium term.

Greek house prices rose by an average of 1.5% in 2018, marking the first increase in 10 years, according to the Greek central bank. This compares with a negative 1.0% change in 2017, and negative 2.4% in 2016. This is "credit positive" for Greek banks, as it will help them along in their efforts to shed bad debts, according to an April 1 note from Moody's. In particular, it will make it easier for banks to sell off portfolios of soured mortgage loans, the note said.

Loan portfolio sales

Loan portfolio sales are an important component of the "big four" Greek banks' plans for cleaning up their balance sheets. Alpha Bank AE, for example, is preparing a €3.8 billion portfolio of loans for market with a view to closing a deal by the end of the year, all of which are connected with real estate in some way. The portfolio is made up of loans to small and medium-sized enterprises backed by real estate, as well as a securitized portfolio of retail loans backed by real estate assets, according to the bank's 2018 results presentation.

Rising real estate prices are a positive for banks unless there is a property bubble, according to Jonas Floriani, director at AXIA Ventures Group and a regular commentator on Greek banks.

"Higher prices would increase the banks' collateral values, therefore the total NPE coverage," he said in an email.

Nonperforming exposures, or NPEs, include a slightly broader range of debts than nonperforming loans, usually involving loans in which repayment is overdue by more than 90 days or where a loan has been deemed unlikely to be fully repaid without collateral realization.

While it is difficult to say which of Greece's banks would be helped most from the uplift in real estate prices, Piraeus Bank SA and Alpha Bank, which have the highest stock of NPEs, would arguably reap the most significant benefits, Floriani said.

A more benign real estate market would also help banks to auction off properties, he added.

Auctions of defaulted properties form another plank of Greek banks' strategies to cut bad debts: Greece now has an e-auction platform, which banks can use to sell off property, although local newspaper Kathimerini reported in late 2018 that banks had struggled to dispose of property via online auctions.

Moody's expects house prices will increase "moderately" in the next 12 to 18 months on the back of "positive momentum" in the Greek economy. The agency is forecasting 2.2% GDP growth in Greece for 2019 compared with 1.9% in 2018.

'Long-lost first cousin'

Greece's so-called Golden Visa scheme, which grants permanent residency to non-EU nationals and their families investing €250,000 or more in real estate, has been a catalyst for foreign money, according to Moody's. Net foreign direct investment in Greek residential property increased 172% year-on-year in 2018, the note said.

Chinese buyers have been by far the most enthusiastic participants in the scheme: out of a total of 3,620 permits given to overseas property investors as of April 1, 2019, some 2,416 went to Chinese property buyers, according to data from the Greek Ministry for Migration Policy. They are followed by Russian investors, who were granted 428 Golden Visas, and Turkish investors, who were given 402. Lebanese, Egyptian, Iranian and Ukrainian investors have also been active participants in the Golden Visa scheme.

Plamen Tonchev, head of the Asia Unit at the Athens-based Institute of International Economic Relations, and regular commentator on China's relations with southeastern Europe, said that there several important drivers behind the rush of Chinese money.

Worsening pollution in Chinese cities and disillusionment with falling quality of life are spurring well-heeled Chinese buyers to consider buying a bolthole in Europe, he said. Greece's Golden Visa scheme requires a lower level of upfront investment than similar schemes elsewhere in Europe, and is an attractive option for aspirational Chinese families who want their children to go to university in Europe, he said.

Chinese investors may also be hedging their bets in the face of a Chinese economic slowdown by moving money out of the country and "parking" it in property, Tonchev said.

There is no sign of the flow of investment drying up any time soon, but there is a possibility that a property boom could become unpopular (and politically contentious) if it leaves Greeks priced out of the market — something that is starting to happen in certain neighborhoods of Athens and in tourism hotspots such as Santorini, Tonchev said.