Foot-drag­ging by banks on tough calls is be­ing pun­ished by equity in­vestors

Len­ders have no choice but to bite the bul­let, rec­og­nize losses from bad loans, Greek bonds, cut costs

Kathimerini English - - Business & Finance - BY DIM­ITRIS KONTOGIANNIS

AGreek bankshave been mak­ing the same mis­take the state has in as­sum­ing things will get bet­ter as time goes by, and ap­par­ently they are wrong as well.

Lo­cal banks now have lit­tle choice but to bite the bul­let, rec­og­nize the losses from bad loans and Greek bonds, cut costs and re­cap­i­tal­ize. If they do not do it, the mar­ket will do it for them.

A look at the share prices of Greece’s ma­jor listed banks is speak­ing vol­umes. The stock price of the Na­tional Bank of Greece, the coun­try’s largest credit in­sti­tu­tion, has lost 33 per­cent in the last six months and 50 per­cent in the last 12 months. It re­cently fell be­low the level of 5.0 eu­ros where the last rights is­sue took place.

The stock price of Al­pha Bank has fallen 24.4 per­cent in the last six months and 30 per­cent in the last 12 months, whereas the share price of EFG Eurobank has dropped 22 per­cent and 33 per­cent re­spec­tively. The stock per­for­mance of Pi­raeus Bank has also been poor since it has fallen 39 per­cent in the last six months and 62 per­cent over a year. Postal Sav­ings Bank, a can­di­date for pri­va­ti­za­tion, has seen its stock price fall 10 and 20 per­cent re­spec­tively over the same pe­riod.

By all ac­counts, Greek banks have been pay­ing a high price be­cause of the pub­lic sec­tor’s se­vere prob­lems and not the other way around, as is the case in other coun­tries such as Ire­land. How­ever, this does not mean they should not be held re­spon­si­ble for other mis­takes that they have made on their own.

Ex­tend­ing gen­er­ously con­sumer and other forms of credit to their re­tail cus­tomers to go on va­ca­tion and ful­fill other de­sires was one of them. It helped banks boost their prof­its and earned hefty bonuses to their top man­agers, but ul­ti­mately left them with a legacy of non-per­form­ing loans they have to cope with to­day at a time when the Greek econ­omy is con­tract­ing.

The same holds true for their re­la­tion­ship with the state. Greek banks, some more than other, were able to earn sig­nif­i­cant in­come from do­ing busi­ness with the pub­lic sec­tor, in­clud­ing gov­ern­ment bonds. This is not to say that they should have turned the blind eye at a time when their home turf needed help, but it is fair to say that their share­hold­ers are now pay­ing the price of their past choices.

It there­fore comes as lit­tle sur­prise that the stock mar­ket is pe­nal­iz­ing Greek banks by driv­ing their stock prices and cap­i­tal­iza­tion down to lev­els un­seen since the sec­ond half of the 1990s.

In­vestors are clearly dis­ap­pointed by the fail­ure of the state to push through with pri­va­ti­za­tions and an over­haul of the pub­lic sec­tor, con­trol­ling pri­mary ex­pen­di­tures while at the same time re­al­iz­ing that heavy tax­a­tion has brought even the vi­tal pri­vate sec­tor to a dif­fi­cult po­si­tion. This has not helped the coun­try’s im­age and has hurt lo­cal banks.

To be fair, in­vestors do not re­ally hold to much es­teem the eco­nomic pol­icy pro­gram (mem­o­ran­dum) Greece signed with its eu­ro­zone part­ners and the IMF – Greek bond yield spreads tell the story. But stock mar­ket in­vestors are also par­tic­u­larly dis­ap­pointed by the lo­cal banks’ ten­dency to kick the can down the road much like the state and avoid tak­ing the bit­ter pill.

Mar­ket par­tic­i­pants are fully aware of the wide­spread prac­tice of lo­cal banks to ex­tend the ma­tu­ri­ties of loans that seem prob­lem­atic to fa­cil­i­tate the bor­row­ers. How­ever, as long as there are no signs of the Greek econ­omy turn­ing around, these loans be­come can­di­dates for write-offs, as in­vestors know very well.

The same is true for Greek bonds. In­vestors know that lo­cal banks hold the bulk of their Greek gov­ern­ment bonds in the port­fo­lios, whereas they are al­lowed to record them at ac­qui­si­tion price at a time when their prices in the thin sec­ondary bond mar­ket have col­lapsed.

Just to il­lus­trate the dif­fer­ence, the 10-year Greek bond price hov­ers at around 50 and 55 per­cent of its face value nowa­days, com­pared to 70 and 80 per­cent a few months ago. If lo­cal banks had mark-to-mar­ket these bonds at the time, they should have been in bet­ter shape to­day since the mar­ket would have priced that in and per­haps some or all may have found ways to raise cap­i­tal to boost their cap­i­tal ad­e­quacy ra­tios.

By fail­ing to act ear­lier and take the hit, Greek banks are now fac­ing a much worse sit­u­a­tion. So, even though they have tried themshelves to avoid tak­ing the bit­ter pill by post­pon­ing some tough de­ci­sions thanks to the pre­vail­ing ac­count­ing rules, the stock mar­ket seems to be putting pres­sure on them to act by com­press­ing their stock val­ues.

There is no doubt that banks would have in­curred big losses for ex­ist­ing share­hold­ers if they acted as the stock mar­ket had asked them to. Still, choos­ing to wait, like they did be­fore, may en­tail even greater costs to them and the na­tional econ­omy.

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