Banks have work cut out af­ter re­cap

Credit sec­tor must per­form ma­jor changes to sur­vive in the low-growth en­vi­ron­ment of the com­ing years

Kathimerini English - - Front Page -

ANAL­Y­SIS Com­plet­ing the re­cap­i­tal­iza­tion of Greece’s four core banks is a lon­gawaited step in the right di­rec­tion but it will nei­ther open the spig­ots of credit to the econ­omy nor ad­dress the main chal­lenge fac­ing lo­cal banks in the years ahead – stag­nant or slowly grow­ing busi­ness.

As ex­pected, three of the four core banks se­cured the min­i­mum 10 per­cent pri­vate par­tic­i­pa­tion in their share cap­i­tal in­creases to re­main un­der cur­rent man­age­ment.

National Bank of Greece and Alpha Bank have suc­ceeded in rais­ing more than 10 per­cent of the re­quired cap­i­tal from pri­vate in­vestors, and Pi­raeus Bank is also ex­pected to fol­low suit, mainly thanks to the deals it struck with France’s So­ci­ete Gen­erale and Por­tu­gal’s BCP. On the other hand, Eurobank Er­gasias was fully re­cap­i­tal­ized by the HFSF (Hel­lenic Fi­nan­cial Sta­bil­ity Fund).

Read­ers are re­minded that the cap­i­tal needs for all Greek com­mer­cial banks were es­ti­mated at 40.5 bil­lion eu­ros in May 2012, with 27.5 bil­lion eu­ros cor­re­spond­ing to the four core banks, namely National, Alpha, Eurobank and Pi­raeus.

The Greek cen­tral bank again re­viewed their cap­i­tal needs in the fall of 2012 and con­cluded the es­ti­mated cap­i­tal needs were ad­e­quate. The cap­i­tal needs of National Bank were put at 9.75 bil­lion eu­ros, Alpha’s at 4.5 bil­lion, Eurobank’s at 5.8 bil­lion and Pi­raeus’s at 7.3 bil­lion.

To a large ex­tent, the cap­i­tal gap stemmed from the re­struc­tur­ing of the Greek pub­lic debt, a process known as PSI, or pri­vate sec­tor in­volve­ment.

The four banks suf­fered losses of 28.2 bil­lion eu­ros from bonds

and the an­tic­i­pated stag­na­tion of dis­pos­able in­comes in the next few years do not sup­port the case for a sig­nif­i­cant in­crease in bank de­posits. and sov­er­eign loans while to­tal losses for the sys­tem stood at 37.7 bil­lion eu­ros.

How­ever, while the com­ple­tion of the re­cap­i­tal­iza­tion is a pos­i­tive de­vel­op­ment in it­self, it may not be the last one, at least for one or more of the sys­temic banks. This may be the case if the econ­omy re­mains in re­ces­sion, giv­ing rise to more bad loans. Banks will be sub­ject to new stress tests on their loan port­fo­lios in the next few months, which may point to the need for more cap­i­tal.

To fully or partly fill the cap­i­tal gap, they will have to move ahead with the dis­posal of some core and non-core as­sets, count on on­go­ing as­set-li­a­bil­ity ex­er­cises to boost their cap­i­tal ad­e­quacy ra­tios and, gen­er­ally speak­ing, speed up delever­ag­ing.

In their busi­ness plans sub­mit­ted to the cen­tral bank prior to de­ter­min­ing their cap­i­tal needs, a dou­ble-digit de­gree of deleverag- ing is as­sumed by each bank ac­cord­ing to their ex­ec­u­tives.

Of course the pic­ture will brighten if the govern­ment and some in­ter­na­tional banks are right in pre­dict­ing that the Greek econ­omy will sta­bi­lize later this year and start re­cov­er­ing in 2014. An­a­lysts say banks em­ploy­ing in­ter­nal mod­els to as­sess risks have lee­way in prop­ping up their ad­e­quacy cap­i­tal ra­tios.

So, banks will face cap­i­tal con­straints in turn­ing on the credit tap to the econ­omy, as many ex­pect, de­spite the com­ple­tion of the re­cap­i­tal­iza­tion. How­ever, an even big­ger con­straint may turn out to be liq­uid­ity. The govern­ment and bankers are count­ing on the re­turn of de­posits and banks’ greater ac­cess to the in­ter­bank mar­ket fol­low­ing the re­cap­i­tal­iza­tion, ex­pect­ing it will boost liq­uid­ity.

Nev­er­the­less, the con­tin­u­ing re­ces­sion and the an­tic­i­pated stag­na­tion of dis­pos­able in­comes in the next few years do not sup­port the case for a sig­nif­i­cant in­crease in de­posits. More­over, Greek banks will have to grad­u­ally de­crease their de­pen­dence on the Eurosys­tem dur­ing the same pe­riod, which will make it more dif­fi­cult for them to pro­vide credit to com­pa­nies and house­holds – con­trary to pop­u­lar be­lief.

In other words, the re­cap­i­tal­iza­tion and re­struc­tur­ing of the Greek bank­ing sec­tor – even if no ad­di­tional cap­i­tal is needed af­ter the new stress tests to be con­ducted in the com­ing months – may ease credit con­di­tions in the econ­omy, but it will not bring about the nor­mal­iza­tion en­vis­aged by many.

In ad­di­tion to the cap­i­tal and liq­uid­ity con­straints in the quar­ters and likely years ahead, banks will have to cope with a big­ger prob­lem: stag­nant or in­suf­fi­ciently grow­ing busi­ness. Re­tail credit in­sti­tu­tions tra­di­tion­ally make money from in­ter­est and fees charged on loans and much less from other sources such as trad­ing in­come, as­set man­age­ment, ban­cas­sur­ance.

Al­though the base­line sce­nario of the Greek ad­just­ment pro­gram forecasts sat­is­fac­tory growth rates in the fu­ture, many doubt whether the econ­omy can grow by 2 per­cent or more on aver­age dur­ing the 2013-20 pe­riod, while some even think it may aver­age close to 1 per­cent. This is a far cry from the aver­age gross do­mes­tic prod­uct growth rates ex­pe­ri­enced dur­ing the 1995-10 pe­riod, dur­ing which the banks learned to op­er­ate and earn huge prof­its.

With credit growth to the econ­omy in sin­gle dig­its at best, the banks can­not count on rev­enues from in­ter­est in­come and fees in or­der to make hand­some prof­its and in turn gen­er­ate in­ter­nal cap­i­tal, while sat­is­fy­ing their share­hold­ers.

Con­se­quently, in­ad­e­quate busi­ness growth ahead rep­re­sents the ma­jor chal­lenge ahead for the banks and their top man­age­ment teams. The suc­cess­ful com­ple­tion of the re­cap­i­tal­iza­tion is a pos­i­tive de­vel­op­ment, but one can­not re­al­is­ti­cally hope that it can do more than just ease credit con­di­tions in a cash-strapped econ­omy.

To rise to the chal­lenge, the top brass of Greek banks will have to man­age things dif­fer­ently than they used to in the last 15 years or so.

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