With Greece finally exiting its EU bailout programme, the country's banks will now benefit from normal lending rates. However, consolidation in the sector plus Greece's still-fragile economy means continued caution remains a watchword. Kit Gillet reports.


After a decade of financial turmoil that resulted in the largest economic bailout in history, on August 20, 2018, Greece emerged from the last of its bailout programmes. This means that Greek banks can now borrow at market rates for the first time in eight years. While the end of the programme was rightly lauded as a milestone for the country, few in Greece’s financial sector are letting it go to their heads.

Since the crisis began, Greece’s economy has contracted by more than one-quarter. Meanwhile, the banking sector has gone through a massive restructuring, with the number of banks active in the country shrinking from 40 to less than a dozen, and the four systemic banks (which combined represent more than 90% of the banking sector) needing to be recapitalised three times.

Savage cuts

According to data from the Hellenic Bank Association (HBA), the number of people employed in the Greek banking sector has shrunk from more than 66,000 in 2008 to just over 40,000 by the end of 2017, with branch numbers also decreasing, from 4087 in 2008 to just 2000 in December 2017. Deposits, meanwhile, fell by more than €110bn, with banking sector assets dropping from €418.6bn in 2008 to €259.7bn at the end of 2017, according to the HBA.

Still, recent progress in reducing banks’ non-performing exposures (NPEs), as well as in rebuilding confidence in the sector, has some hoping that the worst is in the past and the banking sector can look towards long-term stability and growth.

“Τhe path has been paved, both in terms of legal framework as well as with regards to banks’ NPE strategies,” says Chryssanthi Berbati, head of corporate development and investor relations at Piraeus Bank, the country’s largest lender. “Confidence is returning, and this is evident in the continuous increase of deposits.”

And now, the future

Since the Greek government turned to the EU and International Monetary Fund for help in 2010, the country has received bailouts worth €289bn. While propping up the country in the short term, the bailouts were accompanied by enforced austerity measures that strongly impacted upon the Greek economy and drastically increased the public debt, which now hovers at about 180% of gross domestic product (GDP). Unemployment now stands at about 20% (though this is an improvement on recent years), wages are down and taxes are up.

Speaking at an event in Athens in late August, European Central Bank (ECB) policy-maker Jens Weidmann said Greece faces a long road to recovery. “The route to future prosperity for Greece could lie in proving in the years ahead that it can stick to a sound fiscal path,” he said, pointing to the need to continue running a budget surplus, reduce bad loans and reform institutions.

Yet after years of negative growth, Greece’s economy is expected to grow by 2% in 2018, after expanding by 1.4% in 2017. While this level of growth is unlikely to kick-start the economy, it is a welcome development for those involved in the financial sector.

“I would love to see Greece going through a V-shaped recovery – a massive drop in GDP, followed by GDP growing by 5% to 7% a year – but I don’t think that is realistic,” says Jonas Floriani, director of research at investment banking group AXIA Ventures Group. However, he adds that the important thing is that 2% growth does not bring any more harm to the banks “and that is something that has been missing for a long time. There has been a lot of headwind coming into their faces.” 

A return to profit?

Lucyna Stanczak-Wuczynska, EU banks director at the European Bank for Reconstruction and Development (EBRD), which began operating in Greece in 2015, believes a lot has been achieved in the country's banking sector in the past few years. 

“Re-capitalisation has taken place. Banks have reduced their dependency on expensive emergency funding assistance. Profitability is on its way back,” she says.

She adds that banks have also improved their credit rating and have been successful in re-entering the European capital market, issuing cover bonds and securitised instruments as well as continuing to meet ambitious non-performing loan (NPL) reduction targets. Still, the picture is less rosy when looking at the remaining challenges, she says, such as the further reduction of NPEs and the return to growth.

In July 2018, rating agency Moody’s raised its outlook for the Greek banking system to 'positive' from 'stable', in expectation of improvements in banks’ funding and asset risk, as well as a gradual decline in problem loans, marginal profitability and stable regulatory capital. However, it said Greek banks will continue to face difficult economic conditions linked to high unemployment in the country and scarce lending opportunities.

As part of their restructuring, Greek banks were required to sell off many of their banking assets abroad. While some sales were well timed – such as National Bank of Greece’s (NBG's) sale of Finansbank before the Turkish economy’s recent misstep – it has left banks overly reliant on the domestic market. 

“NBG managed to sell its Turkish operations just before Turkey went belly up, so that was great for NBG not to have Finansbank on its books,” says AXIA’s Mr Floriani. “In general though, all of the countries that the Greek banks were exposed to have higher growth rates than Greece, better asset quality, so in theory it is detrimental to their earnings power. At the same time, it gives them the time they need to focus domestically on the clean-up, and once that is finished they can look towards non-domestic assets again.”

According to Bank of Greece, the operating income of Greek commercial banks and banking groups dropped by 1.4% in 2017 to €8.46bn, with losses after tax of €475m. However, losses related to discontinued operations amounted to €580m, down from €2.9bn in 2016, pointing to ongoing efforts to refocus banking operations and the profitability of continuing operations.

In the second quarter of 2018, Piraeus Bank reported a net profit from continuing operations of €24m. This was after seeing a €79m loss in the first quarter of the year related to €132m costs from a voluntary exit scheme for roughly 1200 employees, which is ultimately expected to save the bank €47m a year in recurring costs. 

Second largest lender NBG reported a profit after tax from both continuing and discontinued operations of €19m for the first half of 2018, while Eurobank saw a net profit after tax, discontinued operations and restructuring costs of €36m. Fourth largest lender Alpha Bank reported a profit after tax of €12.3m for the same period. “We have delivered a strong operational performance so far in 2018, enabling us to absorb increased provisions as we implement our NPE reduction plan,” CEO Demetrios Mantzounis said after the results were announced.

Non-performing challenges

The largest issue affecting Greek banks is their high rates of NPEs (that is, NPLs as well as loans belonging to debtors assessed as unlikely to be able to meet their obligations in full without realisation of collateral).

“The main concern is how to tackle the high level of NPLs. NBG has the lowest among its peers but it is still about 40% – others are 50%. It is a systemic issue,” says Ioannis Kyriakopoulos, chief financial officer at NBG.

According to Bank of Greece, at the end of June 2018, NPEs comprised 47.6% of total exposures in the banking sector, worth about €88.6bn. But the stock of NPEs was actually down 6.1% compared with the end of December 2017; and compared with their peak in March 2016, they have been reduced by the equivalent of 17.3%. Banks are targeting an ambitious 37% reduction of NPEs between June 2017 and the end of 2019. NPLs, meanwhile, are targeted to fall 47% to €38.6bn over that period.

In the second quarter of 2018, Greek banks continued to meet their reduction targets, with Alpha Bank reducing its NPEs to €24.3bn, against a target of €24.6bn; NBG reducing NPEs to €16bn, hitting its target for all of 2018; and both Piraeus Bank and Eurobank seeing higher-than-targeted drops, with NPEs reaching €29.4bn and €17.3bn, respectively.

The great Greek sell-off

In an attempt to clean up their loan books, Greek banks have been selling off portfolios of bad loans to funds. According to Bank of Greece, banks have sold €6.9bn-worth of loans since June 2017, and plan to sell another €4.7bn by the end of 2019.

Yet according to Nikolaos Georgikopoulos, a visiting research professor at New York University’s Stern School of Business and a senior economic adviser to the president of the Central Union of Municipalities of Greece, some banks still have loans that have not been paid back for almost 20 years. “Until the recent past, Greek authorities did not have the appropriate tools to cope with them, nor the IT infrastructure, and there was not any backing by an appropriate legal framework,” he says. 

However, this has changed, with tools such as out-of-court debt settlement mechanisms, the electronic auction of real estate, the ability to identify strategic defaulters, the ability to address multiple debtors with multiple creditors, and the ability to implement a definitive solution for non-viable businesses. “Still, further steps should take place for the further development of the secondary market for the management and transfer of NPLs,” adds Mr Georgikopoulos.

Following a tender process, in July 2018 the four systemic banks entered into an innovative servicing agreement with doBank, a credit institution specialising in servicing NPLs. According to the agreement, doBank will support the banks in the management of common NPEs of more than 300 Greek small and medium-sized enterprises (SMEs), valued at €1.8bn, while facilitating the search for viable restructuring solutions.

“The doBank deal is important because it shows that the four large banks can work together effectively so as to deal with NPEs,” says Piraeus Bank’s Ms Berbati. “It is a testament of the willingness of the Greek banks to use all tools available in order to run down their legacy books and [the move is] also is supportive of establishing a liquid NPE market in Greece.”

A return to health

In recent years Greek banks have repeatedly tapped emergency liquidity assistance (ELA) drawn from the Greek central bank and put in place in February 2015 when deposits fled the banking system. The Hellenic Financial Stability Fund (HFSF), established in 2010, has also injected €31.9bn into the four largest players, and as of the end of 2017 owned 26.4% of Piraeus Bank, 40.39% of NBG, as well as 2.4% of Eurobank and 11% of Alpha Bank.

In June 2016, the ECB reinstated Greek banks’ access to cheap funding, enabling Greek lenders to reduce their dependence on the more expensive emergency funding. Then, in September 2018, the ECB reduced the amount of emergency funding that Greek banks could draw from the central bank, from €8.4bn to €5.2bn, reflecting improved liquidity conditions. This followed news that emergency central bank funding dropped from €4.84bn in July 2018 to €4.49bn in August.

Both Piraeus Bank and NBG have now exited the ELA programme, while Eurobank reduced its ELA funding by €6.1bn in the first half of 2018, to €1.8bn, and Alpha Bank from €7bn to €1.1bn.

This reduction is linked to the return of domestic deposits. “With no imminent re-capitalisations, people are starting to get more comfortable with the banks as a whole, and people who took their money and were keeping it in safe boxes at home are now saying they’ll bring it back to the banks,” says AXIA’s Mr Floriani. “There is now a sustained momentum on the deposit side, and that was one of the drivers of ELA coming down, because when you have more deposits you don’t need ELA.” 

Piraeus Bank reported a growth of €1bn in domestic deposits in the first half of 2018, with domestic deposits at €41.9bn and the bank’s net loan-to-deposit ratio for Greece at 92%, compared with 115% in the first half of 2017. Eurobank also saw domestic deposits grow €2.2bn in the first six months of 2018, while Alpha Bank saw domestic deposits up €1.2bn quarter on quarter in June, to €37.1bn, with the loan-to-deposit ratio reduced from 132% in June 2017 to 111% in June 2018. NBG, meanwhile, saw domestic deposits rise €866m in the second quarter of 2018, to €39.3bn.

In May 2018, Greece’s four major banks emerged unscathed from ECB stress tests, which revealed that common equity Tier 1 capital ratios were above the 5.5% unofficial threshold. “The results of the stress test exercise confirmed that the market environment in Greece is tangibly improving, even under the conservative assumptions applied in such robust regulatory exercises,” says Piraeus Bank’s Ms Berbati.

Relaxation of capital restrictions

In May 2018, the Greek government announced that it was relaxing capital restrictions on withdrawals, put in place shortly before Greece received its third bailout in 2015, raising the monthly limit of cash that can be withdrawn from €2300 to €5000, as well as the amount of hard cash that can be taken out of the country from €2300 to €3000. The new regulations also doubled the daily amount that could be sent abroad as part of business transactions by registered entities to €40,000. In mid-September, Greece’s finance minister told journalists that plans to further loosen capital controls would happen soon, without giving a specific timetable, and that the country was on track to lift all restrictions.

“The capital controls were introduced at the peak of the Greek crisis, at a point when the very presence of Greece in the eurozone was at stake,” says Fokion Karavias, CEO of Eurobank. “Now all the strategic decisions have been made, the fiscal imbalances have been addressed in a sustainable way and the question of ‘if Greece will remain part of the euro’ is off the cards.”

According to Mr Karavias, what Greece needs now is a growth boost, which requires significant funding, mainly from foreign direct investment. “International investors are wary of limitations in the movement of capital. Therefore, the lifting of the last remaining measures will consolidate the confidence in the prospects of the Greek economy and will make investment decisions easier to make,” he says.

However, he adds that capital controls are not the major obstacle in Greece, which is why their lifting needs to be paired with a systematic effort to create a more pro-business environment, “not least by implementing agreements with our European partners and creditors, by accelerating the privatisation programme, by promoting a reform agenda on revamping the public sector and the pace of judicial procedures, to name but the most prominent priorities”.

Lending limits

Despite deposits creeping up, lending opportunities are still limited in Greece, with businesses cautious about borrowing and banks reassessing their lending habits.

According to New York University’s Mr Georgikopoulos, it is important for Greek banks to adopt a new business model to prove that they can increase their revenues and focus more on lending to enterprises that have the potential to contribute to the recovery of the Greek economy. 

“In the past, credit to enterprises always involved traditional economic sectors and it was provided to those sectors that had the potential for increased revenues from high loan margins while the economic rationale for granting loans were treated as a secondary priority,” he says. “This structural issue needs to be addressed thoroughly. Banks should satisfy new demand by granting credit to dynamic firms in new technologies [and] promoting growth through the use of skilled staff, which does not require significant investment in fixed equipment but in working capital.”

One positive sign for the banking sector as a whole is new interest in the sector. In 2018 a new bank, Praxia Bank, was launched, owned by international investment company Atlas Merchant Capital Fund and targeted towards the SME sector, which accounts for more than 85% of companies in Greece.

“We are of the view that the market can benefit from a new, efficient entrant that can specifically cater to the needs of the SME sector,” says Anastasia Sakellariou, former chief executive of Greece’s HFSF and now CEO of Praxia Bank. “The introduction of a digitally enabled and privately owned bank is something that was missing from the market,” she adds.

Praxia aims, over a five-year period, to grow a loan book of more than €4bn, and to take deposits of a similar size. “We are a challenger bank, we are not aspiring to grow and get market share that is unreasonable,” says Ms Sakellariou. “My view is that there is plenty of room for everyone to operate. The fact that there is no fintech, no digitally enabled player, makes it a huge opportunity.” The bank will also benefit from the fact that, unlike the large systematic banks, it does not have to deal with legacies issues such as NPLs, she adds.

In July 2018, government officials told Reuters that Greece was eyeing the creation of a state development bank that would also lend to SMEs and which would be jointly managed by the finance, economy and energy ministries. There has also been discussions about setting up local co-operative banks.

“Without a doubt, the co-operative banks could have an significant role for financing the local communities and the SMEs,” says Mr Georgikopoulos, pointing to the high degree of consolidation in the banking sector, with a strong emphasis on urban centres. However, he adds that co-operative banks cannot play a protagonist role in Greece, but would have a more supplementary role.

The EBRD has also announced that it will ask its board to approve the extension of its mandate in Greece for five additional years, to 2025, to further help the economic recovery of the country.

Work to be done

Greece has a cash buffer of €24bn, enough to cover two years of funding needs, reducing any immediate liquidity and funding concerns. Still, there is plenty of uncertainty for the banking sector, linked to continued restructuring and also to public spending and economic growth, as well as the 2019 parliamentary elections, which could have a sizeable impact on overall economic policies.

“The bailout programme may have ended but the conditionality that came with that is still with us. Reforms still need to be made, not in the financial sector, but overall, and this has to continue,” says NBG’s Mr Kyriakopoulos.

However, he adds that it is not bank financing but a lack of new investments and new business opportunities that is limiting growth. “That will bring the growth of the economy and increase confidence of investors. The Greek banking sector cannot grow on its own if the country isn’t growing,” he says.



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