With deposits in Greek banks down substantially and unlikely to return soon, a top priority is to reduce the country’s non-performing loan burden, writes Stefanie Linhardt. 

Piraeus Bank

Banks in Greece are hoping for a turnaround, after years of gloomy headlines. First came the sovereign debt crisis, which threw the country’s financial sector into disarray. Then, after a return to confidence and lenders stabilising their positions and accessing global bond markets, uncertainty surrounding Greece’s bailout programme following general elections in January 2015 caused a second run on the country’s lenders.

Some €18bn was withdrawn in two months in 2015, after deposits across the sector had already plunged from €238bn at the end of 2009 to €151bn at the end of June 2012.

Eventually, recapitalisation of the country’s four largest banking groups in 2015 paved the way for a status quo best described as cautiously optimistic. “Things are moving in the right direction,” says George Poulopoulos, deputy chief executive at Piraeus Bank. “We were loss-making only in the first quarter of 2016 and have since reported profits. The bank is on the right track [for a return] to profitability in 2016 and onwards.”

Piraeus Bank, the country’s largest bank by assets, reported €41m of profits before tax across the first three quarters of 2016, and expects 2017 profits to be supported by a pick-up in the economy, a reduction in non-performing loans (NPLs) and an increase in deposits.

A turnaround in profitability would be a welcome development. For several years, Greece’s banks have reported losses, while pressure on bank liquidity caused by the significant outflow of deposits has further exacerbated problems.

A pick-up?

Deposit rates of corporates and households across the Greek banking sector have remained relatively stable since June 2015 at above €120bn, but this is still only about half of the amount deposited seven years ago, according to Bank of Greece data.

According to Piraeus Bank data, customer deposits increased slightly from €134bn in December 2015 to €135bn at the end of September 2016 across the sector, with €2.5bn of inflows recorded in the second and third quarters of 2016. The bank's deposits increased by €400m in the same period – and in the second and third quarters alone, Piraeus added some €1.3bn of deposits, about half of the Greek banking sector's total inflows.

“Our strategy is to be close to the customer in order to bring deposits back,” says Mr Poulopoulos. “We have seen that with the relaxation of capital controls, which allows customers to withdraw what they are depositing now, confidence is improving.”

A question of confidence

And confidence is what the financial sector needs, as does Greece’s economy as a whole (see article on the Greek economy on page 42). At a time when banks are still faced with capital controls (see Bracken column on page 12), only allowing customers to withdraw limited amounts of cash from their bank accounts, confidence is a measure that needs to be monitored.

“The removal of capital controls would bring confidence back to customers,” says Ioannis Kyriakopoulos, chief financial officer at National Bank of Greece (NBG), the largest bank by deposits. “But if you remove capital controls and the confidence of the public is only perceived and not real, people may withdraw their money out of the banks, which will create a problem.”

Banks are trying to lure deposits back to the system through some higher interest rates, he adds, but success has so far been limited.

Some €87bn of deposits were withdrawn by June 2012 and are widely thought to have left the country – banks do not expect to see those re-enter the system. Meanwhile, the €20bn of deposits taken out after the election of the far-left Syriza party in January 2015 (and subsequent uncertainty over the outcome of negotiations on the country’s financial programme) has largely been placed under mattresses or in safety deposit boxes. Banks are targeting this money to be re-deposited, less any amounts spent.

Yet as the banks' natural liquidity sources remain sparse, and bond market financing has not been an option since late 2014, lenders have had to resort to emergency liquidity assistance (ELA) from the European Central Bank (ECB) to add to their funding.

As of July 2016, ELA extended to Greek banks totalled €51.4bn, with a 1.55% interest rate, plus some €31.4bn of funds directly from the ECB at 0.05%, according to data collected by Nikolaos Georgikopolous, research associate at the Centre of Planning and Economic Research in Athens.

NBG, which has the largest amount of deposits within the sector, expected to have repaid all of its state aid by the end of 2016, while Piraeus had some €22.4bn of eurosystem funds as of mid-November 2016.

NPL drag

Coupled with the low level of deposits, the biggest problem Greek banks are now facing is their large NPL burden. The financial sector had some €79.3bn of NPLs across institutions as of September 2016, 38% of all loans, and a realisation of the need to work those out has only recently hit home. Non-performing exposures (NPEs) – NPLs as well as loans whose debtors are assessed as unlikely to pay their credit obligations in full without realisation of collateral – has reached 51% of all loans, or €106.0bn, according to Bank of Greece data.

“If the banks are not able to face up to the NPLs in the next six months, then, even if we see growth in 2017, NPLs will still be increasing at least until the second half of 2017. This is made worse because deposits are still not increasing significantly,” says Mr Georgikopolous, who also is a visiting research professor at New York University’s Stern School of Business.

NPLs have been a big challenge to Greece’s banks not least since the widespread consolidation in the country’s financial sector. Between 2012 and 2013, some 16 lenders were brought into the country’s big four – NBG, Piraeus Bank, Alpha Bank and Eurobank Ergasis – changing not only the dynamics and the lenders’ sizes but also the increasing stock of NPLs.

After the mergers, Piraeus Bank emerged as the largest in terms of assets. Meanwhile, its NPL ratio of 39.5% at the end of 2015 had been lowered to 38.8% at the end of September 2016.

“Seven different systems had to be migrated into one,” says Piraeus Bank’s Mr Poulopoulos. “We created an internal bad bank and have transferred the stock of NPLs into it. After six months, we started seeing results and since then we have seen a steady decline in the formation of NPLs. NPLs are down by more than €2bn, year on year.”

As it stands, NBG has dropped to joint third position in Greece (alongside Eurobank) for loans, largely because of the country's consolidations, but “this may prove to be an advantage as NPL stock is lower and it also allows for healthy growth in the future”, says Mr Kyriakopoulos. The bank lowered its 37.9% NPL ratio at the end of 2015 to 35.4% in September 2016.

Tackling the NPL burden

Greece’s lenders have agreed to ambitious year-end 2019 targets with the ECB’s Single Supervisory Mechanism plans, which are well on track. Piraeus Bank is required to reduce NPLs by 58%; NBG by 50%; Alpha Bank, which at the end of September 2016 had 38.3% of NPLs, has a 48% reduction target; and Eurobank Ergasias’s 34.8% at the end of September 2016 must be cut by 37%.

About 25% of the overall reduction goals are targeted for the end of 2017, some 35% in 2018 and the remaining 40% in 2019.

Despite such difficulties, Greek banks now have “no excuse” for not reducing the huge stock of NPEs “in a quick but orderly manner”, according to chairman of the board of Eurobank Ergasias, Nikolaos Karamouzis, in a speech on October 31, 2016, at the London School of Economics.

Mr Karamouzis expects banks to write off several billions of euros of NPLs in 2017 and sell collectable but delinquent loans worth another few billion euros. “Starting with the first quarter of 2017, both NPE and NPL formation will be in negative territory,” he added in the speech.

The optimism comes as legislation to accelerate the time to liquidate improves recovery options, while lenders are taking diverse measures to reduce NPLs across the bank’s retail and corporate client portfolios.

At NBG, so far the greatest share of the reduction in NPLs has been achieved through loan restructurings offered to the bank’s retail clients that cannot service their debt, according to Mr Kyriakopoulos.

Especially for retail customers, banks are now increasingly offering solutions to partly freeze their obligations, to allow them longer periods and smaller instalments to repay their debts, as well as partial write-offs. However, there still remain those borrowers who are not co-operative and instead seek legal protection. In those instances, a workout can take three or four years as the courts consider every case.

External help

While banks have established their own internal departments to deal with NPLs, most are also working with outsourced solutions. One such provider is Aktua Soluciones Financieras, a Spanish special servicer, with which Alpha Bank launched a joint venture to manage what it describes a “substantial part” of the bank’s NPLs at the end of 2014 to “accelerate friendly resolutions and reach consensual and non-judicial solutions”. This partnership largely focuses on retail NPLs.

Other solutions include Pillarstone, a fund established by private equity firm KKR, which together with the European Bank for Reconstruction and Development (EBRD) signed an agreement with Alpha Bank and Eurobank in May 2016 for the transfer of €1.2bn of troubled corporate credits.

“The platform aims to provide viable Greek corporates, which encounter financial difficulties, the chance to have access both to liquidity and operational expertise that will help them invest, grow and create new job opportunities,” Theodore Athanassopoulos, executive general manager at Alpha Bank, said in a statement. “As such it is an important step towards the implementation of Alpha Bank’s NPE strategy.”

NBG and Piraeus are also seeking to sign agreements with Pillarstone, which also acts in Italy, while the EBRD is co-investing in partnership with KKR and the banks with a 5% stake.

It's complicated

But NPL resolution is not always straightforward. “The biggest challenge is in how to deal with NPLs from small and medium-sized enterprises [SMEs],” says Sabina Dziurman, director for Greece and Cyprus at the EBRD. “Everyone knows this is a problem but there are few ready-made solutions. This is definitely something we would like to look at if we found the right partners to work with.”

Also, the difference in the price sellers and buyers of NPLs would like to achieve is often still too large, according to Ms Dziurman, which makes NPL sales difficult.

According to Greek banks’ third-quarter results, loan coverage ratios ranged from 65.5% at Eurobank to 74.5% at National Bank of Greece at the end of September 2016.

So far, there has not been much interest in sales of Greek NPLs, according to NBG’s Mr Kyriakopoulos. “We expect that sales will take place after some confidence is established in the market and bid/ask spreads narrow; we presume this to be a trend for 2018 or 2019,” he says.

Confidence could already improve in 2017 – especially if the second assessment of the Greek programme is passed quickly, some further debt-relief is agreed, Greek bonds are included in the ECB’s quantitative easing programme, and the expected growth in the Greek economy of 2.7% (according to the European Commission) materialises.

Bankers hope the anticipated pick-up in the economy should help lenders reduce their NPL burdens, as it might allow some borrowers to service their debts again, and renewed access to capital markets for Greece’s banks would reduce reliance on ECB funding and thus lower the cost of funds.

Time for some fresh faces?

In the midst of Greek banks’ legacy issues, competition in the sector is low due to subdued demand for credit and only a few deposits being returned to the banks. But this could change.

Former Barclays boss Bob Diamond’s Atlas Merchant Capital is looking to bring in some fresh air. As no new banking licences are being granted in Greece, the fund is eyeing Crédit Agricole’s idle car-leasing portfolio in the country, which comes with a banking licence, according to sources with inside knowledge.

The potential newcomer to Greece’s financial sector would focus its operations on banking for SMEs and will be able to act without the legacy issues that larger institutions have to navigate.

Anastasia Sakellariou, former chief executive of Greece’s Hellenic Financial Stability Fund, and Anthimos Thomopoulos, former chief executive at Piraeus Bank, are working on the project with Atlas Merchant Capital.

Apart from the unused banking licence owned by Crédit Agricole, another idle licence is that of Investment Bank of Greece, which could allow another opportunistic investor to enter the Greek market.

“What is needed is a quick return to health in the Greek banking sector,” says Ms Dziurman. “So far it has been a long, slow process. From experience, in those countries where banks took the pain quickly, they also recovered more quickly.”

Competition from Atlas Merchant Capital’s newcomer bank, and the big four’s ambitious NPL reduction targets agreed with the ECB's Single Supervisory Mechanism, might well help speed the recovery up.


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