Banks Weather the Storm,Returning to Normality

GIG: Greece’s economy is on a growth trajectory. At the same time there are global uncertainties weighing on GDP. What does this mean for Greece’s banking sector? What additional measures does the sector expect to continue to boost economic growth?

Handjinicolaou: Greece, after a prolonged period of recession, has entered a phase of recovery. Having successfully addressed the twin deficits, which led the country into the crisis – namely the fiscal and current account –GDP growth is back. Accelerating to 1.9% in 2018 from 1.5% in 2017, with signs that these levels were maintained in 2019, further strengthening is possible in 2020 and 2021.

The increase in GDP growth has led to increases in employment and disposable household income. Other things, such as tangible increases in real estate prices, are also rising for the first time in many years. Most importantly, it has contributed significantly to the return of confidence and trust among economic participants with collateral benefits to the Greek banking system, as is evidenced by the return of deposits to the Greek banks.

Τhe elimination of the twin deficits; the restoration of confidence coupled with the lengthening to its debt maturities; the adequate liquidity that Greece has secured for itself; as well as the renewed access to the markets, limit significantly any downside to the Greek economy.

GIG: What is your assessment of the health of Greece’s banking sector? Should we expect any further consolidation?

Handjinicolaou: The improving growth prospects of the economy have created a positive backwind for the Greek financial sector with several collateral benefits:

• The return of deposits has led to a considerable improvement in the banks’ liquidity conditions, enabling complete disengagement from the Emergency Liquidity Assistance (ELA) mechanism. In addition, Greek banks have achieved access, again, to the interbank lending market. Most importantly, they have regained access, after many years, to the medium-long term capital markets, as evidenced by the recent issuance of a Tier II bond by two of the Greek systemic banks.
• The sustained progress in liquidity conditions was a contributing factor to the recent abolition of capital controls. This positive development is expected to strengthen depositors’ confidence, and help banks improve their funding profiles and revenues, triggering further rating upgrades.
• The capital ratio of the systemically important banks has remained robust, averaging 15.9% at the end of 2018. This sets Greek banks among those adequately capitalised within the EU, according to the European Banking Authority (EBA).
• Following huge cumulative losses in previous years, Greek banks have returned to capital accretive profitability. As the economy gradually recovers, and as more investments flow into the country, profitability is likely to improve even further.

Due to the Greek crisis in the last decade there was a deep restructuring of the Greek banking system. As a result, there was a drastic reduction in the number of banks operating in Greece from over 65 to 5. I do not anticipate any additional restructuring in the foreseeable future.

GIG: The materialisation of investments requires financing from Greek banks. One of the criticisms aimed at Greece’s financial sector is that new loans provided to small businesses, the backbone of the Greek economy, remain minimal. What role can we expect Greece’s banking sector to play? Are they prepared to play the role of financiers of the economy?

Handjinicolaou: There is a misconception regarding credit expansion in Greece. Greek banks do lend money and are doing so at increasing rates. However, as the banks proceed with their successful execution of their NPE reduction plans, balance sheets and associated net credit growth appear to be shrinking. There is new lending, however, and the new lending alone has increased every year during the past few years. Heading into 2019, Piraeus Bank planned to extend around €4 billion of new financing to the Greek economy. At year end, totals were closer to €4.5 billion according to our CEO. Similar trends have been observed at the other major Greek banks.

Another factor that should be mentioned is that Greek banks no longer follow credit practices of the past, such as name lending. Instead, they are focusing and guiding their lending decisions on plans which are supported by sound economic logic, rather than other considerations, as was the case before.

All in all, the Greek financial sector has emerged from its challenges. It is moving steadily, confidently, but also swiftly into a new era of stability and growth. We stand ready to finance the increasingly attractive prospects of the Greek economy. Greek banks have led, and will continue to lead, large, strategically important transactions that promote the extroversion of the Greek economy.

Let’s not forget that banks are here to finance economic and investment activity. Growth will come primarily through an increase in investments. In this respect, the establishment of a more business friendly environment is a necessary condition to attract investments. Such an environment will ultimately lead to increased employment, competitiveness, exports, and prosperity.

The Greek banks have repeatedly stated that they are ready to finance all bankable projects.

GIG: Greek banks have revised upwards their goals to reduce NPEs by 2021. While progress has been made in diminishing the high stock, this remains the biggest challenge for the overall sector. Are these goals achievable? What is the basis for taking this step?

Handjinicolaou: Unquestionably, the major challenge for Greek banks continues to be the successful management of the high stock of NPLs and NPEs. On that front, the progress achieved is significant:

• At the end of December 2018, the stock of NPEs was reduced to €81.8 billion, or 45.4% of total loans, from €107.2 billion in March 2016. At the end of June 2019, the same was further reduced to €78 billion, or 45% of total loans.
• By the end of 2021, Greek banks aim to achieve a reduction of the aggregate stock of NPEs of roughly €30 billion, bringing the NPE ratio below 20% of total loans, according to the revised operational targets for NPE reduction submitted at the end of March 2019 to the Single Supervisory Mechanism (SSM).

The above constitute a solid baseline. However, there are valid reasons to expect overachievement of these objectives:

• Acceleration of economic growth is at the top of the agenda of the newly elected government;
• A series of tax cuts, aimed at accelerating growth, were recently announced by the government;
• Real estate prices in Greece, which underpin most of the NPEs, are accelerating at a rate faster than anticipated;
• The Asset Protection Scheme (APS).

These items give me confidence that the 2021 NPE reduction objectives will be exceeded.

For the first time Greek banks have put their arms around the problem. They have a credible plan to reduce NPEs significantly. Their plans are solidified by the increasing prospects of the Greek economy, and there is room yet for upside surprise!

GIG: The government is taking the final steps to conclude the Asset Protection Scheme (APS), dubbed ‘Project Hercules.’ What is the Greek banking sector’s assessment of this programme? Are there any concerns? What additional measures does the sector expect?

Handjinicolaou: The proposal as we understand it is as follows.

1. The bank sells a reference NPL portfolio to a special purpose vehicle (SPV).
2. The SPV issues asset backed notes (ABS) to fund the purchase of the NPL portfolio, typically in three or more tranches. These senior note tranches are likely to be retained by the bank, while the majority of mezzanine (2nd tranche) and junior notes (3rd tranche) will be sold to third party investors.
3. The Hellenic Republic will provide a guarantee to the SPV on the senior notes’ tranche, subject to specific conditions. Conditions may include securities receiving a rating or a majority of junior tranches having been sold to private investors.
4. Third party servicer(s) will be appointed to manage the NPL portfolio.

Key benefits derived from the scheme:

1. Improved economics for banks (subject to pricing of the guarantee), as it enhances total recovery and results in a favourable risk-weighting for the retained senior notes.
2. It is a versatile tool that can be used in any market-based securitisation transaction, although its effectiveness may be more applicable to specific portfolios. In the context of the Italian example, it has been particularly applicable to collateralised portfolios of mainly business and, to an extent, residential mortgage loans.
3. State guarantee on the senior tranche would facilitate the execution of larger transaction volumes than otherwise possible.
4. It industrialises and accelerates substantial risk transfer approval process.
5. Given the Italian precedent, it can be implemented relatively quickly.

Understandably, the new administration is very keen on executing the scheme as soon as possible. We believe that the APS could further help the NPE reduction goal of addressing this systemic issue by providing further firepower to the already established framework.

Piraeus Bank is progressing with its ambitious yet realistic NPE reduction plan. It is on track with operational targets that have been agreed with the SSM and will utilise all the available solutions currently on the table in the pursuit of its NPE reduction plans. We definitely welcome any additional ideas and plans that enable the Greek banks to reduce their NPEs.

GIG: Based on your interaction with foreign investors, what is their perception of the Hellenic market? Under what conditions do you foresee them returning to the market with real investments?

Handjinicolaou: Investor perception has definitely improved across all Greek asset classes compared to 2018. This is reflected in their valuations.

Looking ahead, investments are expected to be a key driver for growth in the coming years as a more business-friendly environment emerges. The new administration is pro-business and has already unleashed a number of initiatives.

• The loosening of the tax regime on businesses;
• Accelerating privatisations and finalising major projects such as Hellinikon;
• Diminishing bureaucratic barriers, for example simplifying the process to receive a new business license.

More still needs to be done. Creative national initiatives are necessary to boost foreign direct investment (FDI) and achieve higher economic growth rates. Looking ahead continuing structural reform, abolishing regulatory ambiguity, and efficiently increasing public spending remain key challenges.