BoG: Acceleration of inflation in 2022

LAST UPDATE: 18.21

By Leonidas Stergiou

The Bank of Greece is ringing loud bells for the economy and banks, warning of the risk of inflationary pressures that could overturn the favorable outlook for the Greek economy in 2022.

The Bank of Greece’s Financial Stability Report predicts that “inflation is expected to accelerate in 2022.” This development creates one of the uncertainties for the growth of 2022, due to inflationary pressures on energy prices, raw materials and costs. Regarding the ECB forecasts, the BoG states that the European Central Bank is expected to continue to provide a significant amount of liquidity to the markets, provided that the observed increase in inflation is temporary.

Rising oil and commodity prices have dampened optimism about strong economic growth in the last quarter of 2021 and increased uncertainty, especially as there has been concern about the ECB’s tight bond program and rising interest rates.

To the uncertainties, the Bank of Greece adds the indications of weakness in the labor market, but also the large stock of high-risk loans. These are factors that may worsen with the end of support measures, noting that the footprint of the pandemic has not yet become apparent.

Banks

Banks may have made huge securitizations and sales of red loans, limiting the profitability, amount and quality of capital, however, red loans remain for the real economy. That’s why it calls on loan management companies to take more effective, long-term and sustainable moves.

At the same time, he considers as challenges for the banks the continuation of the reduction of the red loans, the creation of internal capital due to the low interest rates, the ability to finance the Greek economy and the improvement of the amount and the quality of the capitals.

New red loans

In particular, the BoG states that despite the reduction in the percentage of non-performing loans (NPLs), about 40% of NPLs and 9% of non-performing loans are under a regulatory regime, which makes them high credit risk. At the same time, in the high risk categories (stage 2 and stage 3) are classified about 13% and 20% of loans respectively, while based on the latest available data, in the context of measures to support borrowers from the pandemic, loans of about 9 billion euros under some form of payment protection and facilitation (eg Bridge program, bank step-up programs), as published by the Capital.gr.

Therefore, it is understood, the BoG states, that the impact of the pandemic has not yet been fully recorded in the size of banks, which makes the rapid and complete recording of new NPLs in their balance sheets an immediate priority to consolidate and strengthen banking resilience. sector.

Impact of securitizations

Loan sales also hit banks’ profitability. According to the Report, if the extraordinary factors are not taken into account, such as the profits from financial operations, the extraordinary operating expenses and the losses from the sale of MED portfolios, the Greek banking groups would show limited profitability.

The negative financial results also affected the capital adequacy of Greek banking groups. The indicators are significantly lower than the average of credit institutions under the direct supervision of the ECB in the Banking Union. was 10.6% and the Total Capital Index at 13.1%.

Capital

In addition, the quality of regulatory equity of Greek banks deteriorated further, as in June 2021 the final and cleared deferred tax credits (DTCs) amounted to 14.8 billion euros, representing 62% of total regulatory capital. capital (from 53% in December 2020). In fact, this percentage amounts to 71.5% of the total regulatory equity if we take into account the full impact of IFRS 9. In addition, deferred tax assets (DTAs) amounting to 1.9 billion euros are included in the regulatory equity of banking groups (after taking into account the full impact of IFRS 9), accounting for 9% of their total regulatory equity. It is noted that although deferred tax assets (DTAs) of € 4.5 billion are not included in banks’ supervisory equity, adequate future profitability is necessary so as not to pose a risk to the bank’s capital base in the long run.

A positive development is the increase of share capital by Piraeus Bank and Alpha Bank and the issuance of securities by all the systems that are counted in the regulatory equity. In terms of capital adequacy prospects, Greek banks face the following challenges:

(a) uncertainty about the possibility of raising capital internally in a low-interest environment;

b) the cost of implementing their strategy to reduce existing NPLs and c) the need to strengthen their mediation role by financing the real economy.

At the same time, the prospects for the capital adequacy of Greek banks are determined by significant challenges, namely the existence of uncertainty about the possibility of internal capital creation in a low interest rate environment, the cost of implementing strategies to reduce existing NPLs, but also the need to strengthen of financing the real economy.

The reduction of red loans is particularly significant, however the ratio of NPLs (June 2021: 20.3%) to total loans remains high and multiple of the European average (June 2021: 2.3%). There is therefore no room for complacency and banks should step up their efforts to further consolidate their balance sheets.

Interconnection with state

In addition, there was an increase in the interconnection of the banking system with the state, as it stood in June 2021 at 26.3% as a percentage of total assets (21.4% in December 2020) and at 44.8% as a percentage of GDP (36 , 5% in December 2020).

And all this when the banking sector is called upon to adapt immediately to this new environment in order to perform its intermediary function and to ensure the smooth financing of the economy.

Loan management companies

As far as loan management companies are concerned, they manage, on their own behalf and on behalf of credit institutions, € 131 billion in exposures, including unaccounted for interest. These exposures account for 83% of overdue exposures. The effective management of these exposures and tackling the problem of NPLs, according to the BoG, is based on the flexibility and specialization of the ECtHR, which owes:

(a) make use of changes in the institutional framework in recent years (such as the Out-of-Court Debt Settlement Mechanism and the provisions of the recent Debt Settlement and Second Chance Act); and

(b) carry out a sustainable restructuring of the MRLs, through the refinancing of those appropriations, adopting transparent procedures and in any case respecting the provisions of the institutional framework

See here the Financial Stability Report of the BoG – Dec. 2021