Floating rate mortgages return after ECB turmoil

Of Leonida Stergiou

The goal of Greek banks to increase organic profitability, ie loan and commission income, faces challenges. On the one hand, the rise in interest rates by the ECB significantly boosts banks’ interest income.

On the other hand, this presupposes credit expansion, ie a net positive increase in lending to the private sector, which to date – at least to households – is not encouraging. At the same time, profitability is tested by the risk of an increase in red loans, due to a decrease in disposable income, which means an increase in provisions.

Banks have already begun to adjust their strategy, starting with loans to individuals, where there is greater profit margins than business credit, while credit expansion remains negative.

In other words, the repayments of loans of larger amounts than in the past exceed the new disbursements, despite the increase that has been observed, mainly, in the last two years.

On the contrary, in business the credit expansion remains upward and positive. The new disbursements of small loans in the five months are estimated at 700 million euros, while the large loans are estimated to exceed 6.5-8 billion euros this year, due to ongoing plans. But in business credit, competition narrows the profit margin.

The first changes

Starting with mortgages, fixed interest rates will continue to rise, making floating rates more attractive, even limiting the margin on the euribor. The main goal is to have an attractive solution in the mortgage market, so as not to discourage demand and, in addition, not to increase the risk of bad debts due to costs.

Eurobank has already raised fixed interest rates on mortgages and reduced floating margins. Alpha Bank is going to do the same from July 4, while it is considered a matter of time for the other banks to proceed, with corresponding adjustments, depending on the mix of loans, customer base and sales strategy.

Low fixed interest rates seem to be a thing of the past, as it was an opportunity created during the period of historically low (negative) interest rates. It is noted that the increase in interest rates by the ECB and the increase in bond yields do not affect the profitability of banks or the installment of borrowers, as these costs are locked. Also, during the period of demand for fixed rate mortgages, their share in new disbursements reached up to 55% (and in some banks 80%). Because new disbursements are smaller than the rest of the mortgages, the percentage of those with a fixed interest rate on the total balance is not estimated at more than 3% -5%. In the Greek market as a whole, floating rate loans (individuals-companies) amount to 95%.

Levels of 2.70% (for 3-5 years) to 3.5% (for 30 years) can no longer be maintained for a long time, as the cost of “locking” interest rates through swap has already increased to the 250 basis points, due to rising yields. The cost of locking in fixed interest rates for long periods depends on the bond yield curve. Eurobank fixed mortgage rates from 2.70% (3 years) to 3.90% (30 years) increased to 2.90% and 4.20% respectively. From July 4, the fixed interest rates for Alpha Bank mortgages increase from 2.80% (5 years) to 3.80% (30 years) to 3.20% and 4.20%.

At the same time, the margin on the 3-month euribor is reduced, which today stands at -0.18%, when a few weeks ago it was -0.4%. For example, Eurobank and Alpha Bank limit margins to fluctuations by about 30 basis points, depending on the maturities. Thus, they are set at 300 to 440 basis points on the 3-month euribor, plus the contribution of 0.12%. It is noted that there are loans based on the 1-month euribor interest rate, which is negative (-0.55%) due to liquidity. Still, most loans do not take into account the negative prices of euribor. Therefore, increases in floating interest rates will occur when the euribor exceeds zero.

New situation

According to bank executives, from September, after the second interest rate increase by the ECB and as we move towards 2023, the picture that is expected to have formed in the market, according to bank executives estimates, will be as follows: floating interest rates will differ at least by 2 points in relation to the constants, which will be at 5% or even at 6%. At the same time, the pricing will be adjusted according to the increase of the financing percentage, ie we are expected to see lower rates of own participation.

This alternative seems to be necessary, as rising real estate prices and the reduction of disposable income from the energy crisis, as well as general uncertainty, have slowed down the demand for mortgages. It is indicative that in the first five months of the year the new disbursements of mortgage loans amounted to around 440 million euros, ie they were 10 million euros less than those of consumer loans.

Supplies

The other source of revenue that banks will focus on to increase profitability is commissions. These will come from the promotion of new bancassurance products, asset management, new loans, consulting services and the creation of new digital services – banking and non-banking. Revenue from commissions in the first quarter amounted to 500 million, while from trading and other transactions to more than 1 billion euros. This last piece of revenue may be tested by market conditions.

Bonds

The recent turmoil in the bond markets with the jump in yields and, consequently, the fall in their price, has cost λάχιστονat least accounting ‒ their valuations. The losses had been evident since March, when, according to data from the Bank of Greece, the valuation of their total bond portfolio fell from the level of 40.6 billion euros at the end of 2021 to 37.2 billion euros. The biggest losses came from Greek bonds (from 28 billion to 25 billion), while the most limited were those from bonds of Eurozone countries (from 11.4 billion euros to 11.1 billion), after an increase in valuations of the latter by 1 billion euros in January.

These losses and the limited opportunities for gains on bonds in conditions of turmoil and uncertainty, are currently fully offset by net interest income, which in 2021 exceeded 5.3 billion euros, while only in the first quarter of 2022 amounted to to 1.2 billion euros. An increase in interest rates by the ECB by 50 basis points, according to the estimates of the four systems, will boost interest income on an annual basis by 250 million euros, while an additional increase by 50 basis points will bring additional income of 400-500 million. (in addition to the initial EUR 250 million).

Red

Regarding the red loans, so far no particularly worrying element has been recorded, according to the banks, although the Bank of Greece has warned about this risk, due to the large amount of loans (approximately 9 billion euros) which is still directly supported. and indirectly with support measures. At the same time, there is an increase in the re-default rate, ie loans that turn red again after the adjustment within 12 to 18 months. Banks have estimated that a 20% reduction in borrower disposable income could lead to new red loans of € 400 million, which would require an increase in provisions (profitability reduction) of € 100 million.