HFSF bell to banks for capital increase and risk reduction

By Leonidas Stergiou

Greek systemic banks may have appeared more resilient than in the past in the stress tests of 2021, however they are more “weak” in the capital impact under the adverse scenario in view of the stress tests of 2023, according to an analysis by the Financial Stability Fund .

For this reason, the authors of the report recommend:

-Further reduction of non-performing exposures (NPE) with the aim of bringing the percentage of red loans closer to the European average which is currently close to 2.1% (from about 10% in Greece). However, emphasis should be placed on lending arrangements, upgrading credit risk systems and credit criteria, so that there is timely action in the event of consolidation failing. Despite efforts to reduce red loans, Greek banks have a higher stock of regulated loans than European banks.

-Career monitoring of loans that joined moratoriums due to Covid-19, with greater emphasis on risks that may affect the quality of assets and the creation of new red loans. Besides, Greek banks have a significantly higher percentage of loans to moratoriums that are characterized as “high risk” (stage 2) in the EU.

-Search for opportunities that will hedge the risk, with careful and effective credit expansion, under the Greece 2.0 program
Revenue diversification both in terms of operation and geographical origin as the more diversified banks respond better to stress tests. The diversification of income is even more imperative due to the pressure on interest income, due to securitizations.

-Search for actions to enhance the operating result through digital transformation, better risk management and integration of ESG criteria in all business activity and banking strategy, while incorporating quantitative and qualitative objectives.

Regarding the stress tests of 2021, the greater resilience of the Greek banking system compared to the two previous exercises in 2018 and 2015 is due to:

-First, in the lower forecasts, as Non-performing Exposures (NPLs) have decreased by more than 50% compared to 2015 when they reached their highest point.

-Second, the smaller impact of the adverse scenario on net interest income due to the favorable composition of the balance sheet, lower financing costs and improved long-term creditworthiness of banks

Third, the lower administrative costs, as banks have reduced and streamlined their activities.

According to the HFSF, for the first time, the Greek banking system reduced the gap in terms of capital impact compared to the largest banks in Europe observed in previous exercises.

Nevertheless, Greek banks remain relatively less capitalized compared to European ones at the end of the Stress Test (2023) time horizon, as was the case at the starting point of the Exercise, according to HFSF analysts.