How does the BoG see the 9-month results of the banks

By Leonidas Stergiou

Significant challenges for banks remain the faster reduction of non-performing loans, enhanced profitability and the qualitative and quantitative strengthening of their capital base, as the impact of the pandemic will appear with a time lag in their assets, according to the Bank of Greece. .

In the Interim Monetary Policy Report, the Bank of Greece notes the progress that Greek banks have made in reducing red loans, stressing, however, that the stock of non-performing loans remains almost seven to eight times higher than the European average. He points out that the reduction of red loans has been achieved almost exclusively through the securitizations of the “Hercules” scheme and not through active management (restructuring, refinancing, etc.), with negative effects on profitability and their capital, which are further weakened due to of the deferred tax rate that exceeded 60% In the Financial Stability Report, the BoG stated that this year this percentage will reach 75%.

In addition, the BoG notes a decrease in operating income and an increase in operating expenses, mainly from securitizations, the low interest rate environment, the slowdown in credit expansion and the costs of restructuring and voluntary expenditures. With regard to loans, the BoG notes a slowdown in credit expansion and a reduction in interest margins for large companies, which have found other ways of financing, such as bond issues. The credit expansion was directed more towards small and medium enterprises, where even there there was not much demand due to the liquidity of the support measures and the significant contribution to their financing by the Hellenic Development Bank and other organizations.

On the other hand, it finds positive moves in terms of strengthening their funds, through increases and bond issues, something that it recommends to continue. The picture of liquidity and the cost of money is also positive, due to low interest rates and the increase in private sector deposits.

Income

In the period January-September 2021, banks showed a slight decline in their operating income compared to the corresponding period of 2020, mainly due to the decrease in income from financial transactions and other sources, which offset the increase in net income from commissions. The maintenance of net interest income at the level of the corresponding period of 2020 reflects the positive effect of the reduction of liquidity borrowing costs, which offset the reduction of the loan balance and the further decline of the net interest margin.

Expenses

The increase in operating expenses, mainly due to the extraordinary restructuring expenses and voluntary exit programs, contributed to the reduction of the results before provisions and taxes compared to the corresponding period of the previous year. In addition, given the formation of significant provisions, primarily due to impairment transactions of NPLs by three systemic banks and secondarily due to the need to cover credit risk, the after-tax result was loss-making.

Capital adequacy

In terms of capital adequacy, both the Common Equity Tier 1 (CET1) and the Total Capital Ratio on a consolidated basis fell to 12.6% and 15.1% at the end of September 2021, respectively. respectively (compared to 14.6% and 16.3% respectively in September 2020). Incorporating the full effect of International Financial Reporting Standard 9 (IFRS 9), the CET1 ratio stood at 10.7% and the Capital Adequacy Ratio at 13.3%. At European level, according to data from the European Banking Authority, the corresponding weighted average CET1 was 15.5%.

Quality of funds

The quality of regulatory equity of Greek banks deteriorated further, as in September 2021 the final and settled deferred tax credits (DTCs) amounted to 14.4 billion euros, representing 62% of total regulatory capital (DTCs). from 53% in December 2020).

Red loans

The ratio of non-performing loans (NPLs) to total loans decreased significantly, but remained high (15%) in September 2021. At European level, this ratio rose to 2.3%. NPLs at the end of September 2021 amounted to 20.9 billion euros, down by 26.3 billion euros compared to the end of December 2020 and by about 86.3 billion euros compared to March 2016, when it was recorded the highest MES level.

According to the Bank of Greece, this decline in 2021 is mainly due to sales of loans amounting to 26.2 billion euros, due to the utilization of the state guarantee program in securitization of loans of credit institutions (“Iraklis”) and less to receivables through assets (ie through loan restructuring / arrangements, arrears collection, liquidation of collateral, etc.). terms of repayment of their loans.

New red loans

At the end of September 2021, about 39% of all NPLs were linked to arrangements, while it is pointed out that a high percentage of loans that are put into regulation show a delay again in a relatively short period of time after the settlement of the regulation. Given the impact of the pandemic, it is likely that a significant percentage of regulated loans will be recorded as non-performing in the fourth quarter of 2021 and 2022. It is noted that the total loans to which regulations have been applied amounts to 17.6 billion euros. The Bank of Greece warns that part of the loans that are under support (eg through programs such as “Gefyra”) may also be recorded as NPLs when the facility period has passed. have been subject to legal protection.

Challenges

Overall, there is an effort by banks to improve the quality of their assets and strengthen their financial size. In a few individual cases, especially smaller banks, this effort needs to be intensified. The facilitative monetary and fiscal policy has been instrumental in improving the size of banks’ financial statements. It is also positive that banks have taken steps to strengthen their capital base both through share capital increases and through the issuance of bonds.

However, the significant challenges they have to face, such as the PES that will arise from the pandemic, the gradual return to normalcy and the expected lifting of the support measures (supervisory, budgetary, etc.), the obligation to cover the Minimum Equity and Eligible Liabilities (MREL) and the need to absorb the effects of IFRS 9, the effects of climate change, the need to create new sources of revenue, etc., require continued vigilance and more intensive action to further reduce MED, the strengthening of their capital base and the utilization of the increased liquidity they have for the financing of the economy, concludes the BoG.

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