How the banks’ interest and organic income soared in the first half of the year

By Leonidas Stergiou

A more detailed look at the results of the first semester is of particular interest. In the first half of the year, there was no increase in interest rates by the ECB, but, it should be recalled, a temporary increase in Greek bond yields and an increase in the euribor.

The 3-month euribor interbank rate increased from -0.53% in the first quarter to -0.36% in the second quarter. The 6-month euribor from -47% in the first quarter, moved into positive territory (0.10%) in the second quarter.

Reduction of interest rates on deposits

The average deposit rate to households and businesses decreased by 1 basis point. That is, from 0.05% for individuals it fell to 0.04%, while for businesses from 0.01% to 0%, according to the figures of the Central Bank.

Increase in interest rates on loans

In loan rates, the weighted average interest rate on new loans increased between the first and second quarters by 16 percentage points. For households, the increase was only 4 basis points, which came from a significant reduction in consumer credit interest rates (from 22 to 37 basis points) and an increase in mortgage interest rates by 12 basis points. The biggest increase, however, was recorded in the interest rates of new loans to businesses, which reached 34 basis points, according to data from the Central Bank.

In addition, the yields of Greek bonds (as well as all of the Eurozone, but mainly the south, such as Italy) increased. Indicatively, the yield on the 10-year Greek bond jumped from 1.62% in January to close to 4% (average) in June to fall to 3.38% in July, according to the BoE. This development does not affect interest income but those from transactions and are included in organic profitability.

What did they achieve?

With the above moves, the four systemic achieved, in the second quarter compared to the first, the following:

Firstly, net interest income increased by 81 million euros. The figures vary around 20 million euros for each systemic bank.

Secondly, reducing the interest they paid by 1 million euros in total. Eurobank and Alpha Bank had the largest reduction in interest expenses (by 2 million euros each), while Nghia Bank had no change.

Thirdly, increased the interest income they receive by 94 million euros. Here it can be seen that interest receipts were the ones that determined the rise in net interest income (the changes in interest expenses were small).

Fourth, interest margin increase for all. Eurobank achieved an increase of 8 basis points, the remaining three (Alpha Bank, Piraeus and NGE) by 10 basis points. NGE was the one with the largest interest margin (194 basis points), while Alpha Bank had the smallest (160 basis points).

Fifthreducing non-performing loans and achieving a single-digit rate, which limits provisioning costs.

Sixth, an increase in the stock of serviced loans (from which the interest income arises) by 4 billion euros. The largest increase in NPLs was recorded by Eurobank (1.4 billion euros), which also has the highest reserve at 39.9 billion (Alpha Bank: 30.6 billion, Piraeus: 27.4 billion and National: 29.8 billion). In the rest of the total loans, the ranking is as follows: Eurobank 42.3 billion, Alpha Bank, 38.1 billion, Piraeus 35.5 billion and National Bank 29.8 billion. The jump in net credit expansion by 4 billion had a marginal effect upward the cost of risk which in turn reduces the net organic income.

Seventh, deposits increased even more, where interest rates to depositors decreased. New household deposits increased in the second quarter by 217 million euros, compared to the first, and those of businesses by 455 million euros.

Eighteen, banks do not do credit hedging on bonds, but on returns. This is done with interest rate swaps, i.e. they give the counterparty theirs and collect the counterparty’s (swap). Since they didn’t sell the Greek bonds, they didn’t write any losses from falling prices. Instead, the rise in yields was left as an additional gain from the difference between the yields of the market and the swap where it has been closed. These moves and a general uptick in banking increased trading revenue by around 6-7% for the four systemics in three months (Q2).