Red again 1 in 3 loans settled 12 months ago

By Leonidas Stergiou

The deterioration in the proportion of loans that went back into the red in the second quarter of the year after they were settled 12 months ago by loan servicers is evident. The comparison is made with the first quarter of the year and with the last quarter of 2021.

According to converging estimates of industry executives, the worsening of the redefault rate in the second quarter, compared to the first quarter, is found in housing and business loans, while a small improvement is observed in consumer loans. However, compared to the fourth quarter of 2021 and the previous period, when support measures were in full effect (suspension, payment subsidies, etc.), there is a general deterioration. However, as market executives report, this deterioration is much smaller than expected and in relation to the intensity of the crisis.

Default rate

The redefault rate is calculated as the percentage of loans that have gone red again after 12 months have passed since their default. The following estimates for the second quarter emerge from data from the management companies:

– In housing loans, the redefault rate was around 32% from around 34% in the first quarter and 25% at the end of 2021.

– In consumer loans it moved close to 37% from 39% in the first quarter and 35% in the fourth quarter of 2021.

– In business – mainly small – it was around 35% from 37% in the first quarter and 32% at the end of 2021.

It is clarified that in each quarter, red loans arise from different arrangements that preceded 12 months, under different conditions and from different portfolios. For example, loans that appeared in the red in the second quarter of 2022 were settled in the corresponding quarter of 2021, while those that turned red again in late 2021 were settled in late 2020.

The redefault rate in the Greek market, together with the loans that exist in the banks (more than 100 billion euros have been transferred from the banks to managers) historically fluctuates around 25%, while the so-called default rate, i.e. the percentage of loans that it eventually turns red and is registered as damage by the system at about 1.5%.

Problematization

Despite the smaller-than-expected deterioration, these rates are considered high by market and regulatory authorities. Historically, the default rate in the Greek banking market was close to 25%. The launch of the extrajudicial mechanism and the new bankruptcy code, after total support measures of 50 billion euros in three years, should have reduced this percentage. That is, more sustainable arrangements had been made.

All sides agree with this, even the servicers and the banks, despite the arrangements that include high haircut rates, according to the official data presented by the Ministry of Finance regarding the course of the extrajudicial mechanism about 10 days ago. In fact, the Minister of Finance, Mr. Christos Staikouras, sent a clear message to banks and funds saying that they should assume their responsibilities. Also, a working group will examine the causes of the high rate of rejection of applications for regulation by creditors, as announced by the special secretary for private debt of the Minister of Finance, Marialena Athanasopoulos. The rate of rejection or non-submission of a proposal for regulation is 54%. For the Bank of Greece, as the governor of the Bank of Greece, Mrs. Giannis Stournaras, has pointed out in his speech, a better use of guarantees and the use of refinancing are required for more sustainable and effective arrangements, where these are considered sustainable only.

Haircut rates

The average debt reduction rate to the State is 23% and the average repayment period is extended to 221 months. The average haircut rate from private creditors (servicers, banks) is 33% and the average repayment period extends to 253 months.

As far as the number of pending applications is concerned, this remains high, but is decreasing at an accelerating rate, as the involved bodies and debtors become familiar with the new system and several technical problems are overcome. Today, more than 55,000 applications for settlement of total debts of 24.5 billion euros are in the “queue”, a size that is again much lower than the bad loans that have been securitized and sold in total (over 100 billion euros). They are in the final stage 6,500 applications (€3.3 billion), while €1.5 billion is expected to be settled in the next period.The number of settlements is still below 500 from the end of May to the end of July, but has seen an acceleration in recent weeks .For example, almost half of the setups (out of 500) were done in two days.

In the banks

Now the problem loans have been transferred outside the banks. Nevertheless, the data on the creation of red loans is interesting. According to the banks:

First, there are no signs of bad loans, based on the data up to the end of the first half. Nevertheless, they are all forecasting 200-400 million euros (each on average) for new bad loans for the whole of 2022, which is considered small for their total loans (around 150 billion in total). .

Secondly, any small increase in the creation of bad loans observed in the second quarter was related to loans to households, while there was a decrease in business loans. This at least appears as a general picture from the results of the first half of the year that have been made public by Eurobank and National Bank to date, but also from estimates of the banking sector as a whole.

Thirdly, the good progress in business loans is mainly due to the availability of several co-financers.

The warnings

However, the competent authorities have a different opinion and believe that there are signs of an increase in bad loans, as recently warned by the central banker Mr. Yiannis Stournaras, the Deputy Governor of the Bank of Greece Mrs. Christina Papakonstantinou, the European Banking Authority (EBA) and the ECB (report first quarter supervisory data).

“From some early indications it appears that we have new flows of NPLs (non-performing loans) and an increase in regulated loans. For this reason, complacency is not allowed and the Bank of Greece is closely monitoring the developments,” said Mrs. Papakonstantinou at a conference on NPLs in mid-May.

According to the latest published data of the European Banking Authority (EBA) for the first quarter of 2022, for the Greek systemic banks, the EBA finds an increase in red loan rates in March compared to December in the primary sector (agricultural production, forestry , fishing) to 16.2% from 15%, in financial and insurance companies to 7.8% from 3.2%, in services (administrative and technical support) to 17.2% from 17%, in real companies estate to 12.6% from 11.5% and construction companies to 19.6% from 19.2%.

Mr. Stournaras warned once again, through the Financial Stability Report, about the increased possibility of creating new non-performing loans, due to the withdrawal of support measures from the pandemic, the reduction of disposable income from the energy crisis exacerbated by the war of of Russia in Ukraine. These warnings come when the Bank of Greece estimates that the loans that can be a potential source of new bad loans are estimated at around 9 billion euros. These are loans, serviced and regulated, which are directly or indirectly still supported by the pandemic support measures.

*The banks and servicers that approve most arrangements