By Leonidas Stergiou
As Greek banks consolidate, a sustainable increase in their profitability remains key to further enhancing their resilience. According to an IMF report, two main sources of profitability, namely net interest income and commission income, appear to be highly dependent on the macroeconomic environment.
The IMF notes that while profitability is expected to return to the medium term, interest rate risk management and the pursuit of sustainable commission income require caution. The fact that lending rates along with profitability do not cover the cost of capital shows that there is a need to improve risk management systems and adopt their business models. The need to address these two challenges is combined with strategic change, as they will be faced with competition from non-banking institutions.
The following findings and recommendations emerge from the IMF report:
– The baseline scenario shows an improvement in interest income, which, however, is highly dependent on the macroeconomic environment. In the unfavorable scenario, interest income falls sharply, regardless of the slope of the yield curve.
– Despite the projected increase in profits, these may not fully meet the expectations of investors, as Greek banks show the highest cost of equity for their shareholders across the EU.
– Despite the high interest rates on loans, the financing margins of Greek banks need more attention to their profitability. Interest rates should cover the cost of money, the cost of credit risk, the cost of capital, operating costs and be adapted to competitive and market conditions. Greek banks have the highest lending rates and margins, along with those in Ireland and Cyprus, but they do not cover the relevant costs and risks, which may be due to high competition between banks. This is most evident in business and mortgage loans.
Loan management companies have emerged as key players in managing private debt, as they have been transferred 85 billion euros in red loans by banks. They manage a total of 120 billion euros in red loans, operating under a strict supervision framework and trying to achieve many goals that can sometimes make it difficult for one to achieve the other. For example, they must achieve the goals of securitization business plans by maximizing red loan recoveries, managing pieces of debt, such as selling collateral at the best market prices, while avoiding bankruptcy or re-defaulting viable borrowers. manage red loans with limited resources (staff, budget, technology, etc.), adhering to strict rules of compliance with personal data, supervisory authorities, etc.
According to the IMF, greater transparency is needed in terms of their financial size and their effectiveness in managing red loans. In fact, the servicers operate on behalf of the investors who bought the securitized red loans, without, however, exposing themselves to the credit risks of the securitizations, with the obligation to bring results to the banks, the investors and, consequently, to the State. , which is guaranteed part of the transactions.
Another issue raised by the IMF concerns the high concentration of the market, where 24 management companies have been lent to the Greek market. Of these, 16 are operating, of which four (Cepal, DoValue, Intrum and QQuant) represent 88% of the market, with most of their capital belonging to foreign investment companies specializing in debt management.
The IMF also points to the need for:
– Further strengthen the secondary market for red loans
– Enhance transparency with more published data on management companies, the Greek red loan market, investors, management efficiency, based on audits by supervisors
– Recoveries are unsatisfactory, which makes achieving business plan goals uncertain in the long run
– The trial of the cases remains slow. The pandemic contributed to this, but also the lack of modernization, such as long-distance hearings, digitization, etc.
– Greece is the first European country to innovate with the new Bankruptcy Code, which is a model for other countries. However, there are 48,000 cases pending in the out-of-court mechanism due to various problems of decades (bureaucracy, lack of state digitization, etc.) that are currently being handled.
– It is necessary to create the Agency for the Sale and Rental of Real Estate which due to delays is expected in mid-2023 at the earliest. Its operation is essential for the protection of vulnerable households and the effectiveness of the new bankruptcy law.
– Management companies should apply for loans from the BoG so that they can offer refinancing and support debt restructuring to sustainable borrowers. This means, at the same time, increasing their risks and tightening supervision over capital, liquidity, risk management and corporate governance.