The European Banking Authority sees signs of an increase in bad loans

Of Leonida Stergiou

Weak profitability and deterioration of asset quality despite the reduction of the non-performing loans index is found pan-European, by the European Banking Authority in its report on the risks of systemic banks in the EU.

In fact, he underlines that these two weaknesses do not seem to be linked to the war in Ukraine, as data from the first quarter has been analysed.

As far as the Greek systemic banks are concerned, the EBA finds an increase in profitability, which, however, came mainly from non-recurring activities and significant cost compression.

The capital adequacy ratios, although moving at higher levels than the supervisory limits, are nevertheless the lowest in the EU.

Red loans

The percentage of non-performing loans as a percentage of total lending continued its downward trend almost exclusively due to securitizations, while arrears are increasing in some sectors and there is an increase in risk in loans that had been put under moratorium regime.

Also, the interest margin decreased significantly compared to previous quarters, but remains above the EU average.

Non-performing loans decreased in the first quarter by 600 million euros and amounted to 14.2 billion euros, of which a third concerns loans to households.

Thus, the NPL ratio in the first quarter fell to 6.7% (from 7% in December 2021), which is the highest in the EU, where the average ratio fell below 2%, to 1, 9%.

Nevertheless, the provisions for the coverage of bad loans amount to the Greek banks are smaller than the average in the EU. In Greece, the coverage rate is 44.4%, while in the E.U. with bad loans of 1.9% it is 44.9%.

The biggest deviations from the EU, i.e. the lowest coverage rates are found in loans to households and mainly in housing loans, while the coverage rates in business loans are close to the European average.

The branches

An increase in the percentage of bad loans in March compared to December is observed in the following sectors:

Primary sector (agricultural production, forestry, fishing) to 16.2% from 15%.

Financial and insurance companies to 7.8% from 3.2%.

Services (administrative and technical support) to 17.2% from 17%.

Real estate businesses to 12.6% from 11.5%.

Construction companies to 19.6% from 19.2%.

Large loan reclassifications made through securitizations, but also small amounts of loans in certain sectors (relative to the total), such as in the primary sector, may cause statistical differences in these rates. Nevertheless, the signs of an increase in bad loans are confirmed by two more indicators:

First, an increase in loans transferred to the high risk category (stage 2) to 13.2% from 13.1%, despite the overall reduction in bad loans.

Second, an increase in the high-risk percentage of loans that had been placed in moratoriums (to 37.4% from 38.6%), despite a reduction in the total arrears of these loans to 16.2% from 16.4%.

Capital

The overall capital adequacy ratio for Greek banks hovers around 15%, when the European average is just under 20%.

Lower than the average and in the last place of the ranking are also the other capital adequacy indicators, such as those of the first rating capital (tier 1), CET-1, etc. However, much higher than the limits.

Profitability

The profitability index (return on equity or RoE) moved to positive levels in the first quarter of 2022 (above 20%) for the first time in several quarters, marking the highest performance after Slovenia. Also, the return on assets moved above 1.5% and was the second best performance in the EU. after Slovenia.

These performances were contributed by:

First, cost reduction. The cost-to-income ratio is the smallest in the EU. (a little over 30% compared to 60% in the EU).

Second, the huge participation of organic trading revenues. Specifically, the percentage of trading in the total organic revenue reached 24% in the first quarter, taking the first place among the countries in the EU.

Interest income and fees

Interest income and commission income appear at the bottom of the EU. and well below average. The percentage of interest income to total operating income was close to 42% (together with French and Italian banks), compared to 55% in the EU. The corresponding percentage of revenue from commissions in Greece was around 15% (last place), against a European average of over 30%.

War and liquidity

Regarding other indicators and risks, the EBA finds zero risk exposure in loans to Russia, Ukraine, Belarus and from deposits from these countries.

Also, Greek banks present a high ratio of reserves that exceeds 19% of assets, when the corresponding European average is 16%.