The X-ray of the four systemic banks from the EBA

By Leonidas Stergiou

The quarterly report on the risks of the systemic banks of the Eurozone by the European Banking Authority (EBA) shows that Greek banks are still lagging behind in terms of growth, compared to the rest. This is mainly due to the large stock of red loans, which they reduce rapidly through securitization, but thus hitting profitability and capital. And yet, Greek banks show the most red loans, almost six times, than the Eurozone average.

In the second quarter of 2021, the rest of the European banks increased their credit expansion and significantly boosted their profitability, while maintaining high capital adequacy ratios and low red loan ratios. Greek banks “wrote” the cost of securitizations and large provisions for red loans, limiting profitability and capital ratios.

Pan-European, but also in Greece, there is a growing demand for mortgages. Banks have increased lending to small and medium-sized enterprises, while lending to large enterprises has slowed. The latter is due to the fact that large companies issue bonds and repay bank loans.

The main conclusions resulting from the EBA report on Greek banks are the following:

First, represent four times the percentage of overdue loans, even though they have been included in installment or grant suspension programs. The recurrence rate increased in the second quarter to 15.6% from 14.1% in the first quarter of the year, when the corresponding percentage in the Eurozone is around 4%. As part of measures to support borrowers from the pandemic, loans of around € 9 billion are subject to some form of protection and payment facility (eg Bridge program, bank step-up programs). About 40% of red loans and 9% of serviced loans are regulated, which makes them high credit risk. At the same time, in the high risk categories (stage 2 and stage 3) are classified approximately 13% and 20% of the loans respectively.

Secondly, Greek banks are highly dependent on government bonds (approximately 35 billion euros) which correspond to approximately 26% of their assets. According to the EBA for all banks, the risk of inflation and possible increase in yields will cause lower prices and losses from their valuations.

Thirdly, red loan securitizations reduced the CET1 (fully loaded) capital adequacy ratio to 10.8% from 12.1% in the first quarter, when in the rest of the Eurozone, capital increased due to profitability.

Fourth, Greek banks show the highest interest rate income ratio to total operating income, exceeding 100%. This, however, as the EBA analysis shows, is technical. It arises from operating income losses due to securitizations. Thus, as the denominator decreases, so does the fraction of other parts of operating income, such as bond trading and commissions.

Fifth, Greek banks show high costs, with the cost-to-income ratio being almost double that of the Eurozone. At the same time, there is a negative productivity of the staff. However, as the EBA explains, this is due to the high costs that Greek banks have incurred during a rapid transformation, where both securitization and volunteering as well as restructuring have increased costs. The benefit of these actions will appear in the coming quarters.

Read also:

* The strengths and weaknesses of the 4 banks