What the ECB data show for Greek and European banks

By Leonidas Stergiou

The large securitizations of red loans in a short period of time, had a significant negative impact on the profits and capital of Greek banks. This, however, was necessary for their consolidation and for them to be able to finance the real economy.

The reduction of the percentage of red loans to the level of 10% shows the great improvement that has been achieved in the last two years, since this index was close to 50%. At the same time, the 10% level shows how far the four systemic banks still have to go in order to reach the Eurozone average of 2%.

Profitability

According to the data of the ECB and the EBA, the four Greek systemic banks (cumulatively) are the only ones that show losses and negative reserves (reserves and retained earnings). In particular, the total net result for the four systemic is -4.6 billion euros, with the reserve element in liabilities appearing -29.2 billion euros. EBA estimates the retained earnings ratio at -256% (which has been deteriorating since December 2020 when it was at -175%).

However, the overall negative result in the nine months came from two systemic banks, due to derecognitions of two large red loan portfolios, through Hercules. Thus, in total, together with the forecasts, impairments amounted to 5.6 billion euros, eliminating operating income and net income of 4.1 billion and 1.1 billion euros, respectively. The inability to save profits is therefore due to losses, which are not recurring and came from consolidation moves.

Sales of red loans also seem to have reduced the operating result of interest income, despite the almost double interest rate margin of Greek banks. This is because interest arrears that had been calculated on non-performing exposures (accruals) are off the balance sheet.

Costs, risks

The four Greek systemic banks show higher costs (compared to their revenues, compared to the rest of the Eurozone. They also show higher risk costs, at 6.88% from 0.53% which is the average in the Eurozone. The stock released by the ECB and the EBA shows that about 40% of mortgages or other types of lending are in the high-risk category. risk (stage 2), while a large percentage remains unserved (18.2%).

Capital

The cost of securitization, the transition to international accounting standards 9 and the rules of Basel III have gnawed on the regulatory capital of the four systemic banks. In fact, one systemic bank has a CET1 capital adequacy ratio below 10%, along with another Portuguese one. In general, capital adequacy ratios are well above the threshold, but 3-4 points lower than the Eurozone average, which was also noted by the HFSF report published earlier this week.

As pointed out by the Bank of Greece, the cost of securitization had a negative impact on capital, thus increasing the rate of deferred tax to 62% of regulatory capital. In fact, if we take into account the impact of the transition to International Accounting Standards 9, then the rate of deferred taxation reaches 71.5% of total regulatory equity. In addition, Greek banks will have to increase their MREL capital (minimum equity and eligible liabilities) by € 16.1 billion by 01.01.2026. According to the BoG, taking into account the total amount of MREL data that should be issued by 01.01.2026 by the Greek systemic credit institutions and to the extent that the issuance cost for them is still high compared to the average levels, the issuance of securities by the Greek systemic credit institutions could have an impact on their already pressed profitability.

Liquidity and risks

The liquidity of the Greek banking system – of all four systemic banks – remains high, especially due to the support measures from the ECB (pandemic). In fact, the widespread use of liquidity measures, both through TLTRO and through the ECB bond market, is evident in the balance sheet of the European Target interbank system. While 2019 closes with a negative balance of 25 billion euros, today it has reached -100 billion euros, without something like this coming from capital outflows (eg deposits), as had happened in 2012 and 2015.

The weighted risk in Greek banks appears higher in the exposure to loans to institutions and companies, while the corresponding indicator for loans to households and small businesses is close to the Eurozone average. This is due to the fact that most red loans and non-performing loans are in business loans.

Read also:

* HFSF bell to banks for capital increase and risk reduction

* The strengths and weaknesses of the 4 banks