By Leonidas Stergiou
The Deputy Governor of the Bank of Greece, Mrs. Christina Papakonstantinou, raised the issue of the risk of creating new red loans less than a week after the publication of the Financial Stability Report. As she said in a speech last week, there are signs of an increase in red loans and an increase in regulation, while she reiterated the additional aggravating factor of declining disposable income due to energy crisis and inflation, exacerbated by war uncertainty.
These warnings come when the Bank of Greece is estimated at about 9 billion euros in loans that could be a potential source of new red loans. These are serviced and regulated loans, which are still directly or indirectly supported by anti-pandemic measures. The full withdrawal of these measures in 2022 will create new pressures. For example, moratoria or installment grants directly related to loans may have expired. However, other measures are still supportive, such as, for example, the repayable advance, etc.
The Bank of Greece notes a significant reduction in red loans on banks’ balance sheets, but proceeds with the following remarks:
Firstthe reduction of red loans came from securitization and not from consolidation, after active management actions (sustainable arrangements, refinancing, etc.).
Secondlywith the securitization, non-performing loans (NPLs) of 100 billion euros were transferred from banks to management companies, without this reducing the private debt and, consequently, the pressure on the real economy from any squeeze of disposable income.
Thirdlysecuritizations hit capital and profitability of banks.
Fourthalthough the proportions of red loans in the total financing reached single-digit percentages, they remain many times higher than the European average.
Fifth, half-settled loans are again non-performing. Of the 15.3 billion euros in regulated loans, 7.2 billion euros are non-performing loans.
Sixth, loans overdue for more than 90 days (excluding denounced receivables) fell further in 2021 to € 5.7 billion (31% of NPLs), down 48% from the end of 2020 (11.0 billion euros). However, it is pointed out that 70.4% of MES falling into this category are more than a year behind, an increase compared to the end of 2020 (67.2%). The corresponding arrears rate for mortgages is 53.3%, for business loans 74.6% and for consumer loans 65.8%. The particularly negative image of NPLs that are overdue for more than a year is reinforced by that of NPLs with a delay of more than two years for all loan categories.
Bank details
For their part, banks are seeing high demand (and disbursements) for consumer loans, in amounts that now reach the corresponding level for mortgages, with a parallel increase in red loans. Demand in the four months of the year is increased by 80% and disbursements by 20%. As for the red loans, the same sources say that it is not yet clear whether the rise is associated with the crisis, something that will be seen from the data from May to June. However, in mortgages and business there are no signs of an increase in red loans. In business, this is largely due to the availability of many co-financed programs.
Banks have estimated that a 20% reduction in borrowers’ disposable income could create new red loans of 400-600m euros. From the calculations so far, regarding inflation until today and based on income data, the reduction of disposable income, on an annual basis, is estimated at around 8% -9%. However, banking sources agree that the impact of inflation and uncertainty is expected to become apparent in the second half of the year, when it is estimated that there will be the first interest rate hikes. For this reason, they believe that the second semester will be the critical period that will offer more reliable indications. For example, the first quarter did not reflect the uncertainty of the war and the worsening of the energy crisis and inflation.
Adjust and red again
The so-called re-default rate, which shows the percentage of loans that are overdue again after 18 months from their settlement, is the most characteristic indicator. For loans that were regulated and the 18-month period expired at the end of 2021, the re-default rate was around 25%. That is, one in four loans turned red again within 18 months of being settled. This percentage, for loans that closed 18 months after the regulation at the end of March 2022, increased to 30%, while today in some categories it has reached 40%. The comparison of the last 18 months, in relation to the previous 15 months, results in a deterioration in all categories of loans. The following categories are indicative:
* In mortgages the re-default rate was around 25%, compared to 34% today.
* In consumer loans the same percentage increased from 35% to 39%.
* In small business loans from 32% increased to 37%.
Executives of banks and loan management companies estimate that the recent support measures to deal with the energy crisis will work positively and will stop this growing trend in the coming months.
What the EBA sees
According to the report of the European Banking Authority (EBA) for the fourth quarter of 2021, the percentage of non-performing exposures in the tourism sector increased from 13.6% in September to 14.1% in December. This is a sector that has been severely tested by the pandemic, supported by measures, while the war in Ukraine may limit the upward trends expected in 2022. Also, the red loan index increased by 1 percentage point (from 6.5% at 7.4%, over the same period) in the administrative and support services sector.
Source: Capital
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