“Greek Renaissance at last” proclaims a research note on banks and the economy from Bank of America this July.
It is the sort of gushing missive, complete with allusions to early modern philosophy and ancient Mediterranean history, that immediately sparks scepticism.
Greek banks are indeed back on the map for big international institutional investors, just as the country’s non-performing loan market is attracting more interest too.
The likes of BlackRock and Norway’s sovereign wealth fund participated in yet another post-crisis capital raising by Piraeus Bank in April, which Piraeus followed by issuing Greece’s first additional tier-1 bond issue.
Most recently, Alpha Bank completed an €800 million equity raising at the start of July.
Aside from the sector’s low valuation – a 70% discount to book value – the key lure is an acceleration of bad-debt sales this year and, hopefully, in 2022.
Thanks to the success of the state’s Hercules Asset Protection Scheme (HAPS), Bank of America notes, all four big Greek banks have come up with plans to cut sector-wide non-performing exposures from 30% to single-digit proportions this year, and to about 5% of their loan books in 2022.
Herculean task
In early July, Greece’s parliament voted through a second €12 billion tranche of HAPS guarantees on the senior tranches of bad-debt securitizations.
Bankers say Covid has not changed the pricing of the junior and mezzanine tranches, thanks to low interest rates and because the Greek property market has continued to recover after losing about half its value during the 2010s.
Grants and loans from the European Union’s €672 billion Recovery and Resilience Facility (RRF) are now crucial for the banks’ ability to convince investors that they can gain new income.
According to Alpha Bank, Greece is set to receive €31 billion in RRF money, making it the scheme’s biggest beneficiary as a proportion of its economy (Romania, where Alpha owns a top-10 bank, is the next biggest).
The hope is for a boom in new loans as banks co-fund RRF infrastructure projects and lend to the suppliers, while other businesses and eventually households enjoy the macroeconomic effect of the RRF and a less dire sovereign financial backdrop overall.
Such talk was particularly present around Alpha’s capital raising.
One of the bookrunners says it is the first post-crisis equity issuance dedicated to the front book. The bank billed it as “growth capital”.
This is a bit of a stretch, though, given Alpha’s loan book is set to shrink over the coming two years.
Clearly, Alpha needed to justify why it was coming back to the market at the same time as accelerating bad-debt sales. Previously it said it could manage the book adequately without raising capital.
Absorption
There’s no doubt Alpha is in a better position than Piraeus, which simply said it needed the money to cut bad debt.
Even at Piraeus, it is a very different situation to the last time Greek banks raised capital in the wake of a near exit from the euro in summer 2015. That was the third time they had done so in as many years. Then, Greek banks had no choice but to wipe out their existing shareholders after a European Central Bank stress test estimated a €14 billion adverse-scenario shortfall.
Yet this time, to take advantage of RRF-related business, Alpha also needed to get rid of bad loans quicker than before, says Dimitris Giannoulis at ResearchGreece. That is because the capital relief gained through deconsolidating NPLs is greater than the capital cost of writing off the loans’ value to their sale price, he says.
Giannoulis is in any case sceptical about the Greek government’s ability to deploy RRF funds, given the country’s poor track record in absorbing EU structural funds.
The hope is for a boom in new loans as banks co-fund RRF infrastructure projects and lend to the suppliers
Even if we assume the government lives up to the banks’ hopes of quickly using RRF money, the big lenders will still see a drop in net interest income over the next few years because of low interest rates – and the loss of income from non-performing exposures.
Alpha and Piraeus both forecast so much and only expect to stop losing money thanks to cost cutting and, to a less extent, higher fees, which are again partly predicated on new lending.
Meanwhile, the true impact of the pandemic is far from certain.
The Bank of Greece’s estimate for the volume of debt that will default after the end of Covid-related repayment moratoria (between €8 billion and €10 billion) is almost double the aggregate of banks’ individual assumptions (about €5 billion). The argument that either number looks small compared with the mountain of bad debt from the last decade (€53 billion in 2020) is hardly reassuring.
Recovery
After many years, Greece’s forecasted economic growth is no longer lower than the European average. The IMF thinks it will grow by 3.8% in 2021 and by 5% in 2022. But this is barely enough to make up for Covid, never mind the last decade’s depression.
Because of travel bans, income from tourism in 2021 will be at best half a normal year’s. Many borrowers in the hospitality sector have consequently delayed their repayments for even longer than under the state-imposed moratoria. Confidence that these borrowers will bounce back, like confidence in the health of banks’ new lending more generally, is the same as belief in how far the banks have improved their risk management.
“There’s always a temptation to cut a few corners in a recovering economy,” says a C-suite executive at one of the big Greek banks.
In fact, he says banks may in some respects be too conservative. Digital means to assess foreign borrowers’ income, in his view, are an important new means to ramp up lending to offshore property investors in Greece.
