(FinancialTimes) – With Greece’s budget deficit at record levels and the country’s banks exposed to troubles both at home and abroad, doomsayers are predicting that Greek banks will go the way of Iceland’s.
Many investors clearly think their gloom is justified. Greek banks’ shares fell by a quarter in the four weeks to December 11 on the Athens stock exchange.
And this week bank shares fell again on fears that structural reform measures announced by the Socialist government would not be enough to restore confidence in the economy.
On Monday, Standard and Poor’s, the ratings agency, said Greek banks face the “highest risks in western Europe”. Last week it warned of a possible downgrade of Greece’s A minus credit rating.
Athens-based lenders have borrowed about€40bn ($58bn) from the European Central Bank at cheap rates to invest in higher-yielding Greek bonds, which they used as collateral. Their bondholdings helped the four big banks to show respectable nine-month profits in spite of a drastic slowdown in domestic credit expansion.
And local analysts remain broadly sanguine about Greek banks’ prospects.
Greek lenders still have core tier one capital ratios – a measure of balance sheet resilience – at close to 9 per cent, according to Greece’s central bank.
Dimitris Haralabopoulos, banks analyst at HSBC Pantelakis Securities in Athens, says: “Corporate lending should come back next year so we should see positive loan growth of around 2-3 per cent.”
Industry participants, though, point to a more worrying future. A deadline looms in May, when Greek lenders are due to repay a total of €4bn in capital injections provided by the government.
Alpha Bank “just got in under the wire”, says one banker, by completing a €986m rights issue days before spreads on Greek bonds started to widen.
State-controlled National Bank of Greece, the country’s biggest lender, raised €1.25bn in fresh equity earlier this year.
But few believe the likes of Piraeus, EFG Eurobank, and Marfin Popular Bank will be able to follow suit any time soon.
“Other banks can forget about raising rights issue funding for the next three months at least,” says Marinos Yannopoulos, finance director of Alpha Bank. “Greece is the wrong zip code.”
Fitch has already put covered bonds issued by Greek lenders on negative watch. And with the economy set to shrink again next year by about 0.3 per cent, against a predicted 1.3 per cent this year, Greek households are increasingly cautious about borrowing.
Credit expansion this year is forecast at less than 2 per cent, while consumer borrowing will be flat, according to analysts.
Non-performing loans are likely to peak in the second half of next year at about 9-10 per cent. They are estimated to have reached 5 per cent at the end of the third quarter.
The Greek banks’ incursion into south-east Europe has compounded their bad-debt problems. Bulgaria is believed to be the worst affected, followed by Romania and Serbia. Although the banks’ international exposure is relatively small at about a fifth of total lending, the portion of loans that are non-performing is higher than in Greece.
Greek banks have stopped making transfers to southeast European subsidiaries, leaving them to fund lending entirely out of local deposits.
Their customers are being encouraged to borrow in local currency rather than euros to reduce exchange rate risk.
Even if credit demand does pick up – EFG Eurobank, for example, which suffered especially heavy losses in Ukraine, expects its international division to return to profit in 2010 – a significant challenge is to make the economics of lending stack up.
Alpha Bank, for example, has a 112 per cent loan-to-deposit ratio, meaning that a chunk of its lending is funded by wholesale finance. And with Greece’s economy in such a fragile state the cost of that finance has ballooned.
“If the Greek government is paying 250 basis points over Libor we can’t expect to pay less,” Mr Yannopoulos says. As one senior Greek banker points out, the macroeconomic situation will determine the banks’ immediate future.
“What happens next in the bank sector depends on how the government handles the debt crisis. The next 60 days will be critical,” the banker says.
Copyright The Financial Times Limited 2009. You may share using our article tools. Please don’t cut articles from FT.com and redistribute by email or post to the web.
Source: Financial Times
(WSJ) – Debt Fears Rattle Europe
The euro tumbled as debt woes spread around the euro zone from Greece, where pledges of austerity and fiscal rigor failed to stem growing fears that the Continent’s economic recovery could be derailed. Read More Here