Two large weights hanging over Greek banks removed

Two large weights hanging over the banking sector seem to have been removed as concerns drop about the amount of fresh problem loans to emerge from the pandemic while the government shows strong support for Piraeus Bank’s share capital hike despite criticism from opposition parties.

Bank shares jumped more than 3 percent on the Athens bourse yesterday, with Alpha gaining 5.7 percent, Eurobank rising 3.4 percent, National Bank adding 0.4 percent and Piraeus Bank down 1.5 percent, reversing earlier gains.

Moody's gave its own answer today to the biggest source of concern among investors on the prospects of the Greek banking system as estimates differ on the level of bad debts to emerge from the pandemic: lenders put the number at 5 billion euros, while the Bank of Greece says that it could reach 10 billion euros.

Moody’s not only downgraded the problem, but announced the upgrade of Greek banks, as it changed the outlook for the country’s banking system from stable to positive.

The agency emphasized that the positive outlook on the ratings of Greek banks primarily reflects the expectations that there will be further progress in reducing the large amount of non-performing loans that banks inherited from the previous crisis, mainly through sales and securitisations and that operating profitability will gradually start increasing.

In its report, Moody's notes that the risk of a deterioration in bank assets due to the pandemic is moderate, while the upgrades reflect improving economic conditions as the eurozone recovers from the economic downturn of the pandemic.

While these forecasts boost the optimism for a smooth return from coronavirus crisis by banks, along with the sale of previous bad debt and the improvement of profitability, another burden for the industry, ie uncertainty concerning Piraeus Bank is dropping through the upcoming share capital increase, which the government has made clear it strongly supports.

In the relevant debate in parliament yesterday Finance Minister Christos Staikouras, underlined that it is necessary to increase the share capital, due to the high index of non-performing loans. "When the portfolio of largest bank in Greece is made up of NPLs, there is a problem of financial stability and a problem of financing households and businesses," said the minister.

In fact, as he explained, the share capital boost will prevent the worst-case scenarios: “The non-consolidation of the bank's balance sheet would trap the credit institution into failing to grow its balance sheet and generate organic profits, amid growing supervisory requirements and difficult access to money and capital markets. This would probably lead to remediation measures. And as I hope we all understand, the cost for depositors and the state from any implementation of consolidation measures would be too heavy to lift, while there would be an irreparable blow to financial stability. "

Regarding the criticism made by the opposition for the abolition of the pre-emptive right of existing shareholders, the minister clarified that a privileged distribution of new shares will be provided for existing shareholders, with preferential management.

It is worth noting that as early as March, investors have begun to discount positive scenarios for the banking sector, leading valuations to higher levels, while the emerging positive developments in relation to sour debt stemming from the pandemic and the completion of Piraeus Bank’s share capital increase improve conditions for the sector.