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A mere decade after the financial crisis, Greek banks are finally showing signs of tackling their NPL exposures in earnest. However, this is due far more to pressure from the ECB and its desire to push ahead with banking union than a wholesale change in sentiment by the industry itself.

On January 24, Yannis Stournaras, governor of the Bank of Greece, declared that the “effective management of non-performing loans is the most important challenge for the banking industry today… If we think that it is desirable for the NPL ratio to converge rapidly to the European average, the Greek authorities must quickly form a consistent and coordinated approach to address the issue of NPLs in a systemic way, on top of banks’ individual efforts.”

A heavy emphasis should weigh on the word “if” in that statement.

NPLs at Greek banks have fallen 20% since their peak in 2016, but still stand at €88.6 billion, or 48% of total loans outstanding. Of the four largest banks, Piraeus Bank had 54.7% NPL exposure in June 2018, Alpha Bank 51.9%, National Bank of Greece 42% and Eurobank 40.7%. Across the EU, the average NPL ratio is now 4%.

And so, while €4.4 billion bad loans held at Greek banks were written-off in 2018 and another €5.2 billion of Greek NPLs were sold, the country has a lot of catching up to do.

The country is now under pressure to cut the volume of NPLs by 27% to €65 billion by the end of this year. That is an extraordinary challenge. It will require doubling the pace of reduction so far.

The easiest way to do this is through straightforward disposals. In February, Alpha Bank revealed the latest of these, with the proposed sale of two portfolios: a €1.5 billion sale of SME loan exposure and a €2 billion package of residential mortgages. The deals should close in the second quarter.

Rival Eurobank has come up with an equally efficient plan: it will merge with a subsidiary, Grivalia Properties, to boost its capital ratios and then sell NPLs via a €7 billion securitization. This should reduce its NPL ratio to just 7%.

The systemic approach by the Greek authorities that Stournaras advocates is also slowly emerging – but it doesn’t look particularly consistent and coordinated. Two separate schemes are on the table.

The Bank of Greece’s proposal is a scheme that would address both NPLs and one of the particular challenges that Greek banks face in dealing with them, the huge proportion of their capital bases that, controversially, are made up of deferred tax credits (DTCs). 

Under this plan, the banks would transfer €40 billion of NPLs to a special purpose vehicle with the associated coverage shortfall met by the value of the DTCs transferred to the SPV alongside them (€7.4 billion). The loans would subsequently be securitized and the DTCs transformed into a claim on the Greek state.

Stournaras says that this would reduce the stock of NPLs in the country by 47% and limit the contribution of DTCs to bank regulatory capital to 30% (from its current 57%).

Asset protection scheme

The ministry of finance, working with The HFSF (Hellenic Financial Stability Fund, which owns the banks), has a competing proposal for an asset protection scheme. The ministry is being advised by JPMorgan, whose private sector rescue for Italian lender Monte dei Paschi di Siena (MPS) was scuppered in late 2016.

The Greek APS proposal would see bad loans transferred to an SPV and securitized using a state guarantee for the senior tranches of the securitizations. This looks very similar to Italy’s state-guaranteed GACS scheme, through which MPS securitized a €24 billion pool of bad debt in May last year – arranged by JPMorgan. The GACS programme was extended for a second time in September last year.

What might transpire is that some combination of the two schemes will eventually get the nod. Whatever happens, it is unlikely that anything will actually materialize before 2020. So, the €65 billion target for this year still looks pretty ambitious. 

If the Alpha Bank and Eurobank disposal plans go ahead smoothly then it should bode well for further sales. Along with Eurobank’s merger plans, National Bank of Greece has €1.7 billion of sales in the pipeline and Piraeus has €900 million of consumer loans and €800 million of shipping loans on the block.

Adopting securitization to accelerate the removal of these loans from bank balance sheets is an obvious and long overdue strategy, but the next challenge will be just how much they will have to pay investors to buy the junior tranches.

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