Portfolio Lead Advisory Services Weekly Digest - Edition 22

In contrast to the rising levels across most of Europe, Greece has seen NPLs continue to fall during the second quarter of 2020 (Deloitte Analysis). The Greek banks reported a decrease in their NPL ratio to 36.7% in Q2 2020 from 37.4% in Q1 2020, primarily through NPL securitisations under the Hercules Asset Protection Scheme (HAPS), with private investors acquiring most of the mezzanine and junior notes.

Greek banks reported total NPLs of €59.7bn in Q2, reducing from €60.9bn as at Q1, and down from €75.4bn on 1H2019. Eurobank had the largest reduction in NPLs during the quarter, reducing to €6.2bn from €13bn (-52.3%), a result of successfully executing the HAPS scheme, with the €7.5bn Project Cairo closing in June. The other banks are not far behind with an abundance of activity through the scheme; Alpha Banks’s €10.6bn Project Galaxy and Piraeus’s €1.9bn Project Phoenix are expected to close imminently, whilst NBG’s €6.3bn Project Frontier and Piraeus’s €5bn Project Vega are also in the pipeline. Despite the flurry of deleveraging activity through HAPS, there is already an eye on the renewed increase in NPEs due to the severe impact of the COVID-19 pandemic and the measures that Greek banks need to take now in order to stop the reversing of their recent success.

At the onset of the pandemic, the Bank of Greece estimated that NPLs could increase between 4% and 11% as a result of the COVID-19 crisis. The volume of this new generation of NPLs will depend on the magnitude of the recession, but the continued presence of the virus and the effects of recent lockdown measures could now see these forecasts as potentially understated. Greek banks set a further €0.3bn of provisions in the second quarter after €1.4bn was set aside to cover future losses during Q1. As reported by the Bank of Greece at the end of September, Greek loans under moratoria grew to €20.1bn, of which €7.7bn were housing loans, €9.3bn loans to NFCs, €1.7bn in consumer loans, €1.4bn loans to sole proprietors and unincorporated partnerships, and €3m were other loans to households.

The Greek government are exploring a number of interventions to support their banking system. The Bank of Greece are continuing to look at the “Bad Bank” option, submitting their proposal to the Greek government at the end of September for such a solution but may face potential roadblocks to be within current state aid parameters. Lessons from the past show that when asset management companies are used after crises, bank balance sheets have been cleared up quicker with a more effective restoration of banks’ ability to lend. The pan-European bad bank solution, a cross-border network of AMCs, connected to a central European hub is also still holding traction across the Eurozone.

In addition, the Government are considering bringing in legislation that will allow HFSF to participate in Greek banks’ future right issues to help strengthen capital positions. Under current legislation, HFSF cannot participate in banks’ rights issues, to avoid propping up banks and fall foul of state aid rules. At present Greek banks are in need of new capital in order to help deal with the new wave and legacy NPLs, with an estimated €8.5bn-€9bn needed to return to healthy capital adequacy position.

At the end of October, the Greek Parliament also approved the new bankruptcy law (L. 4738/2020) which will be in force from January 1 2021 and aims to help over-indebted households and businesses make a fresh start after a crippling decade-long debt crisis. The new law is applicable for both individuals and legal entities and will enable them to either restructure or settle their existing debts having as a prerequisite the liquidation of their personal assets. It is considered innovative for the Greek market since for the first time individuals can enter into bankruptcy, while after bankruptcy they can continue living in their residences for the next 12 years by paying rent, which will be subsidized by the Greek State, and after the expiration of the 12-year lease period they can buy back their property at its market value at that point of time. Despite the arguments from the banking universe on specific clauses and thresholds, everyone agrees that the new law is a move in the right direction and provides a holistic solution on the NPEs issue.

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