What has happened to the Greek banks?

This week the Greek banking sector has returned to the newswires. You might think that after the storm and all the bailouts it might now be if not plain sailing at least calmer waters for it. Here is ForeignPolicy.com essentially singing along to “Happy days are here again”

The Greek banking sector has totally transformed as a result of the financial crisis. Legislation, restructuring and recapitalization have led to a sector that is now internationally recognized for its high capitalization levels and for substantial improvements in stability, governance and transparency. As Professor Nikolaos Karamouzis, Chairman of EFG Eurobank and Chairman of the Hellenic Bank Association, states, “we have been through four stress tests – no other system has been stressed as much.”

However even a view drizzled in honey could not avoid this issue.

“The question of non-performing loans in the Greek banking system is a crucial one”.
Panagiotis Roumeliotis, Chairman, Attica Bank…….About €30-35 billion is tied up in the large NPLs of some 100 companies, who are on the books of all the systemic banks.

The problem with taking sponsored content is that it steps into a universe far.far.away.

In a first for the country, Attica Bank recently securitized €1.3 billion of its bad loans. A move that could be copied by others and which its Chairman, Panagiotis Roumeliotis, says will make it “one of the healthiest banks in Greece.” Initiatives like this mean that the country’s targets for reducing NPLs are being met or exceeded.

Also I note a couple of numbers of which the first gives us perspective.

Another big challenge is recovery of deposits, which flew out of the country until restrictions were put in place in 2015. Since then, €8.5 billion has been repatriated.

Whilst that sounds a lot, compared to the decline it is not especially when we consider the time that had passed as the data here takes us to February 2017. Next comes some number crunching which is very useful for someone like me who argued all along for Greece to take the default and devalue route. Which just as a reminder was criticised by those in the establishment and their media supporters are likely to create a severe economic depression which their plan would avoid!

The 4 systemic banks have undergone 4 stress tests and 3 rounds of recapitalization since 2010, for close to €65 billion.

With all that money it is a good job they are so strong. Hold that thought please as we move to a universe beyond, far,far away.

Unlike the subprime banking crisis of other countries, the crisis in Greece wasn’t due to any particular problem in the sector. Rather, it was a consequence of the Greek sovereign debt crisis that created contagion. Coming out of that crisis, though, the sector has been transformed.

Someone seems to have forgotten all those non performing loans already.

Bringing this up to date

If we step forwards in time to the end of August suddenly we were no longer singing along to Sugar by Maroon 5. From Kathimeriini.

Greek banks Alpha and Eurobank posted weak second-quarter results on Thursday, with Alpha swinging to a loss and Eurobank barely profitable as both focus on shrinking their bad debt load.

So not exactly surging ahead and whilst the amount of support from the European Central Bank has reduced considerably we were reminded yesterday that the problem created in 2015 has not yet gone away.

On 9 October 2018 the Governing Council of the ECB did not object to an ELA-ceiling for Greek banks of €5.0 billion, up to and including Wednesday, 7 November 2018, following a request by the Bank of Greece.

The reduction of €0.2 billion in the ceiling reflects an improvement of the liquidity situation of Greek banks, taking into account flows stemming from private sector deposits and from the banks’ access to wholesale financial markets.

So that is good in terms of the reduction but as I pointed out above bad in that some is still required. After all Greece has now left its formal bailout albeit that the institutions still keep a very close watch on it. But even more significant was the next bit.

The ongoing improvement of the liquidity situation of Greek banks reflects the improved condition of the Greek financial system. The recent stock market developments in respect of the banking sector are not related to the soundness of Greek banks and are due to purely exogenous factors, such as rises in interest rates internationally and in Greece’s neighbouring countries in particular.”

We have learnt in the credit crunch era that the blame foreigners weapon is only deployed when things are pretty bad and a diversion is needed. Rather oddly the Financial Times seemed to be giving this some support.

The turbulent conditions have hit European banks across the continent, as declines in the value of banks’ holdings of Italian debt eat away at their capital base in a dangerous spiral known as the ‘doom loop’.

That applies to Italian banks yes and to some extent to others but I rather suspect we would know if Greek banks had been punting Italian bonds on any scale. Yesterday Kathimerini put the  state of play like this.

Greek banking stocks have lost more than 40 percent so far this year, and the selling pressure grew in recent days.

All rather different to the honey coated Foreign Policy article is it not? Also in the rush to blame others some genuine concerns are in danger of being overlooked.

. I disagree with the statement below Greek banks used 23% of their “real” Tier 1 capital reserves to support the reduction of NPEs. DTCs as a % of total regulatory capital are now ~75%. Banks “burned” EUR 6.6bn of “real” CET 1 capital to reduce their NPE’s by EUR 16.8bn. ( @mnicoletos on Twitter )

As you can see the argument here is that the Greek banks are finding that dealing with sour loans is beginning to burn through their capital. Using the numbers above suggests that each 1 Euro reduction in bad debts is costing around 40 cents. We do not know that will be the exact rate going forwards but if we take it as a broad brush suddenly the “high capitalization levels” look anything but and no doubt there are fears that the capital raising begging bowl will be doing the rounds again.

Piraeus Bank

This had tried to steal something of a march on the others but this from Reuters last week says it all.

Piraeus Bank  said plans to issue debt to bolster its capital were on track on Wednesday as Greece’s largest lender by assets faced a near 30 percent share price fall.

Quite why anyone would buy one if its bonds escapes me but that was and may even still be the plan.

Piraeus Bank’s restructuring plan, which it has submitted to supervisors at the European Central Bank, involves the issuance of debt, likely to be a Tier-2 bond, among other measures.

But if you are willing to take the red pill from The Matrix then maybe you might be a believer of this.

analysts said the 29.3 percent fall in its shares to 1.16 euros by 1020 GMT was the result of negative investor sentiment affecting the whole banking sector,

Comment

There is a fair bit to consider here but let us do some number crunching. We can start with this from Kathimerini referring to yesterday’s report from Moody’s.

The ratings agency said asset quality remains the main challenge for local lenders, with assets at end-June adding up to 291 billion euros and NPEs at 89 billion euros.

So should the Non Performing Exposures eat up capital at the rate described above that would be another 35 billion Euros or so.  That of course is a very broad brush but one might reasonably think that troubles in that area might be much more of a cause of this than blaming Italy and Turkey.

The banks index has followed up its 24 percent slump in September with a fresh 15 percent decline in the first seven sessions in October, sending the capitalization of the four systemic banks below 5 billion euros between them, from 8.7 billion at the start of the year. ( Kathimerini )

So 69 billion Euros has been poured into them according to Foreign Policy and of course rising for them to be valued at less than 5 billion Euros? As to what they were worth well here you are.

 

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Why have house prices in Italy continued to fall?

One of the features of these times is that economic policy is pretty much invariably house price friendly. Not only have central banks around the world slashed official interest-rates thereby reducing variable mortgage rates but many followed this up with Quantitative Easing bond buying which pushed fixed-rate mortgages (even) lower as well. If that was not enough some of the liquidity created by the QE era was invested in capital cities around the globe by investors looking to spread their risks. In addition we saw various credit easing programmes which were designed to refloat even zombie banks and get them back lending again. In my country this type of credit easing was called the Funding for Lending Scheme which did so by claiming to boost business lending but in reality boosted the mortgage market. Looked at like that we see policies which could not have been much more house price friendly.

If we switch to the Euro area we see that this went as far as the ECB declaring a negative deposit rate ( -0.4%) which it still has in spite of these better economic times and a balance sheet totaling 4.5 trillion Euros. This has led to house price recoveries and in particular in two of the countries which had symbolised a troubled housing market which were of course Ireland and Spain. But intriguingly one country has missed out as we were reminded of only yesterday.

The Italian Difference

Yesterday morning the official statistics body Istat told us this.

According to preliminary estimates, in the third quarter of 2017: the House Price Index (see Italian IPAB) decreased by 0.5% compared with the previous quarter and by
0.8% in comparison to the same quarter of the previous year (it was -0.2% in the second quarter of 2017);

The breakdown shows a small nudge higher for new properties that in aggregate is weaker than the fall in price for exisiting properties.

prices of new dwellings increased by 0.3% compared to the previous quarter and by 0.6% with respect to
the third quarter of 2016 (up from +0.3% observed in the second quarter); prices of existing dwellings
decreased by 0.7% compared to the previous quarter and by 1.3% with respect to the same quarter of the
previous year.

Property owners in Italy may be a little jealous of those in Amsterdam who have just seen a 13.5% rise in house prices in the past year.

A ( space) oddity

The situation gets more curious if we note that as discussed earlier the mortgage market has got more favourable. In terms of credit then there should be more around as at the aggregate level the ECB has expanded its balance sheet and we know that Italian banks took part in this at times on a large scale. Whilst the overall process has been an Italian style shambles there have (finally) been some bank bailouts or rather hybrid bailin/outs.

If we move from credit supply to price we see that mortgage rates have been falling in Italy. The website Statista tells us that the 3.68% of the opening of 2013 was replaced by 2.1% at the half-way point of 2017. The fall was not in a straight line but is a clear fall. Another way of putting this is to use the composite mortgage rate of the Bnak of Italy. When ECB President gave his “Whatever it takes ( to save the Euro speech)” in July 2012 it might also have been save Italian house prices as the mortgage rate fell from 3.95% then to 1.98% as of last November so in essence halved.

So if we apply the play book house prices should been rallying in Italy and maybe strongly.

House Price Slump

Reality is however very different as the data in fact shows annual falls. For example 4.4% in 2014 and 2.6% in 2015 and 0.8% in 2016. Indeed if we look for some perspective in the credit crunch era we see the Financial Times reporting this.

In real terms, Italy’s real house prices have been falling consistently since 2007 and are now 23 per cent lower — a drop that has brought the construction and property sectors to their knees.

If we look back to the credit crunch impact and then the Euro area crisis which then gave Italy a double-whammy hit then we see that lower house prices are covered by Radiohead.

No alarms and no surprises

Although existing property owners may be singing along to the next part of the lyric.

let me out of here

What is more surprising is the fact that the economic improvement has had such a different impact on house prices in Italy compared to its Euro area peers.

Italy was the only country in the EU where house prices contracted in the second quarter of last year, according to the latest figures from Eurostat, the EU statistics agency. In contrast, almost two-thirds of EU countries are reporting house price growth of more than 5 per cent. ( FT )

If we look at the house price index we see that as of the third quarter of last year it was at 98.6 compared to the 100 of 2015. So just as Mario Draghi and the ECB were “pumping up” monetary policy house prices in Italy were doing not much and if anything drifting lower. Looking further back we see that the index was 116.3 in 2010 so it has not been a good period of time for property owners in Italy and that does matter because of this.

and in a country where more than 72 per cent of households own their own home

I have to confess I was not previously aware of what a property owning nation Italy is.

The banks

We have looked many times at the troubled banking sector in Italy and we have seen from the numbers above that the property market and the banking sector have been clutching each other tightly in the credit crunch era. Maybe this is at least part of the reason why the Italian establishment has dithered so much over the banking bailouts required as it waited for a bottom which so far has not arrived. This has left the Italian banking sector with 173.1 billion Euros of bad loans sitting on their balance sheets.

Property now accounts for more corporate bad loans than any other sector: 42 per cent compared with 29 per cent in 2011………And for property-related lending the proportion of loans turning bad has been twice as high as in the manufacturing sector, weighing on banks’ €173bn of bad debts. ( FT)

So something of a death spiral as one zombie sector feeds off another as this reply to me indicates.

The trend is getting better for Italian house market but it is a vicious circle: banks’ sales of repossessed property is also contributing to the prolonged house price contraction. The number of real estate units sold via auction increased 25 % in the last 2 years ( @Raff_Perf )

As The Cranberries would say “Zombie, zombie,zombie”

Disposing of bad property loans has also been slower than for other sectors……… In contrast, banks continue to harbour hopes of greater recovery of secured loans to construction and real estate companies. As a result, this lending has remained in limbo for longer.

Another forward guidance fail?

Comment

One way of looking at Italy right now is of a property owning democracy which has had a sustained fall in house prices. This of course adds to the fact that on an individual basis economic output or GDP has fallen in the Euro area as output stagnated but the population rose meaning the net fall must now be around 5%. It is hard not to wonder if the “Whatever it takes” speech of Mario Draghi was not at least partly driven by rising mortgage rates in Italy ( pre his speech they went over 4%) and falling house prices in his home country. Along the way it is not only the banking sector which is affected.

Construction has almost halved from its pre-crisis level. ( FT)

That puts the UK’s construction problem I looked ta yesterday into perspective doesn’t it?

Looking ahead we see a better economic situation for Italy as it has returned to economic growth. What this has done if we look at annual house price numbers is slowed the decline but not yet caused any rises. In some ways this is welcome as first time buyers will no doubt be grateful that they have not seen the rises for example seen in much of my home country but if with all the monetary policy effort the results are what they are what happens when the next recession turns up?

Still if you want the bill pill Matrix style there is this from AURA who call themselves real estate experts.

“I would say it’s a mathematical fact: house prices cannot drop more than 30%. I believe that this drop of values is over and it’s now time to buy”. Stefano Rossini, Ceo for MutuiSuperket.it,

Perhaps he has never been to Ireland or more curiously Spain.

Me on Core Finance

http://www.corelondon.tv/manufacturing-gives-boost-uk-economy/