Tuesday, December 26, 2017

Greek Bank Core Profits

When it comes to Greek banks everyone seems to be stuck on one subject: Non-performing loans.  While this is a very serious issue since bad loans comprise around 45-50% of total loan portfolios, it obscures what is happening under the surface of red ink: strong core profits.

A good example is Alpha Bank, Greece's largest bank by market capitalization (2.47 billion euro as of Dec.23).
*2011 provisions exclude losses from the Greek Government Bond haircut
2017e are 9m results annualized

As you can see from the chart, core earnings (revenues minus expenses) bottomed out in 2012 and have been rising since. This year they are likely to reach pre-crisis levels, or even higher if significant mark-to-market gains from its Greek government bond portfolio are included - 2017 has been a banner year for GGBs.  Furthermore, core earnings are now exceeding loan provisions and write-offs, producing net bottom line profits for the first time in six years.  

Profits are driven by high net interest margins and lower operating costs, which are being slashed as the Greek banking industry consolidates drastically. Just four banks now  account for 97% of all banking assets, a level of concentration far above the EU average.

I expect the rise in core profits to continue as the economic recovery gains momentum in 2018-19 and costs are reduced  further by more staff reductions and branch closures.  I also expect to see some top line gains from a slight pickup in credit expansion and the gradual shift of government borrowing from the official sector to bond issuance.  And I would  not be surprised if the capital controls imposed in 2015 are lifted entirely towards the end of 2018, bringing back deposits now hidden under mattresses.

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