Sunday, November 12, 2017

Greek Banking: Part III, The Moonshine Blues

As we saw in previous posts, the Greek Debt Party ended in 2009.  After borrowers chugged easy credit moonshine by the jugful, their hangover was, predictably, a humdinger.  Let me remind you how raucous the party truly was.

Greek households increased their debt eight-fold in just eight years;  in relative terms, it went from 12% to 55% of GDP - see Chart 1.

Chart 1

The aftermath was catastrophic: bad loans rose from just 5%  in 2007 to 36% in 2016.  This year they are starting to come down slightly (34% as of September) and are expected to drop sharply to 20% by the end of 2019 - at least that's what the Bank of Greece (i.e. the local branch of the ECB) is mandating in its directives to Greek banks - see Chart 2.

Chart 2

Chart 2 is interesting: OK, the Greek Depression started in earnest in late 2008, so it is logical that bad loans would go on rising for some time.  But, c'mon... the economy bottomed out in 2014 and has been flat ever since, so how come bad loans are still such a huge proportion of loan portfolios?  No, it's not a lagging effect.

The answer is as simple as it is astonishing to anyone with even a modicum of credit mores: Greek banks were legally prohibited from liquidating collateral (e.g. homes and business properties), so bad loans have stayed on the books, festering for far longer than basic banking procedures and common economic logic would dictate.  Unfortunately, populist politics are writ large in Greece, Left, Right and Center.  Slogans like "Not a single home shall fall into the hands of a (filthy?) banker" were very common in 20014-15.

The same chart, however, shows that 2018 and 2019 are expected to see sharp reductions in the NPL stock.  At least, that's what the Bank of Greece demands banks to accomplish via a combination of collateral auctions, loan sales, provisions and write-offs. The first two are to be the major drivers. How come?  Reality is a tough mistress, even for previously delusional Leftist politicians who now have to grow up and "meet a payroll", as the saying goes.  Laws shielding borrowers have been amended and auctions are expected to start in late November.  They are to be held online, i.e. hopefully fast and effective.  

This being Greece, nothing happens without lots of hiccups, but auctions are now a key demand by the EU, IMF and ECB before Greece can conclude its bailout program next summer.  Notaries, who are by law responsible for all auctions, recently voted to abstain from the process until December 31 demanding legal due process and police protection from radical groups who threatened them in their duties.  The government immediately concurred with the notaries' requests (shows they are finally "getting it", IMHO) - they are likely to cancel their abstention in a special General Assembly on Nov. 20.

If banks manage to clean up their bad loans by as much as they are expected without taking serious hits to their capital, then the question arises... what are their earnings going to look like in the next few years?  That's the multi-billion euro question, given the current extremely low market capitalization of the banking sector on the Athens Exchange.  

As of today, total market cap for the four Greek systemic banks comes to a mere 7 billion euro, a truly puny 4% of GDP and an even tinier 1.5% of their assets - such as they are, of course, given their high NPLs and NPEs.  By comparison, Spain's Santander and BBV market caps are at 6.7% and 6.4% of assets respectively, while Portugal's BCP and BPI are at 5.2% and 4.4%.

Even if we arbitrarily haircut Greek banks' assets by a radical 50%, current market cap still comes to just 3% of their "haircut" assets - see Chart 3.

Chart 3

Given the above, let's take a closer look at one Greek systemic bank's results, starting in 2008 (I don't want to mention its name, this is not an investment advice blog).  We are looking for trends in core operating earnings and how they compare to loan write-offs/reserves. For better comparison, I have excluded the one-time hit from the GGB haircut (PSI) in 2011 (4.8 billion euro). Results for 2017 are 6 months annualized - See Chart 4.
(*) 2011: A loss of 4.8 billion from the GGB haircut (PSI) is excluded (**) 2017 results are 6mos annualized
Chart 4

To me, the most interesting trend is the rise in profits before loan write-offs and reserve charges.  If the second half of 2017 comes in as the first, pre-charge profits will reach around 1.27 billion euro, surpassing even the all time peak of 2007 (1.21 billion euro). Despite the challenging environment, management is doing a really good job of running their core business and driving down expenses.  (Remember yesterday's chart on the sharp reduction in branches and the overall concentration of Greek banking.)

But good management is meaningless if bad loans continue to engulf results in red ink. 

In the same chart we see that write-offs and reserve charges peaked in 2015 and have been coming down. Again, if the second half of 2017 goes as the first, such red ink will ebb back to 2010 levels and the bank may show decent net profits for the first time in six years.

Obviously, there are lots of "ifs" here.  Bad loans during a deep recession are finicky and can come up or down depending on macroeconomic trends, disposable income and business sentiment.  

Short term, however, I think the deciding factor is going to be the effect of finally restarting auctions to liquidate loan collateral. Given the high percentage of "strategic defaulters" amongst Greek borrowers (variously estimated at 15% to 25%), it is possible that banks will experience a healthy drop in NPLs and NPEs when those people are forced to cough up their hoarded cash or lose their homes and businesses. Mind you, we are not talking about your average Joe and Jane here;  these are people with very significant assets.

Bottom line?  Greek banks are facing a crucial challenge: if they can successfully wield the auction weapon against their bad faith defaulters and force them to pay up, their stock of NPLs and NPEs will come down, perhaps significantly.  They will then have more breathing room to deal with their less fortunate borrowers who have been hit hard by the economic crisis and cannot now service their loans.  

For them, and for the ultimate return of health for Greek Banks, it will be all eyes on the economy.  And that will be the subject of the next post - are there any "green shoots" showing out there? 


  1. All well and good, but you're worrying and screaming about a mouse in the room.

    You've failed to notice the herd of stampeding elephants, and that is state debt. 90% of that is pensions, the rest borrowing. 10 times your borrowing is owed as pensions and the Greek state is increasing that as it takes on more and more pension commitments.

    On the bank bailout its simple. Who pays? Someone has to pay its just the choice of who is made poorer.

    Any sensible Greek would have moved their assets into say Germany and just keep their day to day money in Greece, along with any debts.

  2. I hear what you are saying Lord Blagger.. however, a future pension obligation is not the same as debt, though many people think so.

    Debt is an obligation that is monetized, e.g. a bond issued and sold for cash in the market or a loan from a bank.

    Government debt is certainly huge in Greece, now mostly owed to other Eurozone governments.