FINANCIAL SECTOR DEVELOPMENTS. Table 6.1: Main Financial stability indicators (1) As % of total loans (2) Annualised data Source: European Central Bank - Consolidated Banking data; own calculations The Greek banking sector has become more stable and resilient to shocks since the end of the programme but legacy risks and significant underlying vulnerabilities remain, reinforced by the likely significant negative impact of the Coronavirus outbreak. Liquidity continued to improve throughout 2019, as evidenced by the continuing upward trend in deposits since the abolition of capital controls. However, access to long-term unsecured funding was only slowly being re-established ahead of the Coronavirus pandemic and still at a relatively high cost. Other positive trends observed before the Coronavirus outbreak are now being challenged: for example a pick-up in economic sentiment, which led to an increase in credit provision to large businesses or the start of the real estate prices rebound, a first positive sign for collateral valuations. Greek banks had regained access to long term unsecured funding in 2019, and sealed their return to the markets by tapping it again in two occasions in early 2020 at a lower cost. Nonetheless, asset quality is, even without the impact of the Coronavirus pandemic, still a major challenge, despite the progress made in 2019. The capital position of Greek banks is in line with capital requirements but remains exposed to increased capital demand in the near future and largely dependent on the sovereign through the high share of deferred tax credits in banks’ capital. By end 2019, the banks have returned to profitability but it remains low and fragile. It is dependent on lending growth, exposed to a renewed deterioration of asset quality and, to some extent, sovereign spread volatility. The authorities are taking steps to sustain access to finance for affected businesses, which complement initiatives at the level of private banks and servicers. The government is setting up a series of initiatives. Public guarantees will be offered by the Hellenic Development Bank via the commercial bank network (total envelope for guarantees of €2 billion in the form of cash collateral together with an additional €250 million of guarantees and loans towards the small and medium-sized enterprises through the current ‘ΤΕPΙΧ II’ scheme). Secondly, direct grants are offered by the government (with a total envelope of maximum €0.8 billion in the form of interest subsidies to existing perf...
FINANCIAL SECTOR DEVELOPMENTS. Following the abolition of capital controls in September 2019, the banking sector continued to strengthen but legacy risks and challenges remain high. Domestic deposits continued their upward trend, growing by 4.8% after the lifting of the capital controls. This has further reinforced the liquidity situation of Greek banks (see graph 5.1), which should facilitate compliance with the Liquidity Coverage Ratio requirement by mid-2020. Banks’ profitability is showing signs of recovery, supported by an improving economy and continuous efforts to reduce recurring operating and headcount costs, reflected in an average cost-to-income ratio comfortably below the EU average (51.4% compared to 64.2%). However, their Return-on-Equity is still among the lowest in the EU (2.9% annualised compared to an EU average of 6.2%) and is partly driven by non-recurrent trading income stemming from the banks’ government bond portfolio. As a result, the profitability outlook of Greek banks remains low and exposed to the current environment of subdued evolution in interest income, given the relatively small contribution of commission income to operating profit. The quality of revenues, in particular, is adversely affected by high amounts of interest income from non-performing loans, which are accrued but may not be collected, implying that sales of non-performing loans also have a negative impact on net interest income. As a result, banks are i) adjusting their business models towards a higher share of fee income, trying to balance client reaction over a recent upward trend in transaction fees with a more sustainable growth of their e-payments, bancassurance and asset management business, while ii) looking at ways to increase lending by expanding their client base. The banks are compliant with their capital requirements but the capital structure is largely dependent on state-related assets, specifically due to the high amount of deferred tax credits. Banks’ average common equity tier 1 ratio on a consolidated basis stands at 15.9% at the end of September 2019, up from 15.6% in June 2019, partly due to the issuance of a Tier 2 capital instrument by one systemic bank in July and an overall reduction of risk-weighted exposures. Deferred Tax Credits of the four systemic banks as of end of September 2019 continue to represent a substantial part (55.5%) of the systemic banks’ Common Equity Tier 1 capital, amounting to €15.5 billion. Deferred tax credits greatly increase the sovereign-bank...
