BoE: The warnings and the impressive growth of the banks

The image of banks showed an improvement in all sectors in 2023, notes the Bank of Greece in Financial Stability Report which has just been announced, as they increased their net profit by €400m to €3.8bn, but also the quality of their banking profits, increased their capital and have reached the European average, while significantly reducing their red their loans. They have also increased their liquidity significantly above the European average, while the highest performance indicators are RoE of 12% and RoA of 1.2%.

The bells are ringing on the worry of new bad loans as inflation and high ECB interest rates test borrowers.

Also, the BoE comments on the quality of banks’ capital which has improved, in terms of deferred taxes, but remains high in their capital, with DTCs reaching €12.9 billion although DTAs from deferred tax claims, to be 2.6 billion euros and to constitute 9% of their total regulatory capital.

According to the Bank of Greece, “the improvement of all the main parameters of the banking sector is indisputable”. However, its preservation inflation at an even higher level, combined with increased key ECB interest rates and a slowdown in economic growth, is testing the resilience of households and businesses and may contribute to the creation of new non-performing loans (NPLs).

In 2023, Greek banks recorded profits after taxes and discontinued operations of €3.8 billion, compared to profits of €3.4 billion in 2022.

A positive contribution was made by the increase of of net income from interest as a result of the increase in the key interest rates of the ECB, while the large decrease in income from financial transactions and other income, which are non-recurring, had a negative impact. The Bank points out the great improvement in the quality of Greek banks’ profits from recurring banking operations and not from extraordinary income.

The capital adequacy of Greek banking groups has strengthened significantly, he points out, but the quality of their regulatory capital is still low. The improvement in capital adequacy was achieved mainly due to internal capital generation through profitability, but also through the issuance of capital instruments.

Specifically, the Capital Index CET1on a consolidated basis increased to 15.5% in December 2023, from 14.5% in December 2022, and the Total Capital Ratio TCR to 18.7% from 17.5% respectively. As a result, the CET1 ratio converges with the European average (15.7% in December 2023), while the Total Capital Ratio still lags behind (19.7% in December 2023).

At the same time, liquidity of Greek banks improved, reports the BoE, due to the increase in deposits (over 201 billion euros), with the result that the supervisory liquidity indicators are set at a very satisfactory level.

Also, in 2023 the percentage MED of Greek banks in total loans decreased further (December 2023: 6.6%, December 2022: 8.7%) with three of the four major banks having a NPL ratio below 5%.

However, in the less important banks, the ratio of NPLs to total loans remains particularly high and stands at 37.6%. In this context, the actions aimed at the complete consolidation of the banks’ balance sheets and the achievement of convergence with the European average should be continued.

In terms of prospects, the international environment is the biggest challenge. The aggravation of geopolitical risks with the expansion of war conflicts, but also with the growing trade competition between the US and China, can have significant negative effects on the global economy and, by extension, on financial stability.

Any sharp deterioration in international financial conditions may cause turbulencesays the Bank of Greece, with adverse effects both on the financial situation of businesses and households as well as on the Greek banking sector, as banks’ efforts to expand credit will become more difficult.