The need for the unwavering implementation of banks’ business plans to further strengthen their resilience in the current international environment of instability, high borrowing costs, inflation and escalating geopolitical risks is underlined by the governor of the Bank of Greece, Giannis Stournaras, through the Report on Financial Stability that he gave published yesterday.
The central banker acknowledges the significant progress credit institutions have made in recent years at all levels, putting the domestic sector “better positioned to deal with potential turbulence”.
The effects of wars
As he explains, both the achievement of strong organic profitability and the country’s return to investment grade largely mitigate the negative effects caused by the wars in Ukraine and the Middle East, the precision, the tightening of monetary policy and the economic slowdown. activity.
However, Mr. Stournaras emphasizes that under no circumstances should there be complacency, as a possible worsening of conditions in the financial sector internationally will also affect the Greek market.
This, he argues, was “demonstrated by the recent banking crises in Switzerland and the USA”, adding that “in the modern financial environment the risk of contagion is real and requires immediate coordinated actions by all parties involved”.
The fronts of the industry
In this context, it calls on bank administrations to intensify their efforts on the following fronts:
According to the Bank of Greece, the liquidity indicators of the domestic groups, as well as their access to the markets, have improved significantly.
This was made possible through the strengthening of the deposit base, which allowed the comfortable repayment of a large part of the loans taken out by the Eurosystem, in the context of the targeted longer-term refinancing operations (TLTRO III).
However, the central bank argues that due to the rise in key interest rates in the eurozone and Greek bond yields, funding has become more expensive.
After all, the administrations of the four systemic groups reported during the presentations of the results of the third quarter of 2023, that the expenses for interest will increase in the following quarters.
This will be a result of the increase in interest rates both on term accounts, in which depositors are expected to transfer more liquidity, and on bond issues, as part of the banks’ obligation to build a total capital adequacy ratio of 27% by 2026.
– Red loans
Now, the arrears ratios of all systemic groups have fallen below 10%.
However, the Bank of Greece underlines its concerns about the net inflow of new non-performing exposures this year in the large banks and the remaining of their percentage in the smaller credit institutions at high levels.
As pointed out in the report, in the short term, there are challenges to the further consolidation of bank assets.
This is because the successive increases in the ECB’s key interest rates are testing the resilience of businesses and households.
Therefore, according to the Bank of Greece, they may affect the quality of the banks’ assets with a time lag.
In this context, he emphasizes that the effort to consolidate and free the banking sector from the burdens of the past should continue.
“Actions aimed at consolidating the remaining NPL stock and achieving convergence with the European average (March 2023: 1.8%), as well as the final resolution of other outstanding outstandings, are evaluated positively and must be a priority for the banks” asserts domestic monetary authority.
It also refers to the need to improve the performance of the Loan and Credit Receivables Management Companies, which have been assigned the restructuring of non-performing exposures amounting to 90 billion euros.
Although 77% of these loans are off the banks’ balance sheets, they remain in the economy, with the majority linked to the state guarantee program “Heracles”.
According to the Bank of Greece, their effective management is a necessary condition for the success of “Hercules” and for the greatest possible utilization of idle production potential.
– Capital adequacy
According to the report of the Central Bank, the existing capital adequacy of the banks is considered satisfactory.
However, it is pointed out that they must strengthen it, but also improve the quality of supervisory capital, as it remains low.
Specifically, in June 2023 definitive and settled deferred tax assets (DTCs) amounted to €13.4 billion, representing 51% of total regulatory capital (up from 52% at the end of 2022).
In addition, the regulatory capital of the banking groups includes deferred tax assets (DTAs) of 2.4 billion euros, which constitute approximately 9%.
“DTAs of EUR 3.9 billion are not included in the banks’ regulatory capital, however the achievement of sufficient future profitability is necessary in order not to pose a risk to the capital base of the banks in the medium to long term,” the central bank argues .
Combined with the implementation of corporate actions (e.g. synthetic securitizations, share capital increases for the less important banks) and the issuance of additional capital instruments (Additional Tier 1, Tier 2), the best net results create the conditions for further strengthening of capital buffers above the minimum required limits.
According to the Bank of Greece, maintaining the banks’ current profitability is a challenge.
As it states, the effect of interest rate increases on the banks’ net interest income is positive, as the majority of their loans have been contracted with a floating interest rate.
However, in the medium term, funding costs are expected to increase due to the gradual increase in deposit rates and the increased cost of issuing bonds to cover the minimum equity and eligible liabilities (MREL) requirements.
Therefore, the achievement of the banks’ objectives to increase their loan portfolio, in the midst of a decline in economic activity and high financing costs, is a necessary condition for maintaining the existing high efficiency indicators.
Finally, the Bank of Greece maintains that investigating the interconnection of climate change risks with the financial system is a priority.
As he reports, the unprecedented severe weather events that have recently hit much of the country have resulted in the loss of human lives, as well as significant impacts on local economies and societies.
In order to immediately deal with the damage and relieve those affected, at least in the short term, targeted measures with a mainly fiscal impact have been announced and implemented, while the overall effects on economic activity and the financial system have not yet been fully assessed.
In addition, the overall integration of the environmental dimension into the financial system and therefore the impact that climate change will ultimately have is not yet complete.