Greek banks survive adverse scenario
All four systemic lenders shift attention to restructuring after passing ECB’s simulation of extreme conditions
The Bank of Greece announced on Saturday the successful completion of the European Central Bank’s exercise for domestic banks simulating an adverse economic scenario.
The results of the stress tests showed that in the event of negative developments in the Greek economy over the next three years – the ‘adverse scenario’ – the impact on the capital base of Alpha, National, Eurobank and Piraeus would amount to some 9 percentage points, which corresponds to 15.5 billion euros in total. Those hypothetical losses would be easily covered by the systemic lenders’ capital base, which means there is no need for a capital increase – hence the successful completion of the test.
The central bank said that “in the extreme condition simulation exercise there is no issue of success or failure. Its results, along with other relevant monitoring data are used to form a complete assessment by the regulator about a bank’s state.”
Alpha Bank had the strongest performance among the four lenders, completing the exercise with a capital adequacy index of 20.37 percent according to the baseline scenario and of 9.69 percent according to the adverse one.
Eurobank showed a capital adequacy index reading of 16.56 percent in the baseline and 6.75 percent in the adverse scenario, while National scored 15.99 percent in the baseline and 6.92 percent in the adverse scenario, and Piraeus showed a 14.52 percent reading in the baseline scenario and 5.9 percent in the adverse one.
This forms a particularly positive picture for the local credit system, as even in the extremely adverse context the domestic lenders have shown capital adequacy indexes that are considerably higher than the level of 5.5 percent, which according to analysts was the threshold that had been unofficially set by the ECB.
According to the statement by the BoG, “the exercise was conducted based on the methodology and the approach utilized at the extreme condition simulation exercise of the European Banking Authority (EBA) across the European Union, but with a shortened timetable.”
The results of the adverse economic scenario simulation were mostly formed by the following risk factors: First the credit risk, whereby according to the baseline scenario the negative impact of credit risk on the CET1 capital indexes averaged at around 260 basis points (or 2.6 percent), and under the adverse scenario up to 850 basis points; and second, the net revenues from interest payment, which based on the adverse scenario would be reduced by 22.5 percent compared to the baseline one.
It is noted that the adverse scenario of the exercise provided for the reduction of the country’s gross domestic product by 1.3 percent for this year, an additional contraction by 2.1 percent next year and a stabilization at +0.2 percent for 2020. Therefore, the stress tests confirmed that local banks have a strong capital base, which would survive even a fresh derailment of the domestic economy, which in the last few years has already lost some 25 percent of its GDP.
According to the ECB, “it is important to note that the stress test
after the stress test results were made public, Piraeus Bank Chief Executive Officer Christos Megalou said that the outcome of the ECB’s stress test ‘confirms that market conditions in Greece are considerably improved, even under the conservative assumptions applied in such a demanding surveillance exercise. We remain committed to the implementation of the Agenda 2020 strategic plan toward the further strengthening of the financial position of Piraeus Bank.’ is not a forecast of future events, but a prudential exercise to test banks’ ability to withstand weakening economic conditions.”
Having taken the successful completion of the exercise for granted in the last few weeks, the country’s systemic lenders have already shifted their attention to their biggest challenge for this year too: the reduction of nonperforming loans, as well as their continued restructuring.
In a statement after the stress test results were made public, Piraeus Bank Chief Executive Officer Christos Megalou said that the outcome of the ECB’s stress test “confirms that market conditions in Greece are considerably improved, even under the conservative assumptions applied in such a demanding surveillance exercise.
“We remain committed to the implementation of the Agenda 2020 strategic plan toward the further strengthening of the financial position of Piraeus Bank, as well as the support of the continuing economic recovery of the country,” he said.
Piraeus Bank added in a statement that it is implementing a Capital Strengthening Plan in order to ensure that it continues to exceed capital requirements, and with the aim of accelerating the process for the reduction of risks in its financial figures and the strategy of deleveraging nonperforming exposures. It stressed that it remains focused on the application of its strategic Agenda 2020 plan so as to smooth out its financial figures via targeted initiatives and to return to profits.
The announcement of the positive outcome of the tests came a day after the departure of National Bank of Greece’s chief executive officer, Leonidas Fragkiadakis, on Friday, following a number of developments that created an unfavorable atmosphere in the lender, such as the failure to sell its subsidiaries Ethniki Insurance and Banca Romaneasca.
At Friday’s board meeting NBG group chairman Costas Michailidis thanked Fragkiadakis on behalf of the board for the significant and difficult work he carried out in the last three years at the lender’s helm, steering National to a successful stress exercise, to the application of the restructuring plan and to independence from the emergency liquidity assistance (ELA) mechanism.
Michailidis also spoke of the immediate start in the application of a new strategic plan for the evolution and modernization of National and its group, to the benefit of its employees, its shareholders and the Greek economy in general.