A new parameter has been added to ongoing discussions between Greece and banks with the European Commission's Directorate-General for Competition (DG Comp), as the economic damage caused by the pandemic is ending plans by lenders to show significant profitability in 2020. The downturn is also leading to a review of the Greek institutional framework that has been approved by Brussels concerning deferred tax credits (DTC)
The unforeseen risk, up until recently, faced by banks and shareholders is that if a lender ends 2020 in the red then it is obliged to issue shares that will be taken by the state, diluting stakes currently held by shareholders.
Bank officials say that the European Commission appears willing to discuss this issue constructively. Alpha Bank chief executive Vasilis Psaltis told analysts at a conference call on Friday while presenting 2019 earnings, that the DTC issue is important and being constantly monitored.
DG Comp, as Psaltis noted, has created an integrated framework to address this issue through an interim institutional framework providing for state aid. In this context, Psaltis stressed that banks may even be exempted from the obligation to issue these new shares.
"This means that DG Comp is there to study constructively several relevant cases across Europe. In this context, we expect that a discussion on deferred tax credits will take place at some point," he added.
For the time being, the Greek government has not formally put to the commission the issue of changing the law. Although the crisis caused by the pandemic is causing the economy massive problems, it is too early to estimate what the impact on banks' earnings will be.
It is clear, however, that this matter is of concern to investors buying bank stocks, as they are obliged to take into account the risk of dilution that would result from new shares being taken by the state. According to analysts, a decision by the Commission preventing this from happening would help boost confidence in Greek bank stocks.
DTC's make up a disproportionately large portion of capital held by Greek lenders, as the Bank of Greece has repeatedly emphasized. They account for over 60 percent of Tier 1 capital and, as the central bank has pointed out, a reluctance by banks to use these funds to cover losses, due to the obligation to issue new shares for the state, weighs on efforts to rapidly reduce non-performing loans.