The impact of the pandemic on the banking sector is expected to intensify in 2021, mainly in the form of a new wave of NPLs, as well as an anticipated worsening of the Deferred Tax Credits (DTCs) as a share of total prudential own funds, according to the Bank of Greece, the country’s central bank.
In the governor’s annual report, the central bank said that it has estimated that new NPLs in 2021 will amount to 8-10 billion euros.
“In addition to the twin problem of NPLs and DTCs, Greek banks face a number of serious challenges, common to most euro area banks, such as low core profitability, increased competition from non-banks, challenges stemming from the incomplete banking union, and others associated with the impact of climate change and cyberattacks,” the bank said.
“Non-performing loans (NPLs) stood at 47.4 billion euros at end-December 2020, down by about 21 billion euros from a year earlier. The NPL ratio to total loans remains high, at 30.2 percent, compared with an EU average of just 2.6 percent. However, compared with its March 2016 peak, the stock of NPLs has declined by roughly 60 billion euros, mainly through loan sales and write-offs, and much less through recoveries from active NPL management.
“By the time the Hercules plan is completed in the course of 2021, the NPL ratio will likely have fallen to about 25 percent and the average capital adequacy ratio to below its current levels, with a simultaneous increase in the share of DTCs. These estimates do not take into account the new NPLs that are expected to be added to the current stock as a result of the pandemic shock,” the report added.
Against this background, additional measures need to be taken to facilitate the frontloaded recognition of credit losses on account of the pandemic, as well as the fast repair of bank balance sheets together with addressing the DTC problem. To this end, the Bank of Greece called on the government, as a complement to the Hercules plan currently underway, to establish an Asset Management Company (AMC).
“The Bank of Greece proposal simultaneously addresses the problem of DTCs. The government is examining the advisability of establishing an AMC, as proposed by the Bank of Greece, and has applied to the European Commission’s DG Competition for an extension of the Hercules plan. Should the proposal of the Bank of Greece not be selected by the authorities, an alternative way of addressing the problem of DTCs will need to be found that is compatible with the applicable capital requirement legislation,” stressed the bank.
The commitment of sizeable public funds in the form of state guarantees, to support NPL securitisation through the Hercules plan, which was a decision in the right direction, should ensure a definitive and comprehensive solution to the twin problem of NPLs and the high share of DTCs in banks’ regulatory own funds, it said.