Banking News

Greek banks’ capital in the spotlight

(23 June 2015 – Greece) Greek banks may need a third capital infusion as a recession drives up losses from bad loans and customers flock to withdraw savings in the face of Greece possibly defaulting on its loans.

The four biggest lenders, account for 91 percent of the country’s banking assets, they could see their €12 billion (A$17.5 billion) of tangible core capital wiped out by mounting provisions as overdue and restructured loans default.

Even if Greece reaches an agreement with European creditors to free up additional money, its next bailout will need to include a new round of funding for the ailing banks.

In the last quarter, bad loans rose as the Greek economy slipped back into recession, leaving the four banks – National Bank of Greece SA, Piraeus Bank SA, Alpha Bank AE and Eurobank Ergasias SA – requiring up to €16 billion in additional provisions to cover losses if half of the €59 billion of overdue and restructured loans on their books sour.

Greek banks have had two previous capital infusions in the past two years including a bailout by the European Union and the International Monetary Fund, however the banks remain thinly capitalised.

Over half of their capital is made up of deferred tax assets, which are credits for losses that can be used to reduce taxes when the banks return to profitability, these credits only have value if the government, which is close to broke, can convert them to cash.

Greek bank executives expressed optimism during first-quarter earnings reports, expressing that the outflows would reverse once the government reaches an agreement with its creditors.

With an agreement in place, the banks could switch back to European Central Bank funding, which is cheaper than loans from the Greek central bank.