NPL handling is key to banks’ future

 Credit sector requirements will depend on economic growth, the course of bad loans and their management

By Dimitris Kontogiannis

Greek banks should be overcapitalized to sustain sizable credit losses from the massive stockpile of nonperforming assets accumulated during the 2008-13 recession. Whether the new capital increases and other corporate actions planned by the four core banks in the aftermath of stress tests conducted by the Bank of Greece will be enough remains to be seen. The outcome will largely depend on the country’s economic performance in 2014 and beyond and the banks’ own ability to manage their loan arrears.

The capital needs of the Greek banking sector stood at about 6.4 billion euros – or 5.8 billion for the four core banks (Alpha, Eurobank, National and Piraeus) – according to the recent stress tests conducted by the Bank of Greece. The tests took into account the diagnostic test on the loan portfolios of all banks performed by BlackRock Solutions and were based on the baseline scenario, reflecting macroeconomic projections in IMF’s fourth review back in July. It should be noted that the capital needs for the four core banks amounted to 8.8 billion euros under the adverse scenario, which forecasts a further sizable GDP contraction.

The International Monetary Fund has made it clear Greek banks need more capital to cope with anticipated credit losses this year and beyond. Also, Standard & Poor’s said last week Alpha and Piraeus will need more capital than planned in the next two years to meet the minimum regulatory capital adequacy ratio defined as Basel III fully loaded core Tier 1, at 8 percent as of year-end 2015. S&P pointed out the two banks will continue to benefit from capital support from the...