Three challenges lie ahead for domestic banks

By Yiannis Papadoyiannis

The effective tackling of nonperforming loans, getting credit expansion moving again and completing the return of the banking sector to private hands are the three main objectives of local lenders following the successful completion of the second stage of their recapitalization.

Having collected funds of 37 billion euros within 12 months, from both the state and the private sectors, domestic banks are now among Europe’s most robust in terms of capital adequacy. According to Euroxx data, at the end of 2013 Alpha Bank’s Core Tier 1 capital adequacy ratio stood at 16.1 percent, while Piraeus’s was 13.9 percent, Eurobank’s was 11.3 percent and National’s 11.2 percent.

Their capital bases are set to be further strengthened as all banks are implementing restructuring programs that include the sale of assets, among other measures. Therefore, by the end of 2014, National’s capital adequacy ratio will have exceeded 18 percent while Eurobank’s will be over 17 percent.

A strong capital base is absolutely necessary for banks to get nonperforming loans under control. While bad loans elsewhere in Europe come to an average of 6.1 percent of all credit, in Greece they climbed to 33 percent in the first quarter of the year – over five times more. Senior officials at local lenders say that effective management of NPLs can make the difference.

Banks expect NPLs to increase further within 2014, albeit at a declining rate, and reach their peak since the start of the financial crisis. In 2015 they are seen posting a small drop, while a substantial decrease is forecast for 2016. By 2017 they are expected to have fallen below their current level.

The second major challenge for the credit sector, which will also determine...