Greece’s banking sector received a warm reception at the recent European banking roadshow in Paris, organized by Goldman Sachs. Representatives from international institutional portfolios expressed their positive sentiment towards the management teams of Greece’s four systemic banks. This favorable response signifies a shift in focus from nonperforming loans to key indicators such as net interest margins, credit expansion, and dividends, reflecting Greece’s remarkable recovery and its return to investment grade.
Investment Grade Upgrade Paves the Way:
The improved outlook for Greece’s economy, coupled with the forthcoming return to investment grade, has instilled confidence in investors and signaled a fresh start for the banking industry. Greek bank managers shared their expectations of Greece achieving investment grade status in September, which holds the potential for an upgrade of Greek banks’ bonds. Moreover, the banks revealed their plans to issue new bonds, including for the Minimum Requirement of Equity and Eligible Liabilities (MREL), with a reduced level of returns following the rating upgrade.
Dividend Distribution and Profitability:
In response to inquiries from investors, Greek bank management confirmed their intention to proceed with dividend distributions from this year’s profits, to be paid out in 2024. Dividend distribution ratios are projected to range between 10% and 30%, underlining the banks’ commitment to rewarding shareholders. This move aligns with the improving financial performance of Greek banks and signals their confidence in sustaining profitability in the future.
Meeting SSM Criteria:
Greek bank managers emphasized the fulfillment of three critical criteria outlined by the Single Supervisory Mechanism (SSM) for granting approval. Firstly, the nonperforming loans (NPLs) index is already below the required 10%, indicating progress in resolving past issues. Secondly, organic capital formation has shown positive momentum, highlighting the banks’ ability to strengthen their capital base. Finally, the absolute level of the Common Equity Tier 1 (CET1) ratio meets the SSM’s standards, further solidifying the banks’ stability.
In more detail :
Greek banks estimate that Net Interest Income (NII) will reach its peak in alignment with the culmination of the deposit rate by the ECB in the third quarter of 2023.
All four systemic banks highlighted favorable developments in interest income and confirmed their intention to distribute dividends to shareholders in 2024 (for the profits of 2023).
Net Interest Income
More specifically, Greek banks estimate that Net Interest Income (NII) will reach its peak in alignment with the culmination of the ECB deposit rate, most likely during the third quarter of 2023. To support the asset quality of customers with variable-rate mortgage loans, all four banks have set a “ceiling” of 2.75% on the interest rate spread.
Loan Disbursements
Regarding credit expansion, relatively slow rates were recorded in the first quarter as many businesses sought to utilize excess liquidity to repay existing loans and anticipate future interest rate hikes, while postponing certain investment decisions due to the upcoming elections. However, loan disbursements are expected to accelerate in the second half of the year, achieving the annual targets. Greek banks anticipate that corporate loans will drive credit demand during the period 2023-2025, while demand for housing and consumer loans will be weaker due to rising interest rates.
Liquidity Levels and Asset Quality
Greek banks had an average LCR (Liquidity Coverage Ratio) of 205% in the first quarter of 2023, and they expect it to remain well above 100% even after the planned repayment of TLTRΟ loans. As for the asset quality, improvement continues with consistently low levels of non-performing exposures (NPEs) in absolute terms. The performance in the first half of 2023 was better than expected, as initially it was projected that higher interest rates would generate new non-performing loans.
Dividends
All banks have confirmed their plans to distribute dividends in 2024 (for the profits of 2023). This will be the first dividend payment in over a decade (the dividend outlook ranges from 10% to 30%). Approval from the ECB’s supervisory mechanism, the SSM, will be required. The three main criteria set by the SSM are:
- The ratio of non-performing loans to remain below 10%
- Improvement in organic capital generation
- Maintenance of a high CET1 capital adequacy ratio
Investment Grade Rating
Bank managements estimate that the upgrade of Greece’s credit rating to investment grade will occur in September 2023. This is expected to pave the way for credit rating upgrades for banks and businesses. However, they acknowledge that while the spread of Greek government bonds has narrowed, it has not yet been fully reflected in the repricing of bond issuances by banks. This indicates that there is room for improvement. Greek banks anticipate that after regaining investment grade status, they will see lower interest rates in new bond issuances (including MREL).
Conclusion:
The enthusiastic response received by Greece’s banks at the Paris roadshow showcases the remarkable transformation of the country’s economy and banking sector. With the focus shifting towards positive indicators such as net interest margins, credit expansion, and dividends, Greece’s banking industry is gaining renewed investor confidence. As Greece progresses towards investment grade status, the upcoming bond issuances and dividend distributions reflect the banks’ commitment to sustainable growth and value creation. The positive trajectory of the Greek economy and banking sector positions them as attractive investment opportunities for discerning investors seeking stability and potential returns.
If you’re an investor interested in exploring the legal support available to navigate Greece’s flourishing economic landscape, Amoiridis Law Services® is here to assist you. Visit www.law-services.gr to learn more about our services and how we can help you make informed investment decisions in Greece.
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Athens, June 2023
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