With an eye on the fourth quarter, the Greek bankers

By Leonidas Stergiou

The results of the second quarter and the first half of the four systemic banks, which are to be announced by the first week of August, are expected to move within the positive forecasts that had been made since the beginning of the year. With the start of the war in Ukraine and with inflation and the energy crisis showing their teeth, bankers had set three timelines for a possible review or adjustment of their moves and targets.

The first semester

The first milestone was June. The first half data shows that the target for positive credit expansion to households (housing and consumer) is probably missed for 2022. In contrast, positive, and perhaps better than expected, are the data for disbursements to businesses. Support measures and existing liquidity kept non-performing loans under control. At the same time, the slow movements of the ECB gave time for transactions in the bonds, with the result that no losses were caused by the rise in yields, while there were several cases that led to profits.

They also see difficulties in raising funds from the markets (for them, about 11 billion by 2025 needed to strengthen MREL funds), which may work in favor of bank lending. In general, inflation increases the demand for loans and rising interest rates boost bank income. As long as they can raise loan rates and there are no risks and bigger losses from falling prices on the bonds they hold.

Interest income

In the second quarter it appears that interest income did not increase as much as the banks would have liked. Housing credit competition and lower-than-expected demand kept interest rates (floating and fixed) low, although costs to banks increased significantly due to rising euribor and bond yields. Thus, selective moves were made, such as the further reduction of interest rates on deposits, an increase in interest rates on consumer credit where there was (and still is) high demand and greater risk, while they reduced up to half a unit – on average – interest rates on business credit, due to competition . This happened in both small and medium-sized loans and large loans.

Supplies

Entering a rising interest rate environment not only shifted the center of gravity from fixed to floating rate loans, but also changed the design of investment and bancassurance products. Until recently the solutions revolved around the alternatives for higher returns, relative to zero interest rates. Now, banks, insurance and mutual funds must move to the logic of protection against inflation and risks in stocks and bonds, due to the change in monetary policy and geopolitical developments.

Smaller-than-expected credit expansion to households and the redesign of bancassurance products also sapped some of the expected growth in commission income. The completion of several business plans worked positively, with an increase in commissions from financing and consulting. Tougher conditions for raising funds from the markets worked positively for bank lending, but negatively for advisory fees.

Bonds

The jump in bond yields is not expected to be reflected in a corresponding reduction in the valuations of banks’ results and assets in the second quarter. Greek banks had time to reduce exposure to Greek bonds a bit, buy bonds and strengthen their positions in Eurozone bonds.

Autumn

The second milestone is placed towards the end of September. The ECB will have proceeded with two interest rate increases, while the details of the new intervention tool in the bond markets will have been revealed. Markets will have weighed in on new interest rates, the credibility of the new tool, Italy’s fiscal risk, inflation figures and potential developments on the geopolitical front, with an eye on natural gas.

At the same time, positive developments from tourism receipts, measures against the energy crisis and the appliance renewal program are estimated to keep the market warm, mitigating the negative effects from the rest of the environment.

Until then, banks will proceed with selective movements in pricing policy, so that there are attractive alternatives to housing credit. This will be done by raising interest rates on fixed rate mortgages to significantly higher levels than floating rates. The gap will gradually open, but it is estimated that it will reach up to 2.5 units.

Also, the effects on the valuations of banks’ bond portfolios will have become more apparent. Suffice it to mention that they hold approximately 25 billion euros in Greek government bonds, while almost 40 billion are those from the securitization of their bad loans. It is estimated that it will take several months – from six to 12 – for the new levels of market and ECB interest rates to be fully reflected in banks’ assets and liabilities.

Fourth quarter

Thus comes the third time milestone, which is the last quarter, which is also considered the strongest of each year. In the last three months the banks and the real economy will fund the developments of the previous months. Any negative geopolitical developments, the reduction of disposable income, etc. then they will become more apparent in loan disbursements, insecurity and restraint of investment movements. Then the positive impact on income from rising interest rates and bond losses and a possible slowdown in activity will become apparent.