Greek banks’ exposure to war negligible, economic outlook clouded, BoG report says

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Greek banks’ exposure to Russia and Ukraine is negligible and any predictions about the ultimate impact on financial stability would be extremely premature and precarious, the Bank of Greece (BoG) said on Thursday.

In its financial stability report, the central bank said the impact of Russia’s invasion of Ukraine has clouded prospects for the continued recovery of the Greek economy and exacerbated challenges to financial stability.

The central bank noted that in 2021, the implementation of banks’ strategies to resolve the historical stock of non-performing loans (NPLs) contributed decisively to the improvement in the quality of their assets, but on the other hand has affected their results of operations and their capital. The involvement of credit management companies (CSFs) in the resolution of NPLs has facilitated the functioning of the secondary market for NPLs. However, it is necessary to intensify efforts towards sustainable restructuring solutions for borrowers in order to restore their financial solidity and allow the eventual reintegration of their loans, under certain conditions, into banks’ balance sheets, he said. declared.

He noted that the high GDP growth rate in 2021 and the expectation of continued growth in 2022, coupled with the positive long-term economic outlook, contributed to Greece’s recent credit rating upgrades. by S&P and DBRS, taking Greek government bonds just a notch below investment grade.

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However, the Russian invasion of Ukraine has altered economic conditions, weakening near-term growth prospects. The energy crisis is adding to inflationary pressures, while uncertainty about the duration of the war and its impact on the real economy is having a chilling effect on the economic decisions of businesses and households, amid rising costs output and decline in disposable income, respectively. Against this backdrop, the banking industry is called upon to adapt quickly, tackling current challenges, BoG said.

The high NPL stock remains the biggest challenge for the Greek banking sector. Considering that new PNPs could emerge, particularly if the geopolitical crisis is prolonged or further aggravated, and after the complete withdrawal of pandemic-related support measures, banks must remain vigilant in order to face the challenges. current ones, warned the BoG. The actions they have taken so far to deal with the stock of non-performing loans have undoubtedly contributed to its substantial reduction. However, the NPL ratio remains high (12.8% at December 2021).

At the same time, the impact of measures taken by banks to improve the quality of their assets is negatively affecting their levels of capital adequacy, accentuated by the gradual introduction of International Financial Reporting Standard 9 (IFRS 9 ). In this regard, the combination of low quality regulatory capital due to the high share of deferred tax credits (CID) and structurally weak operating profitability poses additional medium-term challenges for Greek banks.

Liquidity conditions in the Greek banking sector continued to improve in 2021. It is worth mentioning that the balance of corporate and household deposits reached a ten-year high of €180 billion in December 2021. However , the central bank added, banks’ low level of operating profitability and the need for higher provisioning for credit risk have affected their capital adequacy, with the consolidated Common Equity Tier 1 (CET1) ratio falling at 12.6% in December 2021, compared to 15% in December 2020, and the total capital ratio (TCR) at 15.2% from 16.6%, respectively.

The central bank report notes that the continued recovery of the Greek economy requires stronger financing of the real economy and active involvement of the banking sector. Therefore, also taking into account the indirect fallout from the war in Ukraine, banks need to step up their efforts to further improve the asset quality of their balance sheets. The use of the Recovery and Resilience Facility (RRF) should play an important role in supporting the financing of the real economy, so that the Greek economy is put on a path of strong and sustainable growth, according to the central bank report.

SOURCE ; NAMA

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