Greek banks are growing increasingly pessimistic about the prospects for selling large chunks of their €110bn stockpile of bad loans following a series of lacklustre bids from international investors.
With sales likely to disappoint, banks are now refocusing efforts on “curing” bad loans in-house, and have set up new divisions with hundreds of people tasked with the arduous process of agreeing work-outs with many thousands of individual debtors.
The shift is a blow to the government of Greece and its creditors, which have spent the past year rewriting the country’s laws to facilitate such sales in the hope that disposals would help the banking system move on after six years of acute crisis.
“Just because they have non-performing loans doesn’t mean they are no longer core clients”
“We see very limited transactions in terms of bad loan sales, and expect the vast majority of NPL reduction will come through curing,” George Poulopoulos, acting CEO of Piraeus Bank, told IFR. “The bid-offer spread is just too wide, especially on secured credit. Hopefully it will close as the economy improves.”
That view was shared by the CFO of a second Greek bank. “We aren’t yet in a position to talk about firm deals with regard to bad loan sales, and in fact in the near term I am very pessimistic on the prospect of NPL sales,” he said.
Bosses at the banks say that interest from international investors in the weeks since laws were redrafted has been low, and that bids fall far short of the banks’ expectations. Selling at such prices, which are also below the 50% provisions made by banks, would mean deep losses and hits to capital.
Technicals
One factor at play is technical: yields on Greek government bonds, which are used to work out the discounted present value of bad loan portfolios, remain high – the 10-year currently trades at 7.8%. That drives down bids from potential investors.
“Sovereign spreads continue to be elevated so are distorting expected cashflows, and that has led to big differences in price expectations between banks and possible investors,” said the CFO. “That may change as we get more normal discount factors.”
But sales are also being held up by the same rules that were meant to ease sales. Parliament has passed a series of laws to realise a commitment from Greece to its creditors to create a “dynamic NPL market”.
As well as creating the legal foundations for such a market, lawmakers have simplified the process of out-of-court workouts and the pre-bankruptcy process, and also eliminated a series of tax obstacles for borrowers and lenders that had previously held up deals.
Those moves were meant to entice buyers and make it easier for investors to realise the potential value in bad loan portfolios. But the new toolkit has left banks less keen on selling because they now see more upside for themselves in holding on to the assets.
“We have a whole new toolkit in place, and banks need to understand the implications of those changes for cashflow and recovery before looking at the possibility of selling,” said a board member at a third bank. “We need willing sellers as well as buyers.”
Happy clients
As well as potential upside, banks also see the chance to keep key clients happy.
“Many of the non-performing loans are owed by core clients of the banks. You have long-term relationships with many of them,” said the board member. “Just because they have non-performing loans doesn’t mean they are no longer core clients.”
The risk is that, with such large stocks of NPLs, work-outs could drain the resources of Greek banks at a time when the economy is starved of lending. Monthly lending has fallen 80% over the past four years.
But banks point to internal overhauls and the creation of new units dedicated to working with debtors to maximise recovery for banks. Private NPL management firms such as KKR and Aktua have also been brought in to help.
“Right now, most of our conversations are with the servicers to improve our curing process rather than with buyers,” said Poulopoulos. “The new managers will enhance capacity, in that every quarter we will have a benchmark to aim for. That will encourage efficiency.”
Still, much depends on the already uncertain future of the wider Greek economy, which has been ravaged by a crisis that began as a sovereign problem but which quickly infected other sectors as public spending was cut, taxes hiked and the banking system ravished. The output of the economy has shrunk by a quarter since 2008.
“Banks have become more active about claiming back their money, partly because the toolkit for doing so has become enriched and enhanced,” said the board member. “But we need a supportive macro situation to manage the stockpile of bad loans down.”
