The good and bad scenario for the stress test

The good and bad scenario for the stress test

Athens, October 5, 2015/Independent Balkan News Agency

By Spiros Sideris

Although Goldman Sachs in its main scenario puts the cost of recapitalisation at EUR 13 billion, the capital shortfall, depending on the assumptions made, is ranging from a minimum of EUR 7 billion to a maximum of EUR 20 billion for the four Greek banks.

Right now, the rapid goals price reduction proposed by Goldman Sachs is the least concern for the shareholders. With the exception of liquidity, the uncertainties in the process of recapitalisation and the fact the investment house estimates that at the operational level the worst is ahead of us, are probably the most important points of the house’s report for the domestic banking sector.

Specifically, the eleven most important points in which it focuses are:

  1. The size of the recapitalisation seems to be moving closer to the “upper limit” of EUR 25 bn and the prevailing political and economic uncertainty combined with the relatively short time that banks have to raise funds, may limit the investor interest.
  2. The discussions show that the creation of a bad bank is not on the table at this point, but could be reviewed at a later stage.
  3. The recognition of the entire existing deferred tax DTC to the mix of capital of EUR 12.8 bn is critical and should not be challenged.
  4. Doubtful loans will have to be increased by EUR 22.9 n in order to take into account the deterioration of both collaterals and the increase in default rates and the need to increase the ratio of bad loans to 45% of the total, ie levels similar to the case of Cyprus and the bad loan coverage ratio to rise to 60% -70%.
  5. The losses in securities and investment seem to be relatively mild. The reason is that the participation of Greek bonds in the mix of assets is relatively small, at EUR 13 bn, compared to the EUR 38 bn of EFSF bonds. Consequently, the analysis of the Goldman Sachs incorporates a moderate revaluation in the region of EUR 1-2 bn in portfolio value from a mowing of 45% in the value of greek bonds that are held in their nominal values.
  6. Reduced profitability. The pre-provision profits of banks which offer a critical cushion against losses on loans are likely to come under pressure in the current environment. GS for the three-year period includes EUR 8 bn capital buffer from the pre-provision profitability of banks.
  7. With these assumptions and CET1 ratio at 10%, in the basic scenario the capital needs stand at EUR 2.8 bn for Alpha Bank, EUR 4.8 bn for Piraeus Bank, EUR 2.7 bn for Eurobank and EUR 2.9 bn for the National Bank.
  8. In the good scenario: The deficit is estimated at EUR 1.1 bn for Alpha Bank, EUR 2.8 bn for Piraeus Bank, EUR 1.4 bn for Eurobank and EUR 1,7 bn for the National Bank.
  9. In the bad scenario: The deficit is estimated to EUR 4.4 bn for Alpha Bank, EUR 6.8 bn for Piraeus Bank, EUR 4.1 bn for Eurobank and EUR 4,7 bn for the National Bank.
  10. At present, the possibility to release capital through mergers, restructuring and bail-in of private investors is limited. The banking sector has undergone significant accumulation and the publications are below EUR 5 bn. The Greek state remains exposed with a stake of about 58% in the four banks and with EUR 2.3 bn in preference shares in Eurobank and National Bank.
  11. The Cypriot case shows that capital controls can create significant problems in asset quality in the near future. The restrictions imposed on access to deposits is likely to put additional pressure on borrowers and may adversely affect the “payment culture” further. In Cyprus, the ratio of non-performing loans increased from 15% to 40% within one year after the introduction of capital controls and reached 45% in 2014. This compares with a starting point of 33% in Greece from 25% in the first quarter of 2013.