5 BANCHE GRECHE SU 6 PASSANO LO STRESS TEST
ATHENS—Greece's leading private lenders are expected to pass an upcoming health check of Europe's banking sector, but questions remain over whether one of two state-controlled banks being tested may be forced to seek new capital under a worst-case scenario.
The so-called stress tests, the results of which are due Friday at noon ET, are being conducted by Europe's banking regulators on 91 European banks, including six Greek lenders, to see how the banks would fare in the event of an economic slowdown or sovereign loan default.
Specifically, the tests will reveal which banks would fall short of minimum capital requirements under different scenarios, although the exact details remain unclear.
In the past several days, both Greece's central bank governor and the country's finance minister have said the Greek banks would pass the stress tests, helping prompt a brief 2.5% rally in Greek bank stocks earlier this week.
"The Greek banks now have before them the famous stress tests," Finance Minister George Papaconstantinou said in a speech on Monday. "I am certain the banks will pass those stress tests unscathed."
The test will ask banks to assess their Tier-1 capital ratios—the core measure of a bank's financial strength from a regulator's point of view—at the end of 2011 under various scenarios. That ratio measures a bank's core equity capital to its total assets.
Of the six banks being tested, Greece's four leading private lenders—
National Bank of Greece SA,
EFG Eurobank Ergasias SA,
Alpha Bank AS and
Piraeus Bank SA—are considered well-capitalized.
Those four boast Tier-1 capital ratios ranging from 9.1% in the case of Piraeus, to 11.5% for Alpha Bank—well above the 6% minimum that regulators will set as a pass or fail threshold.
Of the two state lenders being tested,
Hellenic Postbank has a more-than-ample capital adequacy ratio of 17%; but state-controlled
ATEBank currently has a Tier-1 capital ratio of just 7.7%. That is above minimum levels, but might not be depending on the scenarios involved.
"All of the major banks have a Tier-1 ratio averaging around 10%, so I don't think there is an issue of whether they will pass the test," said a research director at a local Greek brokerage. "But that doesn't necessarily apply to ATEBank. It has the lowest capital ratio and has had huge write-offs and losses."
It's also not surprising. The bank, which is 77% owned by the Greek state, has long been saddled with problem loans and businesses relating to its role as government lender to the farm sector. In 2005, the government injected €1.25 billion ($1.59 billion) into ATEBank—formerly the Agricultural Bank of Greece—as part of a general restructuring.
But Greece's weakening economy and rising bad loans have squeezed the banking sector overall. In the first quarter of 2010, ATEBank swung to a net loss of €37.4 million on a 69% increase in loan-loss provisions of €95.9 million.
Earlier this month, ATEBank General Manager Ioannis Valakas said that the bank would need new capital, either on the market or from an €10 billion bank support fund being set up by the Greek government.
Since then, Piraeus Bank has made a combined €701 million offer for ATEBank and Hellenic Postbank—promising to take the one-time farm lender off the government's hands, while also taking control of the well-capitalized and deposit-rich Postbank.
But analysts say that the stress tests don't address the real challenge facing Greek banks, namely their access to liquidity. Since late last year, the Greek banks have become heavily dependent on the European Central Bank while being effectively frozen out of Europe's interbank markets amid concerns about a Greek sovereign default.
According to the latest data from the Bank of Greece, ECB lending to Greek banks rose to €93.8 billion at the end of June, up from €89.4 billion at the end of May—and almost double the €49.7 billion in ECB funding at the start of the year.
"It is clear that the Greek banks have an adequate capital base and healthy balance sheets and, consequently, are completely justified in thinking they will bear up to the stress tests," said Yannos Grammatidis, president of the American-Hellenic Chamber of Commerce. "What needs to be improved is the constrained liquidity condition of the banks."
In theory, the ECB can continue financing Greek banks for the foreseeable future. But that won't solve the problem of Greece's—or Europe's—gummed up interbank markets, much less help finance the country's economic recovery.
In a somewhat unorthodox opinion from July 16, Fitch Ratings said that the liquidity challenges facing Greek banks—along with the country's extended recession—constitute a threat to the banks' stability. Despite their high level of capital adequacy, Fitch downgraded the individual ratings of Greece's big four banks to D from C/D because of that heavy reliance on ECB funding.
"Fitch has...downgraded the banks' individual ratings, reflecting Fitch's opinion that the banks' significant reliance on ECB funding and the continued challenging operating environment have markedly reduced their stand-alone financial strength," the agency said.
—Nick Skrekas contributed to this article.
(The Wall Street Journal)
