Financial Stability Review: November 2022

10/11/2022 - Press Releases

• In the first half of 2022, real gross domestic product (GDP) grew by 7.8% year-on-year; for the year as a whole, based on the latest Bank of Greece projections, the growth rate is expected to reach 6.2%.
• The intensity and persistence of imported inflationary pressures, the deteriorating economic outlook, the heightened risk of an abrupt repricing of assets in international money and capital markets, as well as rises in Greek government bond yields, have contributed to increased risks to financial stability.
• Over the first half of 2022, banking sector profitability and asset quality continued to improve.
• The implementation of banks' strategies for resolving the legacy stock of non-performing loans (NPLs), mainly using the Hellenic Asset Protection Scheme (HAPS), has contributed to the NPL ratio reduction to single-digit levels across the four significant banks.
• A return to profitability after two loss-making years has been instrumental in maintaining capital adequacy, largely offsetting the impact of phasing in IFRS 9 and an increase in risk-weighted assets.

The Executive Summary of the Financial Stability Review was posted today on the Bank of Greece website. The Review is published twice a year by the Financial Stability Department.

The Review assesses financial stability developments in Greece, identifies the main systemic risk factors for the domestic banking sector and other sectors of the Greek financial system and analyses the operation of financial market infrastructures (i.e. payment systems, payment cards, central securities depositories and central counterparties).

The November 2022 Financial Stability Review focuses on developments in the banking sector over the first half of 2022. It also includes three Special Features, discussing the following topics: (a) evolution and structure of GDP on the basis of Gross Value Added by sector of economic activity, and respective bank credit; (b) the European and national regulatory framework on information and communication technology (ICT) and security risk management by financial institutions; and (c) reforms to rationalise the channelling of public funds by the Bank of Greece through the System of Treasury Accounts.

Inflationary pressures, heightened uncertainty surrounding geopolitical and energy developments, and the subsequent normalisation of monetary policy impact the financial condition of households and businesses. Rising operating costs for firms, declining household real disposable income, as well as higher funding costs for investment, could dampen bank profitability and would point to a weaker economic outlook. Against this background, the banking sector needs to adjust in a timely manner, so as to address the challenges ahead.

The high stock of NPLs remains the biggest challenge for the Greek banking sector. The significant reduction in the NPL stock has led to a marked decrease of the NPL ratio (June 2022: 10.1%); nonetheless, banks should step up their efforts to bring this ratio closer to the EU average. Moreover, the worsening economic outlook adds to the uncertainty surrounding the debt-servicing capacity of non-financial corporations and households. Accordingly, banks could face a renewed deterioration of their asset quality with a new wave of NPLs.

In the first half of 2022, liquidity conditions in the banking sector presented a mixed picture. Access to money and capital markets for funding became more difficult in the context of monetary policy normalisation. However, deposits continued their upward trend (September 2022: €185.5 billion), reflecting strong economic growth and credit expansion, mainly to firms.

Greek banking groups' capital adequacy declined marginally; the Common Equity Tier 1 (CET1) ratio on a consolidated basis stood at 13.2% in June 2022, slightly down from 13.6% in December 2021, and the Total Capital Ratio at 15.9%, down from 16.2%, respectively. This decline was mainly due to an increase in risk-weighted assets, as the negative impact from the phasing-in of International Financial Reporting Standard 9 (IFRS 9) on banks' regulatory capital was offset by the positive impact of half-year profits. Specifically, in the first half of 2022, Greek banking groups posted profits, after tax and discontinued operations, amounting to €2.3 billion, compared with losses of €4.0 billion in the same period of 2021.

Αctions taken in the context of the implementation of banks' strategies to further reduce the stock of NPLs (after the expiration of the HAPS), including possible outright NPL sales, are likely to entail higher capital charges. Therefore, amid deteriorating conditions for tapping money and capital markets, enhancing banks' internal capital generation capacity by strengthening core profitability becomes a priority.

Finally, the quality of Greek banks' prudential own funds remains low, as deferred tax credits (DTCs) amounted to €14 billion in June 2022, representing 58% of total prudential own funds.

Heightened uncertainty about the economic outlook and the inflation trajectory, as well as increasing risks to financial stability, call for strengthening the resilience of the financial system and for vigilance from all relevant stakeholders, in order to ensure the continued smooth financing of the real economy. In this regard, the faster absorption of Recovery and Resilience Facility (RRF) funds would alleviate pressures, providing crucial support to the financing of the economy.

Related link:

Executive Summary of the Financial Stability Review - November 2022