national bank of greece

NATIONAL BANK OF GREECE

Greek banks and corporate funding costs January 2014

Paul Mylonas CRO & Chief Economist National Bank of Greece

NBG:Analysis ECONOMIC ADepartment NALYSIS DEPARTMENT Economic

Roadmap

High corporate lending rates in Greece The role of credit risk premia The role of liquidity premia Lending rate decomposition Outlining the path to lower rates

NBG: ECONOMIC ANALYSIS DEPARTMENT

p. 2

High loan rates in Greece mainly reflect high credit and liquidity risk premia

Cost of credit Macroeconomic conditions & Uncertainty

Monetary policy

Interest rate on corporate loans

Sovereign risk

Cost of capital

Corporate profitability Collateral valuations

Bank funding cost/liquidity premia

Asset quality

OPEX


p.3

Greece has much higher loan rates to enterprises than other euro area countries, especially in real terms

High risk premia lead to a disconnect between market rates and lending rates… 10

10,0

8

8,0

6

6

6,0

6,0

4

4

4,0

4,0

2

2

2,0

2,0

0

0

0,0

0,0

-2

-2

-2,0

-2,0

Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Oct-12 Jul-13

8

nominal interest rates (new business) (%)

EA, loans to non-financial corporations

10,0 real interest rates %, HICP deflated

8,0

Jan-03 Nov-03 Sep-04 Jul-05 May-06 Mar-07 Jan-08 Nov-08 Sep-09 Jul-10 May-11 Mar-12 Jan-13 Nov-13

10

…while accelerating disinflation amplified the discrepancy with the euro area, in terms of real lending costs

Greece, loans to non-financial corporations, real

Greece, loans to non-financial corporations 3-month euribor

Euro area, loans to non-financial corporations, real

Source: Bank of Greece, ECB, ELSTAT


p.4

The crisis resulted in severe asset quality deterioration and high provisions (cost of risk)

…and prompted a sharp increase in provisions for potentially impaired loans

The NPL ratio has climbed to unprecedented levels…

Consumer

Mortgages

Corp. & SBLs

Total

Source: Bank of Greece


30

€34bn

5

5

0

0

NPL ratio total

Q3:2013

10

Q3:2012

10

Q3:2011

15

Q3:2010

15

Q3:2009

20

Q3:2008

20

Q3:2007

25

Q3:2006

25

Q3:2005

16%

30

per cent

Q3:2004

Q1:2013

Q3:2012

Q1:2012

Q3:2011

Q1:2011

Q3:2010

Q1:2010

Q3:2009

Q1:2009

Q3:2008

Q1:2008

NPL ratio, in per cent of gross loans per category

35

35

Q3:2003

45 40 35 30 25 20 15 10 5 0

Q3:2002

31% in Q3:2013

45 40 35 30 25 20 15 10 5 0

Unemployment rate

Source: BoG, NBG estimates

Source: Bank of Greece, ELSTAT


p.5

Lending rate differentials reflect high credit risk premia and an across-the-board risk re-pricing

Lending rates and country/business specific credit risk

Collateral valuations are also feeding into lending costs

120 Moody’s expected default frequencies of publicly traded firms

Greece

120

100

100

80

80

60

60

-32%

40 2008=100, index

20

40 -46% 20 0

Q1:2008 Q3:2008 Q1:2009 Q3:2009 Q1:2010 Q3:2010 Q1:2011 Q3:2011 Q1:2012 Q3:2012 Q1:2013 Q3:2013

0

Residential prices Effective commercial prices

Source: ECB, EUROSTAT, IMF, Moody’s


Source: Bank of Greece & NBG estimates

p.6

A sharp, and largely uncertainty-driven, drop in bank deposits…

Deposits fell by €100bn, equivalent to about ½ of 2013 GDP…

…far in excess of other programme countries…

Private sector deposits

220

100 80

120

60 Nov-03 Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13

170

Private sector deposits (euro, bn, left axis) Private sector deposits (% GDP, right axis)



Spain Italy Greece

2013 (Oct)

120

140 130 120 110 100 90 80 70 60

index level = 100 at 2009, aop data

2012

270

140 130 120 110 100 90 80 70 60

2011

140

2010

%

2009

€ bn

Total deposits

Ireland Portugal

Source: ECB

p.7

…amplified liquidity shortages, despite ECB support

Loanto-to-deposit ratio Loan deposit ratio 140 135 130 125 120 115 110 105 100 95 90

ratio

Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

140 135 130 125 120 115 110 105 100 95 90

Greek banking system dependence on Eurosystem

Greece Euro area (2012 est.)



Source: Bank of Greece and NBG estimates

p.8

… and fed into bank funding costs

6

5

5

4

4

3

3

2

2

1

1

0

0

2003-01 2003-10 2004-07 2005-04 2006-01 2006-10 2007-07 2008-04 2009-01 2009-10 2010-07 2011-04 2012-01 2012-10 2013-07

6

Germany

Spain

Portugal

Greece

Marginal cost of new time deposits vs interest rate on outstanding amount

% 5

4

5 Greece

4

3

3

2

2 Sep-02 Jun-03 Mar-04 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Jul-10 Apr-11 Jan-12 Oct-12 Jul-13

Nominal interest rate on bank deposits with agreed maturity up to 1 year (outstanding amounts)

Time deposit rate (outstanding) Time deposit rate (new)

Source: Bank of Greece, ECB


p.9

High loan rates in Greece mainly reflect high credit and liquidity risk premia

Cost of credit Indicative quantitative decomposition of effective lending rate to non-financial corporates

Interest rate on corporate loans

Cost of capital

Lending rate = Risk free rate + Liquidity premium + credit premia + cost of capital + Opex

5.5% < 0.2% + 2.0% + 3.0% + 1.0% + 0.2% Bank funding cost/liquidity premia OPEX


p.10

Outlining the path to lower interest rates


p.11

Sovereign risk re-pricing and bank deposit developments reflect a notable reduction in uncertainty

Greece: 10-year government bond spreads over bund PSI completion & 2nd Program

Preliminary agreement on PSI

Agreement on 1st Program for Greece

35

Succesful completion of 2nd Program Review & decisions on Debt relief

30

35 30

25

25

20

Ireland issues 10y bonds

Crisis in Cyprus

15

Elections

15

20

10 5

10 5

Feb-14

Dec-13

Oct-13

Aug-13

Jun-13

Apr-13

Feb-13

Dec-12

Oct-12

Aug-12

Jun-12

Apr-12

Feb-12

Dec-11

Oct-11

Aug-11

Jun-11

Apr-11

Feb-11

Dec-10

Oct-10

Aug-10

Jun-10

Apr-10

Feb-10

Dec-09

Oct-09

0

Aug-09

0

Source: Bloomberg, Bank of Greece


p.12

Further uncertainty reduction will be based on a successful implementation of the programme

Fiscal measures for the period 2014-16 (c. 4% of GDP) so as to achieve a primary surplus of 4½% of GDP by 2016

Closure of funding gap of the programme (c. €10 bn)

Success in the implementation of structural reforms and privatizations agendas (tax evasion, public administration, social security, labor markets, judicial reform)

Political risk


p.13

What policy can do “at the margin”

1.

Lending on more secure terms will permit lower rates • Strong cash flows (e.g. export orientation) • Higher equity participation by borrower • More security (e.g. factoring)

1.

2.

European risk sharing mechanisms (co-financing and guarantees)

3.

Development of securitization market for loans


p.14

National Bank of Greece - Economic Analysis Department Eolou 86 Str., 102 32


Tel: +30 210 3341521/2

p.15