Ignoring the possibility of Greece defaulting on its debt, or further credit rating downgrades making Greek government bonds ineligible for ECB liquidity operations, and you’re still left with potential problems for the Greek financial system.
A Tuesday note from UBS highlights one problem in particular: how widening spreads on Greek government debt might affect local banks.
According to UBS’s Alexander Kyrtsis, Greek banks hold 17 per cent of total Greek debt, which means they’ll inevitably be somewhat influenced by market movements on the debt.
How much though, depends on how the banks classify the bonds.
According to Kyrtsis, most of the debt is held in banks’ Available-for-Sale (AFS) and Held-to-Maturity (HTM) portfolios. For AFS, mark-to-market gains and losses go straight into equity. If sold, the gain/loss goes through to the profit & loss statement, and equity remains unchanged. By contrast, stuff held as HTM doesn’t take a hit (or boost) as market values change.
So here’s UBS’s chart of select Greek banks’ Greek bond holdings and their classification:
With that in mind, here’s UBS’s (very rough) extrapolation of the possible equity hit to Greek banks caused by widening Greek bond spreads affecting AFS-labeled debt. Remember that AFS mark-downs aren’t necessarily a permanent (P&L) loss and they don’t necessarily hit regulatory capital since the AFS reserve is excluded from regulatory capital calculations (for now):
You can see that ATEBank and NBG are relatively more vulnerable to changes in Greek bond yields, than banks like Marfin or Alpha Bank. With the exception of Alpha, which Kyrtsis says has a very small AFS book, all of them take an AFS markdown of some magnitude.
This is all very local, and theoretical, but the thrust of the note is something that could easily be extrapolated to non-Greek banks, who are also big holders of Hellenic debt.
One more thing on Greek banks though. Take a look at the below chart:
Traditionally, a source of Greek bank strength has been its relatively large deposit base. But deposits in the country’s financial system look to have been shrinking, while loans have been stagnating.
Kyrtsis still thinks the Greek banks are generally resilient, but he does note that:
Considering the very low deposit growth and effectively inaccessible term wholesale funding markets, we may even see the Greek banks’ balance sheets shrink going forward.
Small wonder then, that Alpha Bank is UBS’s only buy in the country.
Related links:
Greek banks may face liquidity problems – Capital.gr
Greek & Cypriot banks (Citigroup Note) – Scribd