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.
A total of 6,596 new loans were inked, while the total disbursements of loans secured by residences in the first half of 2022 amounted to €498.7 million, increased by 60% compared to the corresponding period of 2021 (a special year due to the restrictive measures to deal the pandemic), according to the data comprised in the Bank of Greece's recent financial stability report. The majority of disbursements (96.2%) are for residential properties purchases for owner-occupancy, while only 3.8% refer to loans for residential properties purchases that would be later rented.
Loan disbursements with an initial fixed rate period of more than 10 years represent 55.7% of the total of new loans, while loan disbursements with an initial fixed rate period of less than or equal to a year represent 26.6%.
The average loan term at issuance is 23 years.
45.3% of new loan agreements have a duration of up to 20 years, 17.4% have a duration of 20 to 25 years, while 37.2% have a duration of 25 to 35 years.
Debt repayment capacity of households and corporations will be adversely affected
The first half of 2022 saw further improvements in the quality of credit institutions’ loan portfolios. The NPL ratio stood at 10.1% in June 2022, down from 12.8% in December 2021. This reduction reflected the progress achieved towards cleaning up bank balance sheets. As already mentioned, all four significant banks have attained their operational target of a single-digit NPL ratio by end-2022. However, the NPL ratio of less significant banks is very high, at 49.7% (which also relates to the unsuitability of the government guarantee scheme for most smaller banks).
In addition, the system-wide NPL ratio remains a multiple of the European average (June 2022: 1.8%6 ), implying that banks must continue and step up their efforts to reduce their existing NPL stock, especially in the light of emerging challenges. The protracted war in Ukraine, with the ensuing energy crisis, has been a crucial factor behind the increase in imported inflationary pressures, weighing heavily on household real disposable income and business operating costs. The strong economic growth recorded on the basis of data for the first half of 2022 has helped to alleviate pressures.
However, the normalisation of ECB monetary policy, resulting in a higher interest rate environment, clearly indicates that both the cost of financing and the debt repayment capacity of households and corporations will be adversely affected. By contrast, a positive impact is expected on deposit interest rates via the partial pass-through of increased key rates. This environment, combined with weaker near-term economic growth prospects, would again affect the quality of banks’ loan portfolios due to the creation of new NPLs.
The amount of new NPLs is difficult to estimate though, amid uncertainty about the evolution of parameters related to the geopolitical and energy-related crisis, especially in the event that the crisis should prove more prolonged than expected or escalate further. Finally, it should be noted that the transfer of NPLs out of the banking sector does not automatically mean the removal of debt from the economy. The debt remains and is now managed by credit servicing firms (CSFs).
The smooth functioning of the NPL secondary market is therefore key to a definitive debt resolution and to this end the effective use of all available tools is a prerequisite. Rehabilitation of borrowers with viable and bankable investment plans should be put forward as an option that can help towards both a definitive resolution of private debt overhang and the growth of the real economy.
