Greek Banks to Show Pain of Bond Swap, Bad Loans

Greek banks will post big losses for 2011 on Friday, as they will include the writedown on government bonds suffered during last month's bailout deal for the country as well as provisions for higher bad loans due to a deep recession.

April 20, 2012

ATHENS, April 20 - Greek banks will post big losses for 2011 on Friday, as they will include the writedown on government bonds suffered during last month's bailout deal for the country as well as provisions for higher bad loans due to a deep recession.

Greece's big four lenders, Alpha, Eurobank, National and Piraeus, will treat losses from last month's bond swap to cut the country's debts -- part of a rescue package negotiated with the European Union and International Monetary Fund -- as if they took place last year.

The bond swap inflicted real losses of about 74 percent on bondholders, wiping out 22 billion euros ($29 billion) of the banking system's 23.8 billion in core Tier 1 capital ratio, according to International Monetary Fund estimates.

Banks, holders of about 45 billion euros of government bonds, will likely value the hit from the bond swap at its net present value be cause a recapitalization plan for the sector and accounting treatment issues have not been finalized.

This is the reason most analysts would not give loss estimates. Banks will report annual results after the Athens stock market closes at 1430 GMT.

A previous March 31 deadline to report earnings was extended to April 20 to give banks more time to assess the impact of the debt swap and prepare their capital plans.

"It is difficult for us to come up with estimates as the precise accounting treatment of the bond swap losses is not known," said analyst Nick Koskoletos at Eurobank Equities.

Applying a 75 percent haircut on some 35.6 billion euros of bond swap eligible assets -- Greek government bonds and state-guaranteed loans -- the pretax impairment for the four large banks may reach 26.7 billion euros, said Euroxx Securities analyst Manos Giakoumis in a note.

Banks will need to fill the resulting capital shortfall and meet a core Tier 1 target of 9 percent by end-September demanded by the Bank of Greece, the country's central bank.

On this front, banks have acted to boost their core capital, including issuing preferred shares to the government, buying back hybrid securities and selling foreign subsidiaries.

The government, which was due to announce a framework to recapitalize banks on Friday, is still working on technical aspects of the scheme with EU/IMF officials, the country's prime minister told an economic conference on Friday.

"The completion of this procedure and the restructuring of the banking system will create new favorable conditions for the financing of the Greek economy and in particular of small and medium size companies," Prime Minister Lucas Papademos said.

With the economy mired in recession and unemployment at a record 21.8 percent, asset quality will have deteriorated, meaning banks' non-performing loans are certain to rise from 14.7 percent of their books at the end of the third quarter.

Banks are unlikely to spell out capital plans to address the shortfall while the government is still working on the structure of the recapitalization plan, largely funded by the Hellenic Financial Stability Fund (HFSF).

On Thursday, the fund received 25 billion euros of European Financial Stability Facility (EFSF) floating rate notes and has been cleared to provide letters of commitment to banks that it will underwrite their capital needs.

About 50 billion euros have been earmarked in Greece's second bailout to prop up the banking sector.

"Without this support, the banking system can't operate smoothly," Papademos said. (Additional reporting by Angeliki Koutantou; Editing by Mark Potter)