Over the recent years, Greece has taken significant steps in stabilizing its banking sector, owing to several regulatory reforms and a strengthened capital position of its banks. Moody’s revision of the country’s outlook to “positive” in September 2024 is mainly attributed to the recovery of the Greek banking sector and the country’s strong economic performance.
The privatization of the Greek systemic banks marked a key milestone for this positive outcome and a shift toward market-driven governance, stronger operational independence, and improved investor confidence. At this turning point, the country’s alignment with the EU’s climate-neutral economy by 2050 has set the stage for sustainable growth in the banking sector and the wider economy. Additionally, the long-anticipated implementation of the Basel III EU Framework can be instrumental in navigating the Greek banking sector toward a new era of stability and prosperity.
Is Greece Basel III-Ready?
Whilst Basel III introduces stricter standards with respect to capital adequacy, liquidity, and risk management, the Greek banking sector has been progressively aligning with these standards over the past years, demonstrating enhanced resilience and relatively stable capital adequacy. In the first half of 2024, even though banks showed an increase in capital, this was offset by a rise in risk-weighted assets (RWAs). As such, there was a decrease in the Common Equity Tier 1 ratio (CET1) from 15.5% (December 2023) to 15.4%, and the Total Capital Ratio (TCR) remained stable at 18.8%. Although both ratios remain slightly below the EU average (CET1: 15.8% and TCR: 19.9%), liquidity levels are satisfactory, and the impact of Basel III on Greek banks’ capital adequacy ratios is expected to be modest in 2025, even though banks will need to recalibrate their RWA models to ensure compliance with the new standards. However, the management of non-performing loans (NPLs) will remain a critical issue for banks that will require ongoing attention.
NPLs: A Thorn of Grace?
The quality of the banks’ loan portfolios deteriorated slightly in the first months of 2024 mainly because of the addition of certain state-guaranteed loans in the NPL categories, following requirements imposed by the supervisory authorities. This led to an increase in NPL volumes, totaling approximately EUR 0.5 billion. Notwithstanding, the Hercules Asset Protection Scheme (HAPS) has played a crucial role in stabilizing the banking system by facilitating the offloading of NPLs from the banks’ balance sheets through securitization with state guarantees. The Greek government recently extended the scheme (HAPS III), aiming to reduce NPL volumes to EU levels. The extension of the scheme was originally designed to support the so-called “fifth banking pillar,” namely the merger of Attica Bank and Pancretan Bank, by facilitating the securitization of the two banks’ NPL portfolios. It is noted that following the successful merger of the two banks and the upcoming securitization of their NPLs portfolios (valued at approximately EUR 3.7 billion), the merged bank will be able to compete on an equal footing with the four systemic banks, enabling it to serve segments of the Greek market showing increased financing demand, such as small businesses.
At the same time, as the volume and value of NPLs continue to decrease, the secondary market for these loans is expected to grow. A key driver of this growth is the focus on buybacks, where banks reacquire loans that have been successfully restructured, in line with criteria set by the European Central Bank. The risk of these loans, however, becoming non-performing again remains.
A Shift Toward a Green Economy
While the outlook of the Greek banking sector remains positive, its prospects are closely tied to the macroeconomic trajectory of the country, which is further shaped by external factors, such as investments. The country’s green agenda, aligned with the wider EU agenda, plays a crucial role, with initiatives such as the Decarbonization Fund for Greek Islands, aimed at reducing fossil fuel and promoting sustainable energy sources, creating a sea of investment opportunities. An expected increase in investment activity together with regulatory reforms that promote sustainability goals present new opportunities for the banking sector, which is increasingly focusing on green financing and sustainable investments.
Greek banks have started embracing green financing, including financing renewable energy projects and sustainability-linked loans. However, increasing demand for sustainable financing still raises big challenges for banks in terms of ensuring compliance with EU regulations, imposing enhanced compliance and disclosures. Greek banks will need to assess the environmental impact of projects and evaluate their exposure to climate transition risks, particularly in sectors not aligned with carbon reduction goals.
By Marios Bahas, Managing Partner, and George Alexandris, Senior Associate, Bahas, Gramatidis & Partners
This article was originally published in Issue 11.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.