The Q3 results announced by BoC today raised a series of questions. The most obvious one was how can the bank go from 36% NPL rate in Q2 to 48% NPLs in Q3 and yet maintain its Core Tier I ratio at almost the same levels (10.4% v. 10.5%).
Part of the answer is that they are limiting NPL provisioning: They are now covered with provisions amounting to 37% of NPLs, against 42% three months earlier. Overall, this amounts to 18% of all loans extended, compared to 16% for Q2.
Apart from limited NPL coverage, the bank is also deleveraging. Part of the effort relates to the sell-off of foreign assets (not only Greek ops); the bank is also saying that they are “working on the denominator”, by limiting risk, although it’s still rather unclear how they are doing this in practice. In any case, Uniastrum should be expected to be sold off at some point, although we were told that BoC is “not actively” working on selling the Russian operation to an investor. Ex-Laiki’s CNP insurance should be expected to go, as well.
For many the most interesting part of the results is that there is a bank that records 48% in NPLs and is still ostensibly solvent. Even with deleveraging, the question is still whether the bank can sell off assets faster than NPLs (and provisions) are rising.
Part of the answer we are given, is that the largest borrowers are now each wearing a bull’s-eye on their chest. BoC officials are talking about “30 borrowers who owe 6 billion in NPLs”. By our reckoning, accounting for cross-dependent entities and connected borrowers, this also amounts to 20 borrowers who owe 4 billion in NPLs.
The most important change noted is that, unlike the previous management of the bank, who insisted on not selling assets, the Hourican administration is actively looking to “get the shareholders’ money back”. Remember, shareholders are bailed-in depositors, and when they say “we want our money back”, they are being literal.
The recent transactions involving Limassol “formerly” five-star hotels that are in prime locations, have fantastic potential, but are also run down and in debt, was only the opening salvo. With the bank now “actively encouraging” debt-equity swaps (in various forms) as well as similar NPL transactions, it is becoming increasingly likely that distressed selling will soon pick up. BoC senior cadre are also commenting that even direct NPL sales are now on the table –despite the previous management’s no-discount policy on NPL sales.
What has essentially changed is that under the new NPL definition, restructured loans that are now being serviced, are still registered as NPLs until 6 mos after the highest installment. The bank can no longer restructure, declare the loan to be solvent, and then get rid of provisions: Provisions will still be held, since it will still be categorized as NPLs. So now there is more of an incentive to get these loans off the books.
The first move remains to «encourage» investors moving into the most distressed of the borrowers. The bank says they would take over management of some of these businesses, but this «is not the first choice». «We would definitely prefer an investor to do that, instead». However, they add, this doesn’t mean that we won’t do it, if necessary.
This pressure, encapsulated in the comment that «there are o sacred cows in the market», should boost asset sales in the new few weeks. The bank seems more than willing to accommodate by restructuring loans after debt-equity swaps and/or «private» asset sales.