Republish from special edition of Nextdeal (Issue 560)

By Christos Kitsios

“We are observing a shift in the fundamental monetary, economic and geopolitical order. Such shifts occur every 30 to 50 years, when there are major economic imbalances. At the moment, it is not clear when a new equilibrium will be established, which will be its form and how long it will last”, the CEO of Eurobank, Mr. Fokion Karavias, said during its recent annual general meeting of shareholders.

Within the above environment of tectonic changes, the main question that arises for the domestic banking system is whether it will manage to surpass the country's economic model. The Greek economy will continue to grow this year at a stronger pace than the Eurozone, based on official estimates, as it is has little direct exposure to the risk of increased tariffs from the US, due to limited exports. However, if the tariffs push the already suffocating Eurozone economy into an artificial recession (for two or three quarters), the blow for the Greek economy will be considerable, since the Eurozone is the main destination for its exports, as well as the main pool of tourists.

Despite the more than ten-year period of crisis and the growth that followed after 2018, Greece has not managed to establish a more sustainable, long-term growth model, not being so dependent on consumption and tourism. Fixed asset investments, as a percentage of GDP, increased from 11% in 2019 to 15,3% in 2024, but still significantly below the European average of 21%.

Greek banks reflect the above model in their balance sheets, some more and others less. In recent years, they have managed to show strong profitability, thanks to the combination of credit expansion and increased interest rate by the ECB. This was preceded by the consolidation of their balance sheets, by selling or securitizing their claims from Non-Performing Exposures, while last year they found a “formula” with the European Central Bank for the acceleration of the de-recognition of Deferred Tax Claims (DTCs), in order to eliminate their contribution to regulatory capital by 2033 and to readjust, in the meantime, the shareholder reward policy (payout ratio) to levels closer to the European average (i.e. 65% to 70% of annual profits).

Despite the enormous progress they have made, some of the effects of the debt crisis are still visible. Banks hold significant amounts of senior notes of Greek government-backed securitizations, a high percentage of households and professionals are not creditworthy, given the economic recovery, while credit expansion comes only from corporate lending, as soaring house prices (due to limited supply) render mortgage loans prohibitive for most households.

In the event of a deeper slowdown in Europe's major economies, Greek banks will be affected, not only due to the ECB's reduction in interest rates and the consequent reduction in net interest income, but also by the impact of the slowdown on the figures and mainly the investments of their corporate clients.

The increase of performing loans is the main “weapon” in the story of domestic banks, as the income from commissions contributes less to the organic profits, compared to the average of large European banks. This year, it is estimated that commissions will constitute 18% to 25% of the net income. The largest part of the commissions comes from traditional banking operations [e.g. fees for (new) loans, credit card charges, etc.]. Commissions from fund management and bancassurance remain at particularly low levels, in comparison to Europe.

Credit expansion of over 10,4 billion Euros this year

The aim of the four major domestic banks (Eurobank, National Bank, Piraeus Bank and Alpha Bank) this year, is to increase current loans by at least 10,4 billion Euros (+7,07%), a performance that will partially allay investors' concerns about the course of net interest income and profitability in 2026, since interest on new loans begins six months after their disbursement.

For the current year, based on the data available so far, there is no any issue. The Banks’ managements have stated emphatically that this year's targets for net interest income (NII) and profitability are not at risk, even if the ECB lowers the deposit facility rate below 2%. Eurobank, in fact, appeared confident of achieving the NII guidance, even if the ECB interest rate approaches 1,5%.

Behind the above certainty lies the combination of strong credit expansion during the previous year and the rise in commission income, despite the fact that the government “put the brakes” on charges for “public transactions”. The loans granted by banks six months ago, are now bearing interest. Hence, a stabilization of net interest income is expected during the second quarter, although the reduction in interest rates continues. It is recalled that during the last quarter of the previous year, a… crescendo of lending was recorded, with credit expansion exceeding 7,5 billion Euros.

Eurobank, Piraeus Bank, National Bank and Alpha Bank, reiterated their NII guidance. Eurobank expects around 2,5 billion Euros, Piraeus around 1,9 billion Euros and National Bank over 2,1 billion Euros. Their annual targets suggest that quarterly net interest income will not fall, on average, below the first quarter performance (see table). In contrast, Alpha Bank's annual target (NII above 1,65 billion Euros) is consistent with its management's guidance for an increase in net interest income in the coming quarters, due to lower sensitivity to interest rate cuts.

However, the investors' attention is focused on how net interest income will move in 2026, in the event that concerns about a slowdown in major European economies or even worse, a recession, as a result of the economic, monetary and geopolitical turmoil caused by Trump's policies, are confirmed.

Bankers avoided talking about 2026, due to high uncertainty, but the performance of first-quarter credit expansion and, above all, the certainty of achieving year-end targets, is a first indirect answer to the concerns. And this is because this year's credit expansion broadens the base of net interest income in 2026. Eurobank and Piraeus Bank saw their performing loans increase during the first quarter by 1,2 billion Euros and 1,1 billion Euros, respectively (Note: part of Eurobank’s credit expansion was “eaten away” by the decline in the value of dollar loans), while Alpha Bank and National Bank of Greece followed suit.

For the whole year, Eurobank expects an increase in current loans by approximately 3,5 billion Euros, of which 1,9 billion Euros in Greece and the remaining 1,6 billion Euros abroad. If it succeeds, it will become the first domestic bank to re-approach the 50 billion Euros balance of (current) loans (approximately 49,8 billion Euros).

The optimism described above, derives from the assessment that term-deposits interest rates in Cyprus will de-escalate, following, with a short time difference, the fall in interest rates by the ECB, thanks to the broad deposit base that the Hellenic Bank of Cyprus adds to Eurobank Cyprus and the strong demand for loans in Bulgaria, which maintains the average spread.

National Bank of Greece, Piraeus Bank and Alpha Bank are moving in parallel. NBG is targeting a credit expansion of 2,4 billion Euros (about 36 billion Euros) for this year, Alpha Bank at least 2,2 billion Euros (over 35,5 billion Euros) and Piraeus Bank at 2,3 billion Euros (about 36 billion Euros). Of course, Piraeus Bank has increased its outstanding loans by 1,1 billion Euros during the first quarter. It is therefore possible that the guidance for credit expansion will be revised upwards during the current year.

18% to 25% of net commission income

Eurobank and Piraeus Bank present the highest contribution of commission income to their net income. Eurobank reported net commission income of 169 million Euros during the first quarter, which corresponded to 20% of net income. For the whole year, it expects commission income of around 740 million Euros (i.e. 22% of net income). Piraeus Bank had a net interest income of 160 million Euros during the first quarter (i.e. 25% of net income) and is targeting to around 650 million Euros for the whole year (i.e. around 25% of net income).

Alpha is in hot pursuit of their performance, with net commission income of 108 million Euros during the first quarter (19% of net revenue) and aims to bring in 450 million Euros for the whole year (20% of net revenue). Finally, National Bank of Greece, with 106 million Euros during the first quarter (14% of total revenue), aims to close the fiscal year with approximately 470 million Euros (18% of its net revenue).

Read below the article from special edition of Nextdeal (Issue 560) in electronic form page. 101-102 (click right below to zoom in)