Greece’s four largest banks pass ECB stress tests

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On May 5, the European Central Bank (ECB) published results of stress tests of Greece’s four largest banks. In the worst-case scenario, their capital should not fall below the ECB’s minimum requirements over the next three years. This indicates that the restructuring of banks in recent years have been a success.

The Common Equity Tier 1 ratio (CET1) is used by the ECB to assess the financial standing of banks. Their capital should be enough to cover possible unforeseen losses in the event of a recession, low interest rates, weakening of currencies and a fall in property prices. The ECB considers two scenarios: in the base scenario, the ratio should not fall below 8%, while in the worst-case scenario, the lowest threshold is 5.5%.

In the base scenario, Greece’s GDP is expected to grow by an average of 2.4% annually over the next three years, while in the worst-case scenario, the Greek economy is expected to shrink by 1.3% in 2018, by 2.1% in 2019, and a grow by 0.2% in 2020. According to the stress test findings, in the worst-case scenario, the capital of the country’s largest banks may be reduced by an average of 9 percentage points, or €15.5 billion as follows: the CET1 ratio for Alpha Bank may be reduced to 9.7% by 2020, to 6.9% for the National Bank of Greece (NBG), to 6.8% for Eurobank, and to 5.9% for Piraeus Bank.

The purpose of the stress tests is to assess whether Greek banks need additional capital before negotiations on Greece’s exit from the country’s eight-year financial aid program begin in June. Although all the banks are expected to suffer significant losses under the worst-case scenario, their CET1 ratios will not fall below the minimum threshold recommended by the ECB. This proves that the restructuring of Greek banks was successful. Greece is the country with the largest share of non-performing loans in Europe (approximately 50% of all loans), but the country hopes to reduce this figure from €96 billion to €65 billion by 2019.

What the Greek real estate market can expect

The fact that Greece's largest banks have successfully passed the ECB’s stress test not only signals the financial sector’s gradual recovery, but also positive changes in the real estate market. The lack of financing is the main reason why housing prices are not growing at a rapid pace. As soon as property buyers have access to loans, prices of houses and apartments in Greece will start growing.

The Athens property market is already improving:

• According to the Bank of Greece, in late 2017, the cost of housing in the Greek capital was 44% cheaper compared to its peak in 2008. The decline in the cost per square meter is also slowing: it fell by 5.3% in 2015, by 1.8% in 2016, and by only 0.9% in 2017. In quarterly terms, the fall in prices has already stopped, with real estate prices stabilising between April and December 2017.

• Other sources say that real estate in Athens is already appreciating. According to Global Financial Stability Report April 2018: a Bumpy Road Ahead, a study by the International Monetary Fund (IMF), the Greek capital was 13th among the 42 cities analysed in terms of housing price growth. The IMF report stated that between 2013 and 2017, Athens property prices grew by almost 10% per year. at the same time, housing prices across the country continued to decline, according to analysts.

• The demand for real estate is growing. According to the Bank of Greece, there was a 18% growth in the number of property transactions in 2017 compared to 2016, and 9% growth in the first two months of 2018 compared to the same period the year before.

• The real estate market is recovering, driven by a boom in tourism. According to research company Euromonitor International, Athens is the city with the second-highest rate of growth rate of in tourist arrivals in Europe. The 4.8 million international tourists arrivals in 2017 was 10% more than in 2016.

• Demand among foreign buyers is being boosted by the country’s affordable golden visa programme. a residence permit in Greece can be obtained with purchases of real estate from €250,000. By comparison, the minimum threshold in Spain and Portugal is €500,000. Between 2013 and 2017, 5,700 investors and their families received Greek residence permits under this programme.

According to Tranio analysts, it is an ideal time to invest in the Athens real estate as prices have bottomed out and will only grow from here. Prices are low for high-quality apartments that will appreciate, and investors can rent them for a net yield of 5% per annum. Foreign buyers have already realised this opportunity – according to the Bank of Greece, the total value of transactions concluded by foreigners in the Greek real estate market in 2017 was 86.5% higher than in 2016.

Author: Yulia Kozhevnikova