Greeces banks face an uncertain future as the country squares up to a potential exit from the Euro amidst ongoing economic and political instability in the country.
The instability is manifested through plummeting stock prices and significant reduction in volumes and trading activity. The Hellenic stock market shows reductions in turnover of close to 70% and market capitalization down by more than 50% April YTD.
Additionally, PSI+ (private sector involvement), the deal reached to restructure Greek sovereign debt, resulted in large portfolios of Greek debt being reduced in market value by two thirds. Overall, asset valuations have been severely impacted.
Custody providers such as Eurobank EFG and the National Bank of Greece say the last few months have been particularly challenging with a reduction in inbound flows from foreign investors impacting their business. However, says Dimitri Vassiliou, manager head of Sales and Relationship Management at Eurobank EFG, there are other things apart from custody – that are occupying the minds of the banks at present. The country needs to form a government and this needs to happen after the election on June 12. We have to be confident that things will stabilize after that.
Greeces country risk has negatively impacted the credit ratings of local banks, causing difficulties in their dealings with foreign investors, says Stefanos Tefos, assistant director, head of Relations with Foreign Institutional Investors Group Securities Services at the National Bank of Greece.
In response to the ongoing tensions in the Greek capital market, various changes have been implemented on the market infrastructure. These include, among others, the extension of the prohibition of short selling until July 25 2012, further restructuring of market segmentation in categories of listed equities and the postponement of capital gains tax. On the plus side, says Tefos, the Hellenic Exchange has expanded to other markets through its X-Net, a technology platform of the HELEX Group that is used to interconnect the Greek Market with both developing and developed international capital markets.
The Hellenic Exchange has also changed the segmentation of listed shares by introducing a single category for all eligible securities, separating them from those that are to be delisted. Previously the markets had separate categories for small and medium-sized shares. With the share prices falling the decision was made to place these onto one.
These developments have gone some way to remedy the situation in the capital markets. Domestic and foreign pension funds participation has remained practically unchanged since last year, says Tefos.
On asset valuations, however, fixed income has taken the biggest hit. For example asset valuations that were once 1 are now 25, says Vassiliou. The country has suffered in terms of asset valuations rather than on volumes. After PSI+ there was a slight increase on the valuation of fixed income instruments.
There is no mistaking that Greeces banks have endured the most from the current economic instability. These banks were injected with $22.6 billion this week, which will enhance their depleted capital basis and allowing them once again to access European Central Bank funding. 6.9 billion was allocated to NBG, 1.9 billion to Alpha Bank, 4.2 billion to Eurobank and 5 billion to Piraeus.
Notwithstanding the adverse climate, says Tefos, NBG remains strongly committed to custody services through its dedicated business unit, thus maintaining a confident, robust client-base throughout the years and essentially retaining a considerable part of its foreign customer base, while increasing its domestic one.
A similar pledge comes from EFG Eurobank, where Vasillou says there has been no change in custody and securities services. Things have gone well for us and the bank has had to deal with wider issues including a decrease in assets values and other losses across the business more broadly. In transaction services, which includes our business line, things have gone the same this year as they have in the last year.
There has been a decrease in the number of foreign clients. However the size of the domestic client base has increased and firms who were using local agents or doing self-clearing have outsourced or changed providers. These entities include domestic brokers and domestic mutual funds.
NBG too has seen an increase in domestic business volumes. The largest banks are considered safe havens for domestic institutional custodians, says Tefos. The domestic clients in particular have moved from other providers. These clients include brokerage houses and domestic institutional investors such as asset management companies who are moving their business from other local banks, whose credit ratings have suffered since the creation of the PSI+.
And, despite measures to increase local banks capital bases, the custody departments remain in tact and there is no sign of consolidation. Greek custody remains as competitive as ever, says Tefos. We have more providers than what the size of the country justifies.
Vassiliou too does not believe that banks depleted liquidity will lead them to look at potential disposals of their custody business lines. Banks will be looking at so many different parts of the business [other than ours]. Depending on what happens in the elections afterwards it may make sense for Greek banks to merge.
The banks capital structure is mostly geared towards loans to retail and corporate banking clients and have a greater impact on the balance sheet. The use we make of the balance sheet is minimal.
Furthermore, says Vassiliou, the custody department is performing well. The bank is having discussions with three different institutions at the moment about them outsourcing their business to us.
The current environment has not been pleasant to live in as people are losing their jobs. The future depends on how things will evolve. Its not only a Greece political situation but a Europe wide problem.
We are preoccupied with what will happen in the election. The majority of people want us to have a government and to stay in the Eurozone. But we also need changes at a European level.
(JDC)