Three Greek, One Cyprus Banks Fail ECB Stress Test

Three of Greece’s top lenders and Cyprus’s biggest bank failed the European Central Bank’s health check Sunday, but have taken steps since the start of the year to shore up their beleaguered balance sheets and have largely addressed their capital needs.

According to the ECB, National Bank of Greece NBG, +3.93% Piraeus Bank (TPEIR.AT), Eurobank Ergasias (EUROB.AT) and Bank of Cyprus (BOC.CP) faced capital shortfalls at the end of last year, while two smaller Cypriot banks also came up short.

Their balance sheets as of end December 2013–on which the stress tests were based–showed the six banks would have to raise some 10.4 billion euros ($13.2 billion) among them, almost half of the capital needs identified by the ECB among the euro-zone banks it tested.

Alpha Bank, the fourth-largest of Greece’s big four systemic banks and traditionally the country’s most conservatively run bank, was the only lender to pass the test.

But the ECB also said that restructuring plans–which include recent capital increases, assets sales and cost-cutting measures–submitted by the Greek and Cypriot lenders, meant that five of the six now have “no or practically no shortfalls” in their capital. Greece’s No. 3 lender, Eurobank, for example, now needs to raise some 17 million euros, compared with more than four billion euros at the end of last year. Three quarters of that was covered by a rights issue in April.

In a statement, Greek Prime Minister Antonis Samaras hailed the results saying “they surpassed every expectation,” adding that the country was slowly emerging from its five-year-long debt crisis.

Greece’s banks have been battered heavily by the crisis, a six-year recession, a steep decline in Greek property prices, deposit flight and an unprecedented 200-billion-euro sovereign-debt restructuring in early 2012.

In 2012, the four Greek lenders were first recapitalized with the help of a European Union loan, but have also since raised money from the financial markets while taking steps to boost their capital, including shedding staff and selling assets. Earlier this month, NBG–the country’s biggest banking group–began the long-delayed process of reducing its stake in its Turkish subsidiary through a secondary rights offering for the unit, raising $1.58 billion in the process.

“The results of this exercise provide confirmation that the capital raising and restructuring plans implemented by the four Greek banks have significantly strengthened their capital positions,” the Bank of Greece, the country’s central bank, said in a statement.

Likewise Cyprus’s biggest bank, the Bank of Cyprus, raised one billion euros from the financial markets in September, while it has also offloaded a number of foreign subsidiaries. Cyprus’s Cooperative Central Bank has also received a 1.5-billion-euro capital injection from the government this year, allowing it to pass the ECB test, but Hellenic Bank–Cyprus’s number two lender–will still need to raise another 180 million euros.

However, each of the four Greek banks–as well as Bank of Cyprus–are still laboring under a mountain of nonperforming loans, forcing them to set aside billions of euros in provisions and weighing on their bottom line. In Greece’s case, those bad loans are now around 80 billion euros, a sum equal to almost half of the country’s gross domestic product, and are not expected to peak until later this year or early next year. Faced with those bad loans, and prompted by the fear of the stress tests, the banks have also been reining in lending, something that crimped Greece’s economy.

In a statement, Finance Minister Gikas Hardouvelis said it was time for the banks to start lending again. “As the state, we expect that the banks will dedicate themselves to financing the economy, that is, to essentially boost the market’s liquidity,” he said in a statement.

Source: MarketWatch