GREECE: NPL Market Snapshot 1Q2018

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1 Greece NPL Report GREECE: NPL Market Snapshot 1Q2018 March 2018 A review of the Greek non-performing loan market Delfi Partners & Company 2018 DP 0 Private & Conflidential

2 Greece NPL Report Executive Summary Following the Wall Street collapse in 2008, and the subsequent effects on a global scale, Greece s economy has been facing significant financial difficulties. In 2009, the government announced its difficulties to the public, leading to 2010 and the complete shut out by the financial markets. European Union s representatives, Troika, which consists of three European bodies, namely the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF), issued bailouts to save the country from economic destruction and avoid the drifting of the whole European economy. The plan was to provide the country with time to be able to restore its economic problems. Not only the measures were unsuccessful on a macroeconomic level, they also lead to unprecedented economic misfortunes for the local population. As a consequence of the economic crisis, consumers and companies could not repay their financial obligations to the banks, leaving the banking sector hanging by a string. The financial institutions and mostly the four major banks (National Bank of Greece, Eurobank Ergasias, Alpha Bank, and Piraeus Bank) have been trying to find serious investors to take over the NPLs they had in hand and liquidate. Currently Greece is the country with the highest NPLs in the EU with non-performing loans to total gross loan reaching 47.2% in 2017Q3. Dealing with non-performing loans is a top priority for the country s financial institutions. Reduction of the non-performing exposures requires the increase in sales of loans. The economy has slowly started to improve along with the quality of loan portfolios, and this can result in an increase of portfolios attractiveness to investors. Greece will rise again Forbes DP 0 Private & Conflidential

3 Greece NPL Report 1Q2018 DISCLAIMER & LEGAL DISCLOSURES Report Origin This publication report originates from DELFI PARTNERS, global tradename Delfi Partners & Co. and Delfi Partners & Company. Report Content This report has been prepared solely by Delfi Partners & Co. Opinions or suggestions of Delfi Partners & Co. may deviate from recommendations or opinions presented by other departments of the Company. This may be the result of differing time horizons, methodologies, contexts or other factors. Opinions for investment, pricing yields etc. are based on one or more research methodologies. This document is based on publically available information. Although the information as well as any views or forward-looking statements contained herein are believed to be fair and accurate in all material respects, the contents have not been verified independently by the team, and no express or implied warranty as to the accuracy or completeness of such information/ opinion is made by Delfi Partners & Co. emanate from publically available information or information from Delfi Partners & Co. analysts. To the extend this report is based on or contains information emanating from other sources, Delfi Partners & Co. has deemed the Other Sources to be reliable, but cannot guarantee their accuracy, adequacy or completeness. Limitation of liability The opinions expressed in this report, are subject to certain reservations in terms of uncertainties derived from changes to major factors such as future adjustments or amendments of the legal status, changes in the financial and economic circumstances, political risk, country risk etc thus, the study group accepts no responsibility or liability for damages, if any, suffered by any party as a result of decisions made or actions taken based on this work product. The contents of this document are subject to corrections or change at any time given the provision or announcement of updated information related with the content of the report and the timely instruction by the Client. This report bears a specific date. All opinions and estimates in this report are, regardless of source, given in good faith, and may only be valid as of the stated date of this report and subject to change without notice. The assumptions made in this report in order to express our opinion of the submitted values and conclusions, are considered appropriate in light of the circumstances, and by no means is it possible to validate the accuracy and completeness of the judgments and estimates undertaken. Nothing contained herein is, or shall be relied upon as a promise or representation as to the future. In accordance with the standard practice of the Company, we would state that this report is for the use of the party to whom it is addressed to and no responsibility is accepted to any third party for the whole or any part of its contents. Neither the whole nor any part of this report nor any reference thereto may be included in any document, without our written approval of the form and the context in which it will appear. Validity of the report This report is intended only to provide general and preliminary information on the Cypriot real estate market and shall not be construed as the basis for any investment decision. This report has been prepared by Delfi Partners & Co. as general information for private use to the parties that the report has been distributed, but it is not intended as a recommendation of particular strategies or product and thus does not provide investment advice. Before acting on any information in this report or publication, it is recommendable to perform one s own research and consult with their advisors. Sources This report may be based on or contain information, such as opinions, recommendations, prices and estimates which DP Hellas 1 Research Desk NPL Snapshot

4 Greece NPL Report 1Q2018 Overview of the Greek Economy Following the global events of 2008, the Country sank into recession with a negative GDP growth recorded YoY from 2008 to Greece, in 2015, started showing the first signs of economic recovery, with a minor positive growth in GDP, reaching 1.7% in 2017 and is expected to sustain a positive growth the following years. Consumer prices in Greece are also rising gradually, with average inflation in 2017 reaching 1.23% in 2017, up from 0% observed in General government gross debt for 2017 is estimated at 326bn, showing a rise of 45% since 2007 (pre-crisis). This is an indicator of the economy s difficult position and the poor sustainability of government finance. since 2014 and is forecasted to rise to 19,182 until 2022 according to IMF. The country is existing with the fear of semipermanent fiscal deficit. All three main credit ratings agencies cut Greece s rating to a default rate during the crisis, while now Moody s and S&P rose their assessment of Greece to B due to the growth of the economy and the improvement of political stability. The country agreed to three bailouts in the process for rescuing the economy, with the latest being in 2015 with a value of 86bn which is scheduled to be completed in August Greece have already started attracting investors and once they exit from the memorandum, this will induct as a positive GDP growth, Unemployment and Inflation in Greece GDP growth % Inflation Unemployment rate Source: IMF, edited by Delfi Partners & Co. While the general government deficit as a percentage of GDP has been slowly decreasing since the peak of 2014 (180.9% of GDP) and is forecasted to be reduced even further to 161% until According to IMF, during the crisis, Greece experienced the highest unemployment rate in the EU, reaching 27.4% in 2013 and since then it slowly declined to 22% in 2017 and is projected to decline the next years to 17% in GDP per capita in Greece reached a more than 10-year low in 2013 at 16,742 which represents a drop of 26% when compared to its peak in GDP per capita has been slowly increasing signal for future investors and can result to a growth in investment. The country also imposed capital controls in 2015 while being under negotiations over the country s extension of the bailout. These extreme measures resulted to the population no longer trusting the Prem Watsa financial system in Greece, creating money circulation problems since they could only withdraw up to 60 per day. Today the economy seems promising and shows signs of positive growth, the Government has loosened capital controls to 2,300 per month. DP Hellas 2 Research Desk NPL Snapshot

5 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 Greece NPL Report 1Q2018 Real Estate Overview As the Greek economy is growing and is expected to grow further in the next few years, the real estate market is also positively affected. Following seven years of residential values recording a downward trend, the cycle is now exhibiting signs of a turnaround. This improvement in the real estate sector is evident in the major cities, with Athens experiencing a slight fall of 0.9% in the price index of dwelling since 2016 (the smallest drop so far) compared to 2013 where the recorded decline was 12.3%. In Thessaloniki, the country s second largest city, there was a drop of 1.4% in residential prices since 2016, marking the smallest drop since 2009, with the peak being in 2012 with a fall of 13.6%. In other cities excluding Athens and Thessaloniki prices of dwellings fell by 1.4% in 2016, while in 2012 the change was -10.7%. Index of Prices of Dwellings According to the global property guide, rental yields in Greece have been showing a positive trend. Gross rental yields in Greece on apartments reaches 4.2% for 120sqm apartments. Office and Retail Prirce/Rent Index (2010=100) Office Price Index Retail Price Index Source: Bank of Greece, edited by Delfi Partners & Co. Office Rent Index Retail Rent Index Office and Retail markets are following the same downward trend with housing prices during financial distress in Greece. From 2015, when the economy was no longer experiencing negative GDP growth, property prices showed a small recovery and are expected to stabilise, before increasing as the economy gradually improves over time. Athens Thesaloniki Other cities Source: Bank of Greece, edited by Delfi Partners & Co. Greece begun attracting investors from abroad (non- EU) by offering the incentives of residence without citizenship when buying a property worth more than 250,000. Golden Visas program was created in July 2013 and provides residency (5 years) when investing in real estate, and it can be renewed every five years, while there is no minimum stay requirement. For a citizenship to be granted, there is a seven (7) years minimum residency. The Golden Visa program was established in the first place to attract investors and boost the real estate market in Greece. Greece house prices are rising as its economy recovers. However, high property taxes in Greece can be discouraging. Taxes in Greece have been extensively rising since the financial crisis, with taxation authorities calling property owners to pay approx. 3.2 billion in property tax (ENFIA) for the time between September 2017 to January European Commission in 2016 ranked Greece as one of the top 5 countries with the highest property tax in the EU. DP Hellas 3 Research Desk NPL Snapshot

6 Greece NPL Report 1Q2018 NPL Legal Framework Institutional investors are interested in the Greek Banks NPL Market. In order to facilitate the reduction of NPL s, the Greek Parliament passed a new legislation on the 16th of December 2015 with law number 4354/2015 assigning Bank of Greece as the controller of NPLs. Furthermore, the Bank of Greece has the authority to provide licenses to Loan Asset Management Companies, agreements for the management of the claims and to monitor the transfer and sale of claims from NPL agreements. According to the law, the definition of Loans that fall in the category of Non-Performing Loans have to pass the threshold of ninety (90) days which are not serviced by the clients. In 2017 changes have been implemented to the law on NPLs. On the 19th of May 2017, the Parliament have passed the new law 4472/2017 amending the previously mentioned law. The new law has introduced the procedures needed for licensing of the Loan Asset Management Companies (LAMCs). As the name explains LAMCs are the companies that manage the NPLs of the bank acting with the permission of the Bank of Greece. The new NPL law gave to the LAMCs the power to manage the real estate assets given to financial institutions under a mortgage/loan for security reasons. Further the LAMCs can manage on behalf of the owners the leasing of properties to third parties. Another amendment to the previous law was the abolishment of the three-member committee that was responsible for issuing the licenses to the LAMCs. Law 4472/2017 was enacted to allow, in general, the procedures to be simplified and run faster than before. Based on the above, institutional investors turned their eyes to Greece s NPL market, seeking opportunities for profits. This kind of approach to the financial problem is helping the Greek Banks to liquidate their assets and allow them to continue the lending procedures, which results to a gasp of air in relation to the previous years. DP Hellas 4 Research Desk NPL Snapshot

7 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Greece NPL Report 1Q2018 Non-performing Loan Evolution Non-performing loans in Greece have been increasing since the financial crisis, resulting to one of the highest levels in NPLs in the EU. In 2017Q3, NPLs to total gross loans reached 47.2%, which indicates a rise of almost 10% compared to the same period last year. Also, according to Bank of Greece, NPEs remain high across most asset classes, with NPE ratio reaching 43.3% for residential, 53.2% for consumer and 43.6% for the business portfolio for end-september Greece Non-Performing loans % % Source: IMF, edited by Delfi Partners & Co. The sharp rise in banks bad debt can act as a drawback for the country s recovery and can result to a longer period with slow growth due to the banks inability to financially support jobs and growth. Bank s top priority is to reduce existing NPLs along with trying to reduce new ones by improving their credit underwriting criteria. Following European Central Bank regulations, banks in Greece have decided to reduce NPEs by approx. 40% aiming to reach 64.4 billion by the end of If they manage to achieve this, then banks will be able to finance other sectors of the economy that are currently unable to do so. NPE across banks bn % Non-performing Loans to Total Gross Loans Non-performing Loans Net of Provisions to Capital 42.6% 45.2% 53.6% Pireus Bank Eurobank Natioanl Bank of Greece Alpha Bank Business Mortgages Consumer International NPE target 175% 47% IFRS9 in 2018 which is expected to improve coverage levels. The reductions until 2019 will be driven by restructurings, collections, write-offs and key loan sales. Greek banks have also started the sale of loans in the market, mainly in the business portfolio. Eurobank has already sold an NPL portfolio of 1.5bn (unsecured portfolio). On 5 th of February, National Bank of Greece officially introduced the process for unsecured loan sales of 5.2bn. Also, Alpha Bank is now (2018) expecting investors to submit their bids for Venus loan portfolio with book value of c. 2.5bn. Piraeus Bank is still in the discussion for transferring 2 portfolios (total value 1.5bn). The first portfolio is named Aktos including unsecured loans, while the second portfolio is named Amoeba and it contains secured corporate loans. Source: Banks latest financial statements, edited by Delfi Partners & Co. NPE across the main 4 banks in Greece has reached 103.8bn, having a target to reduce this amount to almost half of it, by Combining the NPE of the four main banks, it is observed that 9% of NPE relates to international exposures. Source: IMF, edited by Delfi Partners & Co. NPE of four main Banks 91% Non performing loans to Total Gross Loans (2017Q3) Ukraine Greece Cyprus Italy Portugal 16.35% 14.59% 9% 43.14% 47.20% Greece International 56.44% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% Source: Banks latest financial statements, edited by Delfi Partners & Co. Banks have started adopting certain actions in the process to reduce non-performing loans such as regulatory changes and the transition from IAS39 to DP Hellas 5 Research Desk NPL Snapshot

8 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Greece NPL Report 1Q2018 Cyprus NPL market The Cypriot Banking sector managed to steadily recover from the financial crisis of 1Q2013. The banking sector achieved a substantial recapitalisation in less than four years, which restored confidence and domestic/ foreign investment. However, the banking sector is still fragile due to a high percentage of non-performing loans to total gross loans. NPLs in Cyprus are lower than in Greece. Dealing with non-performing loans is a top priority for the Central Bank of Cyprus as well as the island s financial institutions. The government has made several improvements to the legislative system and process with a revised foreclosure legislation and loan securitisation legislation. The economy s stabilisation and return to growth, is accompanied by a steady decline in the percentage of non-performing loans to total loans, which sits at 43.1% in 2017Q3 according to IMF. Compared to Greece, Cyprus has shown enormous improvement in the process for declining NPLs and managed to successfully reduce NPLs from 48.7% (peak in 2016) to 43.1% in 2017Q3. Cyprus Non-Performing loans % % Source: IMF, edited by Delfi Partners & Co. Non-performing Loans to Total Gross Loans, Percent Non-performing Loans Net of Provisions to Capital, Percent The value of Cyprus NPEs, is 17.8bn by combining the core banks in Cyprus (Bank of Cyprus, Cyprus Cooperative Bank, Hellenic Bank). With Bank of Cyprus having the biggest non-performing exposure from all banks with 8.8bn followed by CCB with 6.7bn. NPEs are expected to continue a steady decline over the next few years due to the Cyprus foreclosure legislation and measures that the Central Bank has enforced focusing on loan sales and securitisation deals. 191% 43% NPLs across Cyprus Banks bn % 58.80% Source: Banks latest financial statements, edited by Delfi Partners & Co % Bank of Cyprus Cyprus Cooperative Bank Hellenic Bank Corporate Retail SMEs Other Core banks in Cyprus have already taken measures for controlling their NPLs. On December 2017, Bank of Cyprus announced the engagement of Pepper Cyprus Limited, a fully owned subsidiary of Australia s Pepper Group Limited, to assist the Bank in resolving non-performing loans from its SME and Retail portfolio. Meanwhile, Hellenic Bank Public Company Ltd sold its NPL and Real Estate Management business to APS Debt Servicing Cyprus Ltd. APS Cyprus, 51% owned by APS Holding and 49% by the Bank, will manage the Bank s non-performing loans and real estate assets, commencing operations on the 3 rd of July Finally, Cooperative Central Bank made an agreement with Spain s Altamira Asset Management SS, Europe s second largest non-performing loans management company with a portfolio of 65bn, to set up a joint unit. 51% of the unit is owned by the Spanish corporation and 49% by the CCB. The bank has produced an ambitious strategy for the next five years, including reducing NPLs by 2.7bn, writing off 2bn of loans and raising its coverage ratio to 67% from 47%. The agreement with Altamira, has a duration of 10 years and does not provide for the sale of assets in the possession of the bank, however it aims to help achieve the Bank s targets. DP Hellas 6 Research Desk NPL Snapshot

9 Greece NPL Report 1Q2018 DELFI PARTNERS HELLAS: Research Team Details Contact Details: Dr George Mountis DP Managing Partner (Greece, Cyprus, SEE) Contact Details: Costas Zeniou DP Director (Greece, Cyprus) Contact Details: Vaios Kafteranis DP Compliance & Corporate Affairs (Greece, Cyprus, SEE) Contact details: Renos Koliandris DP Senior Real Estate Analyst (Greece, Cyprus) DP Hellas 7 Research Desk NPL Snapshot