School of Social Sciences

School of Social Sciences Master of Business Administration Postgraduate Dissertation “Non-Performing Exposures (NPEs) of the 4 systemic Greek banks: Impact of the IFRS 9 application on the determination of provisions.” Georgios Psimopoulos Supervisor: Pr. Nikolaos Tsagkarakis Athens, Greece, July 2019 © Hellenic Open University, 2019 The content of this thesis/dissertation along with its results is owned by the Hellenic Open University and his author, where each of them has the sole and exclusive right to use, reproduce, and publish it (totally or partially) for educational or research purposes, with the obligation to make reference to the thesis’s title, the author’s name and to the Hellenic Open University where the dissertation was written. “Non-Performing Exposures (NPEs) of the 4 systemic Greek banks: Impact of the IFRS 9 application on the determination of provisions.” Georgios Psimopoulos Supervising Committee Supervisor : Co-Supervisor: Pr. Nikolaos Tsagkarakis Pr. Aikaterini Lyroudi Athens, Greece, July 2019 Georgios Psimopoulos, “Non-Performing Exposures (NPEs) of the 4 systemic Greek banks: Impact of the IFRS 9 application on the determination of provisions” “To my wife Giota, my daughter Dioni & my son Orestis for their support and understanding” Postgraduate Dissertation iv Georgios Psimopoulos, “Non-Performing Exposures (NPEs) of the 4 systemic Greek banks: Impact of the IFRS 9 application on the determination of provisions” ABSTRACT The Dissertation investigates the macroeconomic factors that have an impact on the rising portfolio of NPEs in the Greek banks taking into account the characteristics of the Greek banking system. The analysis is based on the NPLs of the four systemic banks (Alpha Bank, Eurobank, National bank of Greece, and Piraeus Bank). The rapid growth of NPLs and the inability of banks to quickly impair them are related the broader macroeconomic environment, including sluggish growth, high unemployment, capital controls, and limited access to financial markets. In this context, the adoption of IFRS 9 has had a major impact on the loan loss provisions of the National Bank of Greece and Piraeus Bank, a lower impact on Eurobank and no impact on Alpha Bank. NBG and Piraeus Bank have seen a huge decrease in their total assets following the IFRS 9 implementation whereas Piraeus Bank experienced an increase in loans, and NBG incurred a decrease in deposits. The prospects for 2019 are positive. Depositors are gaining confidence in the Greek banks, access to money and capital markets is enabled and the Greek economy demonstrates signs of recovery. A strategy that is expected to significantly reduce NPEs is the transfer of these loans from the banks’ balance sheets to Special Purpose Vehicles (SPVs), In doing so, banks’ portfolios will improve and the Greek banks will be able to maintain high capital adequacy. Keywords : loan loss, impairment, non-performing loans, non-performing exposures, Greek banks, IFRS 9 Postgraduate Dissertation v Georgios Psimopoulos, “Non-Performing Exposures (NPEs) of the 4 systemic Greek banks: Impact of the IFRS 9 application on the determination of provisions” ΠΕΡΙΛΗΨΗ Η Διατριβή διερευνά τους μακροοικονομικούς παράγοντες που επηρεάζουν το αυξανόμενο χαρτοφυλάκιο των μη εξυπηρετούμενων ανοιγμάτων ( ΝΡΕ s) στις ελληνικές τράπεζες , λαμβάνοντας υπόψη τα χαρακτηριστικά του ελληνικού τραπεζικού συστήματος . Η ανάλυση βασίζεται στα μη εξυπηρετούμενα δάνεια των τεσσάρων συστημικών τραπεζών (Alpha Bank, Eurobank, Εθνική Τράπεζα της Ελλάδος και Τράπεζα Πειραιώς ). Η ταχεία ανάπτυξη των μη εξυπηρετούμενων δανείων και η αδυναμία των τραπεζών να τα απομειώσουν συνδέονται με το ευρύτερο μακροοικονομικό περιβάλλον , συμπεριλαμβανομένης της γενικότερης οικονομικής ύφεσης , της υψηλής ανεργίας , των ελέγχων κεφαλαίου και της περιορισμένης πρόσβασης στις χρηματοπιστωτικές αγορές . Στο πλαίσιο αυτό , η εφαρμογή του ΔΠΧΑ 9 είχε σημαντικό αντίκτυπο στις προβλέψεις για ζημιές δανείων της Εθνικής Τράπεζας της Ελλάδος και της Τράπεζας Πειραιώς , μικρότερο αντίκτυπο στην Eurobank και καμία ουσιαστική επίδραση στην Alpha Bank. Η Εθνική Τράπεζα και η Τράπεζα Πειραιώς σημείωσαν τεράστια μείωση του συνολικού ενεργητικού τους μετά την εφαρμογή του ΔΠΧΑ 9, ενώ η Τράπεζα Πειραιώς σημείωσε αύξηση των δανείων και η Εθνική Τράπεζα σημείωσε μείωση στις καταθέσεις . Οι προοπτικές για το 2019 είναι θετικές . Οι καταθέτες κερδίζουν εμπιστοσύνη στις ελληνικές τράπεζες , η πρόσβαση στην αγορά χρήματος και κεφαλαίων είναι δυνατή και η ελληνική οικονομία παρουσιάζει σημάδια ανάκαμψης . Μία στρατηγική που αναμένεται να μειώσει σημαντικά τα NPEs είναι η μεταφορά αυτών των δανείων από τους ισολογισμούς των τραπεζών σε Οχήματα ειδικού σκοπού (SPVs). Με τον τρόπο αυτό θα βελτιωθούν τα χαρτοφυλάκια των τραπεζών και οι ελληνικές τράπεζες θα μπορέσουν να διατηρήσουν υψηλή κεφαλαιακή επάρκεια . Λέξεις -κλειδιά : ζημία δανείων , απομείωση , μη εξυπηρετούμενα δάνεια , μη εξυπηρετούμενα ανοίγματα , ελληνικές τράπεζες , ΔΠΧΑ 9 Postgraduate Dissertation vi Georgios Psimopoulos, “Non-Performing Exposures (NPEs) of the 4 systemic Greek banks: Impact of the IFRS 9 application on the determination of provisions” TABLE OF CONTENTS Abstract ..................................................................................................................... v Περίληψη ................................................................................................................. vi Table of Contents ................................................................................................... vii List of Figures .......................................................................................................... ix List of Tables............................................................................................................ xi 1. Introduction ....................................................................................................... 1 2. Literature Review ............................................................................................. 3 2.1 Global financial crisis and the rise of NPLs .......................................................... 3 2.2 The relationship between NPLs and credit risk .................................................... 5 2.3 Financial crisis and the rise of NPLs in the Asian economies .............................. 6 2.4 Financial crisis and the rise of NPLs in the euro area and Greece ........................ 7 3. Overview of the Greek banking system ........................................................ 10 3.1 Introduction to the banking system ..................................................................... 10 3.2 The Greek banking system .................................................................................. 13 3.2.1 Alpha Bank ...................................................................................................... 15 3.2.2 Eurobank ......................................................................................................... 16 3.2.3 National Bank of Greece ................................................................................. 21 3.2.4 Piraeus Bank ................................................................................................... 23 3.2.5 Comparative analysis between the four systemic banks ................................. 25 4. Nonperforming exposures (NPEs)................................................................. 29 4.1 Defining NPEs .................................................................................................... 29 4.2 Macroeconomic factors that affect NPEs ............................................................ 31 4.2.1 GDP growth .................................................................................................... 31 4.2.2 Unemployment ................................................................................................. 32 4.2.3 Inflation ........................................................................................................... 33 4.3 Macroeconomic factors and NPEs during the 2008 financial crisis ................... 34 4.4 Forbearance and NPEs ........................................................................................ 39 4.5 Provisions for impaired loans and earnings management ................................... 40 5. The Introduction of IFRS 9 ........................................................................... 43 5.1 Introducing IFRS 9 .............................................................................................. 43 5.2 Main characteristics ............................................................................................ 43 Postgraduate Dissertation vii Georgios Psimopoulos, “Non-Performing Exposures (NPEs) of the 4 systemic Greek banks: Impact of the IFRS 9 application on the determination of provisions” 5.2.1 Initial measurement of financial assets ........................................................... 44 5.2.2 Financial liabilities measurement ................................................................... 47 5.3 Provisions determination before and after IFRS 9 .............................................. 48 5.3.1 Expected credit losses (ECL) model ............................................................... 50 6. Macroeconomic Determinants of NPEs in the Greek banks ...................... 52 6.1 Gross Domestic Product (GDP) .......................................................................... 52 6.2 Consumer spending ............................................................................................

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