February 27, 2014 / 9:09 AM / 5 years ago

Greece's lenders accept lower capital ratio for bank health test

ATHENS (Reuters) - A health check of major Greek banks is likely to reveal a capital shortfall of about 5 billion euros after Greece’s international lenders accepted a lower capital adequacy ratio than in previous stress tests.

A man walks outside the Bank of Greece headquarters in Athens February 27, 2014. Greece's international lenders have agreed that a lower capital ratio can be used in a second stress test of the country's major banks, bringing it in line with a European banking benchmark, a banker close to negotiations told Reuters on Thursday. REUTERS/Yorgos Karahalis

Greece’s central bank will discuss the stress tests on National Bank (NBGr.AT), Alpha Bank (ACBr.AT), Piraeus Bank (BOPr.AT), Eurobank (EURBr.AT) and smaller peer Attica Bank (BOAr.AT) with the country’s “troika” of international lenders before releasing the results next week.

The tests were run to assess whether last summer’s 28 billion euro recapitalisation left the banks capable of absorbing future shocks as bad loans keep rising.

The four big banks are expected to need about 5 billion euros ($6.83 billion) in extra capital, banking sources told Reuters last week, a sum near the bottom of estimates that have ranged from 4.5 billion to 15 billion euros.

The estimate, based on figures given by the Bank of Greece (BOGr.AT) to each of the four banks, is subject to approval by the “troika” - the European Union, International Monetary Fund and European Central Bank - overseeing its bailout.

In a sign that the two sides are converging on the capital shortfall, the troika has accepted a lower capital adequacy ratio used in the stress test, bringing it into line with a European banking benchmark.

“The troika has agreed to a Core Tier 1 ratio of 8 percent in the baseline scenario,” a banker close to the talks told Reuters, declining to be named.

Lenders had wanted the test to be based on a Core Tier 1 capital adequacy ratio of 9 percent, the same as that used in the first round of domestic health checks in 2012.

That rate reflected the high rate of bad loans in Greece’s banking sector. The lower reference rate will mean lower capital needs for Greece’s four main banks.

Addressing shareholders at Thursday’s annual meeting, central bank chief George Provopoulos said the stress tests were completed on conservative assumptions and that results would be published next week after talks with the lenders on “technical details” relating to methodology.

Provopoulos, also a European Central Bank Governing Council member, said Ernst & Young and Rothchild were external advisers on the health check, which was again based on an asset quality review conducted by BlackRock.

Senior Greek banking sources said Provopoulos’s statement meant that the final capital shortfall to be announced will not differ materially from the central bank’s current estimate.

“I understand that the Bank of Greece will go ahead with the numbers the stress test produced (about 5 billion euros),” a senior banker told Reuters on Thursday.

Provopoulos reiterated in his speech that Greece’s bank rescue fund HFSF, majority owner of the four lenders, has an over 8 billion euro buffer to meet any further capital needs.

Protracted talks with the troika have pushed back the outcome of the test, which was expected early last month. Bankers complain that the delay has undermined Greece’s economic recovery and put off investors looking to take part in the privatizing of No. 3 lender Eurobank.

Non-performing loans held by Greek banks rose to about 31 percent of their total loan book at the end of the third quarter last year from 29.3 percent at the end of the first half.

Greek banks’ incapacity to lend has starved the Greek economy from credit, exacerbating its debt crisis and turning it into a six-year economic depression from which it hopes to escape this year.

Bank loans to the private sector have been shrinking for almost three years, Bank of Greece figures for January showed on Thursday, shrinking by more than 11 percent over the period.

Writing by George Georgiopoulos; Editing by Catherine Evans

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