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Greek banks’ plans ahead of interest rates cuts

Credit institutions are planning how they can cover the effects of possible lower profits in the two-year period 2024-2025 following a potential interest rate cut

Greek banks must provide a full analysis to the SSM through their three-year business plans that will be delivered at the end of March to the supervisor.

Despite the division that prevails within the ECB on the course of interest rates, the banks have started making plans ahead of a possible interest rate cut, which will certainly bring about a corresponding reduction in profits on their balance sheets.
However, provided that the country’s credit institutions have promised significant profitability in the next three years, they are drawing up plans to cover specific potential losses.

Bank estimates

The banks’ estimates are carried out based on the following scenarios:

A. Interest rate cut by 0.50 basis points in 2024 i.e. two interest rate cuts of 0.25 basis points each. Double reduction i.e. one basis point for 2025 i.e. four reductions of 0.25 basis points each.

B. For every 25 points reduction in the key ECB interest rate, a corresponding reduction in interest income of 25-30 million euros is foreseen in each of the systemic banks and a corresponding reduction in profits of 20-25 million euros.

Interest rate reductions will amount to 120 million euros for each interest rate reduction in all 4 systemic banks and 100 million euros in profit reductions for the 4 credit institutions.

According to the banks’ estimates, it is most likely to see two interest rate cuts of 25 percentage points in 2024 and four cuts in 2025. If these happen, then the four banks forecast potential reductions of 240 million euros in interest income in 2024 and 200 million euro profit reductions for the same year. For 2025, these amounts will be doubled, i.e. 480 million euros in interest income reductions for the four systemic banks and 400 million euros in profit reductions, as interest rates are expected to be cut by at least 1%.

In two years, the banks are required to make up for this loss or, more simply, the 600 million euros less profit, if during this period the interest rates are cut by 1.5%.

The problems with deferred tax

Based on the banks’ estimates, the above loss should definitely be covered.

It should be noted that Greek banks have absolutely no room to ease in terms of their profitability, especially since the SSM stopped dealing with bad loans of the banks and focused on the deferred tax and the distribution of dividends. The deferred tax, if it is not covered through government guarantees (issuance of bonds and exchange), which is not possible at this stage, obliges the banks to achieve high profitability in order to cover it. This high profitability is also necessary for the existence of capital reserves.

Banks do not believe that the SSM’s comments will affect their dividend plans, but that remains to be seen.

How banks will cover losses – Boosting operations and supplies

In order for credit institutions to ensure their profits they will move in various directions activating other sources of profitability.
Some banks such as Eurobank, for example, are speeding up the “capitalization” processes of their investments abroad while using this shield to expand similar investments.

Some other banks see room for an increase in commissions.

The interest rates course

The banks’ plans will become more concrete as the ECB’s plans for interest rates become clearer. The first indication is expected on March 7, while a little later in April new decisions will be made.