Interview with Kathimerini
Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Evgenia Tzortzi on 19 January
21 January 2023
So welcome to Greece. How was your visit?
Thank you. Very good. I’ve had good meetings with the staff, the management, with the Governor, a good meeting with the banks. So it has been very fruitful.
And what has come out of these contacts?
For me, it's always an opportunity to first of all engage with the staff. There are a lot of staff in the Bank of Greece that are working with us in on-site inspections, in what we call the Joint Supervisory Teams that are supervising the individual banks, and in expert groups. They are part of our team so it's important for me to connect with them, to tell them what is my direction of travel, what are the main issues that I expect them to deal with, so that's the most important part. Also with the banks, having a little bit of dialogue with them is always important to give them some messages and to receive some others.
You took over as the Chair of the Supervisory Board in 2019, and since then we have had three shocking years, starting with the pandemic, and after that the invasion in Ukraine, and then high inflation rates. How do you describe the state of the banking sector in Europe and particularly in Greece now?
The banking sector is in a much stronger position than it used to be. So notwithstanding the pandemic, and notwithstanding the war, the energy shock, and also some volatility in financial markets, the capital position of the banks is very strong. The cleaning of the banks' balance sheets in terms of non-performing loans (NPLs) has continued, so the ratio has continued declining, and profitability has recovered. 2022 has been a surprisingly positive year. I say “surprisingly” in the sense that investors' expectations were beaten in all the quarters that we have seen so far. So it has been a very positive year for banks. Also, because interest rates have played out positively in terms of profitability. These general messages are true also for Greek banks. Also the Greek banks have to be praised for the progress they've made in disposing of NPLs, in cleaning their balance sheets, in reducing costs, becoming more efficient, more focused.
Of course, let's say, first of all, that there are different situations across different banks, but still, in general, the sector is in a much stronger place. It's still on the path of normalisation, so there is still some distance from peers in the other countries in the European Union, but the efforts made have been massive, and the progress has been very positive.
So we come to the point, then, because the Greek banks have opened the discussions on dividend distribution after, let's say, 13 rather gloomy years. What are the conditions for such a prospective movement? Have you in mind the deterioration of the growth outlook, and what data are you going to consider in order to make your decision on this matter, on this topic?
As part of the normalisation, Greek banks will be looked at, as we do for every bank under our supervision. So the way in which we look at distributions, we announce it – it's a policy that is well known to all banks – it is a sort of forward-looking approach. We ask banks to give us their capital trajectories, their capital projections under the baseline scenario, in terms of interest rates, growth, and under an adverse scenario, for three years. If, even under the adverse scenario, a sufficiently conservative adverse scenario, the banks are able to remain above all our supervisory tripwires, let's say, requirements and buffers, including a payment of some distributions, we would not, in general, object to that. Of course, the task of our supervisory teams is also to challenge the banks to make sure that they have sufficiently conservative scenarios that they take seriously along with the possible risks that come from a possible recession. That is less likely, but still possible in the euro area. Α possibly faster than expected and higher than expected increase in interest rates could be good for some banks, maybe, but could also jeopardise the solidity of some customers. So if all these aspects are taken together...
So it's a matter of capital?
For us it's a matter of capital. Again, for us, the issue is that distributions are capital that exits the banking sector. So we don't want to regret that. We need to be sure when this capital exits to remunerate the shareholders, the banks are able to remain on a safe trajectory. Then, if they can do that, remunerating shareholders is the normal bread-and-butter business of a normal company.
This scenario is similar to the stress test scenario or it is something different?
We need to differentiate. We have a regular stress test every two years, done with the European Banking Authority, which is much more of a sort of resilience test, or a very harsh scenario, with a static balance sheet assumption. So there is a shock and the banks cannot change the composition of their balance sheet, and so it's much tighter in terms of requirements. This exercise will rely mainly on the banks' own projections. Of course, we challenge them from the supervisory point of view, but it's a little bit lighter, because we rely on the banks' own assumptions and estimations.
Given the fact that a significant part of the profitability of the Greek banks is related to financial income, do you think that the level and composition of the profitability justify the request for dividends?
Our perspective is very much forward-looking. If it is a one-off profit that you have in one year, but you are not able to produce the same profitability in the coming years, it will show in the capital trajectory. You will not have capital generation, so the bank will be weaker going forward. For us, what we need to see is that the bank is able to be sufficiently profitable to generate a sufficient amount of resources in the coming years to remunerate the shareholders and to maintain the capital trajectory on a safe path.
One source of this request is probably the NII, the income from the interest rate, but still, the Greek banks have a lower capital ratio among the other European banks. Does this matter? Do you think they should step up in their effort to increase their capital ratios?
First of all, let me say that, indeed, the increase in interest rates, the exit from a negative interest rate environment, is in general a positive for banks' earnings. But, as things usually go, especially as interest rates go higher, you start seeing also winners and losers. So it's clear that, as a bank, if you are exposed to customers that are very sensitive to interest rates, like commercial or residential real estate, for instance, you can also start adding deterioration of asset quality as interest rates go up. Consumer loans, also, is another segment. It might be that also the increase in interest rates is not positive for everybody. There could be banks that will start suffering when interest rates go higher. In terms of capital, the banks in Greece, in general, have relatively lower management buffers, but above the requirements of the supervisors. This is for a good cause, to some extent. They have to use capital to take the losses necessary to clean up their balance sheet and to dispose of non-performing exposures. But of course, we expect that by restoring profitability they need to prove that they are able to build more resilient buffers going forward.
So are you worried about the emergence of a new stock of bad loans because of the high inflation? Are there any signs of such a deterioration?
So far, the indicators of asset quality are still pretty positive. The NPL ratio, has continued declining throughout 2022. If you look at the drivers of this decline, the most important driver has been disposals of NPLs. So securitisation, like here with the Hercules programme, or sales of NPL portfolios. If you look at the inflows and outflows of NPLs, now it's a bit more balanced, so you start getting more stability, and you start seeing a little bit of an uptick of what we call stage 2 loans. So underperforming loans that have signals of deterioration – not yet non-performing, but which have signals of deterioration. We have reached the highest level since the start of the banking union. It's now getting closer to 10%.
Is this high?
It’s starting to be a bit high, but still it’s not a huge increase. So, for the time being, if you look forward to the baseline scenario of a short and shallow recession and increasing interest rates, which is expected with normalisation of monetary policy, there will be a slight increase in NPLs, that will probably be, on average, more than compensated by the increase in revenues, in margins, so it is still positive for the European banks. Of course, as I was saying before, this is an average – there will be winners and losers, so there will be some banks that will do much better, and some banks that will struggle. And the supervisors will care about individual banks, not about the averages, so that will be the main point of attention for us. The other point is, of course, that the war, the Russian invasion of Ukraine, has also created an energy shock. That has created other elements of potential tension, because some manufacturing sectors are now also experiencing a significant increase in energy costs, and this means that they can struggle paying their loans. So these are the other areas on which we are focusing our attention.
Greek banks have a large exposure to corporates because they cleaned up their balances because of the securitisations and they don't have too many household loans currently. So their main exposure is to corporate loans. Do you think this is a good or a bad thing?
In general, corporate exposures are not a bad thing. They have been growing significantly in several Member States recently. To assess this you need to go much deeper – we are doing a lot of analysis on sectors. So there are certain manufacturing sectors that are particularly energy-intensive. I'm thinking of metal, chemicals, ceramic.
We do have these activities in Greece.
Now the energy costs are going down a little bit again, so maybe this will not be such a big issue as we were afraid of only a few months ago, but still it is something that we are looking into. Other issues are, of course, the disruption of supply chains that can affect, again, certain corporates, so we need to be a little bit more granular in our analysis.
Let me turn now to another topic of public interest here in Greece. The first one is the divestment process of the Greek State from the banks. The question is what will be the supervisory role in this process?
If the Hellenic Financial Stability Fund starts divesting, as they have announced they will do in the coming years, our main perspective will be on who will buy those stakes. For us, what is important is to have robust shareholders. So, if the stakes go above certain thresholds, we will have to assess the quality of the shareholders, and then for us what is important is that you have investors that bring a strong vision to the banks and ensure the growth and the safety of the banks going forward.
Do you think that the Greek banks are able to attract high calibre investors based on the high suitability criteria?
I think that the progress which has been made recently starts opening good avenues for investors locally or internationally to be considering these types of investments. Of course, it's not up to me to say. I'm not an investor myself, but what is important is that the banks have again become attractive. This is part of the normalisation process. By being attractive on the equity market, they can also become more attractive in other funding markets. Part of the normalisation of monetary policy is that banks will have to fund themselves in the market much more, and they will also have to meet the targets for minimum required eligible liabilities, the loss-absorbing capacity which is requested by resolution authorities. So becoming attractive is an important element to have access to these markets and to funding on reasonable terms.
One more topic of public interest here in Greece is the level of commissions on a number of crucial banking transactions, such as the instant payments, which is the new trend in the European Union and elsewhere. The Greek Government put pressure on the banks recently. How do you see this interference?
I cannot comment, because I don't know enough on the whole process. What I can say is that from a supervisory perspective, as an authority, we think that, eventually, it is up to the banks to set the fees and commissions to the quality of the service, and then it is up to the customer to decide if they are satisfied or not with this type of services. In the payments area, I have noticed that there's been a strong tenet of European policy to open competition to banks also from third-party providers, from non-bank providers of payment services. They can access directly the accounts of customers at banks with initial payments, with sometimes applying lower fees. Also, if customers are not satisfied, they should − thanks to this opening policy that has been done at the European level − be able to access services from other providers. So I think that the avenue for addressing these issues, if there are issues, is definitely robust competition in the market.
Do you think this is feasible, taking into account the comparatively low income from commission fees in the total income for the Greek banks compared to the other European banks?
I think that, in general, if I look at the prototype of a safe and sound bank at the European level, it is a bank that, under different cyclical and financial market conditions, is able to produce a stable flow of revenues and profits. This also means that they need to have some diversification of sources of profits. So it's good to have traditional profits from deposit-taking and lending, traditional banking business, but it's also good to have some profits from services provided to customers through fees and commissions. So having both, and having both robust enough, enables banks to continue having a good flow of profits. Also, when one of the two legs is disrupted because of cyclical condition or market developments.
Do you think that other providers, like payment institutions or maybe commercial providers, are a threat for banks in the field of transactions?
As I said already with reference to payments, there are areas in which I think there's some competition to banks from new providers with a more technology-focused model of business able to provide customers with a better experience and better services, and sometimes also better pricing. That's something which we should view favourably. Now, in general, what we have seen is a process by means of which a number of different types of players have started attacking different parts of the value chain of banks: payments, lending, consumer lending, FX business. Sometimes also big players such as Amazon, Google, have started offering financial services in their platforms. So it's clear that this has been seen as a challenge for the banks, but I have to be honest, banks in the first stage were pretty defensive, so saying, “We should push back on these entities which are not regulated. There is no level playing field.” I think that the pandemic changed the narrative.
So banks themselves understood that they had to invest in a digitalisation agenda, in a digital transformation, and in being able to offer better services to their customers, and using these also as a way to keep the customers linked to them, and to reduce their costs. So banks which have done that, with a significant investment sometimes in digital technologies, are the banks that now are doing very well in the market.
From time to time you have highlighted the need for mergers in the European banking industry. Do you think there is a scope in the Greek banking sector, the Greek banking system?
When I talk about mergers, I don't do so from an industrial policy perspective. I think that, eventually, it is up to the bankers to understand the opportunities. My point has always been, from a supervisory perspective, that banks still now are lagging a bit behind in terms of refocusing their business model, so investing in digitalisation, improving cost-efficiency, dismissing or maybe selling the lines of business where they are not profitable enough, and getting higher scale in the areas of business where they are good and they have a good franchise. Mergers are a good tool for doing this radical rethinking of the business model, and banks which have pursued this avenue have sometimes also been very effective in reshaping their IT infrastructure, serving their customers better, and being more profitable. There is also still some excess capacity in the European banking sector, so having some mergers can also help dealing with this excess capacity.
But do you mean mergers in Greece or also cross-border ones?
There are different types of mergers. There are the mergers that are particularly effective on cost-efficiency. For achieving those gains, you need to have some overlapping of the distribution network, because you can then reduce staff, reduce branches, and gain in terms of efficiency and profitability, but there are other mergers that are instead more positive in terms of diversifying the sources of revenues. What, for me, is important as a European supervisor, is that if you have a cross-border merger and tomorrow there is a shock that hits one country, the losses in one country can be compensated by the bank by profits that they make in another country. So this diversification effect is very positive, and is what drives our support for cross-border consolidation.
The Greek banking sector is interconnected with the Cypriot one. Do you think that this is a good example for cross-border involvement?
Well, again, it’s up to the banks to decide where they want to expand their business and diversify their sources of revenue. So it's not something that I would prejudge myself, but indeed, having some form of diversification is useful. For me, it's also one of the benefits of the banking union.
What about an ongoing initiative between Eurobank and the Hellenic Bank in Cyprus?
Yes, I know that Eurobank has requested an authorisation to increase their stake in Hellenic Bank. This is something we are currently assessing, but in general we view favourably European banks developing their interests also in other Member States.
Last but not least, what are the supervisory priorities for the next three years, from 2023 to 2025? You have identified these three sectors, which are to strengthen resilience, to address digitalisation and address climate change.
Yes, you're right, these are the main areas of focus. I will give you some examples of the supervisory work we are doing in these three areas. In the area of the nearest-term priority, which is the shock that is currently impacting on the European banks, we are doing a lot of work on exposures which are particularly sensitive to interest rates now that interest rates are increasing, so commercial real estate, residential real estate, consumer lending. We are doing work on sectors which are particularly exposed to the energy shocks. We are doing work on interest rate risk and credit spreads risk, so how banks would manage a shock on interest rates. We have completed already and sent a lot of recommendations to banks in this area, and we are doing work that maybe is not so relevant for Greek banks, but still is very relevant at the European level, on financial markets and the exposures that the banks have, especially to derivatives contracts, or direct financing of non-bank financial institutions that could take risks in leveraged finance markets and in high-yield financial markets more generally. So these are the main priorities there.
On digital transformation, we are reviewing for the moment what the banks themselves are adopting as their digital agenda. For us, a specific focus is governance here. You need to have robust governance processes, good coverage of IT and cyber risk, and we are zooming in also on outsourcing practices. On climate and environmental risk, we have done a number of exercises in 2022, and we set some expectations for the banks on how we expect them to manage proactively climate risk, and we want them to be there by the end of 2024. So we will follow their progress.
They don't like it?
Well, I think they will thank us eventually. Sometimes the task of a supervisor is to push banks to do things that maybe today they don't like, but that can build their resilience and their reputation going forward.