Greek banks' losses show pain of bond swap

Two top Greek banks posted historic losses for 2011 on Friday as huge writedowns on their government bond holdings after last month's sovereign debt swap blew holes in their balance sheets, leaving them undercapitalised. Alpha Bank and Eurobank together posted losses of 9.3 billion euros ($12.3 billion), about 10 times more than they are currently worth in the market.
Alpha's core capital ratio (Tier 1) fell to 3 percent. Eurobank, the country's second biggest, did not disclose its but said the hit left it with total equity of 875 million euros. The banks treated losses from last month's bond swap to cut the country's debts - part of a rescue package negotiated with the European Union and International Monetary Fund - as if they took place last year.
The bond swap inflicted real losses of about 74 percent on bondholders. "The results, so far, are close to what the market had expected, particularly for Alpha, less for Eurobank which was somewhat below expectations," said analyst Manos Hatzidakis at Beta Securities.
Third largest Alpha said that use of a 1.9 billion euro standby facility by the Hellenic Financial Stability Fund, a state capital backstop, would take its Core Tier 1 ratio to 7.3 percent. A previous March 31 deadline for banks to report earnings was extended to April 20 to give them more time to assess the impact of the debt swap and prepare their capital plans.
Banks will need to fill the resulting capital shortfall and meet a core Tier 1 target of 9 percent by end-September demanded by the Bank of Greece, the country's central bank. On this front, they have acted to boost their core capital, including by issuing preferred shares to the government, buying back hybrid securities and selling foreign subsidiaries.
With the economy mired in recession and unemployment at a record 21.8 percent, asset quality deteriorated, meaning banks' non-performing loans rose further - by 130 basis points to 12.9 percent of Alpha's loan book. Eurobank's bad debt provisions rose 4.7 percent last year.
On Thursday, the HFSF fund received 25 billion euros of European Financial Stability Facility (EFSF) floating rate notes. It has been cleared to provide letters of commitment to banks that it will underwrite their capital needs. About 50 billion euros have been earmarked in Greece's second bailout to prop up the banking sector. Top Greek lender National Bank and fourth biggest Piraeus Bank are expected to report results later in the day.