Markets will punish banks mum on Greek debt plans: audit firms


Markets will punish European banks that fail to write down their Greek debt adequately or don’t tell investors how they will boost their capital buffers by June, auditing firms say.

Greece let another deadline slip on Monday for responding to painful terms for a new EU/IMF 130 billion euro bailout, which includes banks taking a far bigger hit on their Greek debt holdings than the 21 percent agreed last summer or a 50 percent loss outlined in October.

Auditors say further writedowns in fourth-quarter earnings are due because market prices have been below even the 70 percent “haircut” banks face under the new Greek deal.


Five and 10-year Greek debt showed discounts of 80 percent on Dec. 31, the cut off period for fourth quarter earnings.

Accountants say the writedowns will have to be made for the fourth quarter of 2011 even though the deal with Greece is only now being formalised.

“It would be hard to argue that the hit is going to be less than 70 percent,” said Iain Coke, head of the financial services faculty at the ICAEW, an accounting industry body.

Auditors said a bank’s “available for sale” holdings of Greek debt will have to be priced at the 80 percent discount seen at the end of December. Debt held at “amortised cost” would likely take a 70 percent hit based on the anticipated net present value of the private sector deal, auditors said.


Deutsche Bank was among the first banks in the EU to report fourth-quarter earnings, taking a further hit of 144 million euros on its Greek debt holdings, roughly in line with the looming 70 percent deal.

Deutsche’s net exposure to Greek debt had shrunk to 448 million euros by the end of 2011 from 1.6 billion euros a year earlier, mirroring a pullback seen at many banks.

“At the end of the third quarter, banks were mostly in the 60 to 70 percent writedown bracket. They will be taking a bit more in the fourth quarter but it won’t be massive,” said John Hitchins, global chief accountant at PwC.

French banks BNP Paribas, Societe Generale and Credit Agricole, which report earnings starting Feb. 15, will be closely watched given their exposure to Greece via both sovereign debt and local retail subsidiaries.


Bank of America analysts estimate a 75 percent writedown on Greek debt would have a net fourth-quarter impact of 445 million euros for BNP, 180 million euros for Credit Agricole and 145 million euros for SocGen.

Although Credit Agricole is the least exposed to Greek sovereign debt of the three, with 158 million euros in its banking book at end-September, it has a big exposure to the broader Greek economy via its local unit Emporiki.

If a deal for a 70 percent writedown is formalised, the market price for Greek debt could drift back up to allow lenders to book a small write back in the first quarter on their available for sale holdings, Hitchins said.

Andrew Buchanan, a senior technical partner at BDO, said if a deal between banks and the EU for a 70 percent writedown is not signed, then the focus for possible writedowns will expand to include other EU countries struggling with high debt levels.

“In addition to Greece, key countries on the radar at the moment are Portugal and Hungary. While we are not currently of the view that those are impaired, they are being watched quite closely,” Buchanan said.


Some banks face other pressures in earnings reports, such as telling investors how they will comply with a requirement from the European Banking Authority to have a core capital buffer of 9 percent by June.

A stress test of lenders in the EU found that 31 banks must fill a 115 billion euro capital gap aimed at restoring investor confidence in the sector hit by debt crisis in Greece, Portugal and other euro zone countries.

The banks have only had to present plans privately to regulators but some have already made their intentions public or are already taking action to improve ratios.

“A lot of them have already made it but some still have some way to go so they will have to publish plans on how to get there,” PwC’s Hitchins said.

Deutsche Bank made a point of saying last week it has met the EBA target already.

“All the banks quote capital ratios in their earnings statements so if you are short of the target the market is going to demand an indication of how you are going to close the gap. There is no regulatory requirement but the analysts want to know how they are going to get there,” Hitchins said.