Consumer Lending in Greece

EXECUTIVE SUMMARY

Consumer credit hits low point

After years of growth, consumer credit growth rates turned negative in in 2009 and this remained the case in 2012. With the country facing the most severe recession of recent decades, consumer credit is being squeezed both from the demand and supply side. Massive wage and pension cuts and booming unemployment rates led to a mass decline in consumption and resulted in many consumers being unable to take-on loans. The ‘buy-now-pay-later’ credit culture of past years has come to be replaced by a more conservative stance dictated by what one can actually afford. On their part, Greek banks, facing grave liquidity problems caused by the explosion in NPLs, deposit outflows and their participation in the PSI are rejecting the great majority of new loan applications across all lending categories.

Massive loan re-adjustments amidst booming NPLs

The dismal economic situation has brought numerous consumers into a position where they are unable to pay back debts. With non-performing loans rocketing, banks have moved to massive work-out agreements and are offering borrowers longer deadlines, lower monthly instalments and ‘grace periods’ while forcing them however to provide real estate guarantees. Even so, a significant number of re-adjusted loans turn red again in a short period of time. Amidst generalised consumer insolvency, banks are focusing on more secure types of lending such as home-equity lending. As a result, ‘Green’ loans, used for home energy upgrade projects, seem to be the only developing lending area.

Banks struggling for liquidity

Greek banks announced record losses in April 2012 resulting from the explosion in non-performing loans and their participation in the PSI (bond reduction). Losses for the four biggest banks - NBG, Alpha Bank, Eurobank and Piraeus Bank - amounted to EUR28 billion while it is estimated that EUR18 billion is required to restore banks’ capital adequacy. The final terms for the re-capitalisation of Greek banks, with the participation of shareholders and the European Financial Stability Facility (EFSF), are expected in the summer of 2012. With banks focusing on gaining back consumers that massively withdraw their deposits and with strict issuing criteria leading to massive application rejections, it is no wonder that pawnshops have appeared in every corner of the country.

Law for ‘households in excessive debt’

In late 2010, a law for ‘households in excessive debt’ was put in place which offered bank customers the ability to proceed to a judicial settlement of their debt as long as they can prove that they have found themselves in a position where they are unable to repay despite their best efforts. Amongst the law provisions are the extension of payment deadlines to up to 20 years with a low interest rate or a four-year ‘grace period’ during which the borrower will only pay interest. However, the bulk of loan re-adjustments are made extra-judicially.

Prospects remain grim for consumer lending

The re-capitalisation scheme for Greek banks will have a significant impact on consumer lending over the forecast period. Whatever the outcome, consumer lending is set to deteriorate as rising unemployment rates and shrinking disposable incomes will boost consumer insolvency. From the banks’ point of view, the priority will be portfolio deleveraging and de-risking, intensive remedial management, combined with strict issuing criteria and selective growth, mainly through existing clientele, thus leading to low new origination volumes.

Non-performing loans: a time bomb for Greek banks

The grim situation of the Greek economy, characterised by harsh austerity measures, booming unemployment rates, increases in taxation and cuts in wages and pensions widened the ‘black hole’ of non-performing loans in 2011 and 2012 which can now be described as a time bomb which, together with the out flux of deposits, threatens the viability of Greek banks.

It is estimated that more than 500,000 households delay their monthly instalments by one to three months while 50,000 households have stopped servicing their debts altogether. These numbers rise every month and have also come to affect mortgages, which have so far been considered as the healthier segment of consumer lending. Interestingly, the wide range of workout agreements banks have introduced in order to minimise their losses do not appear to be able to improve the situation.

Current Impact

These developments led to a boom in the amount of non-performing loans in 2011, with card-lending and consumer loans displaying the biggest problems. According to the Bank of Greece, the percentage of NPLs is set to rise even faster in 2012, when wage cut-downs and unemployment rates will increase further as the country gets deeper into recession. By the end of 2011, NPLs in the card lending segment had climbed to 26% from 20.5% in 2010 and this figure had reached 31% by the end of 2012. The percentage of NPLs in the non-card lending segment increased from 15% in 2010 to 19% in 2011 and is expected to reach 24% by the end of 2012.

Even the mortgages/housing segment, which has been considered the healthiest lending segment, with NPLs ranging around 4% pro-crisis, are now also facing severe problems. The percentage of NPLs within mortgages/housing rose from 10% in 2010 to 14% in 2011 and will reach 19% by the end of 2012.

In this context, banks are applying very strict criteria – a development which is leading to a decline in gross lending across all areas while even those borrowers who actually manage to get a loan are frequently granted a smaller one than what they applied for.

Outlook

By now, banks have put into effect very strict criteria regarding age, professional status, income and real-estate guarantees in order to provide new loans. In fact, banks only provide very few new loans and their goal is to provide loans only to those receivers that have proven to be reliable over time – a very small percentage of loan receivers.

Banks will continue to focus on finding ways to stop existing loans from turning into NPLs through special workout arrangements rather than providing new ones. The recession of the Greek economy, new anticipated measures (such as further cuts in wages) and the re-capitalisation of banks are all factors on which the future picture of lending will rely on.

Future Impact

According to the Bank of Greece, NPLs will keep increasing by more than 1% per trimester over the early stages of the forecast period, with predictions for later-on being very risky given the uncertain and rapidly changing circumstances. However, as the ratio of non-performing to total loans has almost doubled between 2010 and 2012 and the recession is most likely to deepen, NPLs are set to increase further.

Property taxation measures affect mortgages

During 2011 and 2012, the Greek government passed various taxation measures in order to increase public revenue. Under the umbrella of public deficit reduction and the urgency of filling in ‘black holes’ of the state budget, a new tax was imposed on all private property in spring 2011. The new tax, which is collected via electricity bills and widely referred to as a ‘poll-tax’, was initially announced to be a one-off collecting measure. However, a few weeks later it was announced to be a permanent tax to be collected annually.

Moreover, the government reduced the tax exemption limit on property from EUR400, 000 to EUR200,000 – thus subjecting thousands of home owners to taxation. In spring 2012, millions of Greeks will be called to pay for ‘forgotten’ property taxes of 2010 and 2011. All those new regulations, along with the internal depreciation that causes rental fees to shrink, are making home ownership a less and less attractive business.

Current Impact

The new taxation measures clearly work as counter-incentives for house ownership and contribute to the steep reduction in home building and buying and, consequently, to a decline in demand for mortgages. As a result, gross lending for mortgages was negatively impacted in 2011 and 2012, collapsing by 29% and 30% respectively. While the vast majority of Greek consumers see owning a house as being essential, under the current circumstances many Greeks choose to rent and delay house purchases. The decline is also coming from the supply side even though banks remain more willing to provide mortgages than any other type of consumer loan as they are considered to be less risky due to their material guarantee.

Outlook

The Greek government is planning to merge the various taxes on real estate into a single unified one in 2012 or 2013. While real estate taxation will be simplified, the overall tax burden will not decrease. On the contrary, according to Greece’s lenders and the Troika, the new unified tax must bring revenue of more than EUR2.3 billion – the sum of the various property taxes today. With this aim in mind, there are plans to reduce, or even abolish, the current tax exemption limit of EUR200, 000 and to increase real estate objective values so as to align them with real market values. In certain areas, where there is significant divergence between objective and market values, great surcharges are to be expected on both transactions and ownership.

In April 2012, the European Commission stated in its quarterly report that there is room for further tax increases through ‘indirect’ measures such as the imposition of imputed income for ownership-occupancy, which actually means that Greeks may be forced to pay in order to live in their own house. When considering all of the above, it is clear that home ownership in Greece is set to become an almost unaffordable option.

Future Impact

With home ownership subjected to constantly rising taxation and thus becoming less and less attractive, demand for mortgages will keep declining over the forecast period. In addition, the main factors that drive the consumer residential loan market (having a stable job and a reasonably good outlook for the economy in general) are quite negative and set to deteriorate over the forecast period.

Salaries are expected to remain low and the possibility of further wage reductions is always open. In addition, retirement and social security benefits will also be cut down further. The end result is that not only will first time home buyers have difficulty affording a new mortgage but their parents will also be financially constrained and limited in their own capacity to help. Taking all the above into consideration, gross mortgage/housing lending is projected to decline at an average annual rate of 15% from 2012 to 2017.

Loan adjustments under spotlight amidst booming payment inability

In late 2010, a law for ‘households in excessive debt’ was introduced which offers bank customers the ability to proceed to a judicial settlement of their debt if they prove that they are permanently unable to pay debts despite their best efforts. The law involves four steps. Firstly, the borrower is obliged to attempt to reach an extrajudicial agreement with the bank. Secondly, the borrower has to apply to the country court stating his/her property and income status, the bank’s demands and a proposed adjustment plan. The third step leads to the settlement before the country court if lenders for over 51% of the debt agree. Finally, should the court decide that the borrower’s property and income are not sufficient to cover his/her debt, a judicial adjustment of the debt is arranged.

The court may then delete a part of the debt, extend payment deadline to up to 20 years with a low interest rate or grant a four-year ‘grace period’ during which the borrower will only pay interest. During the ‘grace period’, the court makes a re-evaluation of the borrower’s status (property and income) and if this is found to be the same up to 100% of the debt can be written off. Moreover, the law states that the borrower’s main residence cannot be auctioned if its value is less than 150% of the tax-exemption limit (currently EUR200,000, thus if the value is less than EUR300,000).

The first court decision was issued on 28 June 2011 and was in favour of the borrower and released him from the obligation to pay an enormous amount he owed to the bank. In addition, in March 2012 other regulations were put into effect which reduced by up to 50% the monthly instalments on mortgages issued by the Deposits and Loans Fund for civil servants in order to come to terms with the sharp wage cuts. Additional regulation included a two-year grace period for mortgages and the extension of the loan’s length until the 85th year of the borrower.

Current Impact

In many cases, banks are making extrajudicial loan adjustments on a massive scale and offering borrowers longer deadlines, lower monthly instalments and ‘grace periods’ while forcing them however to provide real estate guarantees. It is estimated that some 750,000 loans have been adjusted this way over the last couple of years. Banks are making great efforts to keep loans ‘alive’ and not record them as NPLs. Nevertheless, by February 2012 it was estimated that up to 50% of adjusted loans were subject to payment delays, with 3 out of 10 adjusted loans experiencing payment delays from the first month and 2 out of 10 within three months.

In addition, banks are frequently turning down borrowers’ extrajudicial adjustment proposals or replying with proposals that are not in the interest of borrowers – e.g. lower monthly instalments leading to a higher total amount to be paid in the end. During the last months of 2011 and the first months of 2012, courts around the country favoured borrowers and ‘deleted’ interest and debts. As more - but still not many - consumers make use of the new law and as the recession deepens, more banks seem willing to make better adjustments and have created special programmes (with low interest rates and long grace periods) for the unemployed. These types of adjustments are the only option for banks given that the non-performing loan ratio reached 19% for mortgages/housing, 25% for consumer credit and 31% for credit cards at the end of 2012. By April 2012, 700 court decisions had been issued and another 11,000 were already in state courts.

Outlook

Amendments of the law were underway in spring 2012 in order, according to the Consumer’s General Secretary, to counter banking practices that lead to an actual increase in total loan cost in exchange for a lower monthly instalment. One of the various provisions of the amendment is the abolition of the first step of the previous law (ie the compulsory attempt of the borrower to come to an extrajudicial agreement with the bank). This is due to the fact that the first step is judged to be ineffective so far because of banks’ unwillingness to seriously consider borrowers’ requests. Other amendments include the fact that consumers are entitled to bank accounts of up to EUR1,500 which cannot be confiscated and a debt adjustment period of five years starts when the consumer applies and not when the decision is issued. In addition, for consumers with total payment inability the debt will be written-off in three years.

However, the whole context remains rather fluid. It is worth noting that on 30 March 2012, the labour Minister stated that a substantial article of the amendment for ‘households in excessive debt’ (article 49) had been repealed due to on-going discussions with ECB. Ten days later, the minister suggested to the Prime Minister that the article (and essentially the whole amendment) had been re-activated as negotiations with the ECB and the Troika had been completed. Given that parliament could not vote due to the 6 May elections, the amendment was re-activated via a legislative act.

Future Impact

According to consumer association surveys, one out of five consumers in excessive debt (at a personal or household level) declares an annual income of less than EUR4,000, an amount below the poverty line, while 22.3% are unemployed. In addition, 36% of consumers in excessive debt have liabilities to banks that range from EUR80,000 to EUR200,000 while one out of two owes EUR80,000 to EUR300,000. Taking this into consideration, along with pessimistic GDP projections, wage and pension cuts and rising unemployment rates, it is certain that an increasing number of consumers will turn to the courts to reach some kind of debt adjustment agreement.

In this context, banks are expected to make more generous deals in the hope that loans will not be drastically readjusted or worse, written-off completely. An increasing number of people with loans will look for re-adjustment. However, the number of non-performing loans is set to continue increasing over at least the early stages of the forecast period.

Consumer lending in deep freeze

Consumer lending in Greece during 2011 and 2012 was almost non-existent. On the supply side, banks are facing grave liquidity problems. On the one hand, non-performing loans (NPLs) are booming to unprecedented levels despite massive loan re-adjustments. During 2011, some 40% of re-adjusted loans could not be serviced over the next six months as increased taxation, wage and pension cuts and rising unemployment rates (up to 25% in 2012) reduced consumer incomes and thus led to new settlements. On the other hand, under the fear of bankruptcy or to cover basic needs, consumers engaged in massive deposit withdrawals. Since the crisis hit the Greek economy, nearly EUR70 billion of deposits have been removed from Greek banks, with the figure expected to reach EUR100 billion by the end of 2012. The four major Greek banks (National Bank of Greece, Alpha Bank, Eurobank and Bank of Piraeus) announced record losses of EUR28 billion in 2011 due to their participation in PSI and the boom in NPLs. Demand for consumer loans is also shrinking given that consumption is in free fall due to austerity measures and general uncertainty while more and more Greeks are not eligible for loans as unemployment rates boom and wages fall. Following two years of steep decline, car and electric appliances sales contracted further in 2011 by more than 25%. Demand for mortgages is also minimal, with new taxes on real estate adding to the problem.

Current Impact

The lack of adequate lending capital and the explosion of NPLs has led banks to enforce very strict credit issuing criteria, with consumer loan application rejections reaching 95% in 2011 and new loans only being issued to adjust older non-performing ones or to ‘wrap up’ credit card debts. The only lending sub-category that seems to be performing well is ‘green loans’, which are used to finance home photovoltaic systems or home energy upgrade projects.

This grim situation can be quantified in the continuous decline of gross lending for non-card lending, card lending and mortgages/housing (-12%, -16% and -29% in 2011 and -10%, -12%, and -30% in 2012). According to the Bank of Greece, outstanding balance for non-card lending and card lending is declining steadily, contracting by 4% and 13% respectively in 2011 and 4% and 9% in 2012. For mortgages/housing, outstanding balance fell by 3% in 2011 and 4% in 2012.

Outlook

On the supply side, prospects remain grim – for the forecast period at least. The massive reduction in the value of Greek bonds has caused major losses to Greek banks while NPLs and deposit outflows will continue to drain them of necessary funds. What is more, the anticipated re-capitalisation schemes will serve to cover ‘black holes’ and provide the necessary operating funds for Greek banks rather than be channelled to the market via loans. The European Central Bank will provide liquidity under very strict circumstances and the asphyxiating environment will last well over the forecast period.

On the demand side, things do not look good either. The main combination of factors that drive the consumer residential loan market, not only in Greece, but in virtually every developed market around the world is having a stable job and a reasonably good outlook for the economy in general as measured by consumer confidence indexes. Unfortunately for Greece, both of the aforementioned factors are quite negative and not likely to improve in the near future as there is no visible way out of the recession. In contrast, recently introduced and further austerity measures will result in a decline within card and non-card lending areas.

Future Impact

Only time will tell what exactly the future impact of austerity measures will hold for the Greek economy regarding consumer and mortgage/housing lending. However, the long-term outlook is less than positive. Wages fell by 20% in early 2012 and new measures are anticipated in the summer of 2012. Along these same lines and as a direct result of the aforementioned austerity measures, retirement and social security benefits will also be cut further. The end result will be that not only will first time home buyers have difficulty in affording a new mortgage but that their parents will also be financially constrained and limited in their own capacity to help while high taxes on real estate will also have a negative impact. As a result, gross mortgage/housing lending is projected to fall at an average annual rate of 15% from 2012 to 2017.

The picture is similarly bleak with respect to non-card lending. Following the free fall of consumer spending in all areas, cars and durables included, and the inability of financially-ridden consumers to cover even basic needs along with the banks’ liquidity problems, consumer loans will remain at minimal levels. Outstanding balance within non-card lending is projected to fall at an average annual rate of more than 1% over the forecast period to EUR23.2 billion by 2017. Outstanding balance within card lending will fall at an average annual rate of 4% as the ‘buy-now-pay-later’ mentality of the 2000s gives way to a ‘buy-if-you-can-afford-it-now’ stance.

Green loans, a newly evolving area

‘Green loans’ for financing home energy upgrade projects (and, until recently, home photovoltaic systems), represent a new and evolving area. Green loans for home energy upgrade projects are used for environmentally-friendly projects such as replacing oil with natural gas infrastructure, changing window frames and installing heat insulation for walls, roofs and terraces. Interest rates for green loans are subsidised and therefore cheaper for consumers who also expect to save money from their green investments. The money saved can in turn be used to pay monthly instalments and this provides a motive for banks to issue green loans more easily than any other type of loan. While green loans for home photovoltaic systems represented an evolving area in 2010, they came to a halt in 2011 following the announcement of the Public Power Corporation that its network is satiated and will not get power from small producers.

Current Impact

All major banks have launched green loan schemes, offering a wide array of products, and green loans have come to represent the only lending area - along with balance transfer products - which is actually developing amidst the recession. From February 2011, when the ‘Home Saving’ (“Exikonomisi Kat’ Oikon”) programme was re-launched, until February 2012, the number of applications for green loans reached 50,000 and the total budget of the programme, covered by banks and the National Strategic Reference Framework (NSRF or ESPA in Greek), amounts to EUR800 million.

Outlook

With oil prices soaring, more and more financially struggling consumers are expected to turn to the usage of natural gas, which is relatively cheaper. This will in turn lead to increasing demand for green loans used for home energy upgrade projects. In addition, the ‘Home Saving’ project was re-launched in 2011 under more propitious terms and targeting wider parts of the population and there is thus room for further developments. With regard to loans for home photovoltaic systems, the picture remains unclear however as it is likely that the Public Power Corporation will unblock applications for energy supply by small producers and thus trigger demand for home photovoltaic loans.

Future Impact

With prospects looking grim across consumer lending areas, green loans are expected to remain the most promising segment. Banks are expected to launch new and innovative schemes and constant gross lending for other personal lending is only expected to decline at a mild average annual rate of 1% over the forecast period due to green loans and balance transfer products.

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Overview

Discover the latest market trends and uncover sources of future market growth for the Consumer Lending industry in Greece with research from Euromonitor's team of in-country analysts.

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The Consumer Lending in Greece market research report includes:

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