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Southern European economies continue to outperform the core. Banking sectors once laid low by the sovereign debt crisis have staged a remarkable recovery. In Greece, bank shares have doubled on average since the end of 2022. Funding costs are falling, as Alpha Bank’s discounted €300mn AT1 issue showed this week.
The next leg of their recovery will depend on the extent to which they can return capital to their shareholders. They have recently received the go-ahead from the European Central Bank after a 16-year hiatus. But one residual legacy of the crisis may hobble that process: deferred tax assets, or DTAs.
Specifically, deferred tax credits (or DTCs) are a type of DTA linked to the €107bn of non-performing loans that weighed down the Greek banking sector at the end of 2015. Potential losses were too big for banks to handle on their own and had to be transferred to the state.
In effect, DTCs are implicit state guarantees that remain on the balance sheets of Greek banks today, to the tune of €13bn, or 44 per cent of total CET1 across the sector. As such, they also count as core loss absorbing common equity tier one capital. The idea of outsized payouts to shareholders starting from the same pot would be financially and politically contentious.
Greek banks are hardly planning to be profligate. They have guided for payout ratios of 50 per cent in their business plans to 2026. A cautious approach makes sense given the sector’s record. But current profitability suggests that a 70 per cent payout ratio could be justified, notes Gabor Kemeny of Autonomous.
These tax assets are not just a hurdle for payouts. They are fully counted as equity and hence suppress return on equity metrics. This also boosts tangible book value and suppresses associated valuation measures.
This will take a while to work itself out. Annual amortisation will only resolve the DTCs fully by 2040-42. DTCs as a proportion of CET 1 will fall to 37 per cent for National Bank of Greece and Alpha Bank by 2026, thinks Autonomous. Amortisation — about €150mn-€200mn a year at each bank — could be accelerated if DTCs do prove to be a hurdle to payouts.
But the problem is not insurmountable. In Spain, CaixaBank has DTAs equal to 44 per cent of its CET1 from its acquisition of Bankia. That has not prevented it from increasing its payout ratio from 50 per cent to 60 per cent.
Whether Greek banks’ dividends and valuations are in effect capped rests heavily on whether the country can follow this Spanish model.