Greek banks and insurers – next steps remain critical
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Immediate reaction: Closed bank branches followed by potential capital controls
After months of negotiations Greek Prime Minister Tsipras announced on Friday night that he would put the package of measures proposed by the "institutions" (IMF, EU, ECB) to a national referendum taking place on 5 July. Given the failure to find an agreement with European creditors over the weekend and heightened uncertainty, we expect Greek banks to remain closed or that direct capital controls might be imposed. The Emergency Liquidity Assistance (ELA) will no longer fund deposit outflows. Greece currently has around EUR 90 bn ELA funding. According to press reports, cash withdrawal limitations might be imposed in a first round until 6 July.
To draw a parallel to Cyprus, banks were closed for two weeks followed by capital measures: a maximum of EUR 300 daily ATM withdrawal, EUR 500 transfer abroad and a cap of EUR 1,000 physically taken abroad.
In the short term, we expect uncertainty to rise – a short-term risk off scenario – with a potential negative impact on other Southern European banks – Italian, Portuguese and Spanish houses in particular. Medium-term central bank action, particularly quantitative easing, should prevent yields from rising and thus support banking and insurance stocks.
Medium-term solution for Greek banks depends on referendum
Our main scenario includes the acceptance of the referendum or, in the worst case, new elections in Greece after a prolonged period of uncertainty. Most important for banks (sector rated outperform) is the longer-term continuation of ELA funding. As a result, the European Central Bank (ECB) remains the main regulator for Greek banks in close coordination with the national regulator. As was the case in Cyprus or Ireland, a consolidation of the Greek banking scene into a "good bank" and a "bad bank" would be an option to pursue in the medium term. Deposits over EUR 100,000 should remain protected, while a recapitalization is most likely.
If a failure to reach a deal triggers all the ECB ELA funding – banks could be faced with balance sheet gap of over EUR 90 bn they cannot refund. The only option for Greece would be to introduce its own currency, recapitalize banks and run the recovery and resolution process. Equity, T1 and T2 debt might be written down and senior unsecured debt impacted and suffer losses. While only the tail risk, this cannot be ruled out completely.
Greek banks will no doubt be affected by a harsher recession in coming quarters. Given the turmoil and the negative economic consequences, we expect the asset quality of the banks to worsen further. This will negatively impact the earnings power no matter what the final outcome of the negotiations.
Government bonds play a pivotal role in the context of life insurance products.
We currently rate the insurance sector underperform. The stock market may be afraid of a spill-over effect to other peripheral countries such as Italy and Spain. The insurance sector has a sovereign exposure to both Italy and Spain, representing roughly 15 percent of book value (net after policyholders; 9 percent Italy, 6 percent Spain). Any spill-over effect to either Italy and Spain could weigh on the sector. Most large European insurers would suffer from rising government yields in both Italy and Spain. Swiss insurers as well as Nordic insurers have close to no Southern European exposure and may be safer investments in these days.
How to position?
Overall, European banks have very manageable exposure to Greek corporates, which is mostly collateralized. Sovereign debt has been reduced completely over the last few years. We put all the Greek banks under our coverage under review and expect a harsh negative reaction once the stock exchange opens.
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