A big debate started at institutional level about it deferred tax and its management with a focus on our country, because unfortunately the Greeks banks have, in all respects, the most onerous elements in relation to deferred taxes.
As everything shows, this variable as a percentage of banks’ capital must decrease due to the need for shareholders to obtain a higher return from the banks’ success.
What’s happening abroad and what’s happening in Greece
Autonomous provides enlightening information on how deferred tax is used in bank balance sheets, but mainly on how to deal with it.
In Spain, deferred tax is offset against bank profits and, in the event of losses, these are converted into government bonds (thus avoiding a loss of capital on the part of the banks).
In Italy, deferred tax is offset against profits and there is no option to convert capital into bonds. Deferred tax will be fully amortized by 2030.
Irish banks do not have deferred tax credits on their capital.
Greek DTC law allows for extended straight-line amortization: 20 years for deferred amortization related to previous loan write-offs and 30 years for losses incurred on banks’ balance sheets by PSI. The annual depreciation of Greek banks (150-200 million euros in each bank) can be offset by annual income tax payments. As Autonomous reports in its report, although the corporate tax rate for banks is 29%, in practice banks pay almost no tax.
Greek banks have far more deferred tax assets on their balance sheets than any other bank in Europe, including other countries in the region. The sector held deferred tax credits of €12.9 billion at the end of 2023, equivalent to 44% of total capital. At the same time, the figures are unfavourable compared to GDP, public debt and deficit.
This discussion was opened for two reasons:
- Investors are increasingly demanding dividend distributions from profitable Greek banks. But profit sharing has an absolute ceiling when DTC relative sizes are so high
- Greek banks have moved from balance sheet consolidation to growth and deferred taxes are a visible thorn in their balance sheet.
What is the options
So what could banks gain from reducing deferred taxes? Eliminating conversion risk could alleviate regulator concerns about the quality of bank capital, potentially paving the way for higher capital distributions, which is the end result.
Recycling DTC into income-generating assets (e.g. bonds) could improve banks’ profitability.
According to Autonomous, lower DTC participation combined with increasing returns on capital would reduce banks’ cost of equity capital and therefore valuations could potentially increase.
Straight-line depreciation
In the case of straight-line deferred tax depreciation – a tactic followed by Greek banks to date – the CDT will have been eliminated by 2040-42.
By 2026, DTC’s share as a percentage of CET1 will decrease to 24% at Eurobank, 37% at Ethniki and around 50% at Piraeus, reports Autonomous.
The assessment is that this will allow banks to distribute dividends that will amount to 50% of their profitability.
If Greek banks remain profitable, a quick DTC write-off could be an option.
Accelerated amortization rates
Banks could very well be tempted to tackle DTC at an accelerated pace.
Of course, one issue is that a faster DTC amortization would require Greek banks to issue more MREL debt, since regulatory capital is part of MREL resources.
The report’s assessment is that such discussion could begin more intensely in the next period.
Replace DTC with titles
Converting DTCs into Greek government debt would have a double benefit, as, the report says, it would reduce DTC but also generate income for banks from the bonds, which would reduce deferred tax. This is what Spain does.
The problem is that the government will face growing debt and possibly a higher public deficit, depending on Eurostat’s assessment of this new bond issue.
The deferred amount is equivalent to 6% of GDP, well above the 3% in Spain or 1% in Italy, and the Greek government with such a decision could quickly find itself in a process of excessive deficit
Outlook for Greek banks
The stable performance of Greek banks in the last Stress test her ECB to 2023 provides evidence that regulators are comfortable with the industry’s risk profile. However, Greece, being a small regional country based on cyclical industries, and investors consider the country an economy vulnerable to an unexpected recession in Europe. If an economic downturn leads to deep losses, the presence of DTC would complicate the outcome relative to other markets.
However, Autonomous considers the Greek banking sector to be structurally attractive because:
- constitutes a centralized banking system,
- has room to accelerate loan growth,
- it also has good prospects for building credit quality after the extensive liquidation of banks’ balance sheets.