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The Greek Asset Protection Scheme appears to be maturing, with EU approval received today .

 Our estimates show it would lead to a 36% reduction in NPEsu and 15% improvement in profits at a capital cost of 230bp  Banks would be 29% more expensive in aggregate. But theu improvement in perception should outweigh the capital cost.

 The Greek government has today received approval for its “Hercules” Asset Protection Scheme (H-APS) by the EU Competition authorities that targets the large stock of Non-Performing Exposures (NPEs) on Greek banks’ balance sheets.

This note serves two purposes. First, we provide an in-depth introductory guide to securitisations of NPEs and APS. Second, we provide a practical example and in the process assess the impact on the Greek banks assuming securitisations in line with the available data and press reports. We think the H-APS should be judged on two accounts: versus a simple securitisation, and versus sticking with existing plans.

The incremental impact versus a simple securitisation is easier to explain; the bank gains capital (52bp by our count) and losses profitability (60bp lower ROTE based on our estimates). The capital gain however might be instrumental in facilitating the transaction. The government sponsorship might also improve pricing beyond what we assume in our estimates. Overall, we think that the H-APS is currently economically viable as the benefits versus an outright securitisation offset the negatives.

Things are a bit trickier when comparing the H-APS to the banks’ existing plans. NPEs would fall by 36% accelerating the NPE reduction by just over 1.5 years versus our base case estimates. Profits would jump by 15% with ROTE at 5.5% versus a baseline 3.8% in 2020e. But the capital hit from the transaction would also lead to a c230bp loss of capital and make the banks 29% more expensive on a PTBV basis.

It is important to note that we stand with the minority and believe that the banks would be able to deliver on their existing NPE reduction plans. The H-APS would serve to dispel some of the doubts of the majority. As a result, we think it would be positive for the market’s perception of Greek Banks. Alpha Bank is our preferred play in the sector (see Alpha Bank, 16 September 2019 for more).

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