ALBKY Alpha Services and Holdings SA (PK)

ATHENS—Greece's top four lenders will need to inject up to €14.4 billion ($15.8 billion) in fresh funds to strengthen their capital base, according to the results of a health check performed by the European Central Bank released on Saturday.

The amount, which was determined by an examination of lenders National Bank of Greece (NBG) SA, Piraeus Bank SA, Eurobank Ergasias SA and Alpha Bank AS., is in line with market expectations. The banks are now required to say how they plan to raise this capital by November 6.

The checks were carried out using baseline and more-adverse scenarios for the course of the Greek economy up until the end of 2017 to project possible credit losses.

Under the baseline scenario, the banks will need €4.4 billion, while under the adverse scenario, the capital shortfall reaches €14.4 billion, the ECB said.

"Covering the shortfalls by raising capital will result in the creation of prudential buffers at the four Greek banks, which will improve the resilience of their balance sheets and their capacity to withstand potential adverse macroeconomic shocks," the ECB said in a statement.

This will be the third capital increase for the country's battered lenders since Greece's debt crisis erupted in 2010, and it must be completed by the end of the year. From January, European rules on bank recapitalization potentially require bank depositors to take a hit.

The country's state-owned recapitalization fund, the Hellenic Financial Stability Fund, will cover any capital gap beyond the baseline scenario if it cannot be raised in the market, by buying a mix of new shares and contingent convertible bonds that banks will issue. The new shares will have full voting rights.

A breakdown of figures shows Piraeus Bank, the country's second-largest lender, has the biggest recapitalization requirement, needing to meet a shortfall of €4.93 billion. Eurobank, the only lender that isn't majority owned by the Greek state, has the smallest need at €2.12 billion. Alpha Bank needs €2.74 billion in fresh capital, while the country's largest lender NBG requires €4.60 billion.

According to Greece's third bailout agreement reached in mid-July with international creditors, eurozone countries and the International Monetary Fund, some €25 billion of public money was earmarked to recapitalize Greece's banks. The framework for the bank recapitalization got the backing of the majority Greece's lawmakers on Saturday.

The banks are likely to raise these amounts, according to analysts, as they wrestle with a massive pile of nonperforming loans, a key challenge for the sector. With the economy slipping back into recession this year, albeit at a milder rate than initially expected, about one in two loans held by Greek banks are nonperforming.

The management of those loans is also proving to be a major obstacle in continuing talks between Greece and international creditors over the country's next tranche of aid, raising policy issues on how the banks should recover their outstanding loans.

They also pose problems for helping to finance the recovery. With funds tied up in bad loans, Greek banks have been severely restricted in their ability to provide fresh finance to companies and households. Demand for credit has also plummeted amid the downturn that wiped about a quarter of the size of the economy since 2010.

"The next big challenge for [Greek] banks will be to get back to normal," said Ricardo Garcia, European Economist at UBS Wealth Management. "Now everything depends on the first review; despite some hiccups, overall things are moving in the right direction, obviously helped by the better than expected economy."

Provisions taken for bad loans continue to take a heavy toll on earnings, according to the latest batch of profit figures released by Greek lenders on Saturday. Banks had held off from revealing these figures until the completion of the asset review performed by the ECB.

Piraeus Bank reported a net loss of €635 million for the first nine months of the year, narrowing from a loss of €1.6 billion in the same period a year earlier. Alpha Bank was also in the red for January to September by €838.4 million versus a year earlier profit of €129.3 million. NBG unveiled second quarter figures showing a loss of €1.6 billion, which compares with a €159 million loss in the first three months of the year.

Other problems faced by the sector include restoring liquidity conditions for the domestic banks that have been relying heavily on emergency funding from the ECB. Lenders suffered a major flight of deposits during the six-month-long negotiations between the Greek government and the country's international creditors, that prompted the introduction of capital controls over the summer.

In a bid to finally restore confidence in the Greek financial system, regulators set a high bar for the stress tests this time round.

The banks are required to have a common-equity Tier 1 ratio of 9.5% after the baseline stress and 8% after the extreme stress. That is much more than the respective 8% and 5.5% hurdles in the previous health check up.

Write to Stelios Bouras at stelios.bouras@wsj.com

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(END) Dow Jones Newswires

November 01, 2015 20:05 ET (01:05 GMT)

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