Greek Banks: Navigating the CHF Loan Resolution for Equity Upside and Systemic Stability

The Swiss franc-denominated loan crisis has been a thorn in Greece's side for over two decades. With approximately 65,000 borrowers (and 200,000 co-signers) grappling with loans that surged in value due to the CHF's 50% appreciation against the euro, the government's pending resolution—expected by year-end—could finally stabilize both borrower balance sheets and those of Greek banks. This article examines how the resolution might reshape equity valuations and systemic stability, offering insights for investors.

The Resolution's Structure: Balancing Borrower Relief and Bank Viability

The proposed solution aims to convert CHF loans to euros at current exchange rates, fix interest rates for three years, and keep loans off the non-performing (NPL) ledger. By avoiding NPL classification, banks sidestep immediate capital hits, preserving their regulatory buffers. For borrowers, this caps repayment obligations at “realistic” levels tied to income—a stark contrast to failed “step-up” arrangements that deferred pain but caused installments to double post-deferral.

However, the devil lies in the details. Banks must absorb some costs to protect capital ratios, which the ECB's Single Supervisory Mechanism (SSM) will scrutinize. If the ECB approves terms that limit write-downs to manageable levels, Greek banks could emerge with cleaner balance sheets. Conversely, overly borrower-friendly terms—such as full CHF-to-EUR conversion without interest—might force banks to take larger hits, dampening near-term profitability.

Greek banks currently trade at P/B ratios of 0.3–0.5x, far below peers in Spain (0.8x) or Italy (0.7x). A successful resolution could catalyze a re-rating, as NPL overhangs are resolved and investor confidence returns.

Systemic Stability: Mitigating Contagion Risks

The crisis's broader threat has been its potential to trigger a wave of defaults and asset sales, destabilizing banks. Over 200,000 individuals face losing homes or businesses, with unpaid capital ballooning to unsustainable levels. Without resolution, mass defaults could push NPL ratios higher, forcing banks to seek capital raises or face ECB intervention.

The Hercules securitization program, which has already offloaded €30 billion of NPLs, is a key backstop. However, new CHF-related NPLs could strain this mechanism unless the resolution prevents further defaults. The ECB's blessing will be critical here: ensuring the plan aligns with SSM rules and avoids destabilizing capital shortfalls.

Legal and Regulatory Crosscurrents

The European Commission is pressuring Greece to enforce CJEU rulings requiring borrowers repay only the original principal, as in Romania and Hungary. If the government caves, banks may face forced contract revisions, exacerbating costs. However, precedents like Croatia's CHF loan settlement—which avoided investor-state disputes by offering fair compromises—suggest a middle path exists.

Investors should monitor whether the resolution mirrors Croatia's approach (partial CHF conversion plus extended terms) or leans toward full borrower relief. The former preserves bank equity, while the latter risks write-downs but avoids legal battles.

Investment Thesis: A High-Reward, High-Risk Opportunity

Upside Case:
- Balance Sheet Cleanup: Removing CHF loans from NPLs improves capital ratios, unlocking P/B revaluation.
- Economic Catalyst: Resolving borrower distress could boost consumer spending and business investment, benefiting banks' core lending businesses.
- Valuation Multiplier: Greek banks trade at historic lows; even a modest re-rating to 0.6x P/B would yield 20–33% gains.

Downside Risks:
- Execution Delays: If the ECB or Commission blocks terms, uncertainty lingers, keeping stocks depressed.
- Cost Overruns: If borrower-friendly terms force deeper write-downs, near-term earnings take a hit.

Investment Strategy:
- Position for Resolution: Accumulate positions in Greek banks (e.g., EFG Eurobank, Alpha Bank, Piraeus Bank) on dips, with a focus on liquidity and capital strength.
- Monitor ECB Feedback: Positive SSM approval signals systemic stability, while delays or rejections warrant caution.
- Compare to Peers: Outperforming European banks trading at higher P/B multiples (e.g., Spain's Santander or Italy's UniCredit) could signal broader confidence in Greece's recovery.

Conclusion: A Turning Point for Greek Banking

The CHF loan resolution is a pivotal moment for Greek banks. While risks remain, a well-structured deal could lift equity valuations and solidify systemic stability. Investors should treat this as a long-term opportunity, balancing near-term volatility with the potential for a multiyear recovery in Greece's financial sector. As the saying goes: “The best time to buy Greek banks is when no one else will.” The resolution's final terms may finally make that a prudent bet.