GIG: Greece’s economy is on a growth trajectory, but there are uncertainties at a global level weighing on gross domestic product (GDP). What does this mean for Greece’s banking sector? What measures do you expect, at a governmental level, to further boost economic growth?
Karavias: After a decade of depression, relapses, and several episodes of teetering at the very edge, Greece is finally back on a path of solid and sustainable growth. The positive shift is everywhere. Economic sentiment is at a 12-year high; capital controls are fully lifted; deposits are flowing back into the banking system, slowly but steadily; real estate prices are on the rise; and all Greek assets are appreciating. Who would have bet, even some months ago, that Greece would join, so soon, the club of sovereigns borrowing at negative rates? And yet this is already true for Greek T-bills. This is not to underestimate the economic headwinds from declining growth in the eurozone, the possibility of a western (if not global) recession, a protracted era of low rates that challenge banking income, and rising geopolitical uncertainties in the eastern Mediterranean. The Greek economy has only just started to recover from a very low base, therefore there is room for high growth rates if the government pro-business agenda for investment-led growth is fully and timely implemented. The emphasis lies on lowering taxes, reducing red tape (especially for investors), kick-starting flagship projects like Hellinikon, and starting to deliver on revamping the public administration and improving judicial procedures. We are off to a good start, but we need to keep up the pace.
GIG: In 2018 Eurobank completed the process of merging with real estate company Grivalia, a move aimed at boosting its capital and helping it tackle NPEs. Can you tell us about this initiative and the benefits it has brought about so far? What additional steps does the bank’s restructuring plan involve?
Karavias: The merger between Eurobank and Grivalia was a cornerstone of our integrated plan to deal with the NPE stock. We were extremely pleased that the market proved appreciative of our plan. The merger strengthened our capital base by 210 bps, boosting our total capital adequacy ratio to 18.6%, the highest among our peers. This allowed us to initiate an accelerated clean-up of our balance sheet. We completed the first securitisation of NPEs in Greece for a €2.5 billion loan portfolio, and then we proceeded with a second securitisation of €7.5 billion of loans, along with the sale of our subsidiary FPS to doValue. Upon closure, we are the first Greek systemic bank with an NPE ratio of 16%, committed to further reduce it to a single-digit by the end of 2021.
Having delivered on capital and NPE stock reduction, we focus on profitability. In line with what we have promised our shareholders that we aim for a return on tangible equity (ROTE) close to 10% this year, as value creation is our prime target.
GIG: Lending to businesses and households is a crucial step needed for the economy to return to normal. However, many small business owners and investors complain that they are starved of finance. How do you respond?
Karavias: It has been a recurring theme in the media, and in the public dialogue, that Greek banks – due to the high level of NPEs – cannot finance the economy. This was never entirely true, and it is entirely untrue at present. Even during the peaks of the Greek crisis, banks never stopped financing the economy. The main problem was one of lack of healthy demand due to the subdued economic activity, and the increased number of borrowers with impaired balance sheets and/or business models. As the economy recovers, lending has been an upward trend recently, albeit at a pace still well under pre-crisis levels. In the beginning of 2019, Greek banks completed the task of restoring normal financing operations and currently are not drawing liquidity from the Emergency Liquidity Assistance (ELA) mechanism. Increased and lower-cost liquidity, along with a noticeable pickup in economic and investment activity in Greece, amplifies our ability to extend loans to healthy businesses as they identify opportunities in the upward economic cycle. I have repeated many times that no solid business plan will come to our consideration that we shall not find the means to finance. At Eurobank, in parallel with the accelerated clean-up of our balance sheet, we are focusing on financing our clients, individuals, households and above all businesses, in all countries where we are present – Greece, Cyprus, Bulgaria, Serbia, and Luxembourg.
GIG: One of the biggest problems faced by the country’s financial system is strategic defaulters and a weak payment culture. What can be done to resolve the issue?
Karavias: While weak payment culture has been without doubt an aggravating factor, one must not neglect the fact that the Greek economic downturn was of unprecedented intensity, with a cumulative loss of more than a quarter of the GDP. Having said that, dealing with strategic defaulters is a priority, even more so as their behaviour hinders efforts to alleviate the burden for those who are in real need. Important steps have been made in the right direction. First, the introduction of e-auctions in 2018. Then, the new legislation on personal bankruptcy, which differs substantially in the way it offers protection to specific households. While the previous law, the so-called Katseli law, provided blanket protection – thus incentivising strategic defaulters to file for it, if only to delay the process by a long and often indefinite time – the current law focuses on realistic solutions for debtors who collaborate and do want to achieve a viable solution, not stall the process. Further recent improvements reduced the administrative burden for those who sign in to the dedicated electronic platform. The fundamental new concept is that sticking with the terms agreed goes hand-in-hand with benefiting from the repayment provisions for the total outstanding debt and the level of instalments. This is a milestone in the effort to create a more solid basis for the understanding between banks and their clients, in other words, a more solid basis for lending in the future.
GIG: Eurobank’s enter•grow•go (egg) programme supporting start-ups is in its eighth year. What about the egg makes Eurobank most proud? What about the egg should other banks in Greece take note?
Karavias: Our enter•grow•go (egg) programme is recognised as a leading incubator, having been instrumental in enhancing the innovative entrepreneurship landscape in Greece. Started in 2013, one should have in mind the kind of environment in which this initiative was born. This was one of the peaks of the prolonged economic crisis and a most challenging period for the banks. However, we believed in its prospects and in the need to create something that would allow a new generation of entrepreneurs to stay in the country and turn their ideas into businesses. We are proud of staying put in the midst of a most adverse juncture, contributing to the future of the economy, and the country, and of taking concrete steps that now bear fruit. The figures clearly show what the egg has achieved. It has hosted 172 groups, with 730 members, among them 100 start-up businesses. In the first six years, 62 of them submitted 31 patents; and 18 of our start-ups have a female CEO, making a contribution in a field where Greece has, admittedly, a considerable way still to go.
The businesses that have been hosted by the egg have spanned all major sectors: tourism, fintech, digital, commerce, agri-food, and many others. 24 start-ups have raised equity funding totalling €4.5 million.
The egg has given 55 start-ups the opportunity to travel abroad in Europe, the US, Canada, and the Middle East to present themselves, network, and search for markets and investors alike.
Given this record, we have decided to scale up this initiative to include not only newly founded groups with interesting ideas to grow, but also more mature businesses that need a favourable environment and support – such as financial advisory – to make their next step into the Greek and/or international markets. The egg initiative has been recognised with 10 awards, but, more importantly, by the reputation it has built among start-uppers, the academic and business communities in Greece, and – increasingly – stakeholders abroad.
GIG: Technology has changed everything, from the way we shop to the way we interact with each other. How do you see it shaping the future of banking?
Karavias: Technology is not about the future of banking. Internal digitisation, the use of big data analytics, e-platforms, and having a digital presence are all present challenges. Disruption is the word of the day, but its impact is yet unknown. There are fields where, in a few years, nothing will even remotely remind us of what we used to know. Among them certainly are payment services and retail banking, but it is not only banks that will see challenging times. Fintech start-ups will come to realise that size does make a difference in banking. Large retailers are bound to struggle to adapt to a highly regulated framework. At day’s end, the biggest challenge is the same for all, established financial organisations and disruptors alike: how to gain the trust and best serve a client base that is increasingly segmented and differentiated, especially in generational terms. The gap in needs, aspirations, priorities, ways of thinking, how purchases are made, how business is conducted – between millennials and baby boomers, for example – is getting larger. Bridging it will be the ultimate test for anyone, established or aspiring, who wants a place in the banking business in the coming years.
GIG: Under pressure from EU bank regulators, there have been many changes on the boards of Greek banks in recent years. How effective have these changes been? How will they improve the way banks operate in Greece?
Karavias: In the first phase of the crisis, the gap between the established practices in the Greek banking system and the framework that had been redrawn in Europe and the US, in the light of the 2007/2008 global financial crisis, was a major issue that attracted a lot of attention from international creditors working in Greece. It was deemed, not without reason, that poor governance had been one of the main weaknesses of the Greek banking sector and an exacerbating factor when the crisis struck. At the creditors’ initiation, a new law served as a lever to introduce best international practices. This law was fully implemented, with visible impact. As we speak, Greek banks, in terms of governance, are at levels fully comparable to the best international practices. The boards of the four systemic banks have significant international participation, from people with extensive experience and expertise. There are an adequate number of independent, non-executive members, and all of the committees meet the standards of the single supervisory mechanism (SSM). Governance quality is without doubt one of the big gains Greek banks received from an otherwise unforgiving period.