Banks dominating Greece's financial system
Private sector deposits held (Dec. 2019)
Amount of non performing loans held by banks (at Sept. 2019)
The EU-approved plan that will assist banks to offload approximately €30 bn in bad loans
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Over in the boardrooms and corporate offices of Greece’s Big Four
banking groups, they have been burning the midnight oil. Collateral
victims of the country’s nearly decade-long financial turmoil,
Greece’s four big banks – National Bank of Greece (NBG), Piraeus
Bank, Eurobank, and Alpha Bank – have been busy digging their way
out from under a mountain of bad loans left behind by the crisis.
After years of procrastination, the banks have started to set
ambitious targets. Project Hercules, which was recently approved
by the European Union, allows banks to shift non-performing loans
(NPLs) to special purpose vehicles (SPVs) and issue senior,
mezzanine, and junior tranches of debt. The plan allows the
government to offer guarantees for the senior tranche, provided it
is remunerated with market rates for such guarantees, to avoid
running foul of state-aid regulations.
Step back a few years and Greece’s big banks were once the
darlings of foreign investors, the bluest of blue chips on the Athens
Stock Exchange, financing a fast-growing domestic economy, and
expanding across Southeast Europe. With operations stretching
from Turkey to Poland, Greek banks were becoming leaders in an
underfinanced but quickly developing regional market. The future
But the crisis changed all that. Unlike other eurozone members that
were plunged into financial straits when local banks dragged down
the state, in Greece it was the spendthrift ways of the state that
dragged down the banks.
Bank of Greece Governor Yannis Stournaras says Greece is ready to exploit its growth potential, yet remaining structural deficiencies must be addressed to help bolster foreign direct investment.
Greece’s top four banks dominate the country’s financial systems. The lenders Piraeus Bank, National Bank of Greece, Eurobank, and Alpha Bank jointly control about 97% of the market and total deposits in the country. In addition to the top players, the smaller banks in the market include Attica Bank, Aegean Baltic Bank, Investment Bank of Greece, Praxia Bank, and several cooperatives banks.
In the past 10 years, Greek banks have faced the perfect storm.
They were squeezed between a collapsing economy on the one
hand and a debt and liquidity crisis on the other that eventually
forced them into three successive bailouts. Greece’s unprecedented
recession, with the economy shrinking by an estimated 25%, sent
unemployment rocketing and asset prices tumbling. At the same
time, depositors fled and international markets turned sour,
shutting Greece, and its banks, out of global debt markets. A
monstrous €200 billion sovereign debt restructuring in early 2012
added to the pain.
The depth of the problem led to the re-examination of the sector’s
corporate governance practices, and with the help of European
institutions, a far more robust framework has been put into place.
Nowadays things are looking up. The economy is recovering, asset
prices are rising again, and unemployment is falling. Profitability is
returning: Piraeus Bank and NBG reported core operating profits in
2018, while Alpha Bank and Eurobank posted a net profit of €53
million €91 million, respectively.
“The positive performance in 2018 coincides with the successful
conclusion of our restructuring plan, which restored our
commercial flexibility,” says Vassilios Psaltis, CEO of Alpha Bank.
“Now, our priority is to take the next steps in accelerating our non-
performing exposure (NPE) workout.” NPEs are a broad definition
of bad loans that includes other debt instruments and off-balance
In May 2018, the Greek banks successfully passed the European
Central Bank (ECB) stress tests, showing they have enough capital
and provisions to deal with their bad loan problems. Deposits are
returning, albeit at a slow pace, and access to international financial
markets is improving.
Meanwhile, through write-offs, loan sales, and restructuring agreements, by September 2019 the banks had reduced their stock of NPLs to €71.2 billion, or roughly 42% of total loans. That’s still a mountain, but it is ahead of ECB targets and well down from a €107 billion peak in March 2016. By the end of 2021, the Greek banks want to collectively reduce those bad loans to €26 billion.
Deferred tax credits have also served as a key deterrent to
accelerated NPL reduction says the Governor of the Bank of Greece,
Yiannis Stournaras. They need, he adds, to be systematically
Vassilios Psaltis, CEO of Alpha Bank, says a comprehensive transformation that is underway will help Alpha to clean up its balance sheet, dramatically reduce NPLs, and allow it to “become a bank once again”, reasserting its leading role as a financier of households, businesses, and the Greek economy.
The Hercules plan, approved by EU institutions in October 2019 and
by the Hellenic parliament in December of the same year, is now
concentrating the efforts of all stakeholders. The plan allows
external servicers to manage the loans, and in the fourth enhanced
surveillance report the EU released on the Greek economy in late
November 2019 – a sort of economic health check on Greece – the
Commission proposed a number of auxiliary actions to expedite the
resolution of the issue. These range from streamlining legislation to
even the financial training of judges, and they are being gradually
kneaded into the statute books.
According to a 2019 report by Morgan Stanley, in 2020 Hercules will
enable banks to reduce bad loans by a sum of €22 billion.
In the meantime, Greece has developed an increasingly active
secondary market in distressed assets that has attracted more than
a dozen foreign funds in the past three years.
Reflecting the progress made and the future steps to be
undertaken, a new optimism towards Greece’s banks is slowly
starting to emerge in the markets. Banks like Eurobank and NBG
have been able to return to international debt markets to tap
financing. And equity investors are slowly starting to see an upside
to badly battered but attractively priced Greek banking stocks.
“Most investors prefer to stay on the sidelines,” says Swiss
investment bank UBS in a recent report that surveyed market
participants. “However, net sentiment is skewed to positive as
respondents seem to give some credit for potential positive
surprises from NPE workouts.”
One of those positive surprises was the game-changing merger of
Eurobank with its property investment affiliate Grivalia, which the
bank announced in late 2018. Real estate assets held by Grivalia
boosted the bank’s capital base and are dramatically accelerating
the disposal of its NPLs. Canadian fund Fairfax Financial, which held
controlling stakes in both companies, is the largest single
shareholder in the merged entity.
Eurobank stands ready to finance major investment projects and solid business plans from SMEs, says CEO, Fokion Karavias.
The merger strengthened the bank’s capital base by 210 basis
points for a total capital adequacy ratio of 18.6%, the highest
among the four Greek banks. That is allowing Eurobank to proceed
with a front-loaded clean-up of its balance sheet through two
different securitisation transactions, involving close to €10 billion of
bad loans. Credit ratings agency Moody’s raised its outlook on
Eurobank to ‘positive’ from ‘stable’ following the news, and Fitch
followed with a one notch upgrade in the bank’s credit rating.
“The merger between Eurobank and Grivalia was a cornerstone of
our integrated plan to deal with the NPE stock,” says Eurobank CEO
Fokion Karavias. “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.”
The merger plan was vetted with regard to the share exchange ratio
by Deloitte, on the part of Eurobank shareholders, and Ernst &
Young (EY) on the part of Grivalia shareholders.
The merger will also allow Eurobank to make some real money.
Bringing its ratio of bad loans down to single digits – close to a
European average of around 3-4% – will boost the bank’s earnings
by about half a billion euros, a return of 10% on its tangible equity.
The move has put Eurobank in pole position among the Greek
banks, challenging others to follow them in the race to clean up
their problem loans. And those other banks have risen to that
With the release of its 2018 year-end results, NBG announced plans
to speed up its clean-up. At the end of 2018, the bank’s NPE ratio
was 41%. Now it wants to bring that number down to below 15% by
the end of 2021 and into single digits in the year after. It, too, has
two big distressed asset sales in the works.
“The conditions are in place for an acceleration in NBG’s
performance. First, a new management team is in place and is
leading the implementation of the bank’s fully articulated
transformation programme. Second, the macro environment is
steadily improving, and the legal environment is becoming
friendlier to NPE clean up,” says Paul Mylonas, CEO at NBG.
“We have a huge opportunity to transform NBG into a highly
profitable bank with a clean balance sheet and a paradigm for the
sector. We will take full advantage of it.”
Likewise, Alpha Bank has raised its goals by embarking on a plan
dubbed Galaxy. “This is not just the most significant securitisation
of NPEs in Greece, but the third largest in Europe,” says the Alpha
Bank’s Psaltis. “It is a transaction that allows us to reduce the NPE
rate from 44% in 2019 to below 20% in 2020 and eventually to a
single digit rate in 2022. The percentage of NPLs in default, for
more than 90 days, will fall below 5% in 2022,” he adds.
George Handjinicolaou, Chairman of the Hellenic Bank Association, says that though challenges remain, the Greek banking sector is steadily returning to health.
Piraeus Bank has announced targets to cut its NPEs by more than
half, to €11 billion in 2021, and to single digits by 2023.
In November 2019, the bank struck a deal with Swedish debt servicer
Intrum – one of largest debt servicers in Europe – to effectively
spin-off its bad debt management operations resulting in a
transaction that valued the debt servicing platform at €410 million.
“We have created the first independent servicer of size in the Greek
market,” says Piraeus Bank’s Megalou.
Intrum acquired 80% of the new entity for €328 million.
“The agreement with Intrum will enable the bank to reduce its
operating costs,” says Christos Megalou, CEO of Piraeus Bank.
“However, the rationale of this transaction is not solely based on
cost reduction, but on leveraging Intrum’s expertise to manage
even more effectively our NPLs, moving faster in execution.”
In the meantime, banks are gradually returning to their main task:
to finance the economy. Credit expansion to the corporate sector
has already turned positive after years of deleveraging.”
The banks have been placing bets on the new economy emerging in
Greece, an economy based more on exports and innovation and
less on imports and consumption, as was the case in the past. That
means each of the banks has been targeting growth industries, like
exporters and hi-tech companies, which represent the future of the
Piraeus Bank, for example, has been supporting exporters. Among
other initiatives, the bank and one of its subsidiaries – a manager of
industrial parks – are behind an enormous new logistics centre
being built just west of Athens. The giant freight village on the
Thriasio Plain – along with a nationwide public works programme to
upgrade road, rail, air, and sea connections – is expected to
transform Greece into a regional trade and transhipment hub for
Another example: NBG teamed up with the Athens Exchange Group
to launch a new programme aimed at cultivating and mentoring
promising small- and medium-sized enterprises and preparing them
for their eventual listing on the Athens stock exchange. The Roots
programme provides expert training and advice to small companies,
accelerating their growth.
Keen to support Greece’s budding entrepreneurs, six years ago
Eurobank launched its enter•grow•go (egg) incubator programme
for innovative start-ups, spanning a range of sectors from tourism
to fintech to the agro-food industry.
Since then, the programme has
helped 24 start-ups raise equity, supported dozens in their search
for overseas markets and investors, hosted 100 start-up businesses
that have submitted almost three dozen patents among them, and
won 10 awards.
“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,” says Eurobank’s Karavias.
“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.”
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