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
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 looked bright.
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 sheet items.
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 addressed.
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.
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 challenge.
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 Greek economy.
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 Southeast Europe.
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.”
