Greek banks mov­ing into a new era

Financial Mirror (Cyprus) - - FRONT PAGE -

The core Greek banks re­ported first quar­ter re­sults in the last three days of May, the last act in a se­ries of im­por­tant de­vel­op­ments for the bank­ing mar­ket over the past two months and the third phase of a new era for Greek banks which started two years ago.

The first phase in­volved con­sol­i­da­tion in the sec­tor, with sig­nif­i­cant M&A ac­tiv­ity in the 12-month pe­riod start­ing in July 2012, which re­sulted in the trans­for­ma­tion of the do­mes­tic bank­ing land­scape. At the end of that part, four banks - Al­pha, Eurobank, Na­tional and Pi­raeus - ac­quired the bulk of medium and small banks and now con­trol around 95% of the sec­tor’s as­sets.

The sec­ond phase was marked by the first round of re­cap­i­tal­i­sa­tion. Al­pha, Na­tional and Pi­raeus raised 21.7 bln in fresh cap­i­tal, of which 3.1 bln or 14% stemmed from pri­vate in­vestors. The re­main­der was cov­ered by the Hel­lenic Fi­nan­cial Sta­bil­ity Fund (HFSF). Eurobank’s cap­i­tal needs of 5.84 bln were fully cov­ered by the HFSF.

At the end of that phase, HFSF be­came the dom­i­nant share­holder, al­though with re­stricted voting rights, con­trol­ling an 81% stake in Pi­raeus and 84% in Al­pha and Na­tional. The HFSF stake in Eurobank was 95.2% with full voting rights.

The third phase was ini­ti­ated in early March this year when the Bank of Greece dis­closed lo­cal lenders’ cap­i­tal needs by the Bank of Greece. The cap­i­tal short­fall for the top four banks was es­ti­mated at 5.8 bln un­der the bind­ing base­line sce­nario and at 8.8 bln un­der the ad­verse sce­nario.

STRONGER CAP­I­TAL RA­TIOS

The four banks sub­se­quently pro­ceeded with cap­i­tal in­creases rais­ing a to­tal of 8.31 bln (Al­pha 1.2 bln, Eurobank 2.86, NBG 2.5 and Pi­raeus 1.75 bln) from pri­vate – pri­mar­ily in­ter­na­tional – in­vestors. That amount was 2.7 times higher than the 3.1 bln raised by pri­vate in­vestors last year.

Since the HFSF did not par­tic­i­pate in those eq­uity rais­ings, its stake in the four banks was di­luted to 35.4% (now with re­stricted voting rights) in Eurobank, 57.2% in Na­tional, 67.3% in Pi­raeus and 69.9% in Al­pha.

Fol­low­ing the cap­i­tal in­creases, the pro-forma Q1 ful­ly­loaded Basel III Com­mon Eq­uity Tier I (CETI) ra­tio (ap­pli­ca­ble in 2024) sig­nif­i­cantly im­proved to 12% for Al­pha, 11.6% for NBG, 11% fro Pi­raeus and 9.8% for Eurobank.

Un­der cur­rent cap­i­tal stan­dards, CETI stood at 17.7% for Eurobank and Na­tional, at 15.6 for Al­pha (ex­clud­ing pref­er­ence shares) and at 14.4% for Pi­raeus (also ex­clud­ing pref­er­ence shares). The dif­fer­ence to Basel III fully loaded fig­ures is largely at­trib­uted to the elim­i­na­tion of the de­ferred tax as­set mostly re­lated to the PSI losses.

Higher cap­i­tal in­creases by Al­pha and Pi­raeus, well above the cap­i­tal needs (at 262 and 425 mln, re­spec­tively) de­ter­mined by the BoG, en­abled the two banks to pay back their state pref­er­ence shares.

These shares, worth 940 mln for Al­pha and 750 mln for Pi­raeus, were is­sued in May 2009 as state aid un­der the law 3723/2008. At the time, the Greek state is­sued a spe­cial bond (ma­tur­ing on May 21, 2014), which was its con­tri­bu­tion in kind for the pref­er­ence shares it re­ceived from the banks.

NBG has in­di­cated it plans to redeem its pref­er­ence shares worth 1.35 bln “when ap­pro­pri­ate”, while Eurobank noted it is “in no rush” to pur­chase its pref­er­ence shares worth 950 mln.

The next chal­lenge on the cap­i­tal front is the out­come of the ECB stress tests to be dis­closed in the au­tumn. The re­cent cap­i­tal in­creases min­imise the risk of additional cap­i­tal needs par­tic­u­larly for Al­pha and Pi­raeus.

In ad­di­tion, ECB stress tests will also de­ter­mine whether the re­main­ing HFSF back­stop fa­cil­ity of 11.4 bln will re­main un­touched, al­low­ing it to po­ten­tially be used to re­duce pub­lic debt or cover the govern­ment’s fund­ing needs.

DI­VER­SI­FIED FUND­ING

The sec­ond im­por­tant de­vel­op­ment this year was the is­sue of se­nior un­se­cured bonds by Pi­raeus and NBG placed with in­sti­tu­tional in­vestors for the first time over the past four years. Pi­raeus’s trans­ac­tion was a 3-year note of 500 mln with a coupon of 5% on March 18. One month later, Na­tional is­sued a 5-year note of 750 mln with a coupon of 4.375%.

Since the be­gin­ning of the year, and par­tic­u­larly af­ter the com­ple­tion of cap­i­tal in­creases, Greek banks have ma­te­ri­ally re­duced their Eurosys­tem fund­ing with all banks cur­rently hav­ing zero ex­po­sure in Emer­gency Liq­uid­ity As­sis­tance (ELA) fund­ing. More specif­i­cally, their cur­rent ECB fund­ing stands at 51.6 bln, im­ply­ing a nar­row­ing by 21.3 bln (29%) on the end2013 fig­ure of 72.9 bln. Since de­posits have shown out­flows of 1.93 bln by the end of April, it seems the ECB fund­ing has been re­placed by in­ter­bank lend­ing.

The bulk of the ECB fund­ing col­lat­er­als of 49 bln at year-end 2013 were in the form of un­cov­ered govern­ment-guar­an­teed bank bonds that will not be el­i­gi­ble for ECB fund­ing pur­poses as of March 2015. Greek banks have al­ready started re­plac­ing these col­lat­er­als by as­sess­ing other fund­ing sources, which would in­volve tap­ping debt mar­kets, se­cu­ri­ti­sa­tions and cov­ered bonds on top of higher in­ter­bank lend­ing that has been ev­i­dent so far.

NO Q1 SUR­PRISES

The Q1 re­sults did not un­veil any ma­jor sur­prises show­ing a quar­ter on quar­ter (QoQ) mod­er­ate pres­sure on net in­ter­est in­come (NII), on­go­ing delever­ag­ing, de­posit re-pric­ing, fur­ther cost con­tain­ment and a dou­ble-digit QoQ drop in loan pro­vi­sions. Most of these trends are broadly ex­pected to be main­tained for the rest of the year.

Ex­clud­ing Na­tional, which showed Q1 net profit of 181 mln, the other three banks posted net losses rang­ing from 94.1 mln for Al­pha to 246 mln for Pi­raeus. This is broadly a func­tion of pre-pro­vi­sion in­come (op­er­at­ing in­come mi­nus op­er­at­ing ex­penses) still fall­ing short of loan pro­vi­sions, al­beit the lat­ter is on a de­clin­ing trend.

RIS­ING NPLS

The as­set qual­ity showed the non-per­form­ing loan (NPL) ra­tio ris­ing to 37.9% for Pi­raeus, 33.3% for Al­pha, 30.9% for Eurobank and 23% for Na­tional. The lat­ter has ben­e­fit­ted from its Turk­ish sub­sidiary (Fi­nans­bank) hav­ing an NPL ra­tio of just 6% even though the ra­tio for Na­tional’s Greek op­er­a­tions stood at 28.4%, still be­low its peers.

The high­est quar­terly NPL in­crease was posted by Eurobank, which saw a rise of 1.5 per­cent­age points (pp), fol­lowed by Pi­raeus at 1.3 pp, Al­pha at 0.6 pp and Na­tional 0.5 pp (1 pp for Greece).

The NPL dy­nam­ics are also di­rectly re­lated to the cu­mu­la­tive pro­vi­sions (rel­a­tive to loans) for each in­di­vid­ual bank. As ex­pected, for banks with a high NPL ra­tio the loan loss re­serves (LLRs) to loans ra­tio is at the high-end.

The re­spec­tive ra­tio in Q1 stood at 19.2% for Pi­raeus, at 18.6% for Al­pha, at 15.5% for Eurobank, with Na­tional at the low end, at 12.9%. Over­all, the four banks had ac­cu­mu­lated LLRs of 43 bln cor­re­spond­ing to 16.6% of the to­tal loan book at 259 bln.

Al­pha and Na­tional en­joy the high­est NPL cov­er­age (LLRs over NPLs) at 56% with Eurobank and Pi­raeus at the low-end, at 50.3 and 50.7%, re­spec­tively.

OUT­LOOK

Go­ing for­ward, the evo­lu­tion and res­o­lu­tion of NPLs is the key qual­i­ta­tive met­ric for banks’ loan port­fo­lio, with banks’ cur­rent es­ti­mates point­ing to a peak of the NPL ra­tio close to the end of the year eas­ing there­after in line with the an­tic­i­pated bot­tom­ing out and re­bound of the Greek econ­omy.

Set­ting as­set qual­ity aside, we would ex­pect delever­ag­ing to con­tinue for a cou­ple of quar­ters and pos­i­tive credit growth to re­sume as of Q4 2014 or Q1 2015. De­posit repric­ing, par­tic­u­larly re­gard­ing lower time de­posit rates, will be the key driver for a re­bound in the NII within the year.

On the cost front, syn­er­gies stem­ming from the re­cent ac­qui­si­tions will con­tinue to drive ex­penses down. The im­ple­men­ta­tion of vol­un­tary re­tire­ment schemes will also re­sult in fur­ther cost con­tain­ment, which is ex­pected to con­tinue show­ing a dou­ble-digit drop in the com­ing quar­ters.

Al­though these pos­i­tive trends are ex­pected to fur­ther im­prove the pre-pro­vi­sion in­come through­out the year, the level of loan im­pair­ments is still high and will con­tinue to erode prof­itabil­ity this year.

Cur­rent con­sen­sus es­ti­mates point to a loss-mak­ing year for all banks ex­cept Na­tional, while a re­cov­ery of bot­tom-line prof­itabil­ity is ex­pected as of 2015.

The banks’ stock per­for­mance shows Al­pha has soared 57% com­pared to the is­sue price of last year’s cap­i­tal in­crease, Pi­raeus shares saw a mod­est in­crease of 6%, while Eurobank and Na­tional shares have re­treated 73 and 39%, re­spec­tively.

Those who have in­vested in this year’s cap­i­tal in­creases in the past cou­ple of months will see a dif­fer­ent pic­ture: Eurobank and Na­tional shares have risen 32 and 19%, re­spec­tively, while for Al­pha and Pi­raeus the re­spec­tive gains stand at a mod­er­ate 6%.

Fol­low­ing the in­jec­tion of 8.3 bln eu­ros of fresh cap­i­tal in the past two months, the com­bined share­hold­ers’ com­mon eq­uity of Greek banks stood at 32 bln in Q1 with tan­gi­ble eq­uity at 29.5 bln.

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