Greek banks moving into a new era

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.