Τετάρτη, 11 Ιουνίου 2014

Greek Banks begin to return to private ownership

Capital raisings in the wake of a domestic stress test have enabled Greece’s four systemic banks to pull in private investors and begin the return to normality.

While the country’s financial and economic crisis is far from over, Greece is decisively heading in the right direction. The government is running a primary budget surplus (excluding debt servicing costs) and in April 2014, it was able to return to the capital markets for the first time since 2010, with a €3bn five-year bond that was more than six times oversubscribed, resulting in an eventual yield of less than 5%. Richard McGuire, senior fixed-income strategist at Rabobank, talks of a period of “bullish reflexiveness” in peripheral eurozone sovereign debt markets.

“There is self-generating momentum as spreads narrow, leading to ratings upgrades, and allowing bailed-out countries to dip their toes back into the market. That started with Ireland last year, then Portugal in early 2014, and now Greece,” he says.

A different kind of Grexit

Instead of the country’s departure from the eurozone, when investors talk about 'Grexit' they are now referring to its exit from the International Monetary Fund (IMF) rescue programme. The ability to reaccess sovereign debt markets has already enabled Ireland to end its IMF programme in 2013, followed by Portugal in May 2014.

However, the Greek banking sector still faces profound challenges. The capital raisings to return the four systemic banks to viability in April 2013 required large injections from the country’s multilateral-backed bail-out fund, the Hellenic Financial Stability Fund (HFSF), which ended up as the majority owner of all four banks (see table).

And the macroeconomic and asset-quality assumptions used by US financial firm BlackRock for a stress test commissioned by the Bank of Greece in 2011 were outpaced by the deterioration that actually occurred in the months that followed. Consequently, a second stress test by BlackRock and Rothschild concluded in early 2014 that Greek banks needed to raise further capital – €262m for Alpha Bank, €425m for Piraeus, €2.18bn for National Bank of Greece (NBG) and €2.95bn for Eurobank.

Investor diversification

The four banks began raising equity in March 2014. In the improving macroeconomic context and with the confidence that the new stress test had this time captured the worst-case scenario, the 2014 round of capital raising was strikingly different from a year earlier. This time around, the required funds were raised entirely from the private sector. Piraeus raised €1.75bn to meet even the adverse stress-test scenario and repay government preference shares due to mature in mid-2014.

“Even at the time when Greece was preparing to join the euro in 2000, I do not think we had so much interest from so many countries and from such a diverse universe of investors. That bodes well for continued access to the capital markets, and for the eventual reprivatisation of the bank,” says Anthimos Thomopoulos, chief executive of Piraeus Bank.

Even Eurobank, which was unable to raise private funds at all in 2013, this time managed to pull in €2.86bn through combined public and private placements. As a result, Eurobank has become the first of the four to return to majority private ownership.

Christos Megalou, chief executive of Eurobank, explains that the April 2013 capital raising was overshadowed by the planned merger with NBG, which was vetoed by Greece’s financial backers in the EU. That forced the bank to substitute about 85% of its capital base at short notice, which was simply not possible from private investors.

“In contrast, this year those uncertainties were not present while Eurobank had acquired two smaller banks, New Hellenic Postbank and New Proton Bank, strengthening its strategic position in the Greek banking sector. The significant synergy creation contributed to making Eurobank’s investment proposition more attractive, facilitating its reprivatisation to the benefit of the Greek state and economy,” says Mr Megalou.

Shareholder shake-up

The more diverse investor interest has altered the complexion of the banks’ shareholder bases significantly compared with 2013. In 2013, the banks had needed to make the deal more attractive to investors by offering warrants alongside the shares. These warrants give the holders the right to acquire shares from the HFSF in the future at a fixed – relatively low – price.

“Apart from core shareholders – including the founding family – other participants in the 2013 capital increase included US and UK hedge funds that were attracted by the warrants element of the offer. These funds were present in the 2014 placement too, but we also attracted a wider variety of investors including long-only value investors who are looking to leverage the Greek economic recovery,” says Spyros Filaretos, chief operating officer of Alpha Bank.

The $21bn US alternative asset manager Paulson & Co disclosed a 5.42% holding in Alpha Bank following its €1.2bn 2014 capital raising. The economics of the Alpha deal made particular sense for investors. The 2013 capital raising was at a price of $0.44 per share. Following a 60% climb in the share price since then, Alpha was able to raise the new capital in 2014 at $0.65 per share in a non-preemptive offering, preserving value for all existing investors, including HFSF.

Strategic realignments

The 2014 capital raisings have had one paradoxical effect. The HFSF’s holdings were less diluted in Alpha and Piraeus, which had the lowest capital needs and strongest internal capital generation from acquisitions, than in NBG or Eurobank. As a result, the state retains larger shareholdings in the two stronger banks, and has been more heavily diluted in the two banks that had the largest capital gap.

Although the state has the highest ownership power in Alpha and Piraeus, these banks will be hoping that their superior ability to return money to the taxpayers will be taken into account in their relationship with the HFSF. This will also be important for their negotiations with the European Commission’s directorate-general of competition, which will decide what operations the four banks must divest in recognition of the state aid they have received.

About 80% of Alpha Bank’s international presence is in Cyprus and Romania. Lazaros Papagaryfallou, executive general manager of Alpha Bank, says this commitment will not change in the context of its restructuring plan. The bank is reviewing its options in its other international operations, which are mostly based in the Balkans.

“The overall plan is to have a more balanced presence in our international entities, in the sense that we should be able to address the commercial funding gaps in our business plan. That may entail some deleveraging and some refocus of our credit portfolios, but overall our presence will not be materially affected by our restructuring plan,” says Mr Papagaryfallou

Piraeus is in a different position, because a string of domestic acquisitions during 2012 and 2013 has catapulted it from fourth into first place in terms of market share in Greece. In this context, the bank is committed to reducing its capital and liquidity commitment in non-core markets, mainly in central and eastern Europe, as it enjoys a better competitive advantage and higher returns in Greece. The bank already sought to sell its Egyptian subsidiary in 2012 but delayed any deal as management focused on a stream of domestic acquisitions. Piraeus is currently exploring a number of potential asset sales, although nothing has yet been announced publicly.

Return to funding markets

The crucial next step for Greek banks is to normalise their funding mix. Shut out from wholesale markets and facing severe retail deposit outflows at the height of the eurozone crisis, the banks became heavily dependent on funding from the Eurosystem – the European Central Bank (ECB) and Bank of Greece. Emergency liquidity assistance (ELA) from the Bank of Greece, which does not require the high-quality collateral needed for ECB refinancing, is particularly expensive.

After regaining access to private secured funding markets, Alpha Bank has cut its reliance on ELA funding from the Greek central bank to just €1bn. The rest of its central bank funding comes from less punitive ECB facilities.

“The overall Eurosystem funding for Alpha Bank has dropped from €25bn at the peak of the crisis to less than €16bn currently. This development underlines the improvement accomplished in Greece, as confidence is being restored and deposits are gradually coming back to the system, wholesale funding from third parties has begun to kick in and there has been selective asset deleveraging,” says Mr Papagaryfallou.

Piraeus and NBG have already returned to the senior unsecured bond markets. In fact, Piraeus raised €500m a month before the sovereign came to market, in a three-year deal that was more than six times oversubscribed.

“We timed the capital raising and the bond issue to coincide. One could argue that there was no imminent need for a capital injection on the scale that we undertook, so it was important to demonstrate to our shareholders that the extra money they paid into the bank would secure a critical dividend, in the form of easier access at competitive rates to the funding markets. We were very interested in the read-across between the equity and debt capital markets,” says Mr Thomopoulos.

Senior unsecured issuance on its own will not materially change the funding profile of the Greek banks, but over time it will feed through as a benchmark for money markets, commercial paper and secured financing. In this context, Mr Filaretos says Alpha Bank is focused on the pricing that it can obtain before deciding on the timing of any return to senior unsecured markets.


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