The core Greek banks reported first quarter (Q1) results in the
last three days of May. The release of the results was the last act
in a series of important developments for the Greek banking market
over the past two months. These developments constitute the third
phase of the new era for Greek banks, which started two years
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 percent of the sector's assets.
The second phase was marked by the first round of
recapitalization. Alpha, National and Piraeus raised €21.7 billion
($29.5 billion) in fresh capital, of which €3.1 billion ($4.2
billion) or 14 percent stemmed from private investors. The
remainder was covered by the Hellenic Financial Stability Fund
(HFSF). Eurobank's capital needs of €5.84 billion ($7.94 billion)
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 percent
stake in Piraeus and 84 percent in Alpha and National. HFSF's stake
in Eurobank was 95.2 percent with full voting rights.
The third phase was initiated in early March this year when the
Bank of Greece disclosed local lenders'
by the Bank of Greece. The capital shortfall for the top four banks
was estimated at €5.8 billion ($7.89 billion) under the binding
baseline scenario and at €8.8 billion ($11.97 billion) under the
Strengthened capital ratios
The four banks subsequently proceeded with capital increases.
They successfully raised a total of €8.31 billion ($11.3 billion)
-- Alpha €1.2 billion ($1.63 billion), Eurobank €2.86 billion
($3.89 billion), National €2.5 billion ($3.4 billion) and Piraeus
€1.75 billion ($2.38 billion) -- from private (primarily
international) investors. That amount was 2.7 times higher than the
€3.1 billion ($4.2 billion) raised by private investors last
Since the HFSF did not participate in those equity raisings, its
stake in the four banks was diluted to 35.4 percent (now with
restricted voting rights) in Eurobank, 57.2 percent in National,
67.3 percent in Piraeus and 69.9 percent in Alpha.
Following the capital increases, the pro-forma Q1 fully-loaded
Basel III Common Equity Tier I (CETI) ratio (applicable in 2024)
significantly improved to 12 percent for Alpha, 11.6 percent for
National, 11 percent for Piraeus and 9.8 percent for Eurobank.
Under current capital standards, CETI stood at 17.7 percent for
Eurobank and National, at 15.6 for Alpha (excluding preference
shares) and at 14.4 percent 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 banks, well above
the capital needs of €262 million ($356 million) and €425 million
($578 million), respectively determined by the BoG, enabled the two
banks to pay back their state preference shares.
These shares, worth €940 million ($1.28 billion) for Alpha and
€750 million ($1.02 billion) 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
National has indicated its plans to redeem its preference shares
worth €1.35 billion ($1.84 billion) "when appropriate," while
Eurobank noted it is "in no rush" to purchase its preference shares
worth €950 million ($1.29 billion).
The next challenge on the capital front for Greek banks is the
outcome of the ECB stress tests, which is due to be disclosed in
the autumn. The recent capital increases minimize 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 billion ($15.5 billion)
will remain untouched, allowing it to potentially be used to reduce
public debt or cover the government's funding needs.
Diversifying funding sources
The second important development this year was the issue of
senior unsecured bonds by Piraeus and National placed with
institutional investors for the first time over the past four
years. Piraeus' transaction was a 3-year note of €500 million ($680
million) with a coupon of 5 percent on March 18. One month later,
National issued a 5-year note of €750 million ($1.02 billion) with
a coupon of 4.375 percent.
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 ((
)) funding. More specifically, their current ECB funding stands at
€51.6 billion ($70.2 billion), implying a narrowing by €21.3
billion (29 percent) on the end-2013 figure of €72.9 billion ($99.1
billion). Since deposits have shown
outflows of €1.93 billion
($2.62 billion) 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 billion ($66.6
billion) 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, securitizations 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
remaining of the year.
Excluding National, which showed Q1 net profit of €181 million
($246 million), the other three banks posted net losses ranging
from €94.1 million ($128 million) for Alpha to €246 million ($334.6
million) 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
A detailed analysis of Greek banks' Q1 results can be found
The asset quality showed the non-performing loan (NPL) ratio
rising to 37.9 percent for Piraeus, 33.3 percent for Alpha, 30.9
percent for Eurobank and 23 percent for National. The latter has
benefited from its Turkish subsidiary (Finansbank) having an NPL
ratio of just 6 percent. However, the NPL ratio for National's
Greek operations stood at 28.4 percent, still well below its
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 percent for Piraeus, at
18.6 percent for Alpha, and at 15.5 percent for Eurobank, with
National at the low end, at 12.9 percent. Overall, the four banks
had accumulated LLRs of €43 billion ($58.5 billion), corresponding
to 16.6 percent of the total loan book at €259 billion ($352.7
Alpha and National enjoy the highest NPL coverage (LLRs over
NPLs) at 56 percent, with Eurobank and Piraeus at the low end, at
50.3 and 50.7 percent, respectively.
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 re-pricing, 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 (albeit exhibiting a double-digit
decline) 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.
Greek banks currently have a combined market value of €35.1
billion ($47.7 billion), corresponding to 45.7 percent of the Greek
market capitalization. HFSF's share in banks has a market value of
€21 billion ($28.6 billion), implying unrealized capital losses of
€4.4 billion ($6 billion) on its "investment" last year. This
primarily reflects unrealized losses of €3.7 billion ($5 billion)
from Eurobank and €3.4 billion ($4.62 billion) from National, while
unrealized gains from HFSF's participation in Alpha and Piraeus
currently stand at €2.2 billion ($3 billion) and €400 million ($544
The banks' stock performance shows Alpha's share has soared 57
percent compared to the issue price of last year's capital
increase. Piraeus shares saw a modest increase of 6 percent, while
Eurobank and National shares have retreated 73 and 39 percent,
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 percent respectively, while
for Alpha and Piraeus, the respective gains stand at a moderate 6
Following the injection of €8.3 billion ($11.3 billion) of fresh
capital in the past two months, the combined shareholders' common
equity of Greek banks stood at €32 billion ($43.5 billion) in Q1,
with tangible equity at €29.5 billion ($40.1 billion). Current
prices indicate Greek banks are trading 1.1x their Q1 book value
and 1.2x their Q1 tangible book value.
Under the base case scenario for the economy and assuming
political stability remains intact, the anticipated recovery of
profitability from next year will also have a positive impact on
Greek banks' valuation over the medium term.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
Investors should be mindful of the risks of transacting in illiquid
securities such as ALBKY, EGFEY, NBG and BPIRY. Their primary
listing in Athens, ALPHA GA, EUROB GA, ETE GA, TPEIR GA, offers
substantially better liquidity. I am long Greek banks with limited
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