- Bad Bank Credibility an Issue NEW
- Regulatory Intervention Coming
- A Who’s Who of Greek Banks
- Revenue Headwinds
- Economic Challenges Loom
(Bloomberg Intelligence) — A Greek “bad bank” is vital, we believe, to avoid first the implosion of Piraeus, and then the wider Greek bank system. The details provided by the Central Bank of Greece appear as sensible as could be expected, but continue to stumble at the same hurdles, namely low tangible CET1 and lack of external capital commitment. All the while, the pressing need for the SSM to agree on new and credible targets for 2019-21 NPE reduction and transitional CET1 capital targets means time is running out. (11/27/18)
Contributing Analysts Marta Bastoni (Banks)
The Bank of Greece’s bad-bank plan is bold, seeks to address some of the dilution risk from existing deferred-tax credits, but leaves critical questions unanswered. Underlying levels of capital will still look scant, and identifying investors for the many billions of euros of senior and mezzanine notes to fund special purpose vehicle purchases is chief among concerns. (11/27/18)
- Transfer significant part of NPEs and part of deferred tax credits to SPV
- Loans transferred at net (of loan loss provisions) book value
- Amount of DTCs match additional loss to bring loan valuations to market values
- Introduce legislation to transform DTCs into irrevocable claim by SPV on Greek State
- SPV finances transfer with three-class securitization: senior, mezzanine, junior/equity
- Four banks (maximum of 20% each) and Greek State subscribe to lower class of notes (enabling State and banks to claim any excess value)
The Bank of Greece’s Nov. 22 plan notes that nonperforming exposures (NPEs) will remain high at Greek banks “primarily due to the absence of credit expansion as well as deleveraging of bank balance sheets.” To be able to announce new single-digit NPE ratios for 2021 (like Eurobank, with its plan on Nov. 26) that are agreed with the SSM and achievable, at least 40 billion euros, or 47% of existing NPEs, must be transferred.
Capital ratios will also have to remain in the low-to-mid teens to avoid further share-price weakness, as the ability to raise equity capital remains all but impossible. The sourcing of investors for the senior and mezzanine tranches of the SPV continues to be our main concern, along with the viability of the project. (11/27/18)
Skepticism at the proposed use of Greek banks’ deferred tax credits (DTCs) within a new special purpose vehicle (SPV) is understandable, but the huge dilution to existing shareholders automatically triggered by the DTCs in a clean-up must be avoided. Currently, any lender that records losses in an accounting year must boost its share capital in favor of the state (by 29% of the loss amount, reflecting the current tax rate), increasing the government’s stake and diluting existing shareholders.
New legislation will then convert the DTCs transferred — likely about 7.5 billion euros in total — into an irrevocable claim of the SPV on the Greek State with a predetermined repayment schedule. This will obviate the dilution risk from losses triggered by the transfer, write-off or impairment of loans in arrears per Law 4465/2017. (11/27/18)
Some skepticism surrounding the structure, funding and capacity of the proposed bad bank in Greece remains even after details were presented on Nov. 22. A key concern remains where the buyers for senior and mezzanine notes issued by the special purpose vehicle will be sourced, with Italy, Ireland and Spain also working through legacy issues and absorbing investor capacity. As the graphic shows, deferred tax assets are a core part of transitional capital for the banks. With no likelihood of equity capital raises, any solution must avoid depleting banks’ already scant core capital bases.
The Bank of Greece’s new plan is considerably more complicated and larger in scope than that of the Hellenic Financial Stability Fund, which is based on the Italian model and could relieve the banks of up to 15 billion euros of NPEs. (11/27/18)
Piraeus bank remains the poster child for bad debt cleanup, with 28.5 billion euros of nonperforming exposures at 1H dwarfing less than 5 billion euros of fully-phased in CET1 capital (6.6 billion euros transitional). The approach taken to CET1 calculation, whether transitional — which the regulator will consider — or fully-loaded, which is a default for many investors, makes a significant difference. The bad bank’s estimated impact on CET1 levels is 3 percentage points, on average, a further source of concern for its viability.
For Eurobank, the impact of transition to IFRS9 represented 250 bps of CET1 at 1H, effectively the difference between an 11.9% fully loaded ratio and 14.4% transitional. For Piraeus, the impact was increased 25% to 2 billion euros at 1H, highlighting the enormous sensitivity to accounting approach. (11/27/18)
The rate of increase in restructurings and foreclosures, combined with a fall in non-performing exposure inflows, are together critical drivers of how quickly Greek banks’ bad-debt problems are addressed. Should third-party appetite for portfolio sales and securitizations dry up, the SSM will expect banks to absorb higher losses and writedowns, testing the resilience of already-limited cash coverage and fully loaded common equity tier-1 bases.
National Bank of Greece said on its 2Q call that it understood that the target set by the SSM for 2021 would be “aggressive” and as such, inorganic measures would be critical. The ability of banks to absorb further provisions to write off unprovisioned portions of NPEs also explains the need for a greater cost focus, to bolster their pre-provision operating-profit cushions. (09/10/18)
Cash coverage levels for the Greek banks ranged from 49% (Piraeus) to 60% (NBG) at 1H, with both Alpha and Eurobank within the low end of this range. This is in-line with Italy’s more beleaguered banks Banco BPM (51%), Carige (50%), Monte Paschi (56%) and CredEm (50%) which themselves are vying for investors to help offload their bad debt burdens. Curing of these NPEs will continue to be driven by corporate and SME segments, we believe, while the impact of the growing number of auctions on consumer behavior could accelerate organic outflows of NPEs.
Business loans represent two-thirds of Piraeus’ NPEs, with mortgages a little more than 20%. For Eurobank, mortgages (one-third) exceed corporate (30%) NPEs. Mortgages are larger (almost 50%) than SME and corporate combined for National Bank of Greece. (11/14/18)
The Single Supervisory Mechanism is between a rock and a hard place as it starts discussions with Greece’s banks over new medium-term plans, NPE and CET1 targets. The country’s four main banks, whose rehab is far from over, have total nonperforming exposure of $100 billion vs. a total market cap of about $7 billion and coverage levels similar to Italy’s weakest lenders. (09/28/18)
The elephants in the room that are deterring confidence in Greek banks remain centered on vast non-performing exposures (NPEs), the purchase of foreclosed property at auctions, and growing periphery fears. The four largest Greek banks had aggregate group NPEs of nearly 94 billion euros as of 2Q, more than 90% of which are domestic Greek exposures. We expect that new NPE targets (to be agreed with the ECB and announced for 2020/21) will imply a halving or more of these NPEs, with a little more than half predicated on sales and securitizations.
One key unknown remains the depth and appetite for securitized-mortgage (secured and unsecured) and SME NPL portfolios, as well as further sales. New targets will likely imply collective capacity for about 25 billion euros of transactions through 2021, a key risk. Last reviewed by Jonathan Tyce on 11/13/18, original publish: (09/10/18)
The rout in Greek bank shares, with average price declines just shy of 40% over three months, will complicate ongoing discussions with SSM overseers about new bad loans and capital targets. Further, it may force the regulator and central bank to put a bad-bank plan into action. The ability to fund rights issues to shore up capital is nearly impossible and would be hugely dilutive for existing shareholders. The transfer price of assets could also prove problematic, especially given ongoing skepticism about the stability of house prices, given the banks’ growing intervention in auctions.
Piraeus remains in the line of fire, with a 28.3 billion of non-performing exposures (1H) and 5.2 billion euros of CET1 capital (fully loaded) supporting this. Greek banks reported aggregate NPEs of 86.4 billion euros. (11/13/18)
While it’s clear to all onlookers that Piraeus Bank, and peers, remain undercapitalized vs. their bad-debt mountains, we believe that the ECB will struggle to pull the trigger forcing capital raises. A Bloomberg News report suggests that adverse market conditions may force the ECB to give Piraeus more time to raise about 500 million euros of Tier 2 bonds. Given, we believe, virtually zero chance of a material equity capital increase, we would expect any Tier 2 raise to come at a mid-teens yield, if at all.
Bank of Cyprus raised 220 million euros of contingent convertible debt with a fixed coupon of 12.5% in August. One of the issues facing Greek banks issuing AT1 debt will be the creation of viable distributable reserves from which the coupon can be paid. Last reviewed by Jonathan Tyce on 11/13/18, original publish: (09/28/18)
EFG Eurobank — arguably one of the stronger Greek banks with a profitable and material non-domestic business — shows how expensive it could be for a weaker domestically focused peer to issue capital. Its Tier 2 subordinated note, 950 million euros of which was placed with a 6.41% coupon in January, is yielding just shy of 11%, with the bond trading at 76 cents in the euro. Eurobank’s fully-loaded CET1 ratio is almost 1.5 percentage points higher than that of Piraeus and, we believe, any issuance from Piraeus would need to be priced in the mid-teens range. (09/28/18)
The number of foreclosed property auctions has accelerated since moving online, with an 8,000-10,000 target for 2018 looking increasingly likely as the number of suspended auctions falls. From late 2008, Greek residential house prices fell an average of more than 40%, and now appear to have bottomed. In a practice not dissimilar to that followed by Spain’s banking system, and owing to the lack of buyers, Greek banks have been buying back 80% or more of these properties at auction.
Eurobank disclosed that it had bought 88% of 913 properties auctioned between January-July, and Alpha Bank some 80%. The practice will remain subject to skepticism, questioning whether it’s merely a means to reclassify a nonperforming exposure as a long-term asset. Minimum prices are set with reference to the property index and court discretion. (09/10/18)
Greek banks are entering into discussions with the Single Supervisory Mechanism to set new goals for 2021-22, with lower non-performing exposure (NPE) goals and cost-cutting topping the agenda. New plans should be detailed by year-end for most. Revenue run-rate remains a key headwind, with loss of interest income ongoing. We expect greater focus on cost-cutting, while falling provisions remain critical to improved profitability. (09/10/18)
Piraeus Bank, the worst performer among Greek banks over 12 months, is the smallest by market cap and retains the largest NPE load, making it the most-geared play on the ability to reduce bad-loans. John Paulson is the bank’s second-largest shareholder (6.6%) behind the Hellenic Financial Stability Fund (26% stake). A retail deposit share of 30% ranks it second behind National Bank of Greece, ensuring that its deposits base grows as inflows continue, and the loan-to-deposit ratio should tick up toward 100% as corporate loan growth picks up.
We believe that consensus expectations for fees likely understate the contribution that Piraeus’ bancassurance deal with NN group can deliver, as well as growth from credit cards and payments. It ranks second on consensus revenues, with a flat top-line of 1.9 billion euros into 2020. (09/10/18)
Bad-debt cleanup for Greek banks has been prolonged by the rate of re-defaults and new entries into the non-performing-exposure category. Alpha Bank epitomizes the challenge, with a net drop of 200 million euros in the year through June, hobbled by new entries of 1.3 billion euros. To achieve its 2018 reduction goal to 21.4 billion euros, new outflows will have to accelerate to 1 billion euros, necessitating a significant step-up in liquidations. Project Jupiter (secured SME loan portfolio) should be completed in 2H, enabling disposals to take up the slack.
Loan amortization and loss of interest income from loans reclassified as NPEs is still not offset by new corporate-loan production. Net revenue expectations for Alpha are the largest among the four peers, averaging 2.2-2.3 billion euros in 2019 and 2020. (09/10/18)
EFG Eurobank’s next medium-term plan will target a 15-17% non-performing exposure ratio by end-2021, less than half of the level of 40.7% at end-June. Recent sovereign debt widening will likely limit its ability to securitize up to 2 billion euros of mortgage NPEs by year-end, we believe. Similar to peers, its ELA funding will have fallen to zero by December-end, and its 20% market share should ensure domestic deposits grow by about 500 million euros per quarter as capital controls are slowly eased.
EFG’s Serbian, Bulgarian and Cypriot operations, which collectively should contribute about 120 million euros of profit annually, continue to set EFG apart from peers. NPE reduction should develop in a similar vein as before, with net flows and sales driving about two-thirds of the decrease. (09/10/18)
National Bank of Greece is the HFSF’s largest holding (40%), and sell-down risk remain an overhang, though plans to lower the stake will be on ice as shares plumb news lows. With a retail deposit share of 35%, NBG has been the least active in domestic sector consolidation and will present a new medium-term plan in December. The NPE run-down target should be 6 billion euros by 2022 (vs. 16 billion euros currently), albeit with a mix shift and greater focus on sales, liquidations and securitizations.
We would expect cost-cutting to be front and center in NBG’s new plan, with further voluntary redundancies and greater emphasis on cutting administrative expenses. The bank has amassed about 4 billion euros of excess liquidity to fund growth to close its underweight exposure to Greek corporate lending. (09/10/18)
Greek banks remain hostage, to a large extent, to the fortune of the wider economy and the success and timing of sovereign capital raising and fiscal discipline in the nation. Beyond that, the tradeoff between running off high non-performing exposure while sustaining revenue is a difficult balancing act. Tourism and exports will determine growth in the critical corporate-loan space. (09/19/18)
Greek banks’ reliance on the ECB’s emergency liquidity assistance program will fully end by early 2019, having fallen from a high of nearly 90 billion euros in mid-2015. The re-animation of the repo market, as well as inflows of about 1 billion euros a month back into the retail deposit market, suggest that the banks’ liquidity is robust. The banks’ thin capital bases, however, especially if harsh assumptions on cleanup of non-performing exposure (NPE) are applied, mean that liquidity comfort isn’t a given. (09/19/18)
A key challenge for Greek banks is stemming the slide in revenue as loans fall into the non-performing category and the pool of assets falls with every sale, writeoff and impending securitization. New loan production, such as there is, exists in the corporate arena where National Bank has built up several billion euros of excess liquidity to close its underweight share. We believe there is scope for non-interest income revenue to surprise on the upside, but acknowledge that the difficult tradeoff for investors remains: The higher the rate of asset-quality clean up, the greater the short-term revenue impact. (09/19/18)
Two of the major drivers of Greek banks’ net interest margins in recent quarters have been the slide in retail funding costs and the exit from expensive ELA funding. Further relief from deposit-cost repricing is very limited, we believe, suggesting that new loan production and higher front-book corporate pricing will determine revenue direction. New-business rates are pricing 100-130 bps higher than the yield on existing stock. Increasing levels of eligible collateral that banks possess (as ratings improve and covered bond issuance grows) will also unlock access to cheap ECB funds, which should provide some net interest income relief. (09/19/18)
Large non-performing exposures continue to impede lending capacity, and Greek banks need accelerated balance sheet cleanup to support the real economy. Tourism will be a key driver of credit demand; the World Travel & Tourism Council estimates that tourism’s total contribution to GDP was 19.7% in 2017 and will grow to 22.7% by 2028. Export-oriented businesses are another important sector, as they have held up better during the Greek crisis, supported by external demand; the share of exports relative to GDP has risen to 36% in 2Q vs. 19% in 2009, according to Eurostat. Gradual domestic recovery and falling unemployment should stimulate credit demand and boost banks’ willingness to lend. (09/19/18)
The Greek economy should continue its gradual recovery , with modest GDP growth and further declines in unemployment likely. Real GDP growth of 1.4% in 2017 reversed two years of contraction in 2015 and 2016, with unemployment falling about 6% since 2013. A Bloomberg-compiled consensus points to cumulative GDP growth of 6% over the next three years, in line with the European Union average. A further 3% drop in the unemployment is projected by 2019, but that still leave Greece with the highest unemployment rate in Europe.
House prices have began a nascent recovery after a decade of decline, with prices of urban area dwellings growing by 1% year-on-year in 2Q according to the Bank of Greece. The impact of bank-run auctions and purchases will lead to some skepticism about any price recovery. (09/19/18)
Additional sovereign issuance, stability in peripheral bond markets and a commitment to reforms are needed to improve investor sentiment in Greece and for its banks. A high debt-to-GDP ratio of 182% means that further talks will be held with EU partners, despite June’s relief measures. Political risk in the run-up to the 2019 election shouldn’t be ignored, as it threatens progress. (09/14/18)
Greek bond yields have compressed significantly since the 2015 peak, however a further narrowing of premiums will be challenged by both internal and external risks. The high debt-load issue could remain unresolved for years due to its political sensitivity. Turmoil in Italy and Turkey has spilled over to Greece, driving volatility in 2018. Nascent economic growth and implementation of reforms will be the main drivers of future re-rating. S&P has upgraded the country’s credit rating to B+ with a positive outlook, yet sovereign debt remains sub-investment grade, meaning it’s excluded from the ECB’s QE program.
Sovereign yields have important implications for Greek banks as they determine wholesale funding costs. Furthermore, as banks hold Greek bonds, a decline in yields will boost capital position through the AFS reserve. (09/14/18)
Greece’s 24 billion-euro cash buffer, resulting from ESM disbursements, is enough to cover its financing needs for almost two years. However, it may be masking how much flexibility Greece actually has before having to tap the debt markets. Issuance plans have been halted on instability in Italy and Turkey, which has pushed debt costs up. In theory, the cash buffer should allow Greece to wait for more supportive markets, yet there’s an incentive to keeping the buffer intact as it serves as collateral for future issuance. The 10-year maturity extension of 130 billion euros of EFSF loans pushes payments beyond 2032, offering protection to private investors in the medium term.
Debt market activity for Greek banks will be closely tied to sovereign issuance, which is needed to establish investor appetite and normalization. (09/14/18)
Further relief will be needed for Greece, despite measures introduced in June, as its high debt load remains unsustainable in the long run. The IMF’s analysis, which shows Greece breaching its 20% gross-financing-need-to-GDP threshold in 2038, may prove optimistic. The IMF central scenario assumes a 1.8% average primary balance and GDP growth of 2.9% for the 2018-60 period. However, according to the IMF, historically the likelihood of a euro-area advanced economy sustaining a 1.5% average primary surplus for 10 years is only 12.8%. Furthermore, achieving GDP growth with a high primary surplus will be challenging given the low level of implied investment.
The EU scenario, which has Greece meeting its debt obligations, uses even more ambitious assumptions, making it highly unrealistic. (09/14/18)