Alpha, Eurobank unite to stand

In a move widely seen as spurred by increasingly dimmer market and financial prospects, two of Greece?s three biggest lenders, Alpha Bank and Eurobank EFG, announced on Monday merger plans that will create one of the biggest banking groups in the broader region.

The new entity, to be called Alpha Eurobank, will be among the 25 largest eurozone banking groups, with assets totaling 146 billion euros. The two banks currently account for an aggregate network of more than 1,300 branches across eight countries, with prominent market positions in Bulgaria, Cyprus, Romania and Serbia.

According to the details announced, the deal will involve a capital boost of around 3.9 billion euros, of which 2.1 billion in Core Tier 1 funds is seen as resulting from the sale of assets. A further 1.25 billion will be raised via a share capital increase, while a 500-million convertible bond loan will be covered by Qatar?s Paramount Services Holding, which already has a 5 percent stake in Alpha Bank. Paramount will now be the new bank?s largest single shareholder, with a 17 percent stake. It also holds 7 percent in British group Barclays and 10 percent in Credit Suisse.

The Latsis family, currently Eurobank?s biggest shareholders, will control 13 percent in the new bank, while the Costopoulos family, of Alpha Bank, will hold a 4 percent stake.

The merger will involve an exchange of shares, at a ratio of five new Alpha Bank ordinary shares for every seven of Eurobank EFG.

?The consolidation of two highly complementary private sector banks, with substantial synergies and a clear strategic rationale, will play a vital role in the economic recovery of Greece,? said a joint statement.

The share capital increase and the bond loan will be issued in the first half of 2012.

The deal is estimated to create synergies with a net present value of approximately 3.4 billion euros. Core Tier 1 funds of the combined entity is expected to be 14 percent, incorporating the capital plan measures and the impact of the forthcoming Private Sector Involvement (PSI), in which the value of the Greek government bond holdings of the two banks will take a cut of at least 20 percent through a rollover.

The timing of the development was rather unexpected, as pundits claimed that no bank deal was likely as long as the picture regarding PSI remained uncertain and before the auditors of BlackRock Solutions issued results of a scrutiny of Greek banks? loan portfolios – which they launched on Monday.

The government welcomed the development. Finance Minister Evangelos Venizelos said Qatar?s involvement in the deal sent a signal of confidence in the prospects of the Greek economy and its banking system.

Deutsche Bank saw the deal in a positive but qualified light. ?We see this agreement as a necessary step toward efficiency, given the fragmentation of the (Greek) banking sector, but a broad re-evaluation is still dependent on the country?s ability to convince the markets,? it said in a statement.

Analysts said the merger represented the two banks? attempt to ward off the prospect of nationalization, which could result if their lack of capital led them to the government?s Financial Stability Fund.

A further source of anxiety for banks has been the recent crash in their market values. Both Alpha and Eurobank, the country?s second and third largest banks respectively in terms of capitalization, have seen their values dive by about 39 percent in the last month alone. According to first-half results announced on Monday, they also took huge charges to cover their Greek bond exposure, 538.6 million and 664 million euros respectively, reporting heavy losses.

The merger is seen as the pivot of further restructuring in the country?s banking sector.