After years of having their fates decided for them, Greece’s bailed-out banks are now in a position to start tackling tens of billions of euros of unpaid loans and make changes they hope will turn their market dominance into a profitable business.
The first test of their success could come by the end of the year, as some attempt to raise debt from investors.
If they pull it off, it would mark a watershed for banks from a country that has not accessed financial markets since 2010, when Greece was hit by a debt crisis which led to an international bailout with tough conditions attached.
And although it could take years for progress in the banks’ efforts to deal with non-performing loans (NPLs) to become clear, some investors are already staking their bets.
Billionaire hedge fund investor John Paulson threw his weight behind the sector this week, publicising investments in Piraeus Bank and Alpha Bank shares, while outlining why he saw Greek banks as a good play on the country’s economic recovery.
Others have also chanced their arm, driving a 28 percent rally in the big four banks in the last three months on the back of improving fortunes for the Greek economy which is forecast to emerge from six years of recession next year.
“Near-term all of the top four banks’ performance will be very much linked to Greek recovery,» said Paul Formanko, London-based head of central and eastern Europe, Middle East and north Africa banks research for JP Morgan.
“However, over time, managements, asset mix and the quality of the collateral value underpinning non-performing loans are likely to be differentiating factors, along with managements’ ability to deliver cost synergies,» Formanko said.
Not everyone is convinced of the sector’s appeal. Patrick Lemmens, lead manager of Robeco’s 192 million euro New World Financial Equities fund, sees better opportunities elsewhere and argues Greek banks are «not cheap any more». He said it was still «a bit early to get too optimistic about the economy».
Greek banks underwent a huge upheaval during the country’s crisis, leaving three pillars – Piraeus, National Bank of Greece (NBG) and Alpha – largely owned by Greece’s bank bailout fund, while the fourth, Eurobank, is almost entirely owned by the Hellenic Financial Stability Fund (HFSF).
The big four, whose collective market share tops 90 percent, are in the final stages of agreeing restructuring plans with the European Commission as part of the conditions imposed for the summer bailouts that will trigger job cuts, branch closures and international asset sales.
“We had to deal with the first issues first … and then come to some kind of normality and start addressing the operational issues,» NBG’s deputy chief executive Petros Christodoulou said.
A round of stress tests into their capital positions could trigger further sales and other changes, although several senior figures in Greek banking told Reuters they did not expect these tests to have a major impact.
The first challenge for the banks is how to deal with their non-performing loans, a category totalling 28 percent of all lending across the four large banks.
U.S. consultant Blackrock and accountancy firm Ernst & Young are carrying out a «troubled asset review» examining how the banks are dealing with their bad loans and recommending improvements.
A source familiar with the review told Reuters some banks were «kicking the can down the road», or trying to avoid decisions.
“They still look at bad customers and think they will return as good customers,» he added, meaning they sit on cases for too long and don’t take actions that could help them recover money.
Banks are also failing to co-ordinate their efforts to deal with borrowers who have loans from multiple institutions, the source said, adding that recommendations encouraging this are likely to come out of the review.
And a law banning home repossessions introduced in 2010 to protect vulnerable homeowners has led to claims it has encouraged people who can afford their mortgages not to pay.
The banks insist they are tackling the problem head on, with Piraeus exploring ways to ring-fence its troubled assets, so they are run separately to the rest of the bank.
NBG also wants to set up its own internal bad bank in the next two months, said Christodoulou, who then hopes to be able to claim back some of the 7.7 billion euros the bank has set aside for loans likely not to be fully repaid.
Such moves are just part of the restructuring plans NBG and Piraeus are close to agreeing with the EU. Alpha and Eurobank are also on the verge of sealing agreements, which are required of all banks in receipt of state aid.
As well as selling overseas operations, the Greek banks, some of whom doubled in size as a result of their crisis mergers, will also pledge to cut branches and staff in a bid to increase earnings.
“Banks have (already) decreased their cost base by more than 15 percent,» Bank of Greece Governor George Provopoulos told Reuters, adding that the reduction would reach a cumulative 30 percent in the next two years.
“The excess capacity of the sector is rapidly decreasing and the sector is in the process of reaping efficiency gains.”
By the end of the year, the banks will learn whether Athens’s stress tests will force them to raise more capital. And they will head straight into 2014’s pan-European round of EU stress tests, which could yield further demands.
If they don’t have to raise more capital, the banks could be a very attractive proposition; if they do, investors could face their stakes being wiped out, said Florent Nitu, an analyst who covers Greek banks for Citi.
Provopoulos at the central bank played down this risk.
“The banks are well capitalized,» he said, echoing views previously expressed by the banks and adding there is «8 to 9 billion euros» left in the HFSF as a backstop. If Greece did have to resort to this, however, shareholders would see their investments heavily diluted.
Another key milestone will be a successful return to bond issuance. Christodoulou said NBG hoped to raise debt quite soon, with bilateral deals – agreed off-market between two parties – likely before wider market ones as the bank targets a borrowing rate of around 5 percent rather than the 7 percent currently on offer.
When it does issue, it will be «something meaningful», rather than a couple of hundred million euros, he added.
Piraeus has done all the preparation for a bond issue and will borrow «opportunistically» when pricing becomes attractive, said Anthimos Thomopoulos, the bank’s deputy chief executive. The bank «can launch at any time», he added.