Change in sentiment toward Greek assets and sizable investor interest reminiscent of the pre-crisis era are the takeaways from our discussion with Christos Megalou, Piraeus Bank’s chief executive officer. This comes in the aftermath of the bank’s access to debt capital markets for a Tier II bond issuance and the numerous investor meetings Megalou hosted in London.
In this interview with Kathimerini, Megalou highlights the importance of the move for Piraeus Bank, as well as the Greek banking sector as a whole, and explains the conditionality under which the investor interest observed will turn into tangible investments for Greece. The Piraeus CEO describes the initiatives that the bank has undertaken for capital enhancement and the benefits arising from the recent strategic partnership with Intrum for the management of nonperforming exposures. The latter will enable the bank to safeguard the necessary management capacity to focus on the financing of the Greek economy and the needs of its 5.3-million clientele base in Greece.
Piraeus has successfully completed the Tier II bond issue, raising 400 million euros for its capital strengthening. What does this signal for the bank?
The results of the recent Tier II issue and the overall market reception are very satisfactory. This was the first public Tier II debt issue by a Greek bank since 2008, incorporating a number of difficulties and idiosyncratic issues, as one could expect. Our debt issue attracted offers of 850 million euros from 135 institutional investors. This high level of demand comprises a clear vote of confidence on the part of the investment community in Piraeus Bank and all the progress it has made. This is also the combined effect of all the work done by our management team, which acts in a well-designed, structured and disciplined way, assisted by our loyal and efficient personnel, delivering on our targets and strengthening the bank’s credibility. The Tier II debt issuance reinforces our capital position and our balance sheet. In parallel, it acts as a key enabler for the bank’s strategic plan “Agenda 2023” for the benefit of our investors, clients and employees.
How do you assess the interest of the investors you met during the roadshow? Did you see any change in investor sentiment compared to the recent past?
The interest and response we received during the four-day roadshow in London reminded us of the pre-crisis period and was indicative of a shift toward interest in Greek assets, in view of the upcoming election and emerging expectations. We ended up extending the roadshow by a day, as more than 100 investors eventually expressed an interest in meeting with us. Furthermore, half of those we met eventually decided to participate in the Tier II book. Investors expect an acceleration of privatizations and more investments, elements that are expected to contribute to the dynamic and sustainable growth of the Greek economy, boosting employment. This change in investor perception toward the country is reflected both in the decline in Greek bond yields to historically lows, as well as in the increasing valuations of the equity market.
Given that Piraeus’ Tier II subordinated bond is the first issued by a Greek bank since 2008, what does this mean for the other systemic Greek banks?
The inaugural subordinated bond issued by Piraeus signals the return of the Greek banks to the international debt capital markets, expanding the type and the number of investors that will be investing in Greek assets going forward, creating a benchmark for the future valuation of Greek unsecured bank debt.
Furthermore, the large number of investors that participated in the meetings with the Piraeus Bank team during the roadshow were provided with extensive presentations of the positive developments and outlook of the Greek economy and the Greek banking system fundamentals.
An important contributing factor to the success of the bond issue was the participation on behalf of the bank’s existing shareholders, who absorbed some 25 percent of the issue, and have consistently shown their support to Piraeus Bank.
On the other hand, the high coupon burdening the bond issue has raised some concerns as to how the profitability of 2019 can support this cost in connection with the obligation to pay the contingent convertible (CoCo) coupon.
The bank has budgeted the bond issue in its business plan projections, which for 2019 has incorporated a Tier II issue in the middle of the current year at a cost of 10 percent. We took advantage of the prevailing market conditions and achieved a lower coupon. In any case, the annual interest expense of the Tier II bond is 39 million euros, and is fully mitigated by the interest income generated by the bank, which is expected to surpass 1.8 billion euros in 2019. It is important to note that in the first quarter of 2019, Piraeus Bank’s net interest income increased 2 percent year-over-year, with the positive trend continuing in Q2 2019.
Piraeus recently proceeded with a strategic partnership with the Swedish group Intrum to manage a portfolio of NPEs amounting to 27 billion euros. What do you consider to be the benefits of the agreement in terms of cost relief through the transfer of the Recovery Banking Unit (RBU) and what is the expense assumed by the bank for the management of this portfolio?
The agreement with Intrum will indeed enable the bank to reduce its operating costs. We expect the positive impact in terms of pre-provision income to be around 50 million euros per year until 2021. However, the rationale of this transaction is not solely based on cost reduction, but on leveraging on Intrum expertise to manage the nonperforming loans even more effectively, moving faster in execution.
How does this agreement impact the capital strengthening of the bank?
The agreement values the bank’s internal platform of the management of NPEs at 410 million euros. We expect it to be capital accretive by circa 0.8 percentage points. In the event that we overperform our existing NPE reduction plan by 10 percent with Intrum, then the benefit to our capital will reach one percentage point by the end of 2021.
To what extent might providing a 10-year exclusive servicing contract to Intrum hinder Piraeus Bank from participating in possible systemic initiatives of transferring part of its NPE book to special purpose vehicles as proposed by Bank of Greece or the Hellenic Financial Stability Fund (HFSF)? Does it allow you to have the flexibility to participate in similar moves, assuming they get the green light from regulators?
This is clearly not prohibitive. On the contrary, both systemic proposals presuppose large, independent servicers. The strategic agreement with Intrum serves this need. Piraeus Bank moved fast and agreed the creation of the first large independent NPE servicing company in Greece, which will claim its position in both systemic solutions.
What should Piraeus’ borrowers expect from transferring the management of NPEs to Intrum? What will the policy regarding the corporate book be?
Intrum will continue applying Piraeus’ policies, while the internal tools and the bank’s committees will continue engaging actively with this loan portfolio. The loans remain on the balance sheet of the bank. However, we believe that Intrum will be able to have more flexibility in the solutions it offers to borrowers. The truth is that the banks are under significant regulatory pressure, something which is not the case for the servicers. Generally, we believe that the new platform will be beneficial for our borrowers as is the case in all 24 countries in Europe where Intrum operates.
Do you think that the Greek banking system needs further consolidation? Do you foresee any bank mergers and acquisitions?
Over the last decade, due to the international financial crisis, but mainly because of the Greek crisis, there was a deep restructuring of the Greek banking system, with a consequent drastic reduction in the number of banks operating in Greece. Banks in operation, through mergers, acquisitions and redundancies, declined from 64 in 2007 to around 20 at the end of 2018, while almost all foreign banks with a branch network presence have exited from Greece. Today, the four systemic banks exceed 95 percent of the Greek banking system in terms of assets, up from 68 percent at the end of 2007, operating in one of the most concentrated banking sectors in Europe.
Having completed its restructuring, the Greek financial sector can hardly accommodate further bank mergers on the basis of today’s data. It is worth noting that all banks are undergoing a process of operational transformation that leads to the strengthening of digital distribution networks for banking products and services, while at the same time they are gradually and substantially transforming the image of bank branches and services as we have known them to date.
The main pillars of ‘Agenda 2023’
In early June 2019, Piraeus announced its new strategic roadmap up to 2023, “Agenda 2023.” What are the pillars of this strategic plan?
There are three: de-risking legacy assets, growth of business and efficiency and simplification of operations. Regarding de-risking of legacy assets, the bank will decisively continue de-risking its balance sheet, with the aim of reaching internationally accepted, i.e. single-digit, NPE ratio levels. In parallel, Piraeus Bank intends to further strengthen its capital base, ensuring that it continues to remain above the supervisory requirements by circa 200 basis points at all times. Regarding the deepening of the existing 5.3 million client relationships, Piraeus will focus on leveraging the competitive advantages of its core business in Greece. The bank envisages remaining a prominent bank for small and medium-sized enterprises, along with the increased generation of retail products, under a risk-adjusted approach. The bank has identified revenue prospects across all business segments, utilizing the capabilities of its advanced digital platform and providing innovative solutions. Last, but not least, as far as enhancing efficiency and simplification of operations is concerned, the goal is to maximize the bank’s resources efficiency. This will be achieved through a simplified structure, further operational cost rationalization measures, as well as further optimization and automation of internal processes.
What plans are there regarding the development of new business for the bank?
The bank’s main pillars for the development of its business include strengthening the financing of healthy borrowers in the sectors of medium-sized and small businesses and farmers, and small businesses and retail, aiming at strengthening the economy. It is worth noting that during the October 2018 – March 2019 period we disbursed 2 billion euros in new loans in Greece, while for 2019 total new loan generation is expected to exceed 4 billion euros. Emphasis is also placed on the development of e-banking though workflows, digital diversification and online sales.
What are the main reasons that the Greek economy did not show high growth rates after the crisis? What should be done to speed up growth?
Greece’s growth momentum has not been consolidated yet, and the country’s commitment to high primary surpluses as part of its budgetary targets is a major challenge for achieving strong and sustainable growth rates. In 2019, gross domestic product growth is projected at 1.5-2.0 percent, with exports and consumption remaining the main growth drivers of the economy. In the medium term, however, in order to address the above challenges and the transition of the Greek economy to a strong and sustainable growth path, it is necessary, firstly, to continue and complete the structural reforms and privatizations, in order to strengthen the credibility of economic policy and improve further the country’s creditworthiness and, secondly, the attraction of high added-value investments. We are extremely optimistic about the prospects and dynamics of the Greek economy.
Judging by your recent interaction with investors, how do they view Greece and under what conditions will their interest possibly turn into real investment?
In order to be able to attract foreign investment with high added value the economic environment should become more attractive by removing disincentives such as bureaucracy and delays in litigation and considering changing the mix of fiscal policy toward reducing high tax rates. Essential prerequisites to turn investment interest into real investment is undoubtedly a stable and credible fiscal framework, the implementation of privatizations, the reduction of administrative and bureaucratic obstacles and the modernization of the institutional environment in Greece. This is what investors expect to see from a new administration. I have been in the capital markets for many years and I can say that the investment interest we have received over the last few months, and especially after the European elections, is really intense and substantial. I think that in the coming period it will substantiate into investment across the range of Greek assets.