Banks weighing their options ahead of the political unknown

The decision by National Bank of Greece, the country’s largest, to proceed with a rights issue of up to 1.25 billion euros will prove beneficial to the Greek banking system, especially in view of international developments and the government’s hesitancy to take sufficient measures to address the sizable fiscal imbalance. National Bank surprised many in the market last week by announcing a 1.25-billion-euro recapitalization in the form of a fully underwritten rights issue of two new shares for nine existing ones. Although the initial reaction by top officials at some other large banks was not as warm as some may have expected, this does not change the facts. The leader of the Greek banking sector is aiming to boost and improve the composition of its capital base, creating a greater buffer to cope with any worse-than-expected deterioration in loan quality at home and abroad. The move also signals to the market its readiness to return capital received from the state in the form of government bonds worth 350 million euros and enhance its capacity for bank acquisitions outside Greece. Although the other big local credit institutions had hired foreign banks to advise them on ways to boost their capital, none expected National Bank to proceed with a rights issue at this point. Most analysts agree that the move puts pressure on the others to proceed along the same lines by next spring. This is because the banks understand that the political risks may sharply increase soon afterward as it is likely that the country may hold early general elections next March if the current parliament fails to elect the next president of the republic. Already, the leader of main opposition PASOK, George Papandreou, has shown he favors early elections next March. The increase in the political risk is associated with the state’s participation in the share capital funding of private banks. This participation gives the state certain rights regarding the appointment of government appointees to bank boards as well as veto power over executive pay, dividend policy and some other issues. They may not advertise it, but the top echelons at large Greek banks do not like their policies being compromised by the demands of more activist state commissioners who may try to prove to their political bosses that they deliver where their predecessors had failed to do so. Of course, getting out of this part of the national rescue plan may not be as easy as some think, even if other banks follow in the footsteps of National Bank and fully underwrite their right issues in the months ahead. It is quite likely that the central bank may not accept such a development, citing rising nonperforming loans (NPLs) or succumbing to political pressure from socialist PASOK, which maintains a lead in the polls. Moreover, some analysts think that all major banks may exit this component of the rescue plan around the same time so that no bank is left with the stigma of weakness. This means all large banks should have either completed their rights issues or would make moves to be in the last stages before exiting the equity component of the state rescue plan. It is noted that stigma was an issue in the fall of 2008 when the rescue plan was first outlined, and large banks agreed to join only after the chairman of Alpha Bank, Yiannis Costopoulos, stated publicly that his bank would do so because it was in the interest of everybody. With US banks setting the stage by returning TARP money to Uncle Sam, there should be little doubt this will become a global fashion in the months ahead, especially if the global economy shows more signs of recovery. It is no coincidence that S&P, Moody’s and other international credit rating agencies have already started on this issue. This is important because Greek banks will have to return to international markets to fund their asset growth and would certainly not like to pay more to borrow money because they are seen as weak due to the state’s participation in their equity capital. Both institutional investors and central banks would also prefer equity capital to the hybrid securities used up to now by banks to boost their capital adequacy ratios. Finally, but not least, National Bank’s decision to proceed with a rights issue puts pressure on other large banks to follow suit at a time the Greek government seems hesitant to tackle the budget deficit head on. This means it may be forced to take additional restrictive measures next year, compressing gross domestic products growth at a time Greece’s eurozone partners may be coming out of the recession. This may prolong Greece’s economic slump, produce more NPLs and therefore make rights issues more valuable as buffers against a further deterioration in loan quality.