A return to capital markets for Greek banks but no return to domestic lending
In the future we may look back on the past two weeks as a watershed moment for Greek banks following the onset of the twin financial and sovereign debt crisis in 2009. After extensive and well prepared international road shows, financial institutions in Athens attracted unprecedented levels of foreign investors' interest for bond placements and capital-raising initiatives.
First, Piraeus Bank, Greece’s second-biggest lender, successfully launched a 500-million-euro unsecured bond. It was the first of its kind from a commercial bank in Greece since financial institutions were excluded from international capital markets in 2009.
In a second move both Alpha Bank, Greece’s fourth-largest lender by assets and again Piraeus Bank raised a combined 2.95 billion euros ($4.07 billion) in new capital from foreign investors this week. More specifically, Piraeus raised 1.75 billion euros of equity, while Alpha Bank followed close behind with a level of 1.2 billion euros. Shareholders for both banks approved the transactions for the issuance of new ordinary shares this week Friday.
Domestic observers were quick to showcase the fund raising efforts as a sign of Greek lenders bouncing back from isolation in international money markets. Some went as far as calling it a "bull market."
Such optimism is premature and misplaced. What is significant about these recent developments concerns the changing landscape of foreign investors' interest in Greek banks. Both the bond placement and the equity-raising endeavours were not driven by hedge funds' focus on risk-weighted assets with high yields and short maturities.
Rather, traditional institutional investors such as sovereign wealth funds, pension funds, asset management firms, private equity houses and investment funds drove the demand for these activities. Both the bond placement and the equity raising initiatives were heavily oversubscribed, suggesting that investors' interest was not a one-off event. Moreover, the geographical origin of these investors was global, thus signalling that Greek banks were able to attract funds from a large pool of institutions spreading from Europe over to the U.S. and even reaching Asia.
So much for the good news. But it would be foolish to loose sight of the underlying structural challenges for Greek financial institutions, including Piraeus and Alpha Bank. There are three issues that continue to adversely impact on the operational capacity and profitability outlook of Greek banks.
Firstly, the funds raised by Piraeus and Alpha Bank are the result of identified capital deficits by the Bank of Greece one year after both institutions were extensively recapitalised by the Hellenic Financial Stability Fund (HFSF). Put otherwise, repeatedly plugging capital holes on a yearly basis should not become the default option of Greek banks.
But more may be in stock this year when the European Central Bank (ECB) completes its own asset-quality review and stress testing of euro zone banks, including the four systemic institutions in Greece (National Bank of Greece, Piraeus Bank, Eurobank and Alpha Bank). If the ECB reaches other conclusions than the Bank of Greece, more fundraising efforts lie in wait.
Secondly, the success of Piraeus and Alpha Bank should not distract from the formidable challenge of non-performing loans (NPLs) on banks' balance sheets. Their volume as a share of the total loan portfolio now surpasses 38 percent. This requires an ever increasing level of loan impairment charges for Greek banks. The necessary provisioning levels against such NPL volumes not only bind capital resources which banks could otherwise use for lending to the real economy. The charges also impact on the earnings performance of Greek banks and their outlook for 2014.
The rating agency Standard & Poor's identified these risk factors in Piraeus and Alpha Bank's balance sheets as significant enough to deny both institutions a ratings upgrade, while it kept the rating's outlook at 'negative'. Lest also not forget that S&P's rating for both banks is still below investment grade, i.e. 'CCC/C'.
Finally, as is so frequently the case these days in Greek affairs, the immense challenges that remain should serve to place potentially good news into context. The depositor base for Greek banks declined for a second consecutive month in February. Greek banks are starting to receive a vote of confidence from foreign investors, with yields in excess of 5 per cent and a hefty discount for new shareholders difficult to turn down at present. By contrast, domestic depositors are drawing down on their deposits to meet ever rising tax obligations and those having exported capital in the past years are not returning in droves to repatriate their funds in Greek bank accounts.
With a thin and fragile depositor base, Greek banks still do not have the financial leverage to contribute substantial funds to a much-needed lending recovery in Greece. Instead, in February lending volumes to households and businesses remained negative at -4 percent. Without banks pro-actively returning to providing liquidity to the real economy, in particular working capital to SMEs, any presumed economic recovery process in Greece will be short-lived.
While two Greek banks have returned to international capital markets after a hiatus of 5 years, their success story would gain in credibility if they were also in a better position to support any economic recovery. Sustainable evidence on that front is still lacking. Greek banks will continue to be confronted in the course of 2014 with upside risks to capital needs estimates because of their large stock of impaired assets and an uneven deposits' in- as well as out-flow.
*Jens Bastian is an independent economic consultant and investment analyst for southeast Europe. From 2011 to 2013 he was a member of the European Commission Task Force for Greece in Athens. He is a regular contributor to The Agora section of Macropolis. Follow Jens on Twitter: @Jens_Bastian