Greek Banks Face Skeptical Investors in Demand for Fresh Capital

  • Greek banks draw capital increase plans after ECB stress test
  • Lenders need to raise $15.9 billion following economic debacle

Greek banks will ask investors to help plug a 14.4 billion euro ($16 billion) capital shortfall, with billionaire Wilbur Ross saying the government should detail ownership plans for the nation’s lenders as they seek a second round of fundraising.

“The keys to voluntary investor participation in the capital raises will be clarity regarding the ultimate capital structure and the extent of the government’s participation in the governance of the banks,” Ross, chairman of WL Ross & Co. said after the release of the ECB’s so-called comprehensive assessment for Greek lenders on Saturday. “Investors will not be comfortable with committing new equity capital to banks that are effectively nationalized,” the billionaire investor, who holds a stake at Eurobank Ergasias SA, said.

The ECB asset-quality review identified 9.2 billion euros of valuation adjustments for National Bank of Greece SA, Piraeus Bank SA, Eurobank and Alpha Bank AE, the Frankfurt-based supervisor said Saturday. The banks’ capital gap amounted to 14.4 billion euros under a simulated stress test scenario, and 4.4 billion euros under baseline macroeconomic assumptions. The four banks will have to submit recapitalization plans to the ECB’s supervisory arm by Nov. 6.

“Raising funds will clearly be difficult,” Arturo Bris, a finance professor at IMD business school IB Lausanne, said in a phone interview Sunday. “A solution can be a government-sponsored plan that takes care of the bad part of the banking system, while the good part becomes marketable.”

Greek banks cleared the hurdle of a pan-European review in 2014 thanks to capital increases totaling more than 8 billion euros and restructuring plans approved by the European Commission, only to see their solvency put to the test after six months of brinkmanship between Alexis Tsipras’s anti-austerity government and its creditors this year. The standoff resulted in a plunge in share prices, restrictions on ATM withdrawals and transfers of money abroad, as well as a month-long forced bank holiday in July.

“The stress test results of the Greek banks, especially under the baseline scenario, are encouraging enough,” said Panos Xidonas, associate professor of finance at ESSCA, an Angers, France-based management school. “The interest of private investors shall soon be substantially expressed.”

As much as 25 billion euros from Greece’s latest bailout agreement have been earmarked for the banks after Tsipras accepted the euro-area’s demands for more belt-tightening measures and structural economic overhauls, in exchange for emergency loans. The result of the ECB’s assessment shows that no more than 10 billion may be needed if private investors chip in the capital increases, a spokesman for the European Stability Mechanism -- the currency bloc’s crisis fighting fund -- said on Saturday.

The capital shortfall under an adverse scenario of 14.4 billion euros was in line with market expectations, analysts at Athens-based Euroxx Securities Vangelis Karanikas and Yiannis Sinapis write in note to clients. Capital shortfalls under the ECB’s baseline scenario of 4.4 billion euros are manageable, the analysts said.

According to a new recapitalization bill approved by Greek lawmakers on Saturday, the state-owned Hellenic Financial Stability Fund can cover part of the capital gap to banks either through contingent convertible securities, or shares with full voting rights, with the mix between shares and so-called CoCos subject to a decision by the Greek Cabinet. The bill also empowers the HFSF to evaluate lenders’ boards, and bloc strategic decisions.

“Funds inserted by the government should be in the form of CoCos,” Ross said, so that the value of the holdings of existing shareholders, which has dropped over 70 percent this year, isn’t “unfairly” diluted. “It would be nonsensical for the government now to dilute shareholders,” he said.

Lenders have bled about 43 billion euros in deposits over the past 12 months amid doubts over Greece’s place in the currency bloc. They reported net losses totaling over 4.6 billion euros so far this year in bourse filings on Saturday, amid increases in sour loans, expensive emergency funding requirements from the ECB, and a “challenging macroeconomic environment.” Auditors and boards prepared the financial statements on a “going concern” basis about the lenders’ ability to continue their “operational existence,” citing liquidity risks.

Banks' share prices have plunged this year

Lenders said after the stress test release that they will try to cover most of the gap identified in ECB’s exercise through private funds. “The National Bank of Greece intends to raise the capital required, with as much capital as possible from private sources and its own capital actions so as to significantly minimize need for state aid and consequent burden on Greek debt,” Chief Executive Officer Leonidas Fragkiadakis said in a statement after the results.

“As an investor in Eurobank we would like to be part of the solution to the bank’s capital needs,” Ross said. “I hope government participation here, if any, will be in a form that will give professional investors the confidence to do so.”