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Little more than a year ago, Eurobank Ergasias symbolized all that was wrong with Greek banking. The lender had sought to secure its future through a merger with the larger National Bank of Greece, only to have the country’s bailout masters — the troika of the European Commission, the European Central Bank and the International Monetary Fund — block the deal on size grounds. Hemorrhaging red ink and unable to raise even a fraction of its massive capital needs from private investors, Eurobank was effectively nationalized through a €5.8 billion ($7.8 billion) infusion of money from the Greek government’s bank bailout fund.

Today the situation could hardly be more different. Eurobank has become a magnet for international investors eager to capitalize on the Greek turnaround story. The revival began when, in the wake of the bailout, the bank tapped a London-based investment banker, Christos Megalou, to become its chief executive. A former Credit Suisse banker, Megalou took an ax to costs, shedding 12 percent of the bank’s workforce through a voluntary retirement program. He gained scale by acquiring two smaller lenders, with the government bailout fund paying virtually all of the costs. Most important, Megalou used his investment banking Rolodex to reach out to global investors, including a group led by distressed-debt specialist Wilbur Ross Jr. that had scored big gains in Ireland’s banking revival and was looking to duplicate that success in Greece. In April the CEO raised €2.9 billion with a rights issue, making Eurobank the first big Greek lender to return to majority private ownership.

“We now have more flexibility than other banks to make strategic decisions,” Megalou says. He believes that continued cost-cutting and measures to reward more-productive employees will return the group to profitability next year. “It’s also important that clients perceive us as having a private sector mentality,” he adds.

Eurobank’s recovery is the most dramatic sign of a broad-based revival in Greek banking, one that is crucial to the country’s economic recovery. Greece’s other big banks — Alpha Bank, National Bank of Greece and Piraeus Bank — also have convinced some intrepid, mostly foreign, investors that a bank-led recovery is under way. Altogether the Big Four banks have raised €8.35 billion in equity and an additional €2.25 billion through bond offerings this year.

Recovery isn’t guaranteed. Only NBG posted a net profit in 2013, becoming the first Greek bank to return to the black since the debt crisis erupted in 2010. The Big Four will probably need another two years to regain profitability, and still more time to get bad loans under control. Fully 32 percent of the Greek banking system’s loans are nonperforming, and that rate is likely to climb further this year.

Nevertheless, bankers are confident that the worst is over. After contracting by more than 25 percent since 2008, Greece’s economy should grow by 0.8 percent this year and 2.5 percent in 2015, according to government and private economists. “We see new export-oriented businesses springing up, and we are there to finance them,” says Petros Christodoulou, deputy chief executive of NBG. Others cite gains in retail sales, new-car registrations and building permits.

The economy, and the banks, still face stiff headwinds, though. With the unemployment rate stuck at 27 percent — and almost double that for people under 30 — fear of joblessness remains widespread. The social safety net is in tatters, with the value of pension funds cut in half after a withdrawal of government bonds from their portfolios in 2012 as part of Greece’s debt restructuring.

“My daughter-in-law thinks there will be more dismissals at her museum and she may lose her job,” says Ioanna Karas, treating her two grandchildren to steaming bowls of patsa, or tripe soup, in Athens’s cavernous Central Market. Her son, a former store manager, has been unemployed for two years, and his wife, an assistant curator at a state-run antiquities museum, has taken a pay cut. “We don’t see any signs that the crisis is over,” says Karas, a widow, who moved in with her son’s family after losing much of her pension.

With the economy still weak and Greece struggling under a debt of about 175 percent of gross domestic product, many analysts believe the government will need yet another bailout next year. The troika committed €240 billion in loan agreements under earlier bailouts, in 2010 and 2012, but the IMF estimates that the government faces a €12.5 billion funding shortfall in 2015.

“There is no appetite in the euro zone countries to keep lending to Greece,” says Mujtaba Rahman, a London-based analyst for Eurasia Group, a political-risk consulting firm. “But there are €16 billion left over from the second bailout, and they could be called a ‘program extension’ instead of a third bailout.”

Servicing Greece’s massive sovereign debt will require years of continued austerity, leading some observers to worry about economic and political stability. “My biggest concern is recession fatigue,” says NBG’s Christodoulou. “After six years of austerity, people have to be convinced there is a light at the end of the tunnel, or there will be a risk of a political backlash.”

The government of Prime Minister Antonis Samaras continues to hold firm. Although Syriza, the left-wing opposition party, was the biggest winner in the European Parliament elections in May, it claimed only two of the 13 Greek regional governments in local elections held on the same day. In June, Samaras appointed Gikas Hardouvelis, formerly chief economist at Eurobank, as Finance minister, with a brief to press ahead with any needed additional austerity measures and to accelerate the privatization of state entities.

The Greek financial sector received €50 billion from the bailouts, with half of that total going to the four largest banks. But even with their recent equity issues, the Big Four may require further recapitalization. According to a June report by the IMF, lenders could require an additional €6 billion of capital. “A major concern is the very high level of loans that are not performing, including restructured loans that are considered to have a very high risk of becoming nonperforming again,” said Poul Thomsen, the IMF chief of mission for Greece.

The real picture should emerge in November, when the European Central Bank releases the results of its asset quality review and stress test of European banks. “We are all waiting nervously to see what the ECB will announce,” says Miranda Xafa, chief executive of EF Consulting, an Athens firm that advises hedge funds.

Executives at the Big Four banks reject the suggestion that they may need to raise more equity. But just in case, the Hellenic Financial Stability Fund, which the Greek government and the troika created in 2010 to stabilize the financial sector, has €11.5 billion left over from the 2012 bailout that could be used for further recapitalization.

The HFSF has already spent €38.5 billion to restructure and recapitalize the banking sector. Consolidation has played a key role. Greece had 18 banks before the crisis; today only six remain, with the Big Four accounting for more than 90 percent of assets.

PIRAEUS, TRADITIONALLY A PLAIN-VANILLA lender to small and medium-size enterprises, has pursued consolidation more aggressively than any of the big banks. It has used acquisitions to become Greece’s largest bank, and it has done so by spending barely any of its own money. “We had a very clear vision of what was happening and what opportunities existed,” explains CEO Anthimos Thomopoulos. The flight from Greece by European banks desperate to shore up their own positions back home presented particularly rich opportunities. “They left a lot of free equity on the table and even paid Greek players to acquire their banking subsidiaries,” Thomopoulos says. “Of course, we accepted.”

When Greece embarked on bank restructuring in 2012, Piraeus gained a lead on its rivals by acquiring state-owned Agricultural Bank of Greece, known by its Greek acronym, ATE, in July of that year. The deal cost Piraeus €95 million, but it came with several sweeteners. The HFSF removed ATE’s worst assets, then spent €570 million to recapitalize the bank before turning it over to Piraeus. The acquisition was primarily a liquidity play for Piraeus, which obtained ATE’s €14.3 billion in customer deposits. “We got a very good portfolio for very little,” says Thomopoulos, 53, who became head of Piraeus in 2012 after 14 years at NBG, where he had risen to deputy CEO.

In October 2012, Piraeus acquired Geniki Bank, the Greek subsidiary of France’s Société Générale. As part of the deal, SocGen invested €444 million to recapitalize its subsidiary and agreed to subscribe to a €163 million convertible bond issued by Piraeus. In return, Piraeus paid the French bank a nominal €1 million. Using a similar blueprint in June 2013, Piraeus acquired Millennium Bank Greece, a subsidiary of Portugal’s Banco Comercial Português. The Portuguese bank agreed to recapitalize its subsidiary with €413 million and to purchase €400 million of Piraeus shares. Again, Piraeus paid just €1 million for its acquisition.

“In both cases the strategy of the foreign parents was to cut their losses and put money into their subsidiaries to cover any capital shortfalls,” Thomopoulos says. “So we ended up getting more than €1.2 billion in free equity from the two acquisitions.”

Even before sealing the Millennium deal, Piraeus had set its eyes on another target. The Cyprus financial crisis of 2012–’13 threatened a bank run in Greece, where branches of three Cypriot banks held €15 billion in deposits and €24 billion in loans. To avoid the 15 percent haircut that was being imposed on depositors back in Cyprus as part of that country’s debt restructuring, the Greek branches had to be taken over by a Greek bank.

With Alpha tied up doing an acquisition of its own at the time and Eurobank trying to merge with NBG, Piraeus emerged as the only bidder for the 312 Greek branches of Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank. It won the prize in March 2013, in a €524 million deal that was entirely funded by the HFSF. The yearlong spate of deal making nearly doubled Piraeus in size, making it a banking colossus with €92 billion in assets, €50 billion in deposits and 1,660 branches. “Piraeus ballooned into the country’s dominant player, with the largest share of domestic deposits and loans,” says Nikos Koskoletos, an analyst for Eurobank Equities. (Although NBG is larger, with €111 billion in assets, its Turkish subsidiary, Finansbank, accounts for about a third of that total.)

Size isn’t everything, however. Piraeus was still hemorrhaging red ink, racking up a €1.1 billion net loss for 2012. And along with the other Big Four banks, Piraeus was effectively nationalized in 2013, during the first round of bank recapitalization.

The Bank of Greece, which determined the capital needs of each bank, calculated that Piraeus required €7.3 billion. Like its domestic rivals, Piraeus was told to raise at least 10 percent of its capital requirement from the private sector. The incentives offered to private investors were twofold: Warrants were offered to private investors covering almost all of the shares held by the HFSF, and the HFSF agreed not to exercise its rights as a majority shareholder even though it would own as much as 90 percent of the remaining stake. “We can only act as a blocking minority shareholder,” says HFSF deputy chief executive George Koutsos.

Piraeus succeeded in raising 19 percent of its €7.3 billion from private investors, more than any other bank. Alpha tapped private investors for 12 percent of its €4.6 billion capital requirement, and NBG raised 11 percent of its €9.8 billion shortfall from investors. Only Eurobank failed to raise enough private capital by the July 2013 deadline, forcing the HFSF to take a 95 percent stake.

With its scale greatly increased and its capital bolstered, Piraeus was ready to return to the public markets. In March the bank issued a €500 million, three-year bond with a 5 percent coupon, priced to yield 4.52 percentage points more than the benchmark midswap rate. It was a hefty spread, but it ensured strong investor demand for the first public debt sale by any Greek lender since 2009. “We could have issued a larger bond, but it wasn’t meant to change the liquidity profile of the bank,” CEO Thomopoulos says. “We wanted to send a clear signal that Piraeus had overwhelming support in the fixed-income markets.”

Piraeus opened the market for the rest of the big banks. In April, NBG issued a €750 million, five-year bond yielding 4.5 points over midswaps. In June, Alpha sold €500 million of three-year bonds priced at 3.5 points over midswaps, and Eurobank issued €500 million of four-year paper yielding 4.375 points over midswaps.

The turnaround in investor attitudes reflected a growing belief that the worst of the debt crisis was over. ECB intervention to prevent a breakup of the euro and provide liquidity has lured investors back into peripheral countries. In April the Greek government, which had seen yields on its debt soar above 35 percent at the peak of the crisis, issued €3 billion of five-year bonds at a yield of 4.95 percent, below precrisis levels. Greece also made progress on its economic restructuring program, achieving a modest primary budget surplus — before interest payments — of 0.8 percent of GDP in 2013, its first such surplus since joining the euro. “Also, this year began with a flight of capital out of emerging markets, and investors were looking for opportunities in a country like Greece, with the same risk profile but with a more stable currency,” says Michael Massourakis, chief economist at Alpha Bank.

Investors have showed an even greater appetite for Greek bank equity. In February the Bank of Greece announced that the financial sector needed €6.4 billion in extra capital. All of the Big Four banks launched rights issues over the next three months and easily surpassed the central bank’s target. In late March, barely a week after its bond issue, Piraeus sold €1.75 billion in new equity — this time without warrants. Also that month Alpha issued €1.2 billion in new shares. In May, NBG sold €2.5 billion of new shares.

The big surprise was Eurobank, which in late April sold €2.9 billion of shares. One of the largest capital raisings in Greek history, it moved Eurobank back into majority private sector ownership well ahead of its rivals.

The youngest of the major Greek lenders, Eurobank was founded in 1990 by Spiro Latsis, a private banker and scion of shipping and oil magnate John Latsis. Over the next two decades, Eurobank used a string of domestic acquisitions, a deliberate targeting of more-affluent bank customers and sales incentives for its employees to vault to the top rungs of the Greek financial sector. But the crisis left Eurobank even worse off than its competitors because, unlike the other big banks, it decided not to raise capital in the months before the economy’s implosion.

As the controlling shareholder, with a 45 percent stake, Latsis pursued a merger with NBG in early 2013, ignoring signals of displeasure from the troika. Although Greece’s international creditors were in favor of consolidation, the troika opposed an NBG-Eurobank tie-up on the grounds that it would create a bank too large to fail.

When the troika blocked the merger, in April 2013, Eurobank contended it did not have enough time to raise the minimum 10 percent of new capital from private investors, as required under the first round of recapitalization. This irritated HFSF officials, who noted that NBG was managing to comply with the July 2013 deadline. “The result was that three banks raised private sector investment and Eurobank did not,” says HFSF chief executive Anastasia Sakellariou.

Instead, the HFSF had to recapitalize Eurobank with €5.8 billion of public money. Megalou, 55, joined Eurobank in June 2013, after the HFSF had taken 95 percent ownership and Latsis had given up his stake. Before his appointment Megalou had spent 17 years at Credit Suisse, rising to vice chairman of investment banking for southern Europe. He had never worked in commercial banking.

Upon his appointment as CEO, Megalou met with HFSF officials, who assured him that their objective was to return Eurobank to the private sector as quickly as possible. He reached out to investors by embarking on road shows in London and New York.

Megalou’s most avid audience, and for good reason, was a consortium of foreign investors led by Los Angeles–based investment manager Capital Group, Toronto-based Fairfax Financial Holdings and WL Ross & Co., the New York outfit run by Wilbur Ross. In 2011 the consortium had invested €1.12 billion in Bank of Ireland, which had been laid low by the great Irish property bust. By the beginning of 2014, their stake had soared in value by 70 percent, and the investors were eagerly searching for another undervalued European bank.

Greece looked politically stable after the emergence in 2012 of a coalition government under Prime Minister Samaras that included his own conservative New Democracy and the center-left Panhellenic Socialist Movement. The coalition had succeeded in whittling the budget deficit from a mind-boggling 15 percent of GDP in 2009 to 3.2 percent last year. Over the same period a 7.8 percent trade deficit turned into a 0.1 percent surplus. As a result of layoffs, salary cuts and business-friendly labor reforms, Greece held an 18 percent competitiveness edge over the euro zone average by the end of 2013, according to Eurostat, the European Union’s statistical agency. “All this really impressed us,” Ross says.

He and his consortium partners first considered investing in Piraeus and Alpha but decided that their shares were too expensive because of the attached warrants. And they weren’t interested in holding a minority stake in banks that remained under state control. “It makes it much more complicated to go about fixing a bank because political issues are raised when people are let go or forced to make less income or when foreclosures have to be made,” says Ross. “We felt that from a management point of view, private ownership was a huge advantage.”

Eurobank was the obvious alternative: It was unencumbered by warrants, and its precrisis reputation was strong. “It had the best staff and IT systems,” says Jason Manolopoulos, managing partner and co-founder at Dromeus Capital Group, a Greece-focused hedge fund firm with holdings in Eurobank and Alpha. “And it is still the most innovative and progressive Greek bank.”

Management seemed willing to extend the bank beyond its blue-chip and affluent consumer base, as demonstrated by its July 2013 acquisition of TT Hellenic Postbank. Known as a savings bank for small and medium-income retail clients, Postbank was taken over in 2012 by the HFSF, which recapitalized it and kept its toxic assets. A year later the HFSF agreed to accept newly issued Eurobank shares valued at €681 million as payment for Postbank. Along with the simultaneous acquisition of Proton Bank, a former brokerage and private banking specialist, for a token €1 and a €395 million cash infusion from the HFSF, Eurobank gained a combined €12 billion in deposits and increased its total assets by 23 percent, to €77.6 billion. “We felt those acquisitions were done on extremely favorable terms and made Eurobank almost co-equal in size with the other Big Four banks,” Ross says.

After two years of circling Eurobank, the consortium decided to invest in April. It took 30 percent of the €2.9 billion rights issue, which was oversubscribed three times. An additional 35 percent went to a group of mostly long-only funds, including Wellington Management Co. and Pacific Investment Management Co., along with a smattering of retail investors. That reduced the HFSF stake to only 35 percent. Private investors, who paid an estimated 72 percent of book value for their shares, sound confident about the prospect of returns. “We have a target for the bank to trade at 1.5 to 2 times book value in two years, on an enlarged book,” says Ross.

Foreign investors have been assigned five of Eurobank’s 11 board seats — a first for any Greek bank. “We will play an active role in management,” vows Ross, whose firm has one of the seats.

The top priority will be mapping out a return to profitability, something Megalou expects to happen next year. The bank managed to narrow its net loss to €1.15 billion last year from €1.45 billion in 2012, even as loan-loss provisions climbed to €1.92 billion from €1.66 billion the previous year.

Piraeus posted an aftertax profit of €2.53 billion last year only because of one-time gains of €3.81 billion, reflecting negative goodwill charges from its acquisitions. Loan-loss provisions rose to €2.22 billion in 2013 from €2.04 billion in 2012. The bank doesn’t expect to generate net profits until 2016, says CEO Thomopoulos.

Alpha, the fourth-largest bank, with €73.7 billion in assets, used a negative goodwill charge of €3.3 billion from its purchase of Emporiki Bank to post an after-tax profit of €2.9 billion last year, compared with a loss of €1.1 billion in 2012. The bank expects to return to the black on a net basis in 2015. Only NBG posted a net profit last year — a modest €37 million — after a massive €2.5 billion loss in 2012.

Years of recession and sky-high unemployment continue to drive up nonperforming-loan (NPL) rates. At Eurobank, fully 49 percent of loans to small and medium-sized enterprises were nonperforming at the end of last year, and 43.1 percent of consumer loans. Comparable rates for the other big banks ranged from 33 percent for SME loans at Alpha to 48 percent for consumer loans at Piraeus.

In an April report Moody’s estimated that provisioning charges for Greek banks would range as high as 2.5 percent of gross loans this year. That would be down from 2.75 percent in 2013 but well above the average of 1.3 percent from 2005 through 2010.

For political reasons the most troublesome NPLs are mortgages. In 2010 the Greek Parliament passed legislation forbidding foreclosures on primary residences valued as high as €200,000, a yardstick that covered the great majority of homeowners. But between late 2013 and early this year, a series of legislative amendments reduced the pool of mortgage holders eligible for protection — not enough, though, to entirely satisfy bankers. “People have to be given breathing space,” says Eurobank CEO Megalou. “But maybe in a year or two, as the economy improves, more mortgage holders will be in a position to make repayments.” Perhaps by then residential prices will have started to climb. According to the Bank of Greece, home valuations have fallen by a third since late 2008, endangering the banks’ collateral.

Alpha has the biggest mortgage problem: 47 percent of its €20.9 billion in mortgage loans were nonperforming at the end of 2013. Comparable rates were 31.6 percent at NBG, 21.2 percent at Piraeus and 20.6 percent at Eurobank.

Banks continue to provide less coverage for failing mortgages than for other nonperforming loans. At Eurobank the average provision for all NPLs was 50.3 percent in the first quarter, but the provision for nonperforming mortgages was only 27.8 percent.

The IMF has warned Greek government officials and bankers that failure to sufficiently provision for nonperforming mortgages is the biggest reason for considering further recapitalization of the banks. But the Fund also wants to see more progress on corporate loans.

The overall NPL rate for the banking sector, which reached 32 percent in 2013, is expected to peak at about 37 percent at the end of this year, according to Moody’s. Piraeus ended 2013 with a 36.6 percent NPL rate, while at Eurobank it was 29.4 percent. All Big Four banks have created in-house “bad banks” to deal with these massive arrears.

The hope is that the banks will eventually force their unviable business clients to consolidate into potentially profitable companies that can be publicly listed. Piraeus, for example, is moving to merge four fish-­farming operations into one entity and five coastal ferry companies into a single large one over the next year. “We are seeing a repricing of Greek assets — not just banks — and this will create a new generation of midcap stocks,” says Dromeus Capital’s Manolopoulos, who estimates that these consolidated firms could attract several billion euros in investments by 2016. That would equal or exceed the €3.5 billion that the government is hoping to receive from the sale of state companies in 2015–’16. (Privatization revenues are expected to reach €1.5 billion this year, compared with €1.3 billion in 2013.)

But other observers believe the banks aren’t moving fast enough to force bankruptcies and consolidations on their business clients. “The banks are hesitating because they will need more capital to cover these defaults,” says hedge fund consultant Xafa. “And they cannot keep diluting the holdings of their investors by issuing more equity.”

Beyond the reduction of NPL provisioning, the banks are pursuing several strategies to restore growth and profitability. “The biggest driver will be further cost reductions,” Megalou says. Shrinking the head count has played a major role at Eurobank. Last year the bank persuaded 1,072 employees to accept voluntary retirement, at a one-time cost to the bank of €80 million but with recurring savings of €61 million a year.

Eurobank is counting on rising net interest margins to further drive profits. Its margin was 1.93 percentage points in the first quarter, up from 1.65 points a year ago. Thanks to consolidation, Megalou predicts margins will exceed 2.5 points next year.

Credit expansion after years of dramatic retrenchment could be the most important profitability driver. Eurobank estimates that the Greek economy will grow by 2.5 to 2.9 percent in 2015, with new loans rising at a pace of almost 4 percent. Megalou lists shipping, agriculture and generic pharmaceuticals as leading recipients of new loans. The group’s gross loans grew by 11.9 percent last year, to €53.5 billion.

So far, the biggest single beneficiary of Eurobank’s credit expansion is high-end tourism. The bank has already financed, for an undisclosed amount, the acquisition of a luxury hotel in the northern Greek resort town of Halkidiki; it will be part of a new joint venture between Los Angeles–based Oaktree Capital Management and Greek hotel owner Sani. Eurobank hopes to extend loans for as many as five similar resorts that the two partners are planning to develop elsewhere. “They will be rolling out all-inclusive luxury hotels throughout Greece,” says Megalou.

Tourism is also expected to be the major driver of profitability at Piraeus, although the bank’s focus is distinctly midmarket. Greece had 17.5 million foreign visitors last year, up from 15.5 million in 2012 but below the record 19.3 million of 2009, according to the Hellenic Statistical Authority. These tourists tend to be tight-fisted: Last year they spent an average of €685 per person, according to the World Travel & Tourism Council, well below the €1,002 spent by visitors to Spain.

Hotel Parnon, just off Athens’s centrally located Omonia Square, is at the vortex of the tourism boom. With prices starting at $50 for single occupancy, including breakfast, there is hardly a vacancy in the hotel’s 48 rooms. The lobby reverberates with a cacophony of languages: German, Italian, Spanish, Arabic, Swahili, Chinese, Korean and Japanese. Just two metro stops away sits the Acropolis, the citadel dominated by the Parthenon, the marble-columned temple to Athena, patron goddess of the ancient city.

Yannis Avrambos, the 35-year-old manager of the Parnon, recounts the falling and rising fortunes of the hotel, one of three his family own in the neighborhood. “Just months before the crisis, we renovated the hotel,” Avrambos recalls. “It was a disaster.”

With revenue falling by 40 percent in 2009, Avrambos dismissed employees. Those who remained accepted lower wages and far more flexible hours and assignments. Today the staff of nine, down from 15 before the crisis, performs multiple tasks, rotating among the bar, the breakfast room, reception and housecleaning. Avrambos himself works double shifts, shuttling between Parnon and another family hotel.

Although occupancy has returned to precrisis levels, revenue has not. It rose by 10 percent in 2013; Avrambos expects another 10 percent rise this year. “Our prices are still too low,” he says. “But things are definitely getting better. We no longer live from day to day.”

Now that Greece’s big banks have also moved beyond survival mode, they are beginning to think about escaping the orbit of state control and joining Eurobank as private sector entities. The warrant issues by the HFSF last year helped stimulate investor interest in bank shares, but those warrants can be exercised until the summer of 2016.

Investors will also have to remain patient on bank dividends. The European Commission has imposed a ban on dividends until 2017. But if the banks appear to be healthy and profitable, says HFSF chief executive Sakellariou, “then maybe that deadline can be moved to an earlier date.” • •

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