Recent press reports indicate that the long-awaited new – and most likely final – round of discussions on bank recapitalisation framework and terms has been launched. Same sources note that the deadline for the finalisation of all pending issues, which should be agreed by all involved parties (namely MoF, BoG, HFSF, troika and top-4 banks), was set at September 28. It is reminded that the total amount for bank recapitalisation and resolution cost stands at €50bn, according to the updated MoU, which reportedly is split to €29bn for bank recap and the remaining €21bn for resolution cost of restructured banks (such as ATEbank and Proton).

The current legal framework for bank recapitalisation provides the following:

• Banks submitting viable capital raising plans will be given the opportunity to apply for and receive public support accessing capital from the HFSF through common shares and contingent convertible bonds.
• The voting rights of the HFSF for the common shares it holds will be strictly limited to specific strategic decisions (such as modification of articles of association, asset sales, M&A), unless the private participation in the form of common shares is less than a minimum percentage (to be specified by a FinMin decision) of the bank’s total capital needs, which cannot be lower than 10%.
• If capital injection by private shareholders is below the aforementioned minimum percentage, the HFSF shall hold its shares for a period of two years with the possibility to extend for an additional two years.
• If instead this private injection is larger than the minimum percentage, the HFSF may hold bank shares for up to five years.
• The shares acquired by the HFSF shall not be transferred or sold to any other state-related entity in any form.
• Private investors will be given incentives to purchase HFSF-held shares.

Note also that capital support of €18bn in the form of HFSF bonds, had been allocated to the top-4 banks back in May to restore their total capital adequacy ratio > 8% and access to ECB funding, post the huge losses recorded due to PSI.

My understanding is that all issues are currently on the table including total capital requirements as well as key terms such as: minimum private sector participation, use of instruments such as CoCos and/or warrants, subscription price for upcoming rights issues, type of shares to be issued to HFSF etc.

Post the release of Q1’12 results, the initial perception was that the capital shortfall of the top-4 banks would amount to €23bn, mainly stemming from the PSI burden and the outcome of Blackrock exercise also including other mitigating actions such as sale of subsidiaries and/or non-core assets, Liability Management Exercise (LME) and deleveraging. Nevertheless, recent press reports pinpoint to a higher shortfall close to €29-30bn citing deterioration of the loan portfolio due to deeper recession, additional capital requirements that may arise from ongoing M&A activity, while top-4 banks may now have to meet the 10% EBA core Tier I target (initially as of June 30, ’13) instead of the 9% (initially by the end of September).

Key determinants for capital requirements also involve:

• The treatment of PSI related deferred tax asset (€3-5bn), which is not yet clear whether it could be deducted from capital requirements.
• The potential different treatment of state prefs (€4bn), which are currently recognised as EBA core Tier I capital. Note that the legal framework for preference shares excluded the payment of dividends in case the company recorded loss at parent level, which is the case for all Greek banks in FY’11, due to PSI. Nevertheless, MoF has recently announced that following the opinion of the Legal Council of State banks are obliged to pay the 10% annual dividend regardless of their profitability. Thus, there is a legal and regulatory issue whether state prefs could be recognized as capital or loan obligation.
• The valuation of GGBs. A potential valuation at their nominal price could materially reduce capital requirements by €8-10bn. Even though GGBs are valued at market price, their recent higher valuation could lower capital shortfall by €2bn.

The clarification and finalisation of the aforementioned pending issues, will pave the way for the launch of the long-awaited recapitalisation process, which may be completed in Q1’13, taking for granted that Greece gets the next tranche of €€31.5bn, the bulk of which would be allocated for bank recap. Such a development, along with the ongoing M&A activity involving acquisition of mid-sized banks by the major banks, will obviously lead to a new era potentially altering the – prevailing over the past decade – domestic banking landscape.

Note – November 13, 2012

There is an updated post with key highlights of ministerial cabinet act on Greek bank recap terms.