With Greek bank recapitalisation needs and terms still pending and unclear, it is worth noting Eurobank Deputy CEO N. Karamouzis estimates, as they were presented at a recently held bank event in Cyprus. As it is already known top-4 Greek banks received a capital advance of €18bn last May from HFSF in the form of EFSF bonds to restore their capital adequacy ratio >8% and access to ECB funding. Furthermore, €7bn was provided for the resolution of ATEbank, the sound part of which was disposed to Piraeus Bank at the end of July. Note that an equal amount (€25bn) was included in the second adjustment program as a disbursement in H1’12 mainly to cover PSI losses.

Mr. Karamouzis estimated that the top-4 banks will need an additional capital of €9bn (on top of the €18bn) to bring their EBA core Tier I ratio above the 9% threshold set by the BoG and the troika. Furthermore, €15bn will be used for the recapitalisation and resolution costs of the other systemic and non-systemic banks respectively, bringing the total amount to €49bn, in line with the €50bn included in the second adjustment program. From a fiscal perspective, the amount of €50bn has already been incorporated in Greek government’s estimate for 2012 public debt. Nevertheless, the equity market was often confused and misled considering that the €50bn would cover only the capital shortfall of the top-4 listed Greek banks. It is noteworthy that, according to the existing legal framework, at least 10% of recapitalisation needs should be covered by private shareholders via rights issues. Thus, the mistakenly assumed €50bn implied capital increases of €5bn for the top-4 banks, equivalent to >2x their market capitalisation at that time.

According to Mr. Karamouzis, the recapitalisation needs of the top-4 banks would amount to €27bn, i.e. the €18bn already received as capital advance in May and an additional €9bn to cover Blackrock and other losses. If true, this figure is €4bn higher than the €23bn specified in the Financial Assistance Facility Agreement between EFSF, Greece and BoG, which accompanied the second loan agreement for Greece and most likely reflects the worsened domestic macro conditions compared to those assumed last March.

On recapitalisation terms, he outlined the proposed framework, which is under consultation between troika, BoG, HFSF and banks, involving:

• Private sector participation (at least 10% of recap needs) at the same price and terms with HFSF, while private investors will absorb banks’ current negative NAV.

• Investors participating in the rights issues will be granted 9 warrants, which provide the right – and not the obligation – to buy back (the total of) HFSF share participation in the future. The exercise price of the warrants is still undefined and is among the key issues that are currently under consultation.

• Part of the capital needs (up to 35%) will be covered through the issue of contingent convertible bonds (CoCos), while the terms, such as tenor and coupon, have not been yet clarified. It is reminded that the previous government’s initial decision (August ’11) was capital support to be provided only in the form of common voting shares, while the latest MoU also allowed the use of non-voting instruments, such as common shares without voting rights, CoCos, preferred shares etc.

Furthermore, Mr. Karamouzis referred to two proposals made by the bankers, which would potentially reduce banks’ capital shortfall, although the first is highly unlikely to be accepted by the troika:

• Exchange of banks’ GGB holdings with EFSF bonds at their nominal value, which would potentially reduce recap needs by €9bn,

• Recognition of deferred tax asset (DTA) – due to PSI – for regulatory purposes, resulting in a further reduction of potential capital raising by c€5bn. It is noted that three of the top-4 banks (namely Alpha Bank, Eurobank and Piraeus Bank) have already reported their Q1’12 capital ratios incorporating DTA in their regulatory capital calculation.

The clarification and finalisation of bank recapitalisation needs and terms is expected along with the approval and disbursement of the next tranche of €31.5bn, the bulk of which would be allocated for bank recap. The launch of the long-awaited recapitalisation process along with the ongoing M&A activity involving the tender offer of National Bank to Eurobank shareholders and the acquisition of mid-sized banks by the major banks, will obviously lead to a new era altering the – prevailing over the past decade – status quo of the domestic banking landscape.

Note – November 13, 2012

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