* Lenders eager to diversify funding with first deals since 2014
By Alice Gledhill
LONDON, July 28 (IFR) - Greek banks are preparing to return to the European bond market, riding on the coattails of the sovereign that this week sold its first euro benchmark in three years.
The country’s banking sector is desperate to wean itself off the emergency liquidity assistance on which it has been dependent since 2015.
There is precedent for the sovereign smoothing the way for its banks - the four largest Greek banks sold a combined €2.25bn of senior unsecured debt around the time of Greece’s €3bn 4.75% five-year in April 2014.
“You clearly have a situation where Greece is back in the capital markets, and the banks have no [outstanding bonds],” said Louis Gargour, chief investment officer at LNG Capital.
“That is unusual to say the least, and that is also not sustainable – you want to have a capital structure; you can’t just have equity. So it’s only a matter of time before the banks issue debt.”
Bondholders were asked to swap their debt into equity to help plug a combined €14.4bn capital hole across the four largest banks in 2015 as the lenders crumbled under an exodus of deposits and a spike in bad loans.
Bankers admit interest in Greek paper is so far concentrated among hedge funds, but say that it is improving.
The return of the sovereign sent a very positive signal, said Dimitris Nikolos, head of investor relations at Eurobank.
“It’s not a secret that we would like to be in the markets as well,” he told IFR.
The issuer hopes to return this year with either a small senior unsecured or covered bond issue, depending on the price differential.
“In the past we had a very comprehensive, developed, diversified funding programme, with ABS, RMBS bonds, senior debt, Tier 2, etc,” Nikolos said. “We would like to go back to that.”
Eurobank is not the only lender eyeing the market. In a recent corporate update, National Bank of Greece lists a “return to modest primary capital markets activity” among its strategic objectives.
Combined ECB and ELA funding stood at more than €60bn as of March 2017, around 20% of total assets, down from €101bn one year previously, according to Bank of Greece figures. NBG hopes to eliminate its ELA exposure within 2018.
Piraeus was the first of the big four to issue in 2014, beating the sovereign and selling a €500m 5% three-year in March. The bank told IFR in January that, this time round, the banks would likely wait for Greece before returning.
Senior bank paper, which is rated non-investment-grade by all three major agencies, is expected to price at a premium to the sovereign, which printed its €3bn 4.375% five-year at a 4.625% yield.
That would make this source of funding considerably more expensive than the ELA (which costs around 1.5%), but the banks must regain market access to normalise their funding and bank officials expect the cost to reduce over time.
“This may be supported also by investors’ search for yield, which the Greek banks on a relative basis can surely provide,” said Sam Theodore, group managing director at Scope Ratings.
Enticing back depositors is another crucial step for the Greek banks. Private-sector deposits rose in June for the second month in a row, central bank data showed on Thursday, but they remain at 14-year lows.
Suki Mann of Credit Market Analysis reckons deals would be difficult right now despite signs of a thaw in funding conditions.
“However, should the economic growth and recovery story have some substance, we could see one of the banks chance their arm - perhaps in H1 2018,” he said.
Greece’s non-performing loan ratio was almost 46% at the end of 2016, according to ECB data - the highest of the countries surveyed, and capital controls, imposed in July 2015, remain in place.
The banks’ weighted average Common Equity Tier 1 ratio looks strong at 17% (at the end of 2016), but capital quality is undermined by sizeable deferred tax assets accounting for around half, according to Moody’s.
On the other hand, the Greek government is passing a law to allow banks with outstanding state preference shares to convert these to state-sponsored cocos, ensuring this capital remains CET1-eligible after 2017.
Nondas Nicolaides, a senior credit officer at Moody’s, reckons it could take a few years for the banks to normalise their balance sheets and credit position.
“ main priorities are to improve their asset quality through the reduction of NPLs, the full repayment of the ELA and to be profitable in order to stop the capital consumption cycle that was in place for many years,” he said.
“There could be some banks attempting to tap the international capital markets . . . later in the year or next year, but the challenges are quite significant.”
Reporting by Alice Gledhill, editing by Helene Durand and Matthew Davies