Greek banks are planning a series of € 15 billion bond issues to meet the capital requirements set by the SRB by the end of 2025.
The SRB is a supervisory mechanism that sets rules regarding the amount and form of additional funds. Every bank should have them so that, if necessary, there are necessary assets that can be immediately liquidated to support this process. It takes as a basis the capital requirements set by SSM, and on their basis “builds” additional assets, which can automatically become the next funds of the bank.
These goals are called minimum equity and eligible liabilities (MREL) requirements, and the “account” covers the period from this year to 2025 and increases the need for additional capital to 15 billion euros.
Greek banks in general have high equity ratios, either on their own or already issued Tier 2 bonds, and the corresponding CET1 ratios currently range from 15% to 16%.
Consequently, these are targets in excess of the required regulatory capital set by SSM, which will be covered primarily by pre-emptive bonds. However, the number of these problems will be 10 basis points higher than those established by the supervisor and which, although not related to the bank’s capital adequacy, are intended to protect the system in the event of a “failure”. Thus, in the case of Greek banks, the SRB recognizes as the required capital ratio what the SSM imposes, for example 15%, and sets the interest rate higher than what the bank should have to withstand adverse changes.
Target for 2025
All four systemic banks estimate that the 2025 target is between 24% and 25% and should be achieved gradually, with interim targets each year. For this reason, Greek banks began their market entry mainly through senior bonds, and the start of 2021 was initiated by the Eurobank with a bond (preferred senior bonds) issued in April in the amount of EUR 500 million, with an interest rate of 2.125%. March was preceded by Alfa-Bank’s entry to the markets for the issue of second-tier bonds, in the amount of EUR 500 million (the issue coupon was 5.5% compared to the 4.25% coupon in February 2020), the issue of which was aimed at increasing the bank’s capital to proceed with the consolidation actions and did not address the requirements of the SRB.
In accordance with the requirements of the MREL, Alfa Bank issues preferred senior notes upon completion of the share capital increase to EUR 800 million. While similar issues are being prepared by both Piraeus Bank and the National Bank and Eurobank for the third quarter of the year. In total, by 2025, all four systemic banks will issue an average of two issues.
The purpose of capital requirements is not static. This is a rolling target that is influenced by credit expansion, that is, new loans that banks will provide until 2025. According to a recent analysis by Alpha Bank, the new financing is also facilitated by resources that will flow into the country from the Recovery Fund and will reach 33 billion euros by 2024.
The strong credit expansion projected in the coming years also means an increase in the risk taken by banks, as measured by risk-weighted assets (RWA), and therefore the goals set are high for the entire system.
According to the first quarter of 2021, the weighted assets of the four systemic banks, that is, loans that carry risk, amounted to 164 billion euros. Some of these will be removed from the balance sheets as part of the securitization of the red loans issued through Hercules I and II and will be replaced by new, higher quality loans. In any case, and if the estimates of new loans are confirmed, banks will increase their loan portfolios to 200 billion euros, raising the bar on capital requirements as part of the MREL implementation.
Concerns about the cost of new borrowing
Banking management is weighing its next steps, as access to markets with new bond issues increases servicing costs at a time when interest income remains under pressure, mainly due to the derecognition of red loans. It should be noted that even on overdue loans, banks charge interest, which they stop taking into account when these loans leave their balance sheet, that is, when they are sold. Thus, in the coming years, they will have to deal, on the one hand, with the loss of income, and on the other, with the payment of interest to the bondholders. The increased pressure on banks for this reason was also indicated by the commission in a valuation report released last week.
Additional capital fencing is carried out mainly through preemptive bonds, the price of which ranges from 2% to 2.5% and is considered the most affordable means of increasing liquidity in the current situation, which in any case is favorable for Greek banks after the decline in yields … This is reflected in the bonds they have issued to date, that is, in subordinated securities (level II), as well as in priority preferred bonds. The outlook for AT1 issues, which is included in the banks’ business plans, remains open until this tool is used. AT1s are mainly focused on capital protection and are the most expensive form of fundraising after tier II – the average interest rate is estimated at 6.5%, which significantly increases costs for Greek banks.