Shares of Greek banks and
the Athens Stock Exchange are still under pressure as foreign investors perceive
the Greek market risky.
The banking sector suffered
losses and the index has lost close to 43% in the last three months. The main
reasons behind this speculative pressures on the Greek banks are the
unsuccessful attempt of Piraeus Bank to seek financing by issuing a bond worth
€500 million to enhance its capital
needs, the non – performing loans target set by the ECB which thus far all four
banks have not managed to relieve from their portfolios, the low
profitability due to the fact that no new healthy loans are issued to finance
businesses and households, the higher
capital needs for banks set for 2019, and foreign funds with short positions on
Greek banking stocks.
The unsuccessful attempt
by the Bank of Piraeus to seek financing through the issue of Tier 2 bonds is
not limited to the Greek bank. Other foreign banks have also attempted to seek
financing but were also unsuccessful. The cost of capital to raise funding
together with the cost of convertible bonds to stock (8% coupon rate) is a forbidden
cost for the bank, and may take away from its profitability. The bank will seek
funding through private placement, and if that is unsuccessful, it will raise
it through the financial stability fund, a corporation governed by private law.
Foreign investors are
worried that Greek banks may be in need of new increases in owners’ equity.
Data from the four Greek banks (6 month 2018) show that the capital adequacy is
sufficient: 18.5% for Alpha bank, 16.2%
for National Bank, 14.8% for Eurobank, and 13.6% for Bank of Piraeus.
Another important aspect
as part of the banks’ balance sheet is deferred taxes. Deferred tax assets is
considered an asset on the bank’s balance sheet and may be used to reduce its
taxable income. It is a situation where a bank has overpaid or has paid taxes
in advance.
These taxes are returned in the form of tax relief, and in the case
of overpayment, is an asset. They are created due to taxes paid or carried
forward but not yet recognized on the income statement. From the data (6 month 2018), the deferred
taxes as a % of capital for the four banks are 53% for Alpha bank, 84% for
National bank, 87% for Eurobank, and 99% for Piraeus bank.
If a bank incurs a loss
(as in the non-performing loans on their balance sheets) the bank is entitled
to use that loss in order to lower its taxable income in the following year. In
that sense the loss is an asset.
The capital adequacy ratio
is a measure of a bank’s available capital expressed as a % of a bank’s risk
weighted credit exposures, and is used to protect depositors. Capital ratio is
a key measure of a bank’s financial health and has been adopted as part of the
Basel III accord on bank regulations. A bank’s capital is divided into Tier 1
core capital and Tier 2 supplementary capital. The minimum capital ratio
reserve requirement for a bank set by the SSM (supervisory mechanism by
European Central Bank) is at 12.875%.
A bank’s capital ratio
requirement (CAR) is calculated by dividing its capital by its total risk
weighted assets. Thus CAR= Tier1 + Tier 2/risk weighted assets. Tier 1 capital
is the core capital and is composed of common stock + retained earnings. A bank
should ensure that its own funds exceeds a regulatory target, so the riskier
the bank the higher is the target. Tier 2 is supplementary capital. The bank’s
funds are divided into tiers, with tier1 representing capital of the highest
quality (funds raised from issuing shares) + past profits.
The Bank of Piraeus
sought to the market to raise €500 of Tier 2 Bonds, which is a source of funding
primarily for banks. This source of financing is a component of Tier 2 capital,
offer interest earnings to bondholders, it is subordinated debt and makes up a
bank’s required reserves. It is interesting to point out that the main source
of capital of the Bank of Piraeus capital adequacy of 13.6%, includes €2
billion of contingent convertibles (Cocos). Cocos are similar to the traditional
convertible bonds with a strike price, K, which is the cost of the stock when
the bond is converted to stock. Cocos became popular in 2014 to help Banks meet
Basel III capital requirements.
The Basel III compares
the bank’s assets with its capital to determine if the bank could withstand
unexpected losses in the event of a crises. So if capital falls below a certain
threshold, then Cocos are activated, and the bonds will be converted to equity.
The minimum ratio set by the SSM on capital adequacy this year is 12.87% and is
expected to rise by 0.6 in 2019.
Non-performing loans by
all four banks are at €88.6 billion and the Greek banks have not yet met the
target or even the pledge to the SSM to reduce this amount in the next two
years. This will force them to sell portfolios of non-performing loans, and
could lead to a write off on their balance sheets, thus shrinking the capital
cushion they have accumulated thus far.
There are foreign funds
and investment banks that hold a short position in the Greek stock market, and
especially on stocks that are in the center of attention, either due to their
finances, weak results, or hold positions in owners’ equity. These foreign investors
have all participated in the road show that was set by the Hellenic finance ministry
in London. They have been engaged in short positions even since the IMF
requested that the Greek banking sector should seek recapitalization.
Short positions sell to open
(they borrow the stock from a broker) and buy to close (at a cheaper price).
Short selling requires a margin account as well as interest charges.
