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The managements of the four largest Greek banks are satisfied with the stress tests results, as the capital requirements that must be met by the private sector are achievable. Now banks are beginning a marathon to finish by the end of November the third consecutive recapitalisation of the Greek financial system (from 2013 onwards).

On Sunday, the government clarified the conditions of the game, namely how the Financial Stability Fund will participate in the capital increase, facilitating the presentation of banks to investors from abroad.

Under the baseline scenario, the four systemic banks in Greece will have to cover at least 4.4 billion euro of the total capital requirements of 14.4 billion euro. As analysts say, the amount seems small at first glance but there are difficulties that may jeopardize the success of the venture.

The advantages of each bank

In all cases, Alpha Bank and Eurobank, which had the lowest capital deficit under both the baseline and adverse scenarios, have an advantage since, under certain conditions, they could find from international markets the total amount that they are lacking. In this way, they will minimize the participation of the Financial Stability Fund in their share capital, reducing it to a single digit and will make a decisive step towards emerging from the strict monitoring that accompanies the receipt of state aid.

On the other hand, following the announcement of the stress tests results, the managements of the National Bank of Greece and Piraeus Bank have expressed optimism for the successful completion of the new recapitalisation within the prescribed deadlines.

The National Bank of Greece has the advantage of the Turkish subsidiary Finansbank that may contribute to the increase of its capital, either immediately or at a second stage. It is thus a reliable alternative to the payment of a significant state aid, 75% of which will be received in convertible bonds (CoCos).

Piraeus Bank was the most affected in the stress tests, mainly due to its exposure to small companies through the credit market. However, the bank management believes that covering the capital requirements under the baseline scenario is entirely feasible and that the economic recovery will reverse the upward trend of bad loans, which will bring significant benefits to the bank. In this connection, it expects a significant growth of revenue from non-performing loans, which can accelerate the repayment of the convertible bonds (CoCos) granted by the Financial Stability Fund. Furthermore, banking circles emphasize that the public offering of shares to bondholders will also contribute to the recapitalisation procedure. Under certain conditions, they could reduce the amount to be sought from international markets or the state aid by 2-2.5 billion euro.

Problem-raising points

Analysts say, however, that completing the procedure will not be easy, although the capital requirements in the stress tests are lower than expected.

"Four banks withdrawing the amount of about 4.4 billion euro simultaneously and for such a short time would be a difficult undertaking even if the conditions in the sector were much better," emphasize the same sources, adding that the political risk remains high at a time when the successful implementation of the third memorandum cannot be considered guaranteed.

On the other hand, of course, the lower prices at which the capital increase will be implemented are enticing for someone who wants to bet on the recovery of Greece, offering prospects for large gains in a period of 1-3 years.

Outstanding issues

By 6 November the managements of the four largest Greek banks must submit to the European Central Bank their recapitalisation plans so that they will complete all the necessary procedures no later than the third week of November, when they will be able to proceed to the issuance of new shares.

The banks will probably seek from international markets the full amount to cover their capital requirements but they as well may offer shares to domestic investors. Of course, they will obtain the larger portion of the capital from institutional investors through the book-building procedure.

It is expected that an act of the Council of Ministers will determine the annual interest coupon of the convertible bonds (CoCos), which will probably amount to 8%, but also the minimum amount of issues that must be performed by the banks.