Demand for bonds represents a vote of confidence for Piraeus Bank

First Tier 2 capital instrument issued in Greece as of 2008 a positive signal for Piraeus Bank and the country’s financial sector overall, said Christos Megalou, Piraeus’ CEO

Christos Megalou Chief Executive Officer of Piraeus Bank notes the change in sentiment towards Greek assets and sizeable investor interest that resembles pre crisis era. This comes at the aftermath of the Bank’s access to debt capital markets for a Tier 2 bond issuance and the numerous investor meetings Christos Megalou hosted in London.

During an interview with Greek political newspaper Kathimerini, Christos Megalou highlights the importance of this move for Piraeus Bank, as well as for the whole Greek banking sector and explains the conditionality under which the investor interest observed will turn into tangible investments for Greece. The CEO of Piraeus describes the initiatives that the Bank has undertaken for capital enhancement and the benefits arising from the recent strategic partnership with Intrum for the management of non performing exposures. The latter will enable the Bank to safeguard the necessary management capacity to focus on the financing of the Greek economy and the needs of its 5.3 clientele base in Greece.

Piraeus Bank has successfully completed the Tier 2 bond issue of €400mn for its capital strengthening. What does this signal for the Bank?

The results of the recent Tier 2 issue and the overall market reception are very satisfactory. This was the first public Tier 2 debt issue by a Greek bank as of 2008, incorporating evidently a number of difficulties and idiosyncratic issues as one could expect. Our debt issue attracted offers of €850mn from 135 institutional investors. This high level of demand comprises a clear vote of confidence on behalf of the investment community for Piraeus Bank and all the progress it has made. This is also the combined effect of all the work done by our management team, which acts in a well-designed, structured and disciplined way, assisted by our loyal and efficient personnel, delivering on our targets and strengthening the Bank’s credibility. The Tier 2 debt issuance reinforces our capital position and our balance sheet. In parallel, it acts as a key enabler for the Bank’s strategic plan "Agenda 2023” for the benefit of our investors, clients and employees.

How do you assess the interest of the investors you met during the roadshow? Do you see any change in investor sentiment compared to the recent past?

The interest and response we received during the 4-day roadshow in London reminded us of the pre-crisis period and was indicative of a shift in the interest for Greek assets, in view of the forthcoming elections and the emerging expectations. Just to mention that we ended up extending the roadshow by one day, as more than 100 investors eventually expressed interest to meet with us. Furthermore, half of those we met eventually decided to participate in the Tier 2 book. Investors expect acceleration of privatizations and more investments, elements that are anticipated to contribute to a dynamic and sustainable growth of the Greek economy, boosting employment. This change in the investor perception towards the country is reflected both in the decline in Greek bond yields at historically lows, as well as in the increasing valuations of the equity market.

Given that Piraeus Tier 2 is the first subordinated bond issued by a Greek bank since 2008, what does this mean for the other systemic Greek banks?

The inaugural subordinated bond issued by Piraeus signals the return of the Greek banks to the international debt capital markets, expanding the type and the number of investors that will be investing in the Greek assets going forward, creating a benchmark for the future valuation of Greek unsecured bank debt.

Furthermore, the large number of investors that participated in the meetings with the Piraeus Bank team during the roadshow, were extensively presented all the positive developments and outlook of the Greek economy and the Greek banking system fundamentals.

An important contributing factor to the success of the bond issue was the participation on behalf of the Bank’s existing shareholders, who absorbed c.25% of the issue, and have consistently shown their support to Piraeus Bank.

On the other hand, the high coupon burdening the bond issue has raised some concerns on how the profitability of 2019 can support this cost in connection with the obligation to pay the CoCo coupon.

The Bank has budgeted the bond issue in its business plan projections, which for 2019 has incorporated a Tier 2 issue in the mid of the current year at a cost of 10%. We took advantage of the prevailing market conditions and achieved a lower coupon. In any case, the annual interest expense of the Tier 2 bond is €39 million, and is fully mitigated by the interest income generated by the Bank, which is expected to surpass €1.8 billion in 2019. It is important to note that in Q1.2019, the net interest income of Piraeus Bank increased 2% year-over-year, with the positive trend continuing in Q2.2019.

Piraeus Bank recently proceeded with a strategic partnership with the Swedish Group Intrum to manage a portfolio of non-performing exposures amounting to €27 billion. What do you consider to be the benefits of the agreement in terms of cost relief through the transfer of the RBU unit and what is the expense assumed by the Bank for the management of this portfolio?

The agreement with Intrum will indeed enable the Bank to reduce its operating costs. We expect the positive impact in terms of pre provision income to be c.€50 million per year until 2021. However, the rationale of this transaction is not solely based on cost reduction, but on leveraging on Intrum expertise to manage even more effectively the non- performing loans, moving faster in execution.

How does this agreement impact the capital strengthening of the Bank?

The agreement values the Bank’s internal platform of the management of non-performing exposures at €410 million. We expect it to be capital accretive by c.0.8 percentage points. In the event that with Intrum we over-perform by 10% our existing NPE reduction plan, then the benefit to our capital will reach one percentage point by the end of 2021.

To what extent providing a 10-year exclusive servicing contract to Intrum can hinder Piraeus Bank from participating in possible systemic initiatives of transferring part of its NPE book to SPVs as proposed by Bank of Greece or the HFSF? Does it allow you to have the flexibility to participate in similar moves assuming they get the green light from regulators?

This is clearly not prohibitive. On the contrary, both systemic proposals presuppose large, independent servicers. The strategic agreement with Intrum serves this need. Piraeus Bank moved fast and agreed the creation of the first large independent NPE servicing company in Greece, which will claim its position on both systemic solutions.

Judging by your recent interaction with investors, how do they see Greece and under which conditions will their interest possibly turn into real investment?

In order to be able to attract foreign investment with high added value the economic environment should become more attractive by removing disincentives such as bureaucracy, delays in litigation and consider changing the mix of fiscal policy towards reducing high tax rates. Essential prerequisites to turn investment interest into real investment is undoubtedly a stable and credible fiscal framework, the implementation of privatizations, the reduction of administrative and bureaucratic obstacles and the modernization of the institutional context in Greece. These are what investors expect to see from a new administration. I have been in the capital markets for many years and I can say that the investment interest we have received over the last few months, and especially after the European elections, is really intense and substantial. I think that in the following period it will substantiate into investment across the range of Greek assets.

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