Special feature: Greece

Interview with Mr. Fokion Karavias, CEO of Eurobank

March, 2018

In the many conversations you had throughout Delphi Economic Forum, did you detect a noticeable change in perception from last year to this year?

Mr Fokion Karavias: This is true, but in addition to the Forum, what we have seen during the last several months is interest from foreign investors about investments in Greece, both financial as well as real assets, become stronger and stronger. The challenge now is not so much for Greece to find investors, but to effectively monetize the interest of these investors. The challenge is establishing a quick process of approval for these investments in Greece and allowing the investors to proceed as efficiently as possible with their plans.

Fortunately, there is already a pipeline of investments. Although there has been strong interest for a number of years, the pace at which these investments are executed is rather slow and this is one of the issues that the country needs to address to become a credible investment destination.

The pace at which privatizations are being carried out, as well as foreign direct investments outside the privatization perimeter, is rather slow and can improve.

During the different discussions surrounding the banking sector, many questions were raised about how well Greece’s banks will fare during the current stress tests for which the ECB will publish the results in May. Nobody has a crystal ball, but it was consistently pointed out that Greek banks have some of the highest Capital Adequacy Ratios in Europe. How would you assess the evolution of the banking sector in Greece and how different is its position and stability as compared to the last stress tests carried out a few years back?

Mr Fokion Karavias: If we compare the status of the banks at the end of 2015 when we had the last recapitalization with that at the end of 2017, I would say that overall the banking sector has shown improvement in every single line of the balance sheet or of the income statement. Liquidity, for instance, has improved despite the slow pace in the recovery of deposits. We have seen a very impressive de-escalation of Emergency Liquidity Assistance (ELA) use by more than 70%, if compared to the levels of 2017. In terms of profitability, the pre-provision income on average has improved by about 20%.

In terms of NPEs, they peaked in March 2016, one quarter after the recapitalization. Since then there has been a consistently declining trend, which has accelerated in the fourth quarter of 2017. And in terms of the restructuring programmes, the banks are on track in executing their plans. Last but not least, the new legal framework for dealing with NPLs has improved quite significantly and I would dare to say that Greece, compared to other continental European countries, is more advanced and has a more complete arsenal of legal tools to deal with both corporate as well as household NPLs.

Regarding Eurobank, last year has been profitable for us. Since the first quarter of 2016, the bank has added 220 basis points to its Tier 1 capital ratio through organic profitability. With the completion of the sale of our Romanian subsidiary we are completing all the requirements and the commitments that have come out of the restructuring plan. In terms of the NPL management, we were the first bank in 2017 to sell a large portfolio of consumer loans. We were the first bank to carry out an electronic auction and we have taken a number of initiatives to effectively move forward the effort of NPL management. I would say that everybody would agree that between 2015 and 2017, in this 24-month period, the banking system has stabilized and its performance has improved, though we have to admit that the legacy issues still remain and will require more time to be resolved.

The macro indicators for 2017 show solid signs of economic recovery. This is corroborated by the upgrading of Greece’s long-term debt by the international credit agencies, several successful government bond issuances, the most recent just this week, as well covered bond issuances by the leading banks, including Eurobank who placed a €500M covered bond issue in October last year. Would you consider the success of the recent bond issuances a vote of confidence in the banking sector?

Mr Fokion Karavias: I believe confidence in the banking sector improves along with confidence in the sovereign. As the macro outlook becomes more predictable and as the political risk continues to fade out, these facts reflect positively on the outlook of the banking sector and the confidence in the banks will improve. But I think that with respect to both for the sovereign as well as for the banking sector we have to recognize that the legacy issues still persist. For the sovereign we still have very high debt, even if we proceed with the debt relief measures that everybody anticipates. In nominal terms the debt will remain at a very high level and this will create some skepticism among investors. I think that this is something that Greece has to live with.

For the banking sector, banks still have to resolve the issue of NPEs. As Mr Declan Costello (Principal Advisor and EC’s Mission Chief for Greece for the 3rd Economic Adjustment Program) pointed out, it will take three to five more years. In my view the NPL problem cannot be resolved overnight and there is no magic solution for it. There is also the liquidity issue which is at a more advanced stage as compared to NPLs, but still requires some more work for banks to totally eliminate any reliance of the ELA. To that extent, the return of deposits is very important. The return of deposits is a factual vote of confidence in the banking system and also helps the banks address the issue of liquidity.

Strong international anchor investors Fairfax and WL Ross in Eurobank’s shareholding structure make it the most “Private Of Banks”. What can you tell us about the synergies that may emerge from this partnership and how in fact it is again another vote of confidence in Greece’s banks and the banking system?

Mr Fokion Karavias: Eurobank is not the only investment of Fairfax in Greece - it has a very large participation in Grivalia Properties REIC and also is the main shareholder with 80% in Eurolife ERB insurance company. Fairfax has long-term views in all of its investments. Mr Watsa himself is a firm believer in the recovery story of Greece. As a shareholder, Fairfax has been very supportive to the management and I think that customers and the markets alike appreciate the fact that Eurobank is the most private bank among the four systemic banks.

As you pointed out in your presentation at the Forum, Greece will need at least 11% growth in investment in order to achieve the target GDP growth of 2.5% that have been projected for its economy. You pointed out several sectors that you feel hold the most potential, including tourism, infrastructure, energy and logistics. In your opinion, what do you believe to be some of the key investment opportunities today for British firms?

Mr Fokion Karavias: What I said during the conference is that although there is a perception that Greek banks cannot finance the real economy because of the high NPL stock, I do not share this view. Definitely NPL management absorbs a lot of resources from any bank. However, at the moment banks do finance the real economy and I think that any Greek corporate that has a healthy balance sheet can find financing from Greek banks.

There exist of course companies with a lot of leverage in their balance sheets and therefore they might have a problem attracting new financing from banks. Our advice to these companies is to seek alternative ways of improving their balance sheets, either through a capital injection or by considering a merger with other companies in the Greek market.

In terms of the sectors of the economy that can be of an interest to UK investors, or any other international investors, during the conference I mentioned the three that you pointed out: energy, logistics and tourism. This is however not the entire spectrum of opportunities that exist in Greece. We have definitely seen an interest in these three particular sectors from international investors. For instance in energy, the biggest wind farm is going to be built by a UK-based investor together with an Italian operator. Eurobank together with Alpha Bank are providing the financing for this project, a €300 million investment.

But there are other sectors where we also see interest, for instance in the health sector. Right now there is a wave of consolidation in which international investors are participating. Commercial real estate, outside the hotel and leisure, is another area where there is also quite strong interest. The insurance sector is also attracting international interest despite the complications that have arisen in the sale of Ethniki Insurance which belongs to NBG. I think one way or another it is going to be resolved because the sector is very attractive. The industrial sector is also offering opportunities in different subsectors, such as pharmaceuticals. I would say that across the board there is a lot of interest for foreign direct investment opportunities in Greece. The reason why I named these three sectors is because they offer the opportunity for investment in size. One of the problems is that UK investors cannot identify big tickets in Greece. I mean north of €250 million and there are not so many opportunities of this size in Greece.

Under your leadership, Eurobank has consistently outperformed the other systemic banks in Greece in terms of supporting and lending to entrepreneurs and SMEs. How complicated is it for Greek banks to lend to SMEs and entrepreneurs today, what with people’s credit – worthiness and risk? Tell us more about the success of Eurobank’s support to entrepreneurs SMEs with initiatives such as the EGG incubator?

Mr Fokion Karavias: For start-ups, I think that neither in Greece nor internationally is the banking sector the main provider of equity or financing. Therefore, this is not the plan for Eurobank either. What we are trying to do with the EGG is to provide the resources and the environment for young Greek people to start a new business and then we can direct them to specialized funds that could provide the necessary equity injection.

However, Eurobank does have many initiatives to provide financing to SMEs in Greece. SMEs are core in our strategy. We have strong presence already with large corporates in Greece as well as with medium sized ones. We want to become stronger in the segment of smaller SMEs across the country. One of the problems that I have recognized in terms of financing smaller companies is that following the experience of eight years of crisis, banks have become more conservative when it comes to credit.. To this extent, products which could provide credit enhancement to SMEs so that they could get lending without providing hard collateral to the banks could be of great help. One such program is designed and offered by the EIF, called the COSME programme. It provides this credit enhancement to small and medium size enterprises. They have already disbursed €1.5 billion to the Greek market out of which €600 million has been absorbed by Eurobank. If the authorities would like to support the SMEs sector of the economy at the current juncture, they should provide the market with more of these types of credit enhancement products.

What are your priorities for continuing the restructuring efforts of the bank for this year, 2018, a crucial year for Greece? Tell us more about some of the achievements in terms of making the bank more efficient, more technologically advanced and aligned to the needs of the digital era?

Mr Fokion Karavias: In general, Greek banks face two kinds of challenges. One which is related to the legacy issues which we have already discussed. There are also challenges for the banking sector at the global level, mainly due to the technological revolution and the introduction of digital services and products into the banking sector. Therefore, we have to deal with it at the same time when we manage the NPLs. We are allocating resources, both in terms of people and money into the digital transformation of the bank. Our goal is to transform the bank’s operating model to one that is simpler, leaner and more focused. To this extent we have reduced quite decisively the size of our retail network. At the end of this quarter we are going to have about 350 branches in Greece. At the same time, we are trying to introduce digital technology both to client platforms like e-banking, mobile banking or the virtual officer but also in the back office operations by introducing robotics and digital technology to further automate the processes.

We introduced a beta version of the virtual officer and over the next few months we are going to launch it officially. Effectively, an SME can do all the banking services at the computer and interact in real time with each account officer. It is not only just a video call because through this interaction they can exchange documents, sign documents, the officer can present new products to the customer and the customer may ask questions all in real time. Therefore, it is a very interactive form of communication and would be a very similar experience to when a customer visits a branch and deals with the local officer at the bank. With the virtual officer, customers can do anything they want through their computer. This is one of the bank’s most recent innovations.

It is a known fact that Greece has the highest rate of youth unemployment in Europe. It is also known that the youth is highly skilled and educated, driving many to leave Greece to tap opportunities in other countries. The so-called brain drain is a real issue. What lessons have you learned along your journey as a chemical engineer turned banker?

Mr Fokion Karavias: Yes I have a background in engineering. I am not the only engineer at Eurobank. One of the deputy CEOs is also an engineer; our CEO in Luxembourg is an engineer and there are many other examples. In fact there are a lot of engineers in the financial sector in Greece and I believe this is also the case for other countries. When I started my career I was lucky since the timing when I was finishing my studies in the US and the three following years of working in Wall Street, coincided with banking sector booming. At that time in Greece, the financial industry was growing from low levels to one of the biggest industries in the country. Therefore, there were a lot of opportunities for people with MBAs or with experience outside Greece who were returning to the country to find good jobs in the financial industry. Unfortunately, this is not the case anymore, not only in banking but in the overall economy. There is a lack of good jobs for highly trained Greeks and as a result we have the so-called “brain drain”.

Half a million Greeks have moved abroad during the crisis. Actually, this is the third largest wave of emigration that the country has experienced. The first one was at the beginning of the twentieth century when many people moved to the US. Then we had another big wave after World War II when many moved mainly to Germany or to Australia. Nowadays we have the third biggest wave of Greeks emigrating abroad. The difference between the current wave and two previous waves is that this time we have people who are very well trained, with excellent academic backgrounds, some with graduate degrees, that are leaving the country and trying to find a future particularly in other European countries.

This is definitely a problem because it feeds negatively to the demographics issue which the country is facing. I am referring to the low birth rate and the ageing population. This is one of the long-term problems we will face as a country. Now, in order to reverse this trend, the country needs growth and investments, so it goes back to the discussion that we had before.

More investment will stimulate growth that will create new and good jobs for the younger generations. Also to be considered is the combination of the tax rate plus the amounts that people pay for insurance because the way that executives or staff in a private company are taxed is definitely a problem for people trying to find a good job in Greece. The net income that people have is much lower than the gross amount therefore it makes opportunities in Greece even harder.

On behalf of Eurobank and as its CEO, this is your opportunity to share a powerful and confidence-building message to the business and investor community of the UK, readers of The Times.

Mr Fokion Karavias: I believe that anybody who has followed Greece for the last few years has to admit that Greece has taken a number of big steps forward. It has addressed issues that at the beginning of the programme looked almost impossible to deal with and I think that credit should be given to the Greek society, the Greek people. Without saying that all issues have been resolved, Greece remains a member of the European Union and of the Euro Zone. It has a stable political system, a very highly trained population, and therefore Greece can be considered a very attractive investment opportunity for international investors. Therefore, despite the issues that we have, I would encourage international investors and UK-based investors to look to Greece because there are indeed vast and attractive opportunities.