Special feature: Greece

Interview with Mr. George Handjinicolaou, Chairman, Piraeus Bank

February, 2018

In October of last year, Mr Poul Thomsen, director of the European Department at the IMF stated that he had “no concerns over the stability of Greek banks.” This vote of confidence is no coincidence, considering that Greece’s banks have some of the highest “capital adequacy ratios” in the Eurozone. How would you assess the evolution of the Greek banking sector and how different is its position today vis-à-vis 3 years ago?

Mr Handjinicolaou: The Greek banking system has been the victim of the Greek story. The Greek state got into difficulties back in 2009, which led to the Private Sector Involvement (PSI) programme, the debt hair-cut, in 2012 that by definition meant the first recapitalization of the Greek banks. Because Greek banks held government bonds they became a victim of this situation.

In subsequent economic crises that prevailed in Greece, in which the economy shrunk almost 30%, the Greek banking system was victimized again in a second wave, due to the overall economic hardship that had an effect on the balance sheets of the banks with high levels of Non Performing Exposures (NPEs) and Non Performing Loans (NPLs). These are the legacy issues that we are still dealing with.

The banks were recapitalized again in 2017, which has given the banks high capital levels. In addition, the banks have been keeping high provisioning levels over the past few years. In conclusion, I agree with Mr Thomsen regarding the stability of Greek banks. Despite the fact that we have high levels of NPLs, we have done a good job to provide for these, which coupled with the collateral they hold, make the headline that you might see about Greek banks having 45% of NPLs and 51% of NPEs not seem as bad. These are high numbers but when you look at the level of provisioning plus the level of collateral that exists for these loans, the exposure is covered. When you combine this reality with the high level of capital of Greek banks, we are in a good position to bring down NPLs and NPEs to the levels we have committed to with the Single Supervisory Mechanism (SSM) as part of the 3 year plan. So far, we have no reason to believe we will not reach these targets; if nothing else, we will exceed them.

The different aspects I have brought up point toward a situation that is manageable, and that is aided by the improving state of the Greek economy. We believe we are heading in the right direction.

Just this week, Greek banks have begun to submit relevant data to the EBA while it carries out its routine stress tests. With feedback and results expected to arrive in May, prior to Greece’s fourth and last review before it exits the economic adjustment programme in August of this year. Do you see Greek banks in a strong position when facing the new stress tests?

Mr Handjinicolaou: Greece’s creditors want to convince themselves as Greece is looking to exit the programme that the banking system is sound and in a position to not only sustain itself, but to also support and finance the Greek economy. As part of this exercise, there is a triangulation process which is comprised of three components: the first being the thematic review which is carried out by the SSM where they look at whether loans are well provisioned. The second component is the adaptation to the IFRS 9, which is a new, forward-looking method of accounting. This means that for every loan that a bank makes, it must put a provision in its books as well. This is an accurate way of provisioning according to the regulators. This also means that whatever provisioning we put, it will take 5 years to impact the capital of the banks, which is beneficial to us. The third and last component of the triangulation is the stress tests.

We are confident that all Greek banks will fare well in the triangulation exercises. It is a bit premature to speak of any specific result as the authorities have only just begun to roll out the exercises, and you also need to have an understanding of where the thresholds are. The initial reading of the current situation, corroborated by the press, is rather optimistic. Don’t forget that the EBA will define optimistic, baseline and adverse scenarios on which the stress tests will be based on.

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 Piraeus Bank who placed a €500M covered bond issue in October last year. Can we say that these successful bond issuances signal a boost in investor confidence regarding Greece’s future?

Mr Handjinicolaou: Unquestionably the Greek economy in 2017 registered its first quarter to quarter growth after many years of negative or stagnant growth levels. This means success is feeding on success. People want to feel more secure. More secure means a boost in confidence which in turn means a return of deposits. Greece continues to have one of the highest levels of monetary circulation within Europe and possibly beyond, of €36+ billion. This figure is much higher than the 5% of GDP which is the average. So confidence leads to higher deposits which allows consumers to spend more. In 2017 consumption has been a main driver of growth. This increase in consumption then translates to more confidence of business owners, who are then more willing to invest and expand their businesses. This is what has been driving the economy in 2017 and we would like to see more of this in 2018. However, in order to increase the momentum, we also need foreign capital. Here is where we can say that the confidence of the international community is of utmost importance. An indicator of the boost in confidence is the yields of Greek bonds. We have witnessed a huge reduction in yields over the course of the last few months. The 10-year notes came down from 5.5% to 2.5%, practically a 200 basis point reduction.

If you are looking for evidence that the international community is getting more confident with Greece, you needn’t look further than the drop in bond yields. The positive effects of the growth in confidence mean that Greece can tap the international markets more freely. This is again evidenced just yesterday with the issue of a 7-year bond at 3.5% or 3.625% which was very well received.

Greek paper is now investable. At 5.5% it was more attractive, but investors did not feel comfortable to come and invest their money. At 3.5% it is still a high enough yield vis-à-vis the other sovereign bonds like Portugal or Spain but confidence in the Greek economy is there, so it creates a more attractive product in which to invest. It is therefore both factors that Greece is now benefitting from, the yield, but also increased confidence.

In all of our conversations thus far in Greece, there is one element which is continuously underlined as the critical pillar upon which Greece’s recovery will depend: Investment. Local and foreign investment, as well as investment via the capital markets is the key element to catapult the Greek economy to full recovery mode, sustainable growth and job creation. Considering the boost in confidence which you have described, where do you see the best opportunities for British investors?

Mr Handjinicolaou: Driving investment into the economy is a necessary condition. Greece must remain focused on the economic adjustment programme that it has undertaken. We need all the actions and reforms that the state is taking in order to reduce red tape, to make foreign capital more welcome and for investors to be able to come and invest their money in a hassle-free way. These are pre-conditions for UK capital to come in. Capital coming from the UK, for example, is well-trained in the Anglo-Saxon way; it is also capital for which different markets and corporations compete. London is an international hub as it attracts capital coming from around the world and re-exports it to the best opportunities out there. In this context, it’s up to Greece to make itself presentable.

One of the pre-conditions to attract foreign capital is already there, the attractive yields. Greece is offering attractive yields in a number of different areas. Tourism for example offers excellent opportunities for investment in high-end developments in particular. In Energy, Greece is a transmission hub for the European network, but also a transportation hub for natural gas. There is also huge potential in renewables, particularly wind and solar.

In addition to Greece being an energy hug, the other obvious sector is logistics. You just need to look at the map. For trade that comes from Asia, it makes much more sense and can reduce time by one whole week by using ports in Greece and corridors to east and central Europe, than ships going all the way around Europe. There are many other opportunities in certain specialised areas like aluminum production, where Greek companies are some of the most competitive in the world.

In agriculture and agribusiness as well, where there is huge export potential, Greece has only begun to scratch the surface. Piraeus Bank is the leading lender to the agricultural sector and a staunch promoter of smart farming using the latest technologies and equipment. Wine is another agribusiness where Greece has begun to emulate the modern French techniques to make quality wine. Now there is also a push to bring back old, native grape varieties which were almost lost and are in fact better adapted to the local conditions, soil and climate. As you know, Greece was making wine thousands of years ago! Other opportunities will continue to emerge as the environment becomes more investor friendly. It’s about exploiting Greece’s natural advantages, like with wine, and there is huge potential to grow exports. Piraeus Bank is the premiere agricultural bank; we are here to support our farmers.

Building on this, I’d like to ask about Piraeus Bank’s role in supporting the SMEs and entrepreneurs of Greece, which form the foundation of the economy and drive job creation. What do you identify the key elements needed to support the SMEs and entrepreneurs of Greece, many of them part of the younger generation?

Mr Handjinicolaou: At the board level, we have defined where the bank should be investing. Piraeus Bank is largest bank in Greece and in every sector. We are, in a way, a representation of the Greek economy, and as such, pay particular attention to the SME segment, which forms the backbone of the Greek economy. This is where jobs are being created; this is where the ideas are coming from. If the economy is going to rebound, it will be thanks to the SME segment.

It is a stated objective of ours to be the leaders in lending to SMEs. In 2017 we were the first bank that has led increases in lending to SMEs and we have been on record stating that by 2020 we will be financing up to €5 billion each year in new funding. We are here to help the Greek economy and support the SME segment.

In addition, we have recently carried out a €500M bond issue with the EIB for which the funds are specifically dedicated to financing SMEs. The terms were very attractive for us, 5-year term with 2.5%. We undertook the commitment to add to this and extend a total of €700M in financing to SMEs. Effectively we are transferring the attractive cost of funding to attractive terms of borrowing for SMEs, thereby stimulating investments and growth.

We are keen to gather your insight regarding the latest reforms and new legal framework to help banks deal with their legacy issues, the NPLs. What can you tell us about the success of selling NPLs on the secondary market and the use of the online auctions?

Mr Handjinicolaou: When we talk about the major objectives of the bank, clearly the reduction of NPEs and NPLs is number one. The more successful we become in reducing these, the better position we will have in order to release resources from this and deploy them into the real economy. We have therefore been looking for ways to increase the efficiency of our efforts to reduce NPLs and we have asked the government to support us in this drive.

The first aspect is service companies who are now able to enter the market. These service companies are specialised entities which operate to service these loans in a conflict-free way. An independent service provider can play the role of engagement with the borrower more efficiently and assertively. The entrance of these players leads to the development of a secondary market for loans which helps the price discovery process therefore assists by adding additional tools which can be used by the banks to manage their NPEs.

The second aspect relates to the electronic auctions. A lot of the loans that exist in the NPL and NPE portfolios are backed by collateral. After a long period where you engage with borrowers, you reach the time where you need to liquidate. This has also been a difficult element because of the extended length of Greek judicial procedures. The concept of the electronic auctions was created to enable a hassle-free and efficient way to liquidate and not depend on the outcomes of the lengthy judicial processes. This has even driven certain borrowers to come to the table and settle their debts before the auction. It is a major incentive for us to control the strategic defaulters, which in the end, helps us with the reduction of NPEs and NPLs.

There is also a new framework for out-of-court settlement procedures. This also helps avoid the time-consuming process of dealing with the Greek judicial system. These are all tools, which in our view will add momentum and play in a role in helping to achieve and surpass the objectives agreed upon with the SSM for the reduction of the NPLs and NPEs.

As Chairman of Piraeus Bank, what do you consider to be your main responsibility in this critical year for Greece?

Mr Handjinicolaou: I arrived to Piraeus Bank in November 2016 as part of the effort to improve the corporate governance of the bank, which was a pre-condition for the country at the time.

When I look back at the last two and a half years, I consider my biggest accomplishment to be the smooth transition from the previous regime to a properly operating bank. We have complied with all the corporate governance requirements.

The board is independent and provides checks and guidance to the CEO. We have also put in place a mechanism in the form of an independent audit committee. Together with the independent risk management committee, these provide the necessary checks and balances within our organisation. Additionally there is an independent nomination committee. These are all things that have given our organisation a new ethos, which has been a pioneering move within the Greek banking community.

We have done this transition successfully and managed to attract extremely high-calibre board members. I may dare to say we have one of the most qualified boards of Europe today. People with demonstrated track-records; former CEOs like Mr Cucchiani or Mr De Boeck; very strong individuals like Mr David Hexter who has a background in the Swedish banking system. As the chairman, I’m very fortunate to work with such individuals. This is where I derive my optimism when I look to the future because we are in the best position; not only because we are the largest bank, but because the whole leadership of the bank is independent from the legacies of the Greek banking system. The bank is well positioned to take the necessary steps that are consistent with maximising value for shareholders in a very economically-driven manner, but most importantly, doing so within the institutional framework that meets the best international standards of corporate governance.

This is very important for Greece because building strong institutions is what is going to move this country forward. If in my capacity as Chairman, together with the board, are successful in what we are doing, the legacy will prove itself and even though I will not be here, the institution will continue to be run under the same standards and the same excellence. If we achieve this, the rest of history will be very kind to us.

Iwould like to invite you now to make some concluding remarks taking into account that through this interview you have the attention of UK’s business and investor community,. readers of ‘The Times’. On behalf of Piraeus Bank and as its chairman, this is your opportunity to share a message to our readers in the UK.

Mr Handjinicolaou: Having been a participant of the City of London for 15 years and also in the US, I can say that the existence of institutions and process is fundamental in the Anglo-Saxon way of doing things. We at the board are using this as our beacon to run the bank, should be a very comforting signal to UK investors. The UK tends to leave behind in its former territories the legacy of process and structure. Investors in the UK should have comfort that the leadership of this bank, both the CEO, Mr Christos Megalou, and myself come from this kind of environment where we continue to build such processes and structure at the bank. UK investors should have assurance that here their money is well protected in a very transparent way.