Bonds worth about 8 billion euros to be issued Greek banks the next 2.5 years to cover the minimum equity requirements and eligible liabilities, known as the MREL.

These are the capital requirements set Single Authorization Board (SRB) in all European banks to protect against unforeseen circumstances. According to the latest report published by SRB, Greek banks should start massive issuance as they show the highest deficit of MREL funds.

According to SRB’s calculations, Greek banks will have to issue €7.7 billion worth of bonds depending on the level of credit risk they have taken on, mainly their exposure to financing the economy. These include senior preferred bonds or Tier II low-priority bonds, as well as AT1. The calculation is based on the level of risk-weighted assets (RWA), which is a moving target as it increases as credit increases in the economy.

The RWA of the four systemically important banks was €143.2 billion at the end of 2022, and if credit expansion accelerates in the coming years, MREL target coverage could reach up to €10 billion, which would increase bond issuance costs. An alternative solution to limit credit risk and reduce capital requirements is synthetic securitization, whereby some of the risk is transferred off the balance sheet.

Investment grade

A decisive step to reduce the cost of borrowing by Greek banks is considered to be the restoration of the investment grade for the Greek state, which will be placed in the second half of 2023, depending on political developments. It is estimated that it will take 1-2 years for Greek banks to return to investment grade, but it is expected that an increase in Greek democracy will contribute to the first reduction in the cost of borrowing for Greek banks.

From 2019 to date, Greek banks have issued €10.4 billion worth of bonds, achieving a ratio close to 23% and meeting the interim annual targets set by the SRB. However, with the target set by the SRB for 2026 raising the index to cover MREL’s targets above 27%, Greek banks are encouraged to embark on massive new issuance. It should be noted that the 27% target to be reached by 1 January 2026 is a consequence of the extension that was granted to Greek banks and some other European banks, and therefore the deadline is inflexible.

Price

Last year, issuing activity was impacted by increased costs of raising funds from the markets caused by the Russian invasion of Ukraine, and despite the fact that four systemic banks raised 2.6 billion euros and another 900 million euros in the first months of 2023, the cost of these issues fluctuated at a high level, in particular, from 7% to 8.75% for senior preferred bonds from 2% to 3.87%, which was the cost of similar issues in 2021. The picture is similar for low-priority bonds (mainly Tier II), whose borrowing costs reached 10% in 2022, compared to about 5.5% in 2021. AT1 securities are valued more accurately following the international depreciation shock experienced by the holders of the Credit bonds. Suisse in March last year.

Characteristically, the value of the AT1 bond issued by Alfa-Bank at the beginning of 2023 with an interest rate of 11.875% is currently close to 14%, while the value of the corresponding AT1 bond issued by Piraeus Bank in 2021 with an interest rate of 8.875%, is currently at a price above 18%. As for senior preferred securities, the corresponding issue of Eurobank at the beginning of 2023 with a coupon of 7% is today valued at the same price as the corresponding security of Alfa-Bank, but also below the 7% coupon of a similar issue issued by the National Bank. the cost of a possible similar question is exhibited today. The Tier II bond issued by the Eurobank in December 2022 with an interest rate of 10% is valued at around 9%, paving the way for replacing some of the bonds the bank has on its books.

In Europe

The increase in costs is not only about problems with Greek banks. As SRB notes in its annual report, “From October to December 2022, the cost of financing improved and reached its lowest level since mid-August 2022. While these levels were still higher than they were at the beginning of February 2020 before the pandemic, this has led to an increase in emissions. activity in early January 2023.” 2023, SRB notes, “started positively for the banking sector, helped by falling inflation and improved profitability thanks to higher interest rates, although spreads widened sharply in mid-March due to the SVB and Credit Suisse crises. By the end of the first quarter of 2023, confidence returned, helping to defuse the situation.

In 2022, European banks raised €298.8 billion of capital to meet the MREL targets (21% more than in 2021 and 9% more than in 2020). In total, European banks have to issue about 21.5 billion euros by the beginning of 2026, with Greek banks having the highest issuance needs, followed immediately by Italy with 3.7 billion euros and Germany with 2.8 billion euros.