Piraeus Bank, one of Greece’s big four, has been fending off big financial problems, including a mountain of bad loans, some 20.5 billion euros ($23.93 billion) out of its balance of 57.7 billion euros ($67.35 billion) but new CEO Christos Megalou said he’s getting it done in an overhaul of how it has operated, and how it will from now on.
Some 14 months after being brought in from his position as Credit Suisse Vice-Chairman for Southern Europe, he told The Financial Times that he’s making progress toward “normalizing” the bank, including clearing out 60 executives and the former top management team that was in place when its problems accumulated.
The departures came in the wake of a probe by the Greek central bank of irregular lending practices under the previous administration. Central bank auditors found that Piraeus had more than once violated capital controls imposed in 2015 as Greece teetered on the edge of leaving the Eurozone.
A public prosecutor is conducting a separate criminal investigation of the incidents. All those involved have denied wrongdoing. “Thorough change was needed to address the legacy issues,” said Megalou. “We’ve adopted a radical action plan to restore Piraeus’s credibility, predominantly by re-establishing governance principles and risk controls.”
In April, 2017, a prosecutor filed six felony charges against the former chairman, Michalis Sallas, and six other executives over property transactions involving real estate firms linked to Sallas, court officials said, the news agency Reuters reported.
The charges were based on an October 2016 report by a deputy financial crimes prosecutor, which examined six real estate transactions conducted by the bank in 2006.
The report, which was seen by Reuters, alleged that companies affiliated to Sallas and members of his family acquired properties with loans taken from the bank, which were then sold at a lower price to intermediaries, and then sold on to Piraeus at a big premium in five of the six cases.
Sallas, who stepped down in July, 2016, after 25 years at the helm of the bank, denied the charges and said the transactions were “transparent” and “legal” and the Bank of Greece, the country’s central bank, had issued a report confirming that the purchases of the properties had not damaged Piraeus.
In October, 2017, Megalou presided over the ouster of 10 senior executives who quit after
alleged irregularities in the sale of a 1.2 billion euro ($1.4 billion) loan package at a deep discount to Libra Group, a family-owned conglomerate based in New York, controlled by the family of Greek shipping tycoon Michael Logothetis, The Financial Times wrote then.
That included 30 million euros ($35.01 million) in loans to executives who quit in a deal so dubious it brought attention from investigators.
Some loans were allegedly transferred by Piraeus Bank to offshore companies in Cyprus and the British Virgin Islands in violation of capital controls imposed in mid-2015 during a bank run prompted by fears that Greece was about to crash out of the euro, sources told FT.
An anti-corruption prosecutor was examining an auditors’ report on the deal carried out by the Greek central bank and a judicial official told the paper that potential offenses were being probed, including “conspiracy to defraud the bank, conspiracy to defraud the Greek state and money laundering through the violation of capital controls and use of offshore companies,” but nothing has resulted yet.
At the time, Megalou said that the loan package had been fully provisioned in the bank’s 2016 accounts.
“The recent findings in the Bank of Greece audit while embarrassing, do not commercially impact the bank. The past breaches of the regulatory framework are ringfenced, have been provisioned for and have been adequately reflected in the bank’s financial statements,” he said.
As a result of the bank’s former aggressive lending policies, Piraeus may also have to write off another 12 billion euros ($14 billion) and is looking for outside help to get rid of its financial problems.
Piraeus just announced the first sale by a Greek bank of secured loans. Bain Capital Credit has agreed to buy a 1.4 billion euro package of corporate loans collateralized with real estate.
We put in a lot of effort to put this sale together and it attracted a lot of interest . . . we’re continuing to work relentlessly on de-risking the balance sheet while growing the core business at the same time,” he told the paper.
A second sale, of 2 billion euros of unsecured loans, is due next month. That leaves Piraeus with a second-half target of 2 billion euros in bad loans to get rid of he said, a target he said could he easily achieved if market conditions remain favorable.
The Piraeus overhaul is being closely monitored by non-executive directors approved by the European Central Bank’s supervisory arm, the Single Supervisory Mechanism, with veteran international bankers heading the lender’s credit and risk committees, the paper said.
The ECB is one arm of the Troika of the European Union and European Stability Mechanism which gave Greece a third bailout in the summer of 2015, this one for 86 billion euros ($100.38 billion) that Prime Minister and Radical Left SYRIZA leader Alexis Tsipras said he wouldn’t seek or accept because it came with crushing austerity he swore to reject.
He took the money and promptly ordered more brutal conditions on workers, pensioners and the poor, including letting banks like Piraeus sell off bad loans, use collection agencies to hound people who couldn’t afford to pay because of big pay cuts, tax hikes, slashed pensions and worker firings, and allowed foreclosures he swore to reject.
Greek banks have been awash in scandals in which some, particularly state-run, have been used a kind of revolving ATM’s for privileged borrowers – including the former ruling New Democracy Conservatives and its then-partner, the now-defunct PASOK Socialists – who took out loans and didn’t repay them.
In Greece’s curious interlocking system of the government working with banks and the rich, New Democracy gave immunity to the bank officers who approved the loans – 250 million euros ($291.81 million) without requiring enough collateral to cover them.
Greek banks have had an old guard that he said has changed at Piraeus under his direction in which it has hired a cadre of younger bankers, recruiting some to return to their homeland from abroad.
Their task, he said, is to restructure the bad loans and cut the mountain down to a manageable hill and restore the confidence of depositors and investors but it’s not been revealed who owes the most nor whether they will be forced to pay at the same time banks are squeezing smaller debtors relentlessly.
“We had to get away from the paternalistic management culture of the past and focus on accountability, meritocracy and transparency,” Megalou said, apparently referring to the swinging door system in which Greek banks would take the deposits of workers and turn them over to a favored few borrowers. “We believe that making this cultural transformation is the key to our future,” he said.
He said the bank workforce would be scaled down from 13,000 employees now with a reduction of at least 1,200 under a voluntary redundancy plan.
Nondas Nicolaides, a Greece analyst at Moody’s ratings agency, told the paper that, “We’ve definitely seen a change in the corporate culture at Piraeus, it’s quite clear . . . this has improved internal processes, including the handling of NPE (Non-performing exposures) reductions.”
TOO BIG TOO FAST
Piraeus had grown rapidly – too much so – the previous two decades, snapping up nearly 20 smaller banks, some with wobbly portfolios, and before the crushing economic and austerity crisis made lending grind to a halt, it would give out loans to people who had no chance to repay, including civil servants approved for deals that would eat up much of their monthly income although predatory practices are not allowed under Greek law.
In the ECB’s latest stress test of Greek lenders’ financial health carried out in the first quarter, Piraeus fared the poorest, almost at the edge of failure, but still was given the okay by the analysts and took a hit of 1.6 billion euros ($1.87 billion) to cover the cost of increased provisions for expected future losses instead of those already compiled.
The stress test didn’t result in an order for a capital increase – Greek banks had already received some 50 billion euros ($58.36 billion) in recapitalization from three international bailouts of 326 billion euros ($380.53 billion) from the Troika and the Washington, D.C.-based International Monetary Fund (IMF).
But Megalou said there would be a “capital strengthening,” code which amounts to a capital increase but not announced as such with the bank not wanting to set off jitters and said it would be done by December and not dilute shareholders standings.
That would add another one billion euros ($1.17 billion) in fresh equity, a fraction of what was lost in bad loans, and would raised internally through sales of non-core assets and cuts in operating expenses and the issuing of subordinated debt, the paper said.
The bank is also selling off subsidiaries across the Balkans, including in Romania to JC Flowers, an American private equity group, and banks in Bulgaria and Albania are next. But Megalou’s attention is focused on its Greek operations and overturning the culture that created its problems.