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Piraeus hopes to beat €15B bad-loan reduction goal with new debt partnership

Greece-based Piraeus Bank SA expects a newly formed joint venture will help it exceed its target to cut nonperforming exposures by €15 billion by 2021, CEO Christos Megalou said at a first-quarter earnings presentation June 4.

Piraeus Bank and Swedish credit management firm Intrum AB have agreed to establish a new NPE management platform in Greece, in which the bank will hold a 20% stake.

"The joint venture will enable the bank to accelerate the pace and enhance the effectiveness of managing the NPE exposures" and "will be the ideal platform for managing securitization assets" which is a key part of the bank's NPE strategy, Megalou told analysts during the presentation.

Having lowered its NPE exposure by about €5 billion in 2018, Piraeus Bank wants to reduce it by a further €3.5 billion in 2019. The bank's NPE exposure in Greece was about €26.0 billion as of March 31, down from approximately €26.5 billion at the end of 2018 and €31.0 billion at the end of 2017.

The Intrum deal may also result in a bigger-than-targeted boost to Piraeus Bank's capital if the joint venture helps the lender cut NPEs at a faster rate, according to Megalou. In the base case scenario where NPEs are reduced by €15 billion by the end of 2021, the bank expects a positive net capital effect of 55 basis points to 60 basis points.

But if NPE reduction is 10% higher than targeted, the cumulative positive impact on the net capital would reach about 100 basis points at the end of 2021, the CEO said.

"In all cases involving NPE servicers with the scale and capabilities of Intrum, an overperformance of 10% to 20% has been observed," Megalou noted.

Cost savings

As a result of the deal, which is expected to close Oct. 1, Piraeus Bank expects operating cost savings of about €50 million per year in 2020 and 2021 while the effect on its 2019 profit and loss account will be marginal.

The agreement is subject to customary conditions, regulatory approvals and the consent of the Hellenic Financial Stability Fund, Megalou said. There is potential for future price adjustments based on the future performance of the joint venture, he added. The currently agreed-upon earn-out of €32 million will be driven by future EBITDA levels, the CEO said.

Under the agreement, Piraeus Bank is selling 80% of its internal recovery banking unit to Intrum for €328 million. The entity will be led as an independent NPE servicer. The new platform will exclusively manage Piraeus Bank's current €27 billion NPE stock and all new inflows for an initial 10-year period.

The two companies have also agreed to set up a second servicing platform with the same ownership structure for the lender's real estate-owned assets of €1 billion, along with new inflows.

The fee structure agreed upon "follows the logic of similar partnerships we have seen in the past few years in the international markets," Megalou told analysts. There is a fixed fee based on the assets under management, and a success fee based on the financial performance of the business and the overall result on the management of the assets, he said.

The fee structure fully aligns the interests of the bank and the servicer and provides an incentive for the servicer "to take the appropriate actions for the assigned portfolio," he said. The structure also makes sure that if costs for the NPE reduction run high, this will be balanced out in the success fee.

"Any success fees we will be paying relate to both the actual amount of reduction and the cost of risk achieved out of this reduction. So, success fees are fully aligned with the interest of both Piraeus and the servicer," Megalou noted.