Monday, 29 August 2011


The rate at which posts on this blog end up spawning sequels never ceases to amaze me.

Readers will, by now, have read about the planned (and presumably done) deal to merge two of the largest Greek banks, EFG and Alpha. You can also check out my friend @mstevis' take on the deal here. My tongue in cheek suggestion for EFAGA to be the name of the merged bank is not gaining much currency but hey, I can't have it all.

I must first refer you to my original post, back when NBG tried to buy Alpha. Like anyone not entirely bonkers I rained shit on that parade because the proposed merger returned an under-capitalised bank in all respects but this time around it really is different. I still don't like bank mergers but as I've discussed before they are necessary and this one is going ahead.

I've crunched the numbers on the capitalisation of the proposed merged bank based on the Stress Test results for EFG and Alpha, plus details of the announced deal. You can check out the results below:

I believe that the new bank will be seen as secure by the markets, achieving the objective of the merger. My guess is that it will probably turn out to be most beneficial for the Alpha shareholders as, at a time when the market should really only be valuing worst-case Core Tier I, Alpha is way under-priced.

What will it take to elevate the merged bank beyond contagion? I'd say Core Tier 1 at over 7% even if Greek bonds take an 80% haircut. How much will that cost? EUR6bn. Hell they will probably draw that much in deposits, post-merger.

This is probably good news. You don't hear me say that very often, now do you? It's good news because, assuming the new bank tries to keep to a 7% core tier 1 capital ratio, it can in theory lend an extra EUR13bn in risk-adjusted loans. By the same calculation, Alpha could only add a measly EUR3bn and the benighted EFG would have to actually reduce lending by a net EUR15bn. So we go from a net reduction of EU12bn to a net increase of EUR13bn. Now I don't expect all of this will materialise in the current climate but an extra EUR25bn in spare lending capacity out of nowhere is nothing to be sneered at, it's about 10% of the total outstanding loans to domestic non-financial institutions.

Then again I do wonder whether EFAGA won't also start drawing deposits from other Greek banks as opposed to deposits previously moved abroad. It's very likely; after all, most of the country's savings aren't with the super-mobile ultra-rich, whatever defaultniks would have you believe. It could be that this is a winner-take all game in which the first couple of banks to reach good capitalisation take the pot as both depositors and investors flock to them. If I'm right, then the pressure on the rest of the Greek banking sector is about to become unbearable.

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