The merger agreement to increase its share capital with , signed today (18.7.2024) will be submitted to Parliament for ratification. The Ministry of National Economy and Finance points out that the solution reached by the Financial Stability Fund (FIS) by merging Attica Bank with the Pangrete Bank was optimal as, first, it leads to a number of benefits, secondly prevents damage and thirdly, there was no alternative scenario. The benefits and losses that have been avoided are described by Bank of Greece Governor Giannis Stournaras, in a letter (16.7.2024) to the Ministry of Finance and the Greek Treasury. Specifically: A. Damage avoided by signing the agreement The letter of the Governor of the Bank of Greece Giannis Stournara describes the situation of the two banks and analyses the impact if there was no agreement. Specifically, as it says: – According to the latest available data (March 2024), the index of non-performing (red) loans by Attica Bank is 61.5% and Pagretia 53.5%, compared to 5% that is the corresponding indicator for the four systemic banks. For the same date the two banks have a capital adequacy ratio of about 14.3% for Attica Bank and 12.6% for Pagretia, compared to 19.1% for the four systemic ones. – The scenario of no agreement would have a number of very serious negative consequences. In particular: The capital adequacy indicators for the two banks are currently below EUR 106 million of the total capital requirements and in any case they are not sufficient to resolve the problem of non-performing loans. Covering capital needs would be impossible without the conclusion of the agreement. Given the vulnerable financial situation of the two banks, it would be highly likely that the scenario of significant outflow of deposits would not be reached. This would lead to their collapse legally as they would not have access to borrowing from the ECB, and do not have sufficient cash available to cover extreme outflows of deposits. Despite the relatively low size of 2 banks, any collapse would have a serious impact on the financial stability of the Greek banking sector. Specifically: Neither bank covers the conditions of Law 4261.2014 on the transfer of liquidation assets. Therefore, all deposits could not be transferred to another credit institution and uncovered deposits would be lost. With figures of 31.3.2024, unguaranteed deposits are 909 million for Attica Bank and 726 million for Pagretia. So there would be a loss of savings over 1.6 billion euros. As these deposits mainly concern companies and households, a new wave of non-performing loans would arise in this scenario as the ‘haircut’ of deposits would likely have an irreversible impact on their ability to cope with the service of their debt. It is noted that the largest depositors of the two banks are Greek State bodies who would suffer the relevant consequences. There would be secondary effects on important banks through increased contributions to the Deposit and Investment Guarantee Fund (TIF). In particular, the TEC would only exhaust its reserves for the payment of Bank of Attica’s covered deposits (€1.8 billion). Therefore, it should draw funds from the other banks to pay for the covered deposits of Pagretia (EUR 1.7 billion) and additional funds to reach within four years the target of 0.8% of the covered deposits (about 1.1 billion euros), in accordance with the relevant European Directive, which would burden the remaining domestic banks. The existing value of the HFSF’s participation in Attica Bank would be eliminated. As it will be the first time since the beginning of the crisis that would be “haired” deposits in our country, it is almost certain that the confidence of the savers would be shaken and it would be possible to see “bank run” (massive withdrawals of deposits) in less important or “vulnerable” banks, without being able to exclude effects on the liquidity of important banks. The turmoil that would have caused financial stability would have an impact on the availability of the current share of the EFSF to the National Bank, as well as on the access of Greek banks to the money and capital markets. In addition to the notes of the Governor of the Bank of Greece, it is still noted that: The capital collapse of two banks would have incalculable consequences for investment confidence that has been recovered with great effort, step – step over the last five years. The ‘cut’ of deposits avoided throughout the financial crisis would now occur and would cause chain implications for the banking system, the national economy and the country’s image as an investment destination. B. The benefits of the agreement The main benefits resulting from the agreement include: The elimination of the threat to the stability of the banking system, the possible ‘haircut’ of deposits and the possibility of a new recapitalisation. The strengthening of competition for the benefit of depositors and borrowers. The fifth banking pillar created next to the four systemic banks is one of the key tools to stimulate competition at the level of deposits, loans, supplies, etc. in the banking sector. In the same direction, the initiatives of the Ministry of National Economy and Finance, which also enabled non-bank institutions to provide housing and business loans, reduced commissions for small-scale transactions by 50% and introduced tax-free bills. The creation of a new bank with a strong capital base, with non-performing loans limited to 3%, i.e. at a level corresponding to the euro area average and below the corresponding index of the four systemic banks, without deferred tax. In addition, this reduces the total level of non-performing loans of the Greek banking system which is one of the key elements taken into account by rating agencies. Ensuring the public interest as the HFSF protects the value of its stake in Attica, which is now gaining positive returns (positive IRR), at a time when it would have zero value in the event of failure to reach the agreement, while at the same time maintaining strong minority participation in the new scheme with significant potential for development. Such comments are made in his letter by the TTE commander, noting that the aid for competition is expected to have a positive impact on the cost and quality of banking services, as well as that the resolution of the two banks’ balance sheets will contribute to the reduction of non-performing loans. C. The investigation of potential international investment interest and the solution chosen The agreement reached is a result: The Bank’s negotiations with private investors, shareholders of the two banks (Thivest et al.) and the investigation carried out by the international investment bank JP Morgan (with a mandate from the HFSF) as to the potential interest of other investors, to participate in the increase in share capital on at least the same terms as agreed with Trivest. Thus, in parallel with negotiating with private investors (Thivest) and while significant progress had been made on a key framework of agreement, the HFSF asked JP Morgan to ‘run’ a process of investigating potential investment interest (from international investment houses with a great deal of experience in such transactions) to participate in an increase in Attica Bank’s capital with a minimum of the same or better conditions for the Fund in relation to the framework of basic investment conditions of the agreement with the private investor (as formed at the time). The JP Morgan process was completed unsuccessfully as it received negative responses for participation in such an investment by all international investment houses to which it addressed. The above letter from the Governor of the Bank of Greece also states that: “Despite the efforts made by existing and previous administrations of the banks Attica Bank and Pagretia, the search for a strategic private investor with a long-term horizon beyond the existing private shareholder has not worked”. D. What is foreseen in Agreement 1. An increase in the share capital of Attica Bank is made by around 730m euros in which the HFSF, e-EFCA, Thrivest Holdings and private investors will participate. It is noted that from this amount Attica Bank will repay directly to the Greek State Tier2 bond amounting to EUR 100 million, an end of EUR 2028, which would have been extremely uncertain if the agreement had not been made. 2. The increase in share capital will contribute: The EFSF amount of approximately EUR 475 million, The e-EFCA around EUR 48 million. The State’s net financial contribution will be approximately EUR 423 million (475 million from the HFSF plus 48 from the IFCA minus 100 million that is the repayment of the bond). Moreover, the State will benefit from another EUR 44 million which it will not have to pay in 2025 to the new bank created after the merger. The reason is that, on the basis of the agreement, the new scheme that will be created after the merger will give up the right that Pagretia currently has to activate the deferred tax procedure. TMEDE 12m euros. 3. Trivest Holdings with private investors will contribute 200m euros, as well as the total shares of the Pangrette Bank merged by Attica Bank. Therefore, in the calculations, it is obvious that no one in addition to the contribution amount will have to take into account that investors make a substantial contribution to the entire Pan-Gretian Bank. It is noted that the Pangrete Bank in terms of assets is a bank of a similar size to Attica. In particular, the assets of Attica Bank (sizes 2023) are 3.77 billion euros and Pagretia 3.45 billion euros, the deposits of Pagretia are 2.6 billion euros and Attica Bank 3.15 billion euros, while the profits before tax in the year 2023 amounted to 90.8 million euros for the Pangretian bank for 28.6 million euros for the Bank of Attica. Moreover, it is noted that the Pangretian bank along with Thrivest Holding already holds 9.4% of the Attica bank. Systemic banks have stated that they will not participate in the increase in share capital. The new bank after accession to the “Herakles” reduces the percentage of non-performing loans from 60% (which is the weighted percentage of SDRs in both Attica and Pagretia) to 3%, corresponding to the European average and will be fully recapitalised with a capital adequacy ratio of CET1 Ratio over 15%. In this way, the total capital (old and new) allocated by the EFSI acquires a positive rate of return (positive IRR). The new banking pole will be owned by a majority of individuals with strong minority rights for the HFSF. Exact participation rates will be finalized after the completion of the share capital increase. It is estimated that the share of Trivest and other private investors will be up to 58.5%, the TSF will range from 35 – 37% and the State as a whole (FTF + e-EFCA) from 38.5-40%. In other words, two banks with a bunch of red loans which are the result of unfortunate and controversial financing in the past and with an uncertain future, not only are they being rescued, but by the inflow of funds from a public and private sector are transformed into a strong pillar of the banking system that will operate on fully transparent private economic criteria. E. The size of the two banks Shareholders of Attica Bank today are: the NHS with a 7.5% rate, the e-EFKA with a 7.6% rate, the Pangretian Bank with a 5.0% rate, Thrivest Holding with a 4.4% rate, the TMEDE with 4% and other shareholders and systemic banks with a total rate of 6.5%. Shareholders of the Pangrete Bank today are: Thrivest Holding with 43.8%, Alfa Ocean Developments with 4.0%, the National Bank with 3.6%, and other shareholders with a total of 48.7%. According to the financial data of the banks in the financial year 2023: Attica Bank has: Active: EUR 3.77 billion. Financing (after forecasts): EUR 2.68 billion. Deposits: EUR 3.15 billion. Same Funds: EUR 446 million. The Bank has: Active: EUR 3.45 billion. Financing: (after forecasts): EUR 2.04 billion. Deposits: EUR 2.6 billion. Same Funds: EUR 251 million.