After a profitable investment in Bank of Ireland (IRE), Prem Watsa (Trades, Portfolio) and Wilbur Ross (Trades, Portfolio) have joined forces to lead a cash infusion into another of Europe’s stricken financial institutions, Eurobank Ergasias S.A. (FRA:EFGC)(ATH:EUROB). The two investors are coming to the bank’s aid as it raises money to meet new recapitalization requirements set by the Greek Parliament, effective March 30.
Watsa’s firm Fairfax Financial Holdings Limited (TSX:FFH) has committed €400 million to a stock issue the bank is holding, pricing shares at €0.30 each. It is the second largest amount in a group of five investors who are collectively committing €1.32 billion in the offering, including Wilbur Ross (Trades, Portfolio), whose WLR Funds is purchasing €37.5 million in shares. Together, the group is contributing 46.5% of the bank’s capital increase. Fairfax and WLR Funds agreed to a six-month lock-up period following the offering.
Fairfax has previously invested in other names in the Greek market, including Eurobank Properties, Mytilineos Group and Praktiker (XTER:PRA). Watsa’s company already holds a 41% stake in Eurobank Properties, a commercial property member of Eurobank Group, worth €164 million, up in 2013 from 19% previously.
WL Ross & Co. has several other major bank investments since 2005, including Virgin Money, BankUnited (BKU), Talmer Bank & Trust and Kansai Sawayaka Bank.
Both Watsa and Ross will join in the corporate governance of Eurobank following the share offering.
Eurobank’s need for capital arose following a stress test of Greek banks for the period 2013 through 2016, which analyzed the estimated losses of the loan portfolios and future ability of the banks to generate internal capital. The Bank of Greece informed Eurobank on March 6 that it would need an additional €2.945 billion to fully cover its basic capital needs under the base scenario of the stress test.
Eurobank said the equity offering would “provide adequate financial resources to take advantages of the current and expected improvement in the economic environment in Greece,” as well as “meet the capital needs as set by the Bank of Greece, strengthen the capital position by increasing the Core Tier 1 ratio to approximately 19.3% on a pro-forma basis as of 31 December 2013, materially broaden the private shareholder base and free-float, support the recovery of the Greek economy.”
Eurobank is one of four systemic banks in Greece, having a 20% market share in loans and 18% in deposits. Its largest shareholder, with 95.2% of shares outstanding, is the Hellenic Financial Stability Fund (HFSF). The bank expanded substantially in August 2013 with the purchase of New Hellenic Postbank and New Proton Bank.
The capital increase will position Eurobank as the most capitalized bank among its peers in Europe, with a 19% Core Tier 1 capital ratio, compared to its closest competitor’s 18.4%.
The bank’s fourth quarter results were impacted by its two new acquisitions, included Sept. 1, 2013. In the fourth quarter, Eurobank reported increased revenues in both Greece and international operations, with Greece up to €339 million from €275 million in the previous quarter, and international operations up to €152 million from €134 million. Operating income also increased to €491 million, from €409 million the previous quarter, while the bank’s net interest income increased for the fourth consecutive quarter, reaching €393 million. Loans 90 days past due at year-end 2013 rose to 29.4% from 22.8% in 2012.
Eurobank’s 10-year revenue and earnings history:
Eurobank’s share price is €0.42 on Thursday – near a 10-year low – after declining almost 23% year to date, and under book value of €0.64 per share at year-end.
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