Another day, another 3.4 billion euros

Updated 27th May double starred **

Updated 23 May 2013 - updates starred *

Piraeus Bank and the negative goodwill item


In the fraught resolution of the Cypriot banking model determined by the troika in March 2013 Piraeus Bank of Greece was the successful bidder in the fire-sale of the Greek operations of three of Cyprus's banks - Laiki, Bank of Cyprus and Hellenic Bank. The price paid for the acquisition of €16.4bn of assets and 312 branches was €524m. 


(Reuters estimated that the Cypriot bank Greek networks represented a tenth of the Greek banking market).


The sale was forced through and signed by the governor of the Central Bank of Cyprus against the wishes of the boards of the banks concerned.


At the time of the sale the purchase price was regarded by some as little more than derisory - one estimate put it as a mere 19% of Net Asset Value (Hugo Dixon).


* The FT reported that Piraeus was 'understood to be set to make a net capital gain on the transaction of about €1.5bn, bolstering its capital position.'


On May 21st Piraeus Bank announced its results for the first quarter of 2013.  In the lead-in to the results Michalis Sallas, Chair of the Board of Directors, noted that PB was now the biggest bank in Greece with a market share of 30% whilst Stavros Lekkaros, CEO and MD,  announced that the bank had total assets of €99bn.


Despite this the bank made a pre-tax loss of €336m excluding a negative goodwill item.


It turns out that this negative goodwill (WSJ) item is the capital gain the bank recorded after the adjustment of the fair value of its acquisition of the Greek networks of the Cypriot banks above. This is shown as €3.414bn in the quarterly accounts.


The statement accompanying the accounts states with regard to this figure, 


For the determination of the fair value of assets and liabilities of the operations of the Cypriot banks in Greece, that were acquired by the Bank in late March 2013, and contingent liabilities of the acquired items, the method for purchase price allocation was applied according to the provisions stipulated in IFRS 3 "Business Combinations". The negative goodwill amounted to €3,414 mn.


What it might mean

On the face of it the words 'negative goodwill' suggest someone has made a killing or got a bargain. This appears to be the case above with PB. In late March 2013 the bank paid €524m for an asset and liability package it revalued a few days later (the Q1 accounts run to 31st March) at €3.414bn.


Combining the original sale price plus the negative goodwill item gives a total asset value for the Cypriot banks' Greek operations of €3.938bn.


At least on the face of it this masive difference between purchase price and asset value suggests that the Cypriot banks came off very badly in the forced sale of their Greek operations.


On the same day that the Piraeus Bank results were released the former presidents of Bank of Cyprus and of Cyprus Popular Bank (Laiki), Andreas Artemis and Andreas Filippou, made statements to the Cyprus parliament's Institutions Committee.


Both reiterated that they had not signed the contract for the sale of their Greek networks to Piraeus Bank because they considered it a 'bad' deal. 


It was revealed that the deal itself contains a clause that allows Piraeus Bank to carry out post-sale loan assessments of its Greek acquisitions and gives it the right to seek compensation for these from the Bank of Cyprus and Laiki.


The Cyprus Mail article covering the meeting noted that Artemis added that the deal 'left out any obligations [the] Bank of Cyprus may have in Greece, which were not transferred to Piraeus Bank, meaning that in the future BoC is at risk of greater losses'.

*Cyprus Mail (22 May 2013) reports that, 'the merger between Laiki and Marfin Egnatia is widely believed to be one of the reasons for the downfall of the island’s economy'.


Michalis Sarris, ex-Laiki chair January to August 2012 told the parliament's Ethics Committee of “strange” loans worth around €4bn where the collateral, people and interest rates of those loans were 'strange'. He declined to provide further details  over concerns that it could hurt potential court procedures.


Ex-Laiki and Marfin Investment Group, Andreas Vgenopoulos, has asked to appear before the Ethics Committee so that, in his words, 'the Ethics Committee stops operating as a forum of unanswered slander and populist utterances.' *


Piraeus Bad Loan provisions


A further look at the Piraeus Bank 2013 selected balance sheet figures in the Q1 results shows that the bank had total gross loans of €71.87bn (up nearly 100% year-on-year from €36bn).


In the same period provisions for non-performing loans rose by nearly 300% from €2.83bn to €11.18bn. This gave rise to a deterioration in the cummulative-provisions-to-gross-loans ratio from 7.9% to 15.6%.


A note for gross loans and provisions states:


The amount includes the fair value adjustment of €7.0 bn, related to credit risk, from the loans acquired from ATEbank, Geniki Bank, and the domestic loans of the 3 Cypriot banks.


This suggests that the negative goodwill amount of €3.414bn is in some way offset against a fair value adjustment largely deriving from the Cypriot bank networks purchase that increased loans provisions by up to €7bn.


In fact, the consolidated balance sheet shows that the loan provisions increased by €5.2bn between Q4 2012 and Q1 20013. Furthermore, the loan provisioning for ATEbank and Geniki Bank appear to have been incorporated in Q2 and Q3 of 2012.


This suggests that the loan provisioning for the purchase of the Greek networks of the Cypriot banks was in the region of €5.2bn other things being equal.


Note also that the loan provisioning for the Cypriot purchase in the PB 2013 Q1 balance sheet appears to be €2.5bn smaller than in the table  that accompanied the 26th March PB press release concerning the purchase of the Cypriot banks' Greek operations (see 'Background' below).  Loan provisioning here was calculated at €7.7bn on the basis of the PIMCO loan loss forecasts.


*This figure was derived from summing the total expected losses of Laiki, Bank of Cyprus and Hellenic Bank over the three hear period mid-2012 to mid-2015 arising from the report's Adverse Scenario.  The total loss under the Base Scenario was forecast at €6.03bn. That is €1.42bn less than the Adverse Scenario forecast (see sub-sections 4.5.1. - 4.5.3. in the report at pp.90-92).


It is strange (to me at least) that the negative goodwill item does not appear in the 'goodwill' line of the PB consolidated balance sheet.  Instead it appears in the Consolidated Profit and Loss page of the accounts under 'Provisions'.


As such it is offset against actual quarterly impairments of loans of €0.51bn rather than the much larger figure in the balance sheet for cummulative loan provisions.

Summary so far


So far then we know that

  1. Piraeus Bank recorded a negative goodwill amount of €3.414bn for a revaluation of its purchase of the Greek networks of the Cypriot banks.  Combined with the original purchase price for the networks this gives an asset value of €3.94bn.
  2. Piraeus Bank increased its cummulative loan provisions between Q4 2012 and Q1 2013 by €5.2bn due to (other things being equal) the purchase of the Cypriot bank Greek networks.
  3. This is €2.5bn lower than the figures released by PB in late March 2013 after the purchase agreement.
  4. The addition of this bad loan provisioning helped to raise the bank's provisions-to-gross-loans ratio from 7.9% to 15.6% year-on-year.
  5. The negative goodwill amount of €3.4bn does not apear in the balance sheet for the Q1 2013 results but rather under 'Provisions' in the Profit and Loss sheet.

Were the Cypriot banks ripped off?


By comparing the adjustment of the Cypriot bank Greek network asset-value to the purchase price paid it appears that Piraeus Bank paid only 13.3% of the asset value. (See also Hugo Dixon who calculated the purchase price as 19% of Net Asset Value closer to the time of the sale).


However at the time of the purchase it was known that the price was discounted due to the high level of bad loans in the Cypriot banks' Greek operations.


Forecast losses for these were estimated in the PB March 26 2013 press release at €7.7bn.  This figure was based on PIMCO's due diligence calculations which flowed from different macroeconomic scenarios for Cyprus and Greece.


Subsequently the loan provisioning figure for the Cypriot bank Greek networks appears to have been reduced (again other things being equal) by €2.5bn to €5.2bn (which is the different between the loan provisioning for Q4 2012 and Q1 2013).


It must be borne in mind that the provisioning reduction could be more complicated than I suggest in that the fair value adjustment of loans included those for ATEbank and Geniki Bank.  However, these banks were incorporated into the PB balance sheet in the two quarters preceding the acquisition of the Cypriot bank Greek networks.


This said how do we exlpain the €2.5bn difference between the PB 26th March 2013 loan provisioning figure for the Cypriot bank Greek networks and that recorded in the 2013 Q1 balance sheet? Was this due to improving macroeconomic conditions in Greece?


On basis of the adjusted loan provisioning alone it might be fair to tentatively conclude that the Cypriot banks and their depositors have lost out to the tune of €2.5bn.


(That is, if the purchase price was discounted for a certain amount of bad loans and now that amount of bad loans has been reduced the purchase price now looks way too low.) 


I note that according to ex-President of the Bank of Cyprus above there is a clause in the purchase agreement that allows Piraeus Bank to revisit loan loss calculations and seek compensation. Presumably there is not a reverse clause that allows the Cypriot banks to do this.


With regard to the adjustment in the value of the purchased assets/liabilities I initially thought that these were offset by increase in cummulative loan provisioning in Piraeus Bank's balance sheet subsequent to the purchase of the Cypriot bank Greek networks.


But that provisioning was included and discounted in the orginal purchase price and has subsequently apparently fallen by €2.5bn. 


It seems that using the the provisions stipulated in IFRS 3 "Business Combinations" Piraeus Bank has found an extra €3.4bn of value in the assets/liabilities it initially bought for €524m.



If we combine the €2.5bn loan provisioning change and the negative goodwill €3.4bn change we arrive at a figure of €5.9bn.


Can it be possible that this is the size of the loss to the Cypriot banks and their depositors in the forced sale of their Greek networks?


* Clearly more investigative work is needed here to work out the real loss to Cyprus's banks and depositors. Whatever that loss is it is clear that every euro that was shaved off the Greek network purchase price is a euro that has to be found (from depositors/creditors) by the Bank of Cyprus and the remnant bad Laiki bank.


And is it not grossly unfair that while the Greek deposits of Cypriot banks are now in a bank that has received substantial recapitalisation aid from the European Central Bank that same aid was denied to those Cypriot banks who must now recapitalise (with the exception of Hellenic Bank) through the bail-in of their creditors?


In a recent document the IMF has said that given debt sustainability issues no alternatives - even 'non-debt creating strategies, such as direct recapitalization of the banks by the ESM' - were available (p.10).


(On this see May 23 2013 Dijsselbloem quote below.)


But you do have to wonder if the real reason that those alternatives were not available was due to political sensibilities (particularly German ones) about Russian money in Cyprus banks.


The irony being that the advantages that have accrued to the ECB-supported Piraeus Bank through the fire-sale of Cypriot assets have contributed to the recent Fitch upgrade and the rapid rise in the bank's share price to the advantage of its major shareholders, one of whom is Russian (see below). *


**Update 27th May 2013

Ekathimeri reports that Constantinos Loizidis, a member of Piraeus bank group’s executive committee, at a recent press conference in Nicosia,


insisted that Piraeus had nothing to do with the conditions that were set as they were negotiated between the Commission and the Central Bank of Cyprus. The price agreed for the branches of Bank of Cyprus, Cyprus Popular Bank and Hellenic in Greece “was far higher than comparable transactions in Greece,” he said, adding that Credit Agricole and Societe Generale had to pay in order to have their subsidiaries in Greece absorbed by Greek lenders.


It would be interesting to see the data on which Mr Loizidis bases his assertion.  Piraeus Bank press office did not report on the press conference.**



I have included downloads here to the relevant Piraeus Bank documents as these exist as .ashx files on the Piraeus Bank site.  See also Background notes below.

Piraeus Bank Q1 2013 Results and Notes
Adobe Acrobat Document 194.7 KB
Piraeus Bank Q1 Results spreadsheet
Piraeus Bank Q1 2913 Spreadsheet.xlsx
Microsoft Excel Table 138.0 KB
Piraeus Bank 26th March 2013 press release
Piraeus 26 March Branches purchase relea
Adobe Acrobat Document 245.5 KB

Some background on the fire-sale of the Greek operations of Cypriot banking

(extracted from Not so Lucky Laiki)


The Greek Central Bank sought bids for the Greek operations of the Cypriot banks and Piraeus emerged the winner.


A press release from Piraeus Bank of 26 March 2013 said,


Piraeus Bank signed an agreement today to acquire all of the Greek deposits, loans and branches of Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank including loans and deposits of their Greek subsidiaries (leasing, factoring and the Investment Bank of Greece) for a total cash consideration of €524m.


The press release produced the table below, which shows the assets, gross, and net loans and deposits Piraeus Bank took on in the sale.


This suggests that Piraeus bank took the entire Greek loan book of the Marfin Egnatia/Cyprus Popular Bank. A note below the table says that the net loans of €16.2bn includes expected losses ‘determined by the review of international specialized firm - [see PIMCO in p7 below].’


Interestingly there was only one press release from the Central Bank of Cyprus on the sale on 2 April 2013.  This noted that,


the total sale price received was calculated based on the methodology agreed by the Eurogroup on 25 March 2013.


This seems strange given that the sale was carried out under the CBC's authority.

26 March Piraeus Bank press release table showing Greek operations of the three Cypriot banks in column 2
26 March Piraeus Bank press release table showing Greek operations of the three Cypriot banks in column 2


We know the following about the sale of the Greek operations of Cyprus's commercial banks :


1) The forced sales of the Greek operations of Laiki, Bank of Cyprus and Hellenic Bank were carried out through the decrees issued on 25 March 2013 and 29 March 2013 by the Central Bank of Cyprus (was Bank of Cyprus link - now dead) in its capacity as the Resolution Authority, through the powers vested under the Resolution of Credit and Other Institutions Law, 2013.  


2) Piraeus Bank’s purchase of the Greek operations was directly funded by Greece's bank bailout fund - the Hellenic Financial Stability Fund (Reuters 26 March 2013).


The €524m for the Cypriot acquisitions will be supplied by the HFSF in exchange for shares, an official at the fund told Reuters.


3) The Greek finance ministry also pledged to inject €1.5bn of new capital into the combined Greek operations of the Laiki and Bank of Cyprus before they were taken over by Piraeus Bank (FT Hope 22 March 2013).


4) Piraeus Bank was a direct beneficiary of the EU recapitalisation of Greek banks in May 2012 and received €4.7bn bonds from the European Financial Stability Fund via the Hellenic Financial Stability Fund in May 2012. These bonds were designed to act as collateral which would allow the banks involved to regain access to the ECB’s liquidity operations at cheaper rates than under the emergency liquidity assistance. This mechanism was denied banks in the Cyprus bailout (FT Hope 28 May 2012).


5) Piraeus Bank was expected to benefit from a further recapitalisation from the Hellenic Financial Stability Fund (HFSF).


Greek banks including Piraeus will themselves be recapitalised to shore up their solvency ratios. Most of the cash injection will be provided by a state bank bailout fund - the Hellenic Financial Stability Fund (HFSF).


Piraeus Bank's capital needs have been estimated by Greece's central bank at 7.3 billion euros. (Reuters 26 March 2013 Georgiopoulos, Papadimas and Noonan)


6) Piraeus expected to close half of its expanded network of 1,600 branches (FT Chaffin 26 March 2013).




Other points of interest


Can banks be directly recapitalised with ESM?


In an interview (23 May 2013) with Kathimerini, Jeroen Dijsselbloem, the president of the Eurogroup, says,


Now whether direct [bank] recap will be accessible also to countries which are already under programs and have recapitalized their banks is yet to be decided. So I can’t answer that. We are trying to reach an agreement before the summer, but of course there are no guarantees.


Piraeus share price rockets

The FT's Lex column also recently reported that shares in the three largest Greek banks Piraeus, Alpha and National Bank of Greece – are up by an average of 85 per cent since the start of April.


The risk of bank nationalisation has receded due to progress on recapitalisation, which involved €23bn going into the three banks. The funds for this,


will come largely from the Hellenic Financial Stability Fund, which will end up with about 90 per cent of the equity. But if other investors put up 10 per cent of the capital, the HFSF’s voting rights will be limited and private investors will keep control. Piraeus and Alpha have hit the target. NBG is working on it ... Piraeus and Alpha will have common equity tier one ratios of about 14 per cent.


Blackrock carried out stress tests in 2011. Lex believes the capital ratios are now large enough to see the banks through the expected losses provided Blackrock’s view of the losses is sufficiently robust.



Leading shareholders in Piraeus Bank


In a separate development (FT 1 May 2013) a group called Emma Delta recently successfully bid for a €712m controlling stake in Greece's gaming monoploy, OPAP.


One of the investors in Emma Delta is ICT, a Russian group controlled by Alexander Nesis (see also Forbes where his personal wealth is valued at $3.3bn) which is also a leading shareholder in Piraeus Bank.  ICT bought 5.7% stake in Piraeus in June 2011. The ICT release also says,


The size of the stake is “comparable” to the 5.7 percent in Piraeus held by Czech billionaire Petr Kellner’s PPF Group NV, ICT’s press service said today by e-mail, declining to elaborate.


A slightly later (June 28 2011) release from ICT reduces the ICT holding in Piraeus to 'just under 5 percent' stake. (See also Reuters where ICT pays €40m for its stake and gets a seat on the Bank's board.)


*Reuters reported in April 2012 that Piraeus Chair, Michalis Sallas, has a stake of about 1.5% in the bank.


Piraeus and MEB


Previously ... It may also be of some interest that in a Reuters report of

16 July 2012 reporters in Greece claimed that they had seen audit documents that showed that Marfin Egnatia Bank (MEB), the Greek subsidiary of Marfin Popular Bank (Laiki) had agreed in May 2009 a loan facility of €150m to Michalis Sallas, chair of Piraeus Bank (he was non-executive chairman at the time of the article in 2012 and continues as chair).


It appears from the report that Sallas and family members utilized most of the €113m of this facility that was drawn down to buy shares in Piraeus Bank.


* Reuters' Special report: A Greek banker's secret property deals


In April 2012 Reuters noted that Michallis Sallas, a former economics professor, was put in charge of Piraeus Bank 21 years ago when it was still state-controlled. (It was privatised in 1991.) More controversially it revealed that,


Sallas and his wife and his two children have also run a series of private investment companies that public records show have sealed millions of euros in real estate business with Piraeus, deals that were not disclosed to shareholders.


Apparently, the Sallas family companies bought properties with loans from Piraeus Bank which then rented at least seven of these buildings as bank branches from the companies. The bank, 'also bought properties from the companies and financed other buyers to buy properties from them'.


The report also discovered that loans to directors and executives of Piraeus Bank and their families reached €244m in 2008, '0.64 percent of the bank's then total loans and advances to customers'.


The detailed report notes that Piraeus and Sallas did not respond to repeated requests to identify any public declarations about the firms linked to Sallas. *



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