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January 21, 2021
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Piraeus Bank’s CoCo conversion into equity will increase its tangible capital, a credit positive-MOODY’S


On 16 November, Piraeus Bank S.A. (Caa2 stable/(P)Caa2, caa21 ) announced the preliminary

decision of the European Central Bank’s (ECB) Supervisory Board to reject the bank’s request

for the cash payment of its Contingent Convertible Securities’ (CoCos) annual coupon of

€165 million to go to the Hellenic Financial Stability Fund (HFSF2).

The nonpayment of theannual coupon will lead to the conversion of the €2 billion of CoCos into ordinary shares, enhancing the bank’s tangible capital base, a credit positive. This conversion will also increase the bank’s loss-absorption buffer, allowing it to securitise a big portion of its high stock of

nonperforming exposures (NPEs), thereby improving its asset quality.

In October 2020, Piraeus Bank submitted a request to the ECB seeking approval to pay

€165 million in cash for the CoCos’ annual coupon that is due on 2 December 2020. Given

the standing supervisory recommendation toward all European banks to avoid capital

distribution during the ongoing COVID-19 pandemic, and the need for Piraeus Bank to clean

up its balance sheet, which has a high level of NPEs, the ECB’s Governing Council, which will

make the final decision, will likely disallow the coupon payment. According to the terms

and conditions of the instrument, this will trigger the conversion of the CoCos into ordinary

shares at €6 per share, which constitutes under Moody’s definitions an impairment.

However, such a conversion will increase the bank’s tangible capital, and the bank will avoid

the cost of the annual coupon payments of €165 million going forward. Through the coupon

payment savings, the bank estimates it will generate around 40 basis points per year of

additional Common Equity Tier 1 (CET1) capital, which is around €495 million in total by

year-end 2022, the first optional coversion date to the holder, the HFSF.

The additional capital will boost the bank’s CET1 capital ratio of 14.1% as of June 2020 (see

exhibit) and provide an additional loss-absorption buffer, helping the bank reduce its large

stock of NPEs of around €23 billion. The bank aims to leverage the asset protection scheme

legislated in Greece called “Hercules,” planning to decrease its NPE balance significantly

by securitising around €7 billion of NPEs and through the completion of a corporate hivedown to a cleaner banking susbsidiary. Piraeus Bank estimates the negative impact from the

planned €7 billion securitisations to its capital adequacy ratio (16.1% as of June 2020) will be

around 200 basis points.

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