On the occasion of the postponed Athens ECBC plenary, National Bank of Greece’s Vassilis Kotsiras told The CBR about the value of covered bonds for Greek banks, “unfair” treatment at the hands of the ECB, how Covid-19 has disrupted the road to recovery, and future green bond issuance.

With the Greek banking industry having to wait a further year before hosting a European Covered Bond Council plenary, The Covered Bond Report invited Kotsiras, head of capital markets and structured finance, group treasury, at the National Bank of Greece, to share the bank’s experience at the centre of one of covered bonds’ sternest tests, and to discuss Greek banks’ wider capital markets activity from one crisis to the next.

In a complementary article, Dr Tasos Anastasatos of Eurobank explores the outlook for the Greek economy in light of the Covid-19 crisis.

The Covered Bond Report: National Bank of Greece’s experience puts it centre stage in the country’s history with covered bonds: benchmark issuance before the sovereign debt crisis, the subsequent performance of the issuance, and the eventual reopening of the bond markets for Greek banks with a benchmark covered bond. What can we take away from NBG’s experience with covered bonds? What lessons could we learn that might be relevant to the current crisis?

Vassilis Kotsiras, National Bank of Greece (pictured): Covered bonds were one of the most valuable instruments throughout the crisis. NBG issued the first covered bond back in 2009, but thereafter the market deteriorated due to the country’s debt crisis. However, until 2012 Greek banks issued and retained a large amount of covered bonds as they were one of the few assets they could use as collateral in the ECB’s framework. Afterwards, as they lost their investment grade rating, they were among the first assets to be used as collateral for interbank lending with international banks back in 2014. In 2016, they again assisted us in re-accessing the interbank market following the 2015 share capital increases.

NBG considered that it was the right instrument for regaining access to the global debt capital markets and issued a three year covered bond in 2017 rated in the single-B area. Eurobank followed and Alpha Bank did likewise in 2018, with a five year issue. The performance of the issues was phenomenal, especially after NBG managed to regain the investment grade rating from S&P back in July 2018. In less than a year we managed to move from B to investment grade, and real money investors put the on spotlight Greek covered bonds. NBG covered bonds now have investment grade ratings from all three major rating agencies.

What were the key takeaways from this experience?

● We adopted the Irish example, as we call it, to access the market with secured non-bail-inable instrument such as the covered bond, and investors welcomed this choice.

● We worked with credit investors from the beginning of 2016, presenting them with the bank’s restructuring plan and giving them visibility for the following quarters. That enabled us to rebuild our credibility, as the bank was progressing in all fields and delivering on its commitments.

● Investors want a realistic and tangible plan along with actions to implement it. That’s key if they are to support you.

● Apart from the bank’s story, you need to provide a story for the instrument being issued. In the case of the covered bond, this was the road to investment grade, an appropriate structure, and the high quality collateral and data provided.

Following the Covid-19 outbreak and the turmoil that affects the core of our living standards, I believe we need some time to realise the actual impact and digest the actions from the regulators, governments and central banks. I believe that tapping the market again will depend on when we will be able to provide credible visibility to investors for both the country and the banks.

The CBR: Two of your compatriots issued Tier 2 transactions shortly before the Covid-19 crisis hit capital markets, after you issued last year. What does the execution of their issues tell us about how sentiment towards Greece was developing ahead of the crisis? Had Greek banks’ capital markets activity finally become normalised? Could we see a Greek AT1 when conditions improve?

Kotsiras, NBG: From the last quarter of 2019 until February 2020, markets experienced a phenomenal rally. We had six Greek corporates tapping the market, the Hellenic Republic achieving great results with its issues, while Alpha Bank and Piraeus tapped the Tier 2 market with great success and great oversubscription. I could tell that, back then, market access had fully normalised.

However, the Covid-19 crisis disrupted the country’s road to recovery at a very crucial turning point. All the banks have announced major NPE clean-up transactions, the economy was growing, the real estate market was booming, and investments were materialising in the tourism, energy and infrastructure sectors. Now we need to manage the impact along with the government, business and society. Normalisation is something we will need to wait some time for to experience again.

AT1 is part of the MREL requirements and hopefully at some point Greek banks will issue. Having said that, the introduction of a new instrument to the market signals a new chapter. Covered bonds signalled the return to the market and did away with any thoughts of Grexit. Tier 2 was a vote of confidence in the Greek banking sector’s return to a healthy balance sheet. AT1 will signal the return to normalisation and profitability. It is in my view a P&L instrument and the crisis is delaying that new chapter for at least a year.

The CBR: How has the crisis affected your funding plans for this year? Will there be less public issuance from Greek banks?

Kotsiras, NBG: Although it is too early to tell definitively, we should expect fewer public transactions. Greek banks do not face any liquidity issues, and hence are not under pressure to issue at any level. I believe that after the summer investors and issuers out of Greece will be able to reassess their plans, having seen the impact of the crisis on financial results and the performance of the Greek economy. Greek banks need to maintain access to the market, but in a manner that won’t be punitive for their NII and their shareholders.

The CBR: How satisfactory is the treatment of Greek debt and in particular Greek covered bonds by the ECB in its collateral framework and purchase programmes?

Kotsiras, NBG: I prefer to focus on Greek covered bonds as it is a matter that has troubled us a lot at the past.

The essence of QE is to encourage and boost the market around specific instruments in order to enhance economic activity without jeopardising the funds of the central banks. Covered bonds were the first instrument to be part of an ECB purchase programme back at the end of the previous decade, and the reason is that in enhancing the mortgage market you enhance the real estate market and the economic activity of a country that relies on housing. Our 2009 issue was purchased by the Bank of Greece as an eligible instrument. In 2014 the ECB announced special conditions to be met in order that non-investment grade covered bonds from countries that are part of a reform programme could be part of the purchase programme. We fully adopted those requirements, including 25% committed overcollateralisation (OC). In a greatly disappointing move, the ECB changed its decision a couple of weeks after our 2017 issuance. It was devastating as NBG not only followed the ECB’s guidelines but adopted EBA’s recommendation on pass-through structures, such as the cross-default in case of extension (cross-default, thus no conditionality). That was an unfair decision as we have committed to high OC levels that no investor other than the ECB required.

The covered bond is a prime product. What makes it prime is the security it provides. Data and asset selection are of unparalleled importance for maintaining credibility. The second factor in its value is the protection of investors’ capital. That relies on the real estate and banking conditions of each country. How do you tackle that risk? Through the structure. Other countries may be able to absorb one-off liquidations of mortgage portfolios (although this is untested) and others safeguard capital by the amortisation of loans (in pass-through structures). I feel that as the covered bond market has become more commoditised, we have forgotten the nature of the product and what its real value is.

The CBR: How is implementation of the covered bond directive progressing?

Kotsiras, NBG: Hopefully, through harmonisation, we will be able to amend our programme accordingly so as to be able to participate in the purchase programme while in parallel offering the safest structure to our investors. In Greece, we are working closely with the Bank of Greece to adopt the new directive as soon as possible.

The CBR: You recently published a green bond framework, which I understand is the first from a Greek bank. What is the motivation for this?

Kotsiras, NBG: The target of our issuance strategy is to act as a European bank. The green bond market is growing rapidly and we feel compelled to join it, as Greek banks have provided lending to the rapidly growing green energy sector, which is booming in Greece due to the exceptional climate conditions. We feel we need to do more. NBG wants to be the energy bank in Greece, and expanding our lending is linked to our green framework. Covered bonds will most probably not be the first instrument with that label as the relevant mortgage demand is still weak in Greece. Our green rating from MSCI is BBB and we expect to achieve further expansion of our investor base towards more long term investors.