The full rating impact of Eurobank S.A.’s planned acquisition of a higher stake in Hellenic Bank Public Company Limited is unlikely to be clear for both banks until the closing of the transactions and the completion of a subsequent mandatory tender offer, Fitch Ratings says.

Athens-based Eurobank, the operating bank of Eurobank Ergasias Services and Holdings S.A., said this week it had agreed to acquire an additional 18.9% stake in Cypriot Hellenic Bank. All three entities are rated ‘BB-’/Stable.

According to Fitch, Eurobank's final stake in Hellenic Bank, as well as the capital impact of the transaction, are still unknown. The latter will be a function of the number of shares ultimately acquired, price paid and allocation of the negative goodwill that is likely to be generated by the acquisition. Eurobank already owns 29.2% of Hellenic Bank.

The announcement fits in with the group’s declared intention to acquire control of the Cypriot lender in line with the strategy to consolidate its presence in core foreign markets such as Cyprus.

The agency sees a high probability that Eurobank gains majority control over Hellenic Bank upon the completion of the mandatory tender offer.

Hellenic Bank, with assets of EUR20.2 billion at end-March 2023, would represent about 20% of the combined entity's total assets of about EUR100 billion.

If completed, the acquisition would improve Eurobank's business model by increasing geographic diversification and should result in a better balance between retail and business banking activities. This is because Hellenic Bank is retail-focused with a very strong deposit franchise, while Eurobank is more skewed towards businesses and has a comparatively weaker and less granular deposit base.

A combination would marginally improve Eurobank's asset quality, as its non-performing exposure (NPE) ratio of 5.9% at end-June 2023 (excluding senior securitisation notes from total loans) is higher than Hellenic Bank's 3.4% at end-March 2023 (excluding NPEs guaranteed by the Asset Protection Scheme).

However, the reduced NPE ratio as a result of the acquisition, in isolation, is unlikely to be material enough to change our assessment of the combined entity's asset quality.

It expects the potential integration to be smooth despite execution risks entailed in a relatively large acquisition, given the complementary nature of the banks’ business and credit profiles, and Eurobank’s already good knowledge of the Cypriot market.

The acquisition of Hellenic Bank's full capital would cost at least about EUR700 million, based on the about EUR168 million consideration paid to an entity managed by the US asset manager PIMCO for a 17.3% stake and about EUR16 million paid to Senvest Management LLC for a 1.6% stake. This would be equivalent to about 10% of Eurobank's Common Equity Tier 1 capital at end-June 2023, or about half of Eurobank's 1H23 annualised net profit, which we both view as manageable.

The completion of the transactions, which it expects in several quarters, requires approval from the ECB and several Cypriot authorities.