EGFEY Eurobank Ergasias Services and Holdings SA (PK)

By Nektaria Stamouli and Vipal Monga 

ATHENS -- Greece's Eurobank Ergasias SA said it will acquire real-estate company Grivalia Properties REIC, boosting its capital and paving the way for the creation of a "bad bank" to help deplete its pile of nonperforming loans.

The deal gives Fairfax Financial Holdings Ltd., under Chairman Prem Watsa, a 32.9% stake in the merged entity. The Canada-based insurer currently holds an 18.2% stake in Eurobank, Greece's third-largest lender by assets, and a 51.4% stake in Grivalia .

Eurobank on Monday said it plans to buy Grivalia in an all-share acquisition that values the real-estate firm at EUR780 million ($884.4 million). That will strengthen its capital base by around EUR900 million, and the merger will be completed by April, the bank said.

Greece's state bailout fund for banks' share in Eurobank will decrease after the deal to 1.4% from 2.4%. The fund was set up in 2010 to oversee three recapitalizations to the sector completed with the help of state aid and still holds stakes in Greek banks.

Mr. Watsa, one of Canada's best-known investors, has made bullish statements on Greece's recovery. Fairfax has been investing money in Greece since 2010, but Mr. Watsa's bets haven't turned out well so far. Fairfax put roughly $1.42 billion into the country and lost almost 30% on the investments by the end of last year, according to the company's annual report.

Greek banks have been under heavy pressure for the past several months amid fears that they can't digest their mountain of bad loans and might need fresh capital. Nonperforming loans and other assets at Greek banks, which have been recapitalized three times during the country's debt crisis, total around half of their entire portfolio.

Still, Mr. Watsa said he expects Greece's economy to grow between 2% and 3% starting next year, and growth could surpass that expectation. "They've been in a depression," he said, of Greece's economy. "On the way up and out, economic growth can be significant."

Fokion Karavias, Eurobank's chief executive, and George Chryssikos, Grivalia's CEO, came up with the acquisition plan and presented it to Fairfax in September, said Mr. Watsa, in an interview. "The opportunity is very significant," he said. "We liked it."

Mr. Karavias will be the combined bank's CEO, while Mr. Chryssikos will become nonexecutive vice chairman of the board. Mr. Watsa said the two will work together on the merged bank's plans, including any expansion.

Eurobank said the acquisition would allow it to cut its ratio of nonperforming loans to 15% of its total loan portfolio by the end of 2019 and reduce it to single digits by 2021, from the current 39%.

After the merger, Eurobank will proceed with plans to create the bad bank, where it would transfer some EUR7 billion of its bad loans. Those loans are considered the "worst of the total sour loans," an official from the bank said.

It is estimated that unloading these sore loans will reduce the bank's capital by EUR1.1 billion to EUR1.4 billion, which will be covered by the capital boost from the merger as well as a strategic investor Eurobank intends to seek for its loan servicer, Eurobank Financial Planning Services SA.

Eurobank said its plans for reducing its pile on nonperforming loans been approved by the banking-supervision unit of the European Central Bank. An ECB official declined to comment.

Greece's central bank and the government's bailout fund for banks are currently working on two separate plans to finance a bad bank. The biggest question is whether the European Commission will deem the plans legal under the bloc's rules limiting state aid for companies.

Eurobank said both plans, if eventually approved, could be combined with its nonperforming-loan reduction plan.

Eurobank stock, which jumped as much 25% during the session, ended the session 4.3% higher, while Grivalia gained 6.3%. Despite the initial jump in the banking sector after the deal was announced, the banking-stocks index dropped 0.1%. Greek bank stocks have lost some 40% in the past three months.

Write to Vipal Monga at vipal.monga@wsj.com and Nektaria Stamouli at nektaria.stamouli@wsj.com

(END) Dow Jones Newswires

November 26, 2018 14:35 ET (19:35 GMT)

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