Eurobank, Greece’s third-largest lender, said that it will merge with Grivalia, a company controlled by Canada’s Fairfax Financial Holdings, and subsequently own a real estate portfolio valued at €2.2 bn.

The unusual move – basically a capital injection in the form of real estate assets – will make Eurobank the best-capitalised of Greece’s four systemic lenders, increasing its common equity tier-one ratio from 11.3% to 13.8%.

The operation will also clear the way for Eurobank’s large pile of non-performing loans to be reduced at a faster rate, according to Fokion Karavias, Eurobank’s chief executive. ‘The proposed merger is a landmark deal for the bank,’ he said. ‘It will enable the bank to attain the highest total capital ratio in Greece and to accelerate the reduction of its non-performing exposures through a large-scale securitisation of around €7 bn and other initiatives.’

The securitisation — to be carried out next year — would allow Eurobank to reduce non-performing exposures to around 15% of its loan portfolio by the end of 2019.

Following the merger Canada’s Fairfax – Grivalia’s largest shareholder - will increase its stake in Eurobank from 18% to 32.9%. The Toronto-based insurer currently owns 51% of Grivalia following last year’s acquisition of a roughly 10% interest from Eurobank at a price of €8.8 a share. The lender divested the stake at the time as part of a strategy to shed non-core assets.

The new Grivalia transaction – structured as a share swap with a ratio of 15.8 new Eurobank shares for each Grivalia one – currently values Grivalia’s stock at €7.4 apiece, or a discount of roughly 16% to the price paid a year ago.

George Chryssikos, CEO of Grivalia, said he sees the deal as a ‘unique opportunity for the group’. ‘Grivalia shareholders will gain a significant stake in the new group, which will be the undisputed leader in the Greek banking sector. At the same time the transaction will enhance Grivalia’s business positioning, giving immediate access to an enlarged pool of real estate assets.’

The merger is unanimously supported and recommended by both boards of directors.

Other Greek banking deals

Although capital accretive, the operation represents a major turnaround for Eurobank which, like other Greek banks, had been trying to divest non-core assets including its interest in Grivalia and its ownership in the property arm, Eurobank Property Services.

Earlier this year local lenders Alpha Bank and Piraeus completed two major property-backed loan sales as part of their non-core asset sale programme.

Greek lender Alpha Bank is believed to be in negotiations with Apollo Global Management on the Jupiter portfolio of distressed loans including secured debt with a nominal value of €800 mln and repossessed assets worth €50 mln.

In May, US investor Bain Capital emerged as the buyer of the Amoeba non-performing loan portfolio with an on-balance sheet gross asset value of €1.45 bn in Greece's first major property-backed sale by a local bank.