* Banks stabilised after sovereign blow
* EU restructuring plans almost agreed
* Staff, branches, foreign operations to be cut
* New strategy for non-performing loans to be rolled out
* Piraeus, NBG eye bond market return
By Laura Noonan and George Georgiopoulos
ATHENS, Oct 9 (Reuters) - After years of having their fatesdecided for them, Greece's bailed-out banks are now in aposition to start tackling tens of billions of euros of unpaidloans and make changes they hope will turn their marketdominance into a profitable business.
The first test of their success could come by the end of theyear, as some attempt to raise debt from investors.
If they pull it off, it would mark a watershed for banksfrom a country that has not accessed financial markets since2010, when Greece was hit by a debt crisis which led to aninternational bailout with tough conditions attached.
And although it could take years for progress in the banks'efforts to deal with non-performing loans (NPLs) to becomeclear, some investors are already staking their bets.
Billionaire hedge fund investor John Paulson threw hisweight behind the sector this week, publicising investments inPiraeus Bank and Alpha Bank shares, whileoutlining why he saw Greek banks as a good play on the country'seconomic recovery.
Others have also chanced their arm, driving a 28 percentrally in the big four banks in the last three months on the backof improving fortunes for the Greek economy which is forecast toemerge from six years of recession next year.
"Near-term all of the top four banks' performance will bevery much linked to Greek recovery," said Paul Formanko,London-based head of central and eastern Europe, Middle East andnorth Africa banks research for JP Morgan.
"However, over time, managements, asset mix and the qualityof the collateral value underpinning non-performing loans arelikely to be differentiating factors, along with managements'ability to deliver cost synergies," Formanko said.
Not everyone is convinced of the sector's appeal. PatrickLemmens, lead manager of Robeco's 192 million euro New WorldFinancial Equities fund, sees better opportunities elsewhere andargues Greek banks are "not cheap any more". He said it wasstill "a bit early to get too optimistic about the economy".
Greek banks underwent a huge upheaval during the country'scrisis, leaving three pillars - Piraeus, National Bank of Greece(NBG) and Alpha - largely owned by Greece's bankbailout fund, while the fourth, Eurobank, is almostentirely owned by the Hellenic Financial Stability Fund (HFSF).
The big four, whose collective market share tops 90 percent,are in the final stages of agreeing restructuring plans with theEuropean Commission as part of the conditions imposed for thesummer bailouts that will trigger job cuts, branch closures andinternational asset sales.
"We had to deal with the first issues first ... and then cometo some kind of normality and start addressing the operationalissues," NBG's deputy chief executive Petros Christodoulou said.
A round of stress tests into their capital positions couldtrigger further sales and other changes, although several seniorfigures in Greek banking told Reuters they did not expect thesetests to have a major impact.
The first challenge for the banks is how to deal with theirnon-performing loans, a category totalling 28 percent of alllending across the four large banks.
U.S. consultant Blackrock and accountancy firm Ernst& Young are carrying out a "troubled asset review"examining how the banks are dealing with their bad loans andrecommending improvements.
A source familiar with the review told Reuters some bankswere "kicking the can down the road", or trying to avoiddecisions.
"They still look at bad customers and think they will returnas good customers," he added, meaning they sit on cases for toolong and don't take actions that could help them recover money.
Banks are also failing to co-ordinate their efforts to dealwith borrowers who have loans from multiple institutions, thesource said, adding that recommendations encouraging this arelikely to come out of the review.
And a law banning home repossessions introduced in 2010 toprotect vulnerable homeowners has led to claims it hasencouraged people who can afford their mortgages not to pay.
The banks insist they are tackling the problem head on, withPiraeus exploring ways to ring-fence its troubled assets, sothey are run separately to the rest of the bank.
NBG also wants to set up its own internal bad bank in thenext two months, said Christodoulou, who then hopes to be ableto claim back some of the 7.7 billion euros the bank has setaside for loans likely not to be fully repaid.
Such moves are just part of the restructuring plans NBG andPiraeus are close to agreeing with the EU. Alpha and Eurobankare also on the verge of sealing agreements, which are requiredof all banks in receipt of state aid.
As well as selling overseas operations, the Greek banks,some of whom doubled in size as a result of their crisismergers, will also pledge to cut branches and staff in a bid toincrease earnings.
"Banks have (already) decreased their cost base by more than15 percent," Bank of Greece Governor George Provopoulos toldReuters, adding that the reduction would reach a cumulative 30percent in the next two years.
"The excess capacity of the sector is rapidly decreasing andthe sector is in the process of reaping efficiency gains."
By the end of the year, the banks will learn whetherAthens's stress tests will force them to raise more capital. Andthey will head straight into 2014's pan-European round of EUstress tests, which could yield further demands.
If they don't have to raise more capital, the banks could bea very attractive proposition; if they do, investors could facetheir stakes being wiped out, said Florent Nitu, an analyst whocovers Greek banks for Citi.
Provopoulos at the central bank played down this risk.
"The banks are well capitalized," he said, echoing viewspreviously expressed by the banks and adding there is "8 to 9billion euros" left in the HFSF as a backstop. If Greece didhave to resort to this, however, shareholders would see theirinvestments heavily diluted.
Another key milestone will be a successful return to bondissuance. Christodoulou said NBG hoped to raise debt quite soon,with bilateral deals - agreed off-market between two parties -likely before wider market ones as the bank targets a borrowingrate of around 5 percent rather than the 7 percent currently onoffer.
When it does issue, it will be "something meaningful",rather than a couple of hundred million euros, he added.
Piraeus has done all the preparation for a bond issue andwill borrow "opportunistically" when pricing becomes attractive,said Anthimos Thomopoulos, the bank's deputy chief executive.The bank "can launch at any time", he added.
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