(Adds comment by Single Resolution Board head)
By George Georgiopoulos
Oct 22 (Reuters) - Greece's four big banks will turn to private investors to plug any capital shortfalls revealed by the European Central Bank's asset-quality review and baseline stress tests, two banking sources close to the matter said on Thursday.
The HFSF, Greece's bank bailout fund, will cover any additional capital needs found in the ECB health check's adverse scenario if the money cannot be raised in the market, the banking sources told Reuters, as the authorities finalise their recapitalisation framework.
Capital controls, new austerity measures imposed as part of the country's third international bailout and a mountain of non-performing loans have increased the credit risk and reduced the profitability outlook of Greek banks.
The European Central Bank's Single Supervisory Mechanism (SSM) is assessing the capital needs of National Bank of Greece , Piraeus, Alpha Bank and Eurobank . Results are expected by the end of the month.
The ECB's comprehensive assessment of the banks' books will include scrutiny of their loan portfolios and stress tests carried out using baseline and more adverse scenarios for the course of the Greek economy to project possible credit losses up to 2017.
"The AQR (asset-quality review) and the baseline scenario capital needs will have to be covered by the private sector, the additional capital shortfall under the adverse scenario by the HFSF," one of the bankers said, declining to be named.
The Hellenic Financial Stability Fund (HFSF) currently owns majority stakes in all Greek banks except Eurobank, in which it holds a 35.4 percent stake.
Under an international bailout agreed last summer, Greece is set to receive up to 25 billion euros ($28.03 billion) of public money to recapitalise its ailing banks.
Two other senior bankers told Reuters on Tuesday the total bill to shore up the banks' capital bases will cost less than 20 billion euros.
"Banks' new share offerings will be non-pre-emptive, meaning that existing shareholders, including the HFSF rescue fund, will waive their rights," the second source said on Thursday.
The new shares will be placed using a book-building process, and banks have already begun pre-marketing efforts with potential investors as they await the outcome of the health check.
It will be their third recapitalisation since 2013. The HFSF pumped about 25 billion euros into the banks in June 2013, with the four lenders raising another 3 billion from private investors. A second recapitalisation followed in May 2014, when banks raised another 8.3 billion euros mostly from foreign institutional investors.
Under the new plan, the HFSF could see a significant dilution of its holdings. It is already nursing losses of more than 20 billion euros as the combined market worth of the four banks now stands at 5.34 billion euros.
The bankers said it is still unclear what percentage the HFSF's stakes in the banks will be allowed to fall to under the recapitalisations.
Greek bank shares have plunged 69 percent in the year to date.
"The prevailing view at the SSM is that the HFSF is a backstop and will suffer dilution when there is private sector interest. The same thing happened last year when banks raised money from the market," one of the bankers said.
In Brussels, the head of Europe's Single Resolution Board, its newest bank regulator, expressed hope that private investors would step up to the plate.
"I would hope for private investors to participate in any needed recapitalisation after the comprehensive assessment the banks are currently undergoing," Elke Koenig told Reuters.
"Wherever the state steps in, over time the state should try to dispose of those shares."
MIX OF COCOS AND SHARES
Capital shortfalls shown up under the adverse scenario in the stress tests could be covered by the bank rescue fund, which will buy a mix of new shares and contingent convertible bonds (Cocos) issued by the lenders.
"The biggest part of the adverse scenario need will be covered by Cocos," one of the bankers said.
"The terms and conditions have not been finalised. There is discussion between the SSM and DG Competition on the coupon mechanism. The new shares the HFSF will buy will most likely have full voting rights."
The coupon on the Cocos will likely range between 7 and 9.5 percent, with set triggers that lead to conversion into shares, the banker said.
"The logic of Greece's agreement with the ESM is to maximise private investor participation and minimise the state aid component," one of the bankers said.
Banks have until the end of the year to tap investors and complete the capital raising to avoid the risk of "bailing in" uninsured depositors under the EU's bank resolution rules, which take effect in January.
"The fact that all four will come out to market in a short time span is a challenge, but there is no other choice," the banker said. ($1 = 0.8921 euros) (Additional reporting by Francesco Guarascio in Brussels, Editing by Hugh Lawson)