Shaping up for the single currency

Greek banks have been the star performers on the buoyant Athens stock exchange this year, but the surge in share prices masks a shake-out, as competition intensifies in the run-up to European monetary union (Emu).

Of Greece's 42 banks, 20 have a market share of just 1% each. Consolidation is inevitable and several banks are raising money at home and abroad to position themselves for acquisitions. Only around four large banks are expected to live on after 2001 - the provisional date set for Greece's entry into Emu - along with a handful of smaller niche players.

Those that do survive can look forward to operating in what they hope will become the financial centre for the Balkan region. Upbeat proponents of the Greek "gateway" idea say Athens can be to the European Union what Los Angeles is to the US.

Traditionally used to making money in their sleep, Greek bankers are finding life harder as interest rates fall. The spread between lending and deposit rates on drachma loans, which reached 12% during the 1980s, has already fallen to around 4% (2.5% taking into account the cost of reserve requirements and provisioning). The spreads will virtually disappear if the impressively disciplined "new" (à la New Labour in the UK) socialist government of Costas Simitis achieves its stated aim of acceding to the European single currency during its second stage in four years' time - a prospect now viewed as likely even by hitherto highly sceptical foreigners.

"With free interstate banking, clients may well ask themselves why they should borrow from or deposit money with Greek banks when they can get better rates elsewhere," says Mike Papparis, treasurer at Midland Bank Athens.

Bankers in Athens talk of the main players in future being the state-controlled duo, National Bank of Greece and Commercial Bank of Greece (Commercial and Ionian banks had been expected to merge, although given their parallel networks a better option might be to sell Ionian to an ambitious foreign bank); and the aggressive private banks, Alpha Credit Bank (which has had merger talks with main rival Ergobank) and the fast-growing Euromerchant Bank, owned by the London-based banking and shipping Latsis family. Less committed foreign banks may have to leave the market - rumours in April suggested Latsis might buy the local network of NatWest, which has recently made a loss.

The Greek banking system remains mainly state-controlled, and the government is only dipping its toe in the water by agreeing to sell three small state-owned banks: Bank Attica, Bank of Crete, and Bank of Central Greece. These will be difficult to recommend to investors given their lack of transparency and the likelihood that their loan books have not been cleaned up; they are expected to be swallowed up by existing banks.

Officials from the larger state-controlled banks throw cold water on the idea of a plan for eventual privatization, but the days of state-appointed bank officials appear numbered: "The government will eventually have to increase the private shareholdings and allow them to choose their own management," says Panayotis Thomopoulos , deputy governor of the Bank of Greece. "State-controlled banks simply won't be efficient enough in the EU. The momentum towards privatization will increase as competition intensifies."

In the meantime National Bank of Greece, the largest and most progressive state-controlled bank, has been restructuring and modernizing. Its chairman, Theodore Karatzas, the architect of many of the recent changes in Greek banking while under-secretary general at the economy ministry, has committed the bank to focusing on core activities by disposing of non-banking subsidiaries and putting a stop to granting loans on political criteria. He has also instituted a more realistic assessment of the bank's loan portfolio.

NBG wrote off Dr53 billion ($195 million) of bad debts during 1996, having started the process the previous year. In addition it has written off Dr63 billion of equity participations in non-core loss-making subsidiaries. This year it has taken the unprecedented step of withholding dividend payments to be able to write off more bad debts. Despite this its share price has risen some 160% since the end of last year.

NBG is endeavouring to raise its capital adequacy to increase its lending capacity. It plans to raise a $200 million loan, led by Salomon Brothers and Chase, to use as Tier 2 capital - the first time a Greek bank has raised subordinated capital abroad. According to Costas Stamoulis, an NBG director, the bank intends to make a further increase in capital later this year via a $400 million rights issue in Athens and abroad.

Private banks, too, have been tapping the market for funds in order to expand and to upgrade their systems in readiness for Emu. In a deal in May led by BZW, Alpha Credit Bank raised $72 million in the US, UK and continental Europe as part of a $243 million rights issue, with the chairman and his close associates selling their rights to international investors. Alpha Credit Bank is intent on increasing its share of the loan market by moving its capital adequacy ratio towards 11%, and is committed to expansion. Having already established a subsidiary in Romania, and a branch and a subsidiary in London, it will begin operating in Albania as soon as the situation there improves. Alpha has been in merger talks with its main rival, Ergobank, which itself plans to raise fresh capital in order to set up a new Athens-based investment bank in a joint venture with a foreign bank.

Meanwhile Euromerchant Bank this spring acquired for Dr17.5 billion Interbank, a small private bank owned by Banque Worms of France, to expand its market share and create Greece's third-largest private banking group, with assets of Dr600 billion.

Foreign banks are also rethinking their presence in Greece. Although an electronic system for trading government and private debt may lead to an increase in foreign participation in these markets, foreign banks' traditional niches of private banking and treasury are being eroded by such banks as NBG and Alpha Credit Bank, and shrinking margins on corporate loans - another of their big business areas - have made the outlook uncertain.