Consolidation ahead
THE GREEK ECONOMY is booming and so are the country’s six biggest banks, which enjoyed 19.5% growth in operating revenue for 2006. But although strong growth is expected in 2007 and 2008, and the outlook for the sector looks positive, Greek banks are realizing that to sustain expansion they increasingly need to focus on those market segments with the greatest potential.
The largest and oldest of these banks, National Bank of Greece (NBG), is part of the fabric of Greek life: despite increased competition, it has maintained a 30% market share in deposits and more than 20% in loans. Nevertheless, it is also increasingly targeting specific sectors for growth – both retail and corporate, at home and abroad – in a bid to increase margins and improve the profile of the bank.
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"We want to be in high-growth markets and while Greece is growing by 4%, the other markets we are involved in are growing by 6% or 7%"
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"All areas of our business are growing," says Takis Arapoglou, chief executive. "But some parts, such as small [sales below €2.5 million a year] and medium-sized [€2.5 million to €5 million] company (SME) lending and retail, are growing faster than average while other areas, such as large corporate lending, are becoming less buoyant." Three years ago, 60% of NBG’s balance sheet was large corporate lending and 40% retail and SME lending. These proportions have been reversed.
The changing structure of NBG’s balance sheet has not come about by chance. "It’s a deliberate strategy given the fact that spreads in small company lending are much higher than in lending to large corporates," says Arapoglou. In the past, NBG had stayed out of the small-business market and did not develop an infrastructure to serve it. "We have now put the plumbing in place to be able to serve them and, at the same time, have upgraded our risk management mechanism, which is vital for that segment," he says. NBG services SMEs through its 559-branch network and a mobile team of bankers for rural areas.
But by neglecting the admittedly low-margin large-corporate lending business, does NBG not forgo the attractive add-on business, such as cash management, to which lending usually opens the door? "Although we are not dramatically expanding the figures lent to large corporates, we are focused on increasing revenues per customer for that segment," says Arapoglou. "We recognize that large corporate lending can be a loss-leader and where we have lending relationships we now aim to maximize the cross-selling opportunities – it’s a question of getting more from our existing client base by providing more value-added services."
The backdrop for the increase in SME and retail lending in Greece is the transformation of the economy. Greece has outperformed the European Union average since 1996 and grown at about 4% for the past four years.
The spur for Greece’s recent growth has come from several areas. The drop in interest rates of 10 percentage points when Greece became a member of the eurozone in 2001 has been vital in stimulating growth. Subsequently, the continuing EU and domestic investment in infrastructure, not least on the 2004 Athens Olympic Games, has created employment and helped Greece to catch up with the rest of Europe in terms of roads and airports: EU structural funds amount to a significant 2% of GDP annually.
Corporates have also invested heavily in recent years in order to raise standards to European levels, resulting in an investment to GDP ratio of 29% – one of the highest in the EU. At the same time, the mainstays of the economy – shipping and tourism – are flourishing. Moreover, Greece has benefited from the rapid growth of its neighbours. "Greece was once isolated, with the Iron Curtain on one side and an unfriendly neighbour [Turkey] to the east," says Paul Mylonas, chief economist at NBG and director of strategic planning and research. "Now we are surrounded with dynamic economies such as Bulgaria, Romania and Turkey."
Retail borrowing explosion
Economic growth has had a profound effect on the average Greek citizen’s life: real incomes have risen from 70% of the EU 25 average in 1996 to 85% in 2006, according to Eurostat. Unsurprisingly, the combination of low interest rates – taking into account inflation, real interest rates in Greece are the lowest in the eurozone – and a growth in income has fuelled a massive increase in retail borrowing.
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"When interest rates tumbled, there was a huge opportunity to lend to retail segments and effectively create a market from scratch"
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Before interest rates fell in the wake of EU entry, household borrowing was almost non-existent. "When rates tumbled, there was a huge opportunity to lend to these segments and effectively create a market from scratch," Mylonas says. Auto loans, credit cards and other consumer lending have grown enormously since the market was deregulated at the beginning of the decade. Consumer lending in Greece is now 15% of GDP, close to the eurozone average of 16%.
However, perhaps the most important focus of household borrowing has been the residential mortgage market. "Our mortgage book is double [that of our] competitors and we have a commanding lead in the market: 40% of our loan book is mortgages, most of which are residential," says Arapoglou. The market continues to grow strongly, at up to 25% a year. In 2006, outstanding mortgages were 29% of GDP compared with the eurozone average of 38% – indicating that the market still has some way to go.
In addition to low rates and steadily rising wages, other factors have also stimulated the housing market. "There have been substantial demographic changes in Greece, even in the past decade," says Mylonas. Greece has absorbed a large number of immigrants from neighbouring countries and from countries that were previously parts of the Soviet Union. "Many of these people have now been here for a decade and have accumulated enough money to start buying property," says Mylonas.