| David Watson | ||||||
Faced with shrinking margins on traditional assets and volatile financial income – but hopeful of strong loan volume growth ahead – Greek banks face a challenge. Should they acquire or merge with other domestic banks, or link-up with foreign, eurozone headquartered institutions? Such partners might well find Greece an attractive market.
“Pressure on spreads will continue, so in about three years spreads will be about at the same level as in Emu. However I do not think it [the gap] is going to close overnight,” says David Watson, managing director at Piraeus Bank.
While tighter net interest margins have certainly squeezed the profits of Greek banks this year, as the central bank stuck to its high medium and long-term interest rate policy, Watson remains optimistic, pointing out that the effect of tighter spreads will be counterbalanced by a sharp rise in the demand for loans in the next few years.
“On balance, the outlook for the banking sector for 2001 and the medium term is good. Beyond you have to think strategically,” says Watson who agrees that Greek banks have two options: either to engage in intra-country mergers and acquisitions or participate in the pan-European cross border consolidation.
“As far as in-market consolidation is concerned, I am not saying it is impossible or unlikely, but there are some obstacles to that. First, everybody can see how difficult it is to integrate new acquisitions. Second, all major players are universal banks now so you are looking for economies of scale. There are no complementarities,” he says. “As far as pan-European cross border consolidation is concerned, we think it is inevitable. That’s why we have been open to talks.”
Piraeus Bank is known to be in discussions with ING for a possible link-up. Yiannis Pehlivanidis, managing director at Nova Bank, a recent joint venture between Greece’s Interamerican insurance group and Portugal’s BCP, believes that “a gradual link-up, so both sides test it to see how it works out,” is a better approach for established banks than full-blown cross border mergers.
Another prominent Greek banker, Yiannis Stournaras, chairman of Commercial Bank, who played an active role in his bank’s link-up with Crédit Agricole, says that it makes more sense for a large Greek bank to forge a strategic alliance with a large foreign bank than to merge with another large domestic bank. He does not rule out further in-market consolidation, though he sees this mainly among second-tier banks with the postal savings entity also being a potential target.
“The Greek banking sector has the second highest degree of concentration in the European Union and the European Commission may fight a merger among the five large Greek banks,” says Stournaras.
As to the advantages of link-ups between Greek banks and large foreign banks, Stournaras says both sides gain, since the Greek side has access to indispensable know-how and new products and the foreign side to a high growth, under-banked market and a country which may become a regional financing centre.
In which case why have large EU banks been so late in expressing their interest in Greek banks?
“Due to the legacy of an emerging market, the Greek banks have not been on the radar screens of most of the larger European banks,” says Paul Formanko, analyst at Goldman Sachs. “The low level of penetration of financial services in Greece and the scope for high growth in the next three to five years explains the interest in Greek banks. Small but beautiful could describe the Greek market and interest from some Emu banks is likely to increase.”
While Greek banks ponder the main strategic question of whether to seek local or foreign partners, they still have to cope with other pressing issues, such as the questionable sustainability of recent high growth rates in financial income.
The volatility of such earnings has become evident this year, with the poor performance of the Athens stock exchange hurting bank results, although some banks, notably the National Bank of Greece, the country’s largest bank, have the capacity to support annual profits by realizing capital gains for a few more years.
“Trading income depends on capital markets and cannot be lower than this year, given the bad performance of the Athens bourse in 2000,” says Stournaras who believes the worst is over.
More promisingly, Emu entry may boost demand for retail loans which are forecast to increase at a fast clip in the next few years, shoring up bank profitability. “Bank loans as a percentage of GDP stand around 35% in Greece compared to 80% in Portugal, which has about the same per capita income with Greece, and even higher levels in other Emu countries. So the growth potential is there,” says Stournaras. Consumer and mortgage loans are generally expected to post the highest growth rates in the next few years.
| Yiannis Pehlivanidis | ||||||
Of course high loan growth rates may turn out to be a mixed blessing, if they lead to a deterioration in the quality of credit.
Greek banks were smart enough to capitalize on the Athens bourse’s euphoria in 1999 and raised large sums during that high flying year. So most Greek banks are sufficiently well-capitalized to cope with the anticipated strong demand for loans in coming years while satisfying regulators’ capital adequacy ratios by a wide margin.
Even so, some analysts say excess capital, now being placed in high yielding state bonds and money market instruments, could create a problem in the future, if it is not put to the best use in order to enhance the banks’ returns on equity. Banks might be advised to expend some of that capital to train their staff and install advanced systems to closely monitor their loan portfolios.
Challenges loom on the liability side as well. Greek banks will have to worry about losing their depositors, who are accustomed to high returns, in the new low interest rate Emu environment.
“The real challenge for Greek banks is to focus on marketing and become more client-oriented offering a wide range of structured products,” says Nova Bank’s Pehlivanidis. “The experience of a foreign partner and his contribution to achieving the necessary critical mass for developing such structured products could prove important.”
In a bid to keep depositors in the banking groups and to take advantage of investor disenchantment with the Athens bourse, which has dropped more than 35% so far this year, a number of Greek banks have lately started marketing aggressively capital-guaranteed products linked to different stock indices, commodity products and major foreign exchange rates.
If retail banking is generally considered the stronghold of local banks, wholesale banking, especially lending to large corporates, may turn out to be a battle ground in the new era, as large local corporations choose to borrow from large eurozone banks.
“The market for large corporates is a lost affair for local banks. It may take sometime to realize it but it will do so when they start adjusting their returns for risk and see the contribution of margins to the banks’ ROEs,” says a senior local banker who requested anonymity.
But other bankers seemed to disagree with this assessment, saying Greek companies already borrow at very small margins from local banks. “Greek banks will continue to have the upper hand in wholesale banking for the very simple reason that competition has pushed lending rates to very low levels, to the point where Greek corporations cannot get better terms abroad,” says the chairman of Commercial Bank.
Watson of Piraeus Bank agrees. “I do not see any significant impact. Competition in the Greek market has cut lending rates for large corporates. A few large Greek corporations have access but even these face high hurdles for getting funding abroad,” says Watson.
Asset management and underdeveloped bancassurance products, as well as investment banking, also seem to hold promise for the future. Although it is certain that intensifying competition will hit fees and spreads here too.
A few local banks have already clinched deals with large or medium-sized European banks, while others are looking in the same direction. In this quest for a foreign partner, the names of some of Europe’s largest banks have been mentioned, including ING, UBS, CSFB, Hypoffereinsbank, Dresdner, Commerzbank, BSCH, Société Générale, in addition to those of Deutsche Bank, Credit Agricole and Portugal’s BCP which have already linked up with Greek banks.
Interestingly enough the name of Citibank, the country’s largest foreign bank, has not been mentioned. Citibank is known to be following a strategy of organic growth and Citigroup plans to expand its brokerage activities in Greece next year by having Schroder Salomon Smith Barney open an office. The same holds true for HSBC which also seems content with organic growth, although it has been mentioned as a potential buyer in case Barclays decides to sell its local branch network.
ABN-Amro officials in Greece have said that they are always looking for opportunities in the local market, provided the price is right.
It seems likely that almost all Greek banks eventually will find a foreign partner to link up or clinch a product cooperation with. For some Greek banks, forming an alliance is considered a matter of survival, while for others it is a matter of guarding against what they see as the competitive threat from cross-town rivals which join forces with foreign banks. Most see such links as the rational way to get better access to the European market and play a role in what they view as a pan-European banking landscape in a few years time.
“I cannot rule out more link-ups between Greek and foreign banks in the future although this is not necessarily a prerequisite for success,” says Nickos Nanopoulos, CEO of EFG Eurobank Ergasias, in which Deutsche Bank has a 10% shareholding.
Deutsche Bank’s purchase of its stake in EFG Eurobank in December 1998 was the first such move by a large eurozone financial institution in the Greek banking sector.
“The logic behind it was simple. We wanted to have better access to eurozone’s capital markets as well as products and know-how for the new environment. Our partner wanted to have indirectly a branch network in another country,” he says. Nanopoulos points to the fruits of this cooperation in the EFG Eurobank’s sales of international mutual funds Its market share of over 30%, the country’s highest, has been gained in a relatively short period.
Greek bankers now speculate that Deutsche Bank plans to increase its stake in EFG Eurobank Ergasias. Nanopoulos says: “For the time being I do not see it. In the medium-term, there should be a reason for something like that. It is a matter of mutual agreement.”
EFG Eurobank Ergasias’ strategic alliance with Deutsche Bank – which follows the recently-completed merger between EFG Eurobank and ErgoBank – is widely regarded as one of the bank’s main competitive advantages, along with its low reliance on poor quality trading income and its large capital base. The bank is also the market leader in consumer loans and has inherited Ergobank’s strength in lending to small-and-medium sized companies. Through its subsidiary, EFG Finance, the bank has started competing aggressively in investment banking and related capital market activities.
The cooperation between the Greek and the German sides extends now to areas such as real estate and internet banking. Deutsche Bank holds a 20% stake in EFG Eurobank Properties, in which EFG Eurobank Ergasias has 51% stake, with the balance being held by Lamda Development SA.
In 1999, EFG Eurobank Ergasias also acquired a 19.25% equity stake in Romania’s Bank Post which has more than 120 branches.
While EFG Eurobank Ergasias is the first Greek bank to forge an alliance with a major eurozone bank, National Bank of Greece, the country’s oldest and largest commercial bank, is considered the one Greek player to have the potential to acquire a medium-sized eurozone bank.
| Nickos Nanopoulos | ||||||
National Bank’s stated strategic goal is to become a major player in south eastern Europe.
The bank is keeping its eyes open for “opportunities in the eurozone carrying the right price tag” according to a high-level bank official who requested anonymity.
The goal of being a major player in a greater geographical area has already been achieved, thanks to National Bank’s expansion drive in the Balkans. National Bank of Greece has established presences in 16 countries through a number of subsidiaries, accounting for more than 300 branches.
This year, National Bank bought a 65% equity stake in Stopanska Banka AD, the largest bank of the Former Yugoslav Republic of Macedonia with 99 branches. And it bought a 89.9% equity stake in United Bulgarian Bank (UBB), one of the country’s largest banks with 140 branches and a market share of more than 11%.
Under chairman Theodore Karatzas, National Bank has embarked on a restructuring programme to cleanse its balance sheet and shake off its image as a slow moving, bureaucratic giant.
These efforts have paid off as the bank managed to increase its profitability significantly. However, it still has a lot of work to do to deal effectively with the looming threat of increased competition from foreign entrants and domestic private bank consolidation.
National Bank of Greece dominates mortgage lending with roughly 60% of the market and also deposits, with about 40% market share.
Its weak point has been its reliance on trading gains. National Bank is known to have large hidden bond and equity capital gains sufficient to ensure its profitability is not hit for the next three years.
Nevertheless National Bank’s name comes up every time there is discussion of in-market consolidation among major players. Earlier this year, National’s cooperation with Alpha Bank, the country’s second largest bank, in areas including distribution and telecoms fuelled speculation of a merger. When it became apparent this was not going to happen, speculation turned to a possible merger with Piraeus Bank. Again nothing came about, although informed sources say the two sides certainly talked. Earlier this summer, visits by high-level officials of the bank to Italy prompted speculation of a deal with an Italian bank.
Officials at the National Bank do not rule out the possibility of signing cooperation agreements with large Emu banks in specific areas. But they seem to be more genuinely interested in acquiring a bank, rather than following the example of EFG Eurobank or even Commercial Bank of Greece, the country’s third largest commercial bank.
Alpha Bank, the country’s top private bank, is considered by rivals and analysts alike to have been in search of a large foreign partner for some time, although the bank’s senior management remains tight lipped on this matter.
Alpha Bank acquired Ionian Bank in 1999 for some Dr272 billion ($680 million) to become the country’s undisputed second largest commercial bank. Absorbing this new acquisition has hurt its 9-month results, but it should produce significant cost savings and increased income in coming years, as Ionian’s operations are upgraded to Alpha’s standard.
Alpha is also considered to have a good banking services mix and a good quality loan portfolio and is thought to rank first in risk management among Greek banks.
The fact that Alpha Bank has a large free float of stock has repeatedly generated speculation of it being a potential acquisition target. However, this talk has been strongly refuted by its chairman Yannis Costopoulos who has also rejected the possibility of a merger with another Greek bank.
A few months ago, there was speculation of either a stock swap or a possible merger between Alpha Bank and the National Bank of Greece, but this did not come to pass. Rumours of a possible takeover of Alpha Bank by EFG Eurobank Ergasias also played in the local press but were quickly squashed by Costopoulos. Costopoulos is credited with Alpha’s long-running high profitability record and therefore enjoys the strong backing of its shareholders. Any takeover attempt is highly unlikely to succeed without his blessing.
| Yiannis Stournaras, | ||||||
Many analysts and bankers believe Alpha’s next move will be a strategic alliance with a large European bank. Credit Suisse First Boston (CSFB), UBS and Société Générale have been mentioned as Alpha’s potential partners.
Analysts and high-level officials at other Greek banks seem to agree that a link-up with a Swiss or a German bank holds more promise for Alpha Bank, given its corporate structure.
One foreign bank analyst who requested anonymity says he believes it is just a matter of time, “perhaps a few months’ time, perhaps less than that” before an agreement is announced.
In the meantime, Alpha Bank has proceeded with expansion moves in the greater geographical area. It controls directly or indirectly a 62.32% equity stake in Alpha Bank Romania, an 82.5% of Alpha Bank Limited in Cyprus and also conducts private banking through Alpha Bank London and Alpha Bank Jersey. It is also present in the Former Yugoslav Republic of Macedonia, via the acquisition of a 65% stake in Kreditna Banka, as well as in Bulgaria.
Commercial Bank of Greece, the country’s third largest bank, recently reached a strategic agreement with France’s Crédit Agricole whereby Crédit Agricole will buy a 6.7% stake in Commercial Bank and retain the first right of refusal in case the Post Savings Bank and another state entity choose to sell their stakes in Commercial Bank. If this happens, its total stake will amount to about 18-19%, according to Commercial Bank’s chairman, Yiannis Stournaras.
The two banks have reached an initial agreement to cooperate in the fields of bancassurance, investment banking and asset management and this may be extended to include consumer loans.
Crédit Agricole Indosuez is going to buy a 10% stake in Commercial’s subsidiary investment bank while CA’s Indocam will buy a 20% stake in Commercial’s Hermes Mutual Fund Management Company. Indocam is also going to participate with a 20% stake in a new company which will be active in asset management for institutional fund owners. In the area of bancassurance, Commercial Bank is going to set up a new company with CA’s subsidiary, Predica.
In addition to forging an alliance with CA, Commercial Bank is also present in the Balkans and the Black Sea, having set up investment banks with the EBRD in Albania, Bulgaria, Romania, Georgia, Armenia and Moldavia.
Piraeus Bank, the country’s fifth largest bank, tops the list of Greek banks definitely seeking a foreign partner. Piraeus Bank has admitted it is in talks with ING, which operates the third largest life insurer in Greece, for a possible cooperation agreement.
Talks with Allianz, which holds 1% in Piraeus Bank, have failed to produce an agreement in the past.
According to unconfirmed reports, ING may buy a stake, ranging from 5% up to 25%, in Piraeus Bank in exchange for a larger stake, around 49%, in ING’s local subsidiary Nationale Nederlande, which may be merged with Piraeus’s XiosLife insurances.
According to analysts, more distant possibilities include a stock swap or ING buying a straight equity stake in Piraeus Bank.
Piraeus itself has been on a buying spree since 1998, absorbing initially the activities of Chase Manhattan in Greece, acquiring control of Macedonia-Thrace Bank and buying Credit Lyonnais Hellas which it renamed Prime Bank. In 1999, Piraeus Bank absorbed the activities of NatWest in Greece and took control of Xiosbank. The bank commands more than 172 branches and its equity capital exceeds Dr370 billion.
Internationally, Piraeus Bank owns New York-based Marathon Bank. And it has established small presences in a number of Balkan countries including Albania, through Tirana Bank; Romania through Piraeus Bank Romania; Bulgaria through a branch and Cyprus via a 51% stake in Euroinvestment&Finance Ltd.
In addition to the five Greek banks already mentioned, there are other state-owned banks, some slated for part-flotation or full privatization.
The government wants to sell a minority equity stake, perhaps 10%-15%, in Agricultural Bank, one of Greece’s largest banks, which lends primarily to farmers and cooperatives, by the end of the year. But the low quality of its loan portfolio may pose a problem. A year or so ago, there was talk of a possible cooperation agreement between Agricultural Bank and Holland’s Robabank.
The government also wants to further privatize the already-listed ETVA Bank, a bank with large industrial holdings, in which the state holds a 65.6% stake.
Newly-established Nova Bank, which specializes in consumer and mortgage loans makes no secret of its intention to use a successful operation in Greece as the springboard for penetrating the markets of other neighboring countries.
“We sat down with our Portuguese partners and talked. We realized there were opportunities in retail banking and decided to join forces, aiming at bringing the Greek experiment to the Balkans at a later stage,” says Pehlivanidis.
Little room for manoeuvre
Greece has a tight timetable to get its economy into good shape for accession to the European single currency. Inflation is not entirely under control and deregulation and privatization may not be as effective in spurring competition as hoped. Greece will become the eurozone’s 12th member at the beginning of 2001. That’s quite an achievement for a country labelled by many in the 1980s and early 1990s as “Europe’s black sheep”. It will be a dream come true for Greece, but could well turn into a nightmare if the country fails to rise to the occasion in meeting the challenges of competition in euroland.
| Gikas Hardouvelis | ||||||
“Controlling inflation is Greece’s biggest macroeconomic challenge but structural reforms such as deregulation, privatization, reforming the labour market and the social security system are equally important,” says Riccardo Barbieri, senior economist at Morgan Stanley Dean Witter in London.
Christos Avramides, treasury economist at ABN Amro, Greece, agrees that “fighting inflation and achieving real economic convergence are the biggest challenges for the Greek economy in Emu”.
The signs are not good so far. Inflation was brought close to 2% in 1999 from over 20% earlier in the decade, but it has been rising this year, fuelled to a large extent by higher oil prices, and the drachma’s slide against the euro needed to reach its central parity of Dr340.75 per euro by the year-end. The euro’s weakness against the dollar has not helped.
Adding to concerns, partly reflected in the Athens bourse’s protracted fall of more than 35% so far this year, is the government’s inability to push ahead with structural reforms. In fact the socialist government, which was elected to a fresh four-year term last April, has since managed to sell a minority stake in Hellenic Vehicles Industry (Elvo) to a local company and also to part float CosmOTE, the mobile phone subsidiary of state-controlled Hellenic Telecommunications Organisation (OTE), in October.
“Higher oil prices have boosted Greek inflation as in other EU countries. However the recent rise in inflation highlights the pre-Emu window dressing, that is the indirect tax cuts and regulated prices in 1998-1999, which aimed at satisfying the Emu convergence criteria,” says Barbieri. “This points to potential difficulties at controlling inflation as Greece loses control of monetary policy.”
Greek short-term rates have to drop by an estimated 225 basis points by end-December to converge to euro interest rate levels. Reserve requirements, currently standing at 12%, have to be lowered as well. On November 15, the Bank of Greece slashed 50bp off its standby facility rate to bring it to 6%.
“The enormous monetary easing requires tighter fiscal and incomes policies, market deregulation and privatizations,” adds Barbieri who considers the 2001 budget, tabled in parliament in early November, “slightly looser” but takes stock of increased wage moderation.
The current two-year wage agreement calls for increases of 3.55% this year and 3.3% next year and does not contain a catch-up inflation clause.
The 2001 general government budget projects a 0.5% surplus as a percentage of GDP, the first in 35 years, compared with an estimated deficit of 0.8% this year. This optimistic forecast is based on faster real GDP growth, projected at 5%, and lower interest expenses.
The primary surplus, regarded as a better indicator of fiscal stance, is forecast to fall slightly to 5.6% of GDP in 2001 from an estimated 5.8% in 2000.
The 2001 budget also forecasts a drop in the Maastricht-defined debt-to-GDP ratio to 98.9% in 2001 from an estimated 103.9% in 2000, counting on Dr750 billion ($1.9 billion) of privatization proceeds.
“It is a responsible budget but should have been more restrictive to offset the effects of the enormous monetary easing,” says Barbieri.
ABN Amro’s Avramides finds the 2001 budget targets “feasible” but notes that “this is not a tight budget”.
| Christos Avramides | ||||||
Avramides says the government’s projection for average inflation of 2.3% in 2001 is “overly optimistic” but points out that if the actual inflation rate turns out to be higher than the one projected in the budget it will help improve fiscal targets such as the debt-to-GDP ratio because of the higher nominal GDP.
Gikas Hardouvelis, economic adviser to prime minister Costas Simitis, sounds more optimistic. “The Greek economy has experienced higher growth rates than the EU average from 1996 onwards. We see this trend continuing for at least another eight years. This growth will be mainly investment-driven and even though investment is a volatile component of GDP, we know with a high degree of certainty that investment will continue as Greece hosts the 2004 Olympic Games and receives Dr26 trillion from the EU’s Third Community Support Framework (2002-2006),” he says.
Hardouvelis believes growth will not fuel inflation because it is mainly supply-side driven, broadening the economy’s productive capacity.
Indeed, a more favourable outlook for oil prices and the euro, and the absence of this year’s base effects because of last year’s indirect tax cuts, should have a dampening effect on inflation next year. But it is not clear that the deregulation of telecoms and electricity markets will help offset the effect of projected brisk growth and possible second-round effects from this year’s high oil prices and the weakened euro.
There are still pockets of resistance to deregulation in the governing socialist party, prompting Development Minister Nickos Christodoulakis to state recently that to talk about the risks of market liberalization in Greece was tantamount to talking about the risks of a heatwave in Finland.
Hardouvelis admits Greece has “probably trailed other EU states in structural reforms but points out that this slight delay will help it combat inflation more effectively in the future”.
Hardouvelis continues: “Structural reforms are a one-way street but the implementation of reforms should proceed in such a way as to minimize social unrest and secure the fair distribution of its dividends. Of course there is uncertainty about the impact of market liberalization on prices but we do know the direction. What we do not know is the magnitude of price reductions.”
The Greek telecoms market is officially scheduled for deregulation at the start of 2001, but it has yet to be seen whether it will intensify competition and price cuts. The auction for seven operating licences will take place in December. But several crucial questions – such as which and how many new players will enter the market when 3G licences are awarded in the first half of 2001 and when OTE will be deprived of its discretion at leasing lines to competitors at specific cost – have yet to be answered.
The state still owns 51% of OTE and the government has been criticized by many for moving too slowly to find a foreign strategic partner for OTE. The search is still on and four foreign telecoms companies have expressed non-binding interest in a 10% to 20% stake.
The much-touted part-flotation of cellular unit CosmOTE failed to ignite investor interest in heavyweight OTE as well, inviting more criticism.
Hopes that the deregulation of the electricity market, which is due in February 2001, could help squeeze inflation seem unfounded. Fewer than 100 days before the deadline, important regulations and decrees concerning the functioning of the market have yet to be unveiled, prompting some to talk of a deliberate delay aiming at buying time for the state-owned monopoly Public Power Corporation (DEH).
The government wants to sell a 10% to 20% minority stake in DEH to the broad investment public but the Athens stock exchange’s weakness has delayed plans for a listing this year and moved it to next. In general, the liberalization of electricity is projected to affect about 6,000 large energy consumers, representing about 30% of total electricity consumption.
Coming under intense criticism for its failure to push ahead with structural reforms, the government finally tabled a labour market reform bill in mid-November. This calls for the reduction of the average working week to 38 hours in exchange for a more flexible working time schedule, a less stringent regulation of collective dismissals, better incentives for part-time employment and a decrease in employers’ contributions to pension funds for low-salary employees.
But the bill quickly came under fire from the Association of Greek Industrialists which argued that it would raise the cost of labour, leading to higher unemployment and loss of competitiveness. Analysts say the negative reaction of the industrialists could assist the government, which is trying to overcome resistance from trade unionist supporters.
Most analysts, though, agree that overhauling the ailing social security system will be the most serious test of the government’s will to proceed with structural reforms. The public “pay-as-you-go” pension system is highly segmented and complex. A reduction in the number of funds, the harmonization of replacement ratios and retirement ages across pension funds and tighter regulations on pension rights are on the agenda.
“Greece never dies,” goes a military march. But there will be little to save Greece from being ignored in the eurozone if it fails to control inflation and shift structural economic reforms into high gear in the near future.
