Following three years of disappointing earnings – and plummeting stock prices – leading Greek banks hope 2003 will be a turnround year. Their hope is based on a firm foundation absent elsewhere in Europe: strong loan growth underpinned by a growing economy and a largely under-leveraged household sector. Tapping that customer base should finally boost their bottom line.
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“I am optimistic that profits will recover this year,” says Apostolos Tamvakakis, deputy governor at National Bank of Greece, the country’s largest commercial bank in terms of assets. “Retail banking will be the primary source of growth.”
Other bankers are also expressing the hope that earnings will rebound this year. “I hope we are at the end of this downward earnings cycle,” says Marinos Yiannopoulos, executive general manager and CFO at Alpha Bank. Most of the bankers and analysts who are optimistic about a profit recovery this year agree that retail banking will be the main contributor to Greek banks’ top-line growth in 2003 and perhaps 2004.
A favourable macroeconomic environment, the lowest levels of household indebtedness and the least developed financial sector in the eurozone appear to back this view.
Indeed, Greece’s economy was the fastest growing in the eurozone last year, posting a preliminary 4% GDP growth rate on the back of a 4.1% growth in 2001 and 2000 alike. The official projections suggest 3.8% growth this year and 4% in 2004 – numbers that countries in core Europe must look at with envy. The bank loan-to-GDP ratio is estimated at less than 70%, with mortgage and consumer loans accounting for 19% of GDP at end-2001 according to Eurostat.
Playing catch-up
Byron Balis, deputy CEO at EFG Eurobank-Ergasias, expects Greece to play catch-up with the rest of the eurozone and for this process to be maintained even after the 2004 Olympic Games. “This growth is not just for one year or two,” he says. “It may take several years down the road, provided some economic structural changes are enacted.” Low euro interest rates may not be sufficient to revive stagnant economies in the centre of Europe but can have a dramatic effect in Greece. Balis says: “Greek consumers and firms had been penalized by high interest rates for many years. The drop in interest rates has boosted private consumption and investment spending and has improved the cost structure of many companies, reducing significantly their financing cost. This will have long-term effects on the economy and the banks.” Balis forecasts growth of more than 25% in mortgage loans, 20% in consumer credit and more than 15% in loans to small and medium-size companies, but much smaller growth rates in lending to large corporations in the Greek banking market this year. Total Greek credit to business and household was up 16.9% in 2002.
He also points out that net interest margins are relatively high in Greece compared with the rest of the eurozone, with EFG Eurobank-Ergasias’s topping 3%. In a bid to boost its profitability, Alpha Bank recently raised some of its consumer and mortgage loan rates, including the variable mortgage, which was increased to 6% from 5.6%.
“The Greek banking system used to rely too much on capital gains from stocks and bonds, but has adapted to the new environment despite losing significant commission fees from the disappearance of the drachma,” adds Balis.
Analysts, however, point out that fast credit expansion is likely to produce some undesirable effects, such as shrinking average liability spreads. Some of the major Greek banks rely heavily on cheap deposits to fund their loan books in view of their having loan-to-deposit ratios of around 40% compared with the 100% common elsewhere in the EU.
“Ongoing credit expansion will lead to a gradual transformation of Greek banks’ balance sheets,” says Dimitris Spanodimos, banking analyst at UBS Warburg in London. “As loan growth outpaces deposit growth, Greek banks will finance a bigger portion of their loans from wholesale funding. This will close down the average liability spread.”
Spanodimos adds, however, that the shrinking liability spread will be partly offset by a widening average asset spread on the back of an improving asset mix as loan growth persists. Retail banking is not, however, the only motor of growth. Greek bankers readily point to asset management, bancassurance and foreign banking operations as other promising sources of income.
“I also expect revenues from asset management to pick up this year as new products are introduced, the customers become more familiar with existing ones, such as capital guarantee products, and our selling force gets better and better,” says Tamvakakis. “In addition to this, our banking affiliates abroad are doing well and their profits are expected to go up significantly, increasing their share in the National Bank Group earnings.”
Good prospects
Although bankers and analysts agree that top-line growth prospects are good for Greek banks – and could get even better if regulations constraining household borrowing are lifted, as expected, later this year – they also admit cuts in staff costs and the need to deal with some large state-controlled banks’ unfunded pension liabilities are a challenge. So equity investors should be wary. “There is little flexibility in downsizing staff costs, which account for 50% or more of the total cost. In addition to the limitations of the current regulatory framework, firings are not socially acceptable,” says Balis.
According to Merrill Lynch, Greek costs per employee were nearly 30% below the EU retail bank average at end-2001 but were offset by 43% higher staff levels.
Some large Greek banks will also have to recognize unfunded pension liabilities in their equity accounts this year because of the introduction of International Accounting Standards (IAS). Some banks and the government are negotiating the transfer of some of these liabilities to state pension funds.
