BUILDING THEIR STRATEGIES on prospects of a fast-growing economy, Greek banks are trying to take advantage of top-line growth to rationalize their cost structure. At the same time, expansion in southeastern Europe has taken priority over consolidation at home. Greek banks are walking a fine line. The realize the local market is too small to satisfy their growth ambitions, but are wary of the costs and risks of expansion.
Although each bank has its own vision, it seems as if most agree that an M&A deal, when it comes, should be judged by whether it enhances competitiveness as well as simply increasing size. As recently as a couple of years ago, increasing market share was the top priority.
Nickos Nanopoulos, chief executive officer at EFG Eurobank Ergasias, Greece’s largest bank by market capitalization and third by total assets, says: “We have reached critical mass in terms of size, occupying one of the leading positions in all of the segments of the Greek banking industry. We are continuing to enlarge our presence and increase market share in several key segments, such as consumer lending, small business lending, asset management and stock brokerage services. Consequently, we feel no real pressure to make any further acquisitions at this moment.”
Nanopoulos adds that the new wave of Greek bank consolidation will not be driven by the desire to enlarge client and product base as in the past, but will focus on cost-cutting and rationalization.
Nanopoulos admits, though, that “this process is quite difficult to achieve in the current business and social environment”, alluding to rigid labour laws and strong resistance to lay-offs. “It is therefore not likely that we will see further consolidation among large Greek banks but rather between small players,” he says. “In addition, cooperation between Greek and foreign banks is likely to get closer.”
Deutsche Bank holds a 9.3% equity stake in EFG Eurobank Ergasias and Nanopoulos seems pleased with cooperation so far. “Our strategic cooperation with Deutsche Bank is functioning well for both parties,” he says. “We have implemented a number of product-specific cooperations in asset management, debt and equity capital markets, corporate finance, treasury products, stock brokerage services, shipping finance and real-estate investments.”
However, this strategic cooperation does not hold back EFG Eurobank from strengthening its presence in the Balkans. The bank has increased its stakes in Romania, Bulgaria and Serbia.
In the domestic market, EFG Eurobank Ergasias is well positioned in high-margin loan categories such as mortgage lending, consumer credit, small and medium-size enterprises. And despite its rapidly growing loan book, the bank’s capital adequacy ratio stood above 12% at the end of the first quarter of 2003, consisting entirely of tier 1 capital. Its non-performing-to-gross-loans ratio was about 3.6%. Moody’s recently upgraded the bank’s long-term rating to A2 from A3 and its financial strength rating to C+ from C.
Balkan expansion EFG Eurobank Ergasias has managed to surpass National Bank of Greece in market capitalization but National is the country’s largest financial services group and the undisputed leader in total assets, which totalled e53.9 billion at end-2002. “Our goal is to increase the recurring core profitability of the group by focusing on retail banking domestically and selective growth abroad with a clear, retail banking driven strategy in the Balkans,” says Apostolos Tamvakakis, deputy governor at National Bank.
He expects the contribution of international operations to the bottom line to “double in absolute figures within five years”. Tamvakakis notes that this year “earnings from international operations are expected to exceed 25% of consolidated operating profits,” adding that a solid performance by retail banking and a pick-up in asset management and private banking are helping.
Although National Bank’s loan book is also growing fast, the bank is well capitalized, with a tier 1 ratio of 8.2%, rising to 11.2% when tier 2 is added. National Bank plans to increase its tier 1 ratio by one percentage point as it prepares to launch a euro-denominated floating rate perpetual preference share offering, callable after 10 years.
Citing “the major improvements in the bank’s broad franchise, both domestically and overseas, and the overall strengthening of its financial fundamentals” and strong capitalization, Moody’s recently raised National Bank’s long-term deposit ratings to A2 from A3 and its financial strength rating to C from C-.
The possibility of National Bank linking up with another bank has resurfaced, however, less than two year’s after its aborted merger with Alpha Bank, on the back of the state’s recent decision not to renew a bond issue convertible into shares of National Bank, maturing in mid-July. Bondholders will be given the option of either redeeming the convertibles or rolling over to a new straight bond.
This move sparked speculation about a likely M&A deal because the state will take back 6.4% of National Bank’s share capital or 14.5 million shares, controlling directly or indirectly more than 39% of National Bank. Finance minister Nickos Christodoulakis has said the state wants to reduce its stake in National and Emporiki, leaving the door open to a placement with foreign institutional investors.
Asked if a major deal in the banking sector should be expected, Tamvakakis says: “It is likely but it is difficult to see something happening before the year-end. You need a trigger and I do not see it at this point. I cannot rule it out though either.”
Emporiki Bank, the country’s fourth-largest bank ranked by assets, takes a similar line. “Focusing on retail banking and increasing productivity along with curtailing staff expenses via our newly introduced client-centric programme, Pegasus, is top priority for us,” says Yiannis Stournaras, chairman of Emporiki Bank.
Stournaras says his bank has succeeded in increasing its market share in retail banking by one percentage point in the past two years. “Our market share in retail banking now stands at 11.5%,” he adds. “We have also managed to have the highest net interest margin in the local industry in excess of 3.2% and expect this to make a positive contribution to Emporiki’s bottom line this year.”
Emporiki Bank’s pre-tax consolidated earnings after minorities rose by a modest 4% year on year to e33.1 million in the first quarter. As for second-quarter group earnings, Stournaras says: “There will be a big increase even if one does not account for potential gains from the recent stock market rally and bonds.”
Cranking up privatization Staff costs are widely regarded as one of Emporiki’s weak points. UBS estimates that staff expense as a percentage of risk-weighted assets was the highest among the five large Greek banks in 2002 at 3.13%. It is forecast to ease to 3.08% in 2003 and 2.9% in 2004.
“Admittedly, our staff cost is high but one should not overlook the fact that other operating expenses, such as administrative costs, are low,” says Stournaras, who points out that about 300 employees retire each year and only a small proportion are being replaced. “We try to reduce personnel cost mainly through attrition. Our operating expenses to gross operating income ratio stood at 58.09% in the first quarter versus 67.7% at end-2002.”
Crédit Agricole has a 10% equity stake in Emporiki and has right of first refusal if the state decides to sell another 9.5%. This is likely soon since the government wants to crank up privatization in a bid to raise e3 billion this year to retire public debt.
Unlike some competitors, Emporiki has taken a relatively conservative stance on international expansion. “We have decided to open our own branches in neighbouring countries instead of acquiring local banks,” says Stoumaras. Emporiki has already established a presence in Bulgaria, Romania and Albania.
Small and medium-size Greek banks follow the line of the larger ones. “Our main goal is to expand our book of business loans since mortgages represent about 60% of our loan book,” says Costas Karatzas, chairman at Aspis Bank. He says that high-quality blue chips and small enterprises are the bank’s two main target groups.
With Aspis’s capital adequacy ratio standing at 12%, Karatzas feels there is no need to boost it despite the fact that loans are growing at an average rate of 10% to 14% this year and are expected to expand at a healthy rate next year as well. “The planned securitization of a good deal of our mortgage portfolio is going to improve our capital adequacy ratio,” he says.
“We look into the cases of smaller banks and do not rule out a strategic alliance with a Greek or foreign bank although there is none in sight at this moment,” says Karatzas. ABN Amro holds an equity stake of 6% in Aspis, acquired last year. The two banks will cooperate in asset management and private banking.n
