Strong economic growth, consumer credit liberalisation and low penetration of banking products are providing a dynamic platform for Greek financial institutions. And combined with continued expansion into the neighbouring states of southeast Europe and the upcoming Olympics, the outlook for the major Greek banks is increasingly attractive.
While overall bank profitability fell considerably in 2001 and 2002 on the back of declining interest rates in the euro area, a significant reversal of fortunes took place in 2003 as banks grasped opportunities offered in consumer credit.
Some banks, such as EFG Eurobank Ergasias, had already moved heavily into retail. However, the overall shift towards retail lending has been supported since July 2003 by the full liberalisation of consumer credit and by the launching of the Credit Bureau of Teiresias, the credit databank company in Greece that first began collecting credit histories of individual consumer loan and mortgageborrowers.
Retail lending is key
As a result, the major players have all witnessed significant growth in retail lending, which has been the prime driver behind radically improved results. According to Panayotis Thomopoulos, deputy governor of the Bank of Greece (the central bank), average profits at the major players grew by 40% in 2003 as overall aggregate consumer credit expanded by 27%. He adds that the three biggest banks were also able to cut costs by 5%-6%. While the central bank acknowledges that 2002 was a poor year with return on equity (RoE) for Greek commercial banks slipping to 9.3%, the results for 2003 have improved dramatically, with the three biggest banks, National Bank of Greece, Alpha Bank and Eurobank posting returns of 15.4%, 18.2% and 15.1%, respectively.
Like many other countries that have liberalised their consumer credit offerings, including the neighbouring countries of southeast Europe, Greece has huge potential. Mr Thomopoulos says: “Greece has 55% of the European average in relation to consumer credit as a percentage of GDP, so there is still some way to go. There is room for consumer credit growth of at least 20%.”
Lack of penetration
Alpha Bank research notes that mortgage lending as a percentage of GDP was 17% in Greece in 2003 compared with 32% in the eurozone and 61% in the US, while consumer loans were just 8% in Greece compared with 16% in the eurozone and 18% in the US.
This lack of penetration also extends to investment products, where non-money market funds as a percentage of GDP in 2003 amount to 9.3% in Greece compared with 34.0% in Europe and 44.0% in the US. These figures back up Mr Thomopoulos’ view: “While there has been a lot of borrowing in the consumer/household credit area, there is still a long way to go to reach European averages.”
Looking forward, labour costs remain a key issue. Staff costs, according to the Bank of Greece, continue to represent a considerably larger share of operating expenses than the EU on average (Greece 2002: 59%; EU 2001: 52%), in spite of Greece’s lower average cost per employee (Greece 2002: e40,000; EU 2001: e67,000) and low productivity, as measured by gross income per employee (Greece 2001: e117,000; EU 2001: e212,000).
Although labour costs remain stubbornly high, improvements have been made in cost control with Alpha Bank and Eurobank able to reduce their cost income ratios from more than 60% to 54.2% and 54.6%, respectively.
The National Bank of Greece and Emporiki Bank (formerly Commercial Bank of Greece), however, still suffer from their state involvement with high ratios of 66.2% and 76.9%, respectively.
Steady expansion
Despite the staffing issues, most banks are expanding steadily on two fronts, domestic expansion based on retail growth and regional enlargement through branches and acquisitions in neighbouring states and familiar international markets.
Agis Leopoulos, general manager of international activities at the National Bank of Greece (NBG), says 20% of assets and 22% of profits come from outside Greece, where NBG employs 5750 people in 285 branches and subsidiaries.
“Greece is becoming extroverted,” says Mr Leopoulos, who explains that the core profitability of NBG’s international network increased by 19% to e85.9m, which included a doubling of profits in 2003 from the bank’s operations in southeast Europe.
Greek bankers are agreed that while it may still be early days, the growth opportunities lie in regional developments. “Greece is too small to prosper on its own,” says Bank of Greece’s Mr Thomopoulos, acknowledging that Greek companies are already moving their manufacturing operations north. “We may lose some manufacturing, but we gain other jobs from all of these satellites.”
Pointing to a map, Mr Thomopoulos shows the importance of Thessaloniki as the business centre of a region stretching from Sarajevo (525km to the northwest) to Istanbul (530km to the east), and from Tirana (275km to the west) to Bucharest (490km to the northeast) (see map).
He believes that when major road networks connecting these capitals and Thessaloniki are completed soon, there will be great opportunities for Greek entrepreneurs in reviving the historical trade patterns that had served the region well for centuries and look likely to do so again once the infrastructure is in place.
Greek banks have made great strides in recent years in making their financial footprint in southeast Europe and look certain to expand as more Greek businesses develop in the region.
With an estimated 1500 Greek companies operating in Bulgaria, for example, and estimates of Greek direct investment in southeast Europe as high as e6.5bn, there is no shortage of Greek involvement or interest in the region. And with a population of only 11 million, it is no wonder that neighbouring markets, such as Romania with a population of 22 million, look attractive in the long term (see Romania, page 83).
Increased assets control
At the end of 2002, the Bank of Greece reported that Greek banks had 18 subsidiaries and 10 branches in the wider southeast Europe region, managing a total of 617 operational units and 10,876 employees. Greek institutions were estimated by the Bank of Greece at year-end 2002 to control 10%-15% of the total bank assets of each of the Balkan states in which they operate, but this figure would have increased further in 2003 as more expansion took place.
Eurobank, for example, acquired control in 2003 of three post office-related institutions in the region – Banc Post in Romania, Bulgarian Post Bank and Postbanka in Serbia/Montenegro – and has consolidated them them into the group.
Eurobank chief executive Nicholas Nanopoulos, pursuing a policy of achieving strong growth rates in both Greece and southeast Europe, is also looking at acquiring the Post Office Savings Bank in Greece if the newgovernment in Athens is willing.
Besides the regional developments, bankers are optimistic that the Greek economy can continue to achieve GDP growth estimated at 3.8% in 2002 and 4.4% in 2003, well above EU averages. The 2004 Olympic Games have been a catalyst for growth as has been the historically low interest rate environment, but bankers do not overplay the role of the Games. “The Olympics are important but not crucial to our economic development,” notes NBG’s Leopoulos.
Guarded optimism
Bankers are quietly concerned that the events will run well, the right image will be projected and projected tourist arrivals of 18-20 million by 2010 will be achieved, compared with 14 million in 2002. But as everyone in Greece is well aware, the future implications for the country depend on how successful the Games are in August, and that is still five months off and a lot of construction work still needs to be done.
While the central bank describes the structure of the Greek banking system as a combination of 22 Greek commercial banks, 21 foreign banks and 19 cooperative banks and specialised credit institutions, the reality is much simpler. The top five banks account for around 75% of the market and the foreign banks, although not insignificant, are a dwindling force and account for less than 10% of the market.
Also, the Greek banks, despite the apparent consolidation, remain relatively small by European or global comparison. NBG, the largest bank with assets of almost double its nearest rival in 2002, came 183rd in The Banker’s July 2003 Top 1000 world banks ranking, and all the Greek commercial banks combined would not amount to the size of the UK’s Abbey or Italy’s Unicredito Italiano.
Nevertheless, NBG continues to expand and produced a 49% increase in group pre-tax profits in 2003 to reach e521m. Retail banking loans grew by 25% and now represent more than 55% of total NBG lending compared with just 37% in 2000. This retail growth was attributed to a 21.5% expansion in mortgage balances, exceeding e7.1bn, and a 27% expansion in consumer loan and credit card balances.
In addition NBG acquired the Allied Irish Bank branch network in New York, adding to its existing 23-branch Atlantic Bank network in New York, it bought Banca Romaneasca in Romania and introduced mortgages into Albania.
Restructuring likely
After a sale of 11% to investors, the Greek state now holds only a 7.5% stake in the bank. However, following the death of the chairman, Theodoras Karatzas, just prior to the recent elections (see box), significant management restructuring is expected.
At Alpha, exclusive bank sponsor of the Athens Olympics, pre-tax profits have rebounded to e410m, producing the highest return on equity of 18.2%. Alpha saw a strong 29.2% growth in retail lending and has developed a profitable southeast Europe network of 66 branches in six countries. The seven branches in Albania reported a healthy pre-tax profit of e3.8m, almost one-quarter of the region’s profits. With 420 branches and a 20% market share in Greece, Alpha is expanding in most areas.
Alpha’s e75m investment in Olympic sponsorship also seems to have paid off handsomely as Alpha is the exclusive provider of banking services to the 1500 official Olympic suppliers and subcontractors. It is also the exclusive underwriter of the ticketing system and has attracted more than 250,000 new Visa Olympic debit and credit cards.
Rival on the scene
Eurobank represents formidable competition for both NBG and Alpha, achieving 37% growth in pre-tax profits of e373m in 2003. Eurobank has rolled out a series of initiatives in recent years, including seven successful acquisitions, which have contributed to improved efficiency and led to an increase in Eurobank’s market share of household lending of 60 basis points to 16.4%. In terms of ‘organic profitability’ (which results from taking total operating expenses and provisions from total net income), Eurobank believes it is the most profitable of the ‘big three’ with e338m in 2003 compared with NBG at e329m and Alpha at e252m.
The rapid expansion in mortgages and credit creates a gap between the lending and deposit base for all banks and also an opportunity for securitising this new pool of assets. In May Eurobank plans to launch the first securitisation of mortgages in a deal worth up to e1bn. Citigroup and Deutsche Bank have been mandated to arrange this first securitisation and Eurobank expects more to follow.
Best of the rest
After the ‘big three’ come Emporiki Bank and Piraeus Bank which, along with the other top three, accounts for three-quarters of the banking sector. Emporiki (formerly Commercial Bank of Greece) has undergone a revolution, says chairman and CEO Yannis Stournaras, as consultants McKinsey have introduced the Pegasus system throughout the bank. Pegasus is expected to change the philosophy of the bank, restructure operations and build morale. Mr Stournaras expects to triple return on equity after 2006, but the problem is that today Emporiki’s returns are the lowest of the majors, its cost/income the highest and its presence in southeast Europe is weak.
Meanwhile, Piraeus continues to expand its network at home and abroad and churn out solid profits, 43.4% growth in pre-tax profits in 2003 reaching e115.1m. The bank opened 25 new branches in Greece in 2003 and has a 30-branch network in Albania (through Tirana Bank), Bulgaria and Romania; deputy managing director Michael Colakides adds that Piraeus is in discussions at present to buy Romania’s Bank Ion Tiriac. The bank plans to build its overseas earning up to 25% (up from the current 15%) by 2008.
Apart from the majors, Novabank, a subsidiary of Portugal’s BCP, is growing rapidly in the retail space and now has 107 branches across Greece, up from 45 when it started in 2000. Managing director George Taniskidis, unlike other bankers, is cautious about Greece’s year ahead. “Uncertainty is the name of the year for Greece,” he concludes. From the Olympics to EU elections and interest rates, he believes Greece faces an unprecedented level of uncertainty.
Obituary Theodore Karatzas – governor of National Bank of Greece
Theodore Karatzas, who died on March 3 aged 73, transformed National Bank of Greece, the country’s biggest commercial bank, from an unwieldy state bank burdened with dozens of loss-making subsidiaries into the leading player in Greece and the Balkan region.
In eight years as chief executive, Mr Karatzas restructured National and oversaw the bank’s listing on the New York Stock Exchange. The state’s stake in the bank was reduced from 40% to 24% – mainly held by Greece’s public sector pension funds.
Mr Karatzas, a financial lawyer, was appointed to head National by Costas Simitis, the socialist prime minister who took Greece into the eurozone. His brief was to clean up the balance sheet, modernise operations and stay competitive with fast-growing smaller private banks.
Mr Karatzas came to prominence in the late 1980s when he joined the socialist government as a deputy finance minister tasked with bringing Greek financial legislation in line with the then-European Community.
Mr Karatzas’s benchmark report on modernising Greece’s banking system became a handbook for finance ministers. He also drafted legislation overhauling the Athens Stock Exchange and setting up the capital markets commission, the bourse watchdog.
Mr Karatzas’s first move in 1996 was to end National’s practice of lending on political criteria. He also used its entire full-year profits of $200m, to provision against a substantial portfolio of non-performing loans.
National led the Greek banking sector’s “follow your customer strategy” in the 1990s as Athens-based companies started investing in the Balkans. But Mr Karatzas had a broader vision for the bank’s as a regional operation serving both corporate and household customers as the Balkan countries moved towards closer integration with the EU.
