Greek bankers are confident that the credit sector will continue to expand as the country catches up with its European partners. Kerin Hope reports on developments in a still underbanked country.

A quick glance around the main square of a Greek island port reveals half-a-dozen bank branches jostling for space among the cafes and souvenir shops. Yet Greece is still underbanked in comparison with its European partners, with three branches for every 10,000 residents compared with five in other eurozone member states.

The hectic pace of credit expansion since Greece joined the euro in 2002 is starting to slow. But Greek bankers are confident that the sector is heading for several more years of robust growth as the catch-up process continues.

As well as being fewer in number, Greek bank branches are less productive. Assets per employee are €3.8m compared with €6.5m for Portugal, a similar-sized market.

With the overall ratio of lending to gross domestic product (GDP) at 70%, Greece still lags behind its eurozone partners. Mortgage lending, at just 29% of GDP last year, is half the Spanish level. Consumer lending has caught up faster, reaching 15% of GDP, just short of the eurozone average of 16%.

Corporate lending, at 48% of GDP compared with 70% in Spain, still has room for growth, however. Banks are targeting small and medium-sized enterprises (SMEs), which lacked access to bank financing until Greece joined the eurozone because of high interest rates and discretionary credit controls.

“We’re getting to the stage where the mortgage boom is starting to decline. There are fewer first-home buyers. But corporate lending is buoyant thanks to the strength of the economy,” says Nikos Nanopoulos, managing director at EFG Eurobank.

Home loans

Mortgage lending grew by 25.4% last year in addition to a 33% increase in 2005, beating analysts’ forecasts by a wide margin. This year, the pace of lending is projected to slow to about 20%.

National Bank of Greece, the leading mortgage lender with a 24% market share, disbursed a record €3.5bn of housing loans last year. Its current business plan aims for a compound annual growth rate of 17% for the next three years.

Fierce competition has resulted in some innovative deals, including mortgages denominated in a low-yield, non-euro area currency, such as the Swiss franc. These are attractive to Greek investors, who became accustomed to borrowing at lower interest rates in foreign currencies before the country joined the eurozone.

Piraeus Bank’s mortgage portfolio grew by 31% last year thanks to aggressive pricing and a sales drive at recently opened branches, which make up more than one-third of its network.

About 80% of Greeks are already homeowners. But much of the housing stock, especially in Athens and other cities, consists of ageing apartments in overcrowded neighbourhoods. In the countryside, traditional village homes need sprucing up.

“We see growth driven by homeowners who want to trade up and by second-home buyers. The second-home market, on the islands or close to beaches near Athens, is a new development for Greece and demand is growing rapidly,” says Michael Colakides, vice-chairman of Piraeus Bank.

Competition last year compressed spreads by up to 60% and more customers opted for fixed-rate mortgages. Banks are making sales agreements with property developers, especially in the second-home market.

Consumer loans

Growth in consumer lending also outpaced forecasts, largely because of widespread repackaging of credit card debt to take advantage of lower interest rates. Consumer loans were up 33% against 28% in 2005, but the increase for credit cards was just 4%. Forecasts suggest that the growth rate will slow down to about 17% for loans but rise to 4.5% for cards.

“There are still opportunities for cross-selling of credit cards. For example, only one third of our mortgage borrowers have an Alpha credit card. And the average Greek cardholder makes just one transaction a month compared with six for the rest of the eurozone,” says Marinos Yannopoulos, Alpha’s general manager.

Business loans

While retail lending has underpinned Greece’s spectacular recent growth, loans to SMEs are picking up. Improved risk management, including centralised credit controls, has made financing available to small businesses in the provinces and islands.

Banks are also pursuing new borrowers among Greece’s large community of self-employed professionals. Overall business lending was up 11% last year against 9% in 2005. This year, an 8% increase is forecast.

Given the headlong rate of credit expansion, however, it is hardly surprising that non-performing loans (NPLs) are significantly higher than the eurozone average.

“We plan to get NPLs down from 6% to 4% – the average for western Europe – within the next two years. New business has to be high quality,” says Takis Arapoglou, chairman of National Bank of Greece.

Greece’s short history of retail lending suggests that banks will tighten risk management over the medium term. The new credit control systems have still to be tested during an economic slowdown but that could be some way off, given forecasts of GDP growth of about 4% per year over the next three years.

Network growth

The rapid expansion of branch networks both in Greece and abroad has pushed up cost-income ratios to an average of 45% for Greece and 60% for the banks’ south-east European operations. The ratio for Greece, though, is expected to decline to less than 40% in the next three years as cost controls are improved and new branches mature.

In the short term, further expansion can be funded out of deposits, thanks to a 90% loan-deposit ratio for the sector. But household savings rates have plunged to about 6% of disposable income – less than half the eurozone average – suggesting that future deposit growth will be limited. Banks are already turning to medium-term notes and securitisation issues to boost funding, says Mr Nanopoulos.

Interest rates have not yet fully converged, reflecting higher funding costs for Greek banks because of the market’s small size, the high percentage of NPLs and Greece’s lower sovereign rating than its eurozone peers, says Mr Arapoglou.

Despite recent high returns, few foreign banks have joined the Greek market since the launch of the euro. More than 90% of assets are controlled by five leading lenders, making Greece one of the most concentrated bank sectors in the eurozone.

Mid-sized banks like Marfin Popular and Bank of Cyprus are steadily increasing market share, however. And smaller banks are expanding their branch networks in city neighbourhoods and fast-growing suburbs to capture deposits and lend to small family-owned businesses.

“This market is still immature and there’s space to grow,” says Efthymios Bouloutas, Athens-based managing director of Marfin Popular.


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