Bourse operator Hellenic Exchanges has cut trading fees on the Athens exchange and is developing links with other exchanges in the region in its bid for a competitive edge. By Kerin Hope.

At the end of the first quarter, international investors accounted for 50.5% of market capitalisation on the Athens stock exchange (ASE), up from 35% in the same period of 2006.

Investors from abroad focus on both the large-cap FTSE-ASE20, which includes Greece’s six biggest banks, a group of partly privatised state corporations and a handful of private companies that are well established in regional markets, as well as the FTSE-ASE40, a group of mid-cap companies with strong growth potential.

“Greece is on the cusp between a developed and an emerging market. Investors are buying a eurozone country but at the same time they’re taking a bet on the emerging markets of south-east Europe,” says Spyros Capralos, chairman of Hellenic Exchanges.

At around 4700, the Athens general index is well below the peak of 6800 reached during a bubble that preceded Greece’s entry to the eurozone. But the market has shown a sustained recovery in the past three years. One attraction is that Greece does not tax capital gains.

Daily turnover in the first quarter averaged €450m up from €340m for 2006 and €210m for 2005. Banks and a small group of state-controlled corporations are most heavily traded.

Retail investors are still wary, however. Small investors lost an estimated €2bn when the market collapsed in 2000. After bottoming out in March 2003, share prices have gained more than 200%. Yet only about 100,000 Greeks currently own shares, compared with almost one million at the height of the boom.

Mr Capralos, a banker who took two years off to help organise the Athens Olympics, has made rebuilding confidence his priority since taking over at Hellenic Exchanges. The bourse operator, a listed company controlled by Greece’s biggest banks, runs the country’s stock, bond and derivative markets. It also handles clearing and settlement and the share registry as a vertically integrated operation.

Athens attractions

Mr Capralos says tighter regulation, better corporate governance and simplified trading rules have made Athens more attractive. Short selling and stock borrowing have been introduced to bring Greece fully in line with international practice and boost trading on the derivatives market. Trading hours have been extended to accommodate US investors.

In January, the bourse cut trading fees by 33%. Fees on block trades of more than €600,000 were reduced by as much as 50%. “We wanted to make Athens more transaction-oriented as part of a drive to become more competitive,” Mr Capralos says.

Following the example of companies in the FTSE-ASE20 index, Hellenic Exchanges is becoming a regional player. Last year, Athens launched a common electronic trading platform with the small Cyprus stock exchange in Nicosia. Daily turnover in Nicosia is significantly higher, while Athens benefits from lower trading costs and a fresh wave of Greek Cypriot investment.

Hellenic is discussing a similar deal with the Sofia stock exchange following Bulgaria’s accession to the EU in January. “This arrangement would allow Sofia to stay independent and run its own market and, at the same time, increase volumes. And there’s an increasing number of medium-sized Bulgarian companies preparing for an initial public offering (IPO) that regional investors would be interested in buying,” says Mr Capralos.

If the Bulgarian state’s 44% stake in the Sofia exchange is offered for sale later this year as planned, however, Hellenic would be likely to bid. It would also be a potential bidder for stakes in the Romanian and Slovenian exchanges, which are also candidates for privatisation.

Hub hopes

Hellenic’s strategy of becoming a regional trading hub should boost its ranking among small EU bourses, and open the way for co-operation in some form with a larger European exchange looking for alliances in south-east Europe.

Plans are advancing for a new market for small companies modelled on London’s AIM stock market, which has attracted a number of Greek companies, including shipping operators and property developers. Listing regulations would be less rigorous than for the main Athens markets, with companies required to have just one year of published results according to international financial reporting standards.

Listed on the ASE with a market cap of €1.3bn, Hellenic itself is a popular blue-chip stock, with international institutions holding 50.6% of its shares. Last year, its shares outperformed the index by 50%, with net profits tripling to €88m.

Hellenic’s performance is driven by improved turnover, but this is still the lowest among Europe’s peripheral exchanges, offering good growth potential.

Banks contribute

Greek banks have played a key role in the market’s recovery. They account for almost 50% of total market capitalisation and have attracted the bulk of inflows from abroad. “As long as the banks continue to grow fast, expand in the region and produce strong earnings, they will drive the Athens market,” says Vassilis Kletsas, head of research at GFM Levant Fund.

“But price competition is picking up across the region. Many banks, not just Greek ones, are betting on south-east Europe for their growth potential, so you’re looking at more players,” he adds.

Banks are expected to maintain strong earnings momentum this year, driven by continuing rapid household credit expansion, deeper penetration of markets in south-east Europe and tighter cost controls that have pushed down cost-income ratios closer to the average for western Europe. While Greek operations will continue to drive earnings growth in the short term, regional expansion will become more important for investors in the longer term.

“There has been an aggressive hunt for assets in the region by Greek banks. Investors have looked favourably on some risky and expensive deals because they offered exciting growth prospects,” says Joanna Telioudi, head of research at Pantelakis-HSBC Securities.

Two public offerings last year underlined the sector’s importance to the market. National Bank of Greece raised €3.3bn – the ASE’s biggest rights issue to date – to finance its acquisition of Turkey’s Finansbank. International institutions covered the bulk of the offering, amid lingering concern among Greek retail investors over the risks of a Turkish investment.

Postal Savings Bank’s long-awaited IPO, which raised €610m for the government’s privatisation programme, was five times subscribed, with domestic retail investors showing strong interest. This year’s big deal is Marfin Investment’s €5.1bn rights issue, which is expected to be covered mostly by international institutions and a handful of Greek shipowners.

Privatisation boost

The government’s strategy of privatising state corporations through public offerings helps to boost the market, according to Mr Capralos. A ‘salami-style’ approach, with successive sales of 10%-15% stakes in public telecoms operator OTE, state electricity utility PPC and lottery operator OPAP, has provided a steady flow of investment opportunities. Recently, the government has streamlined the process by making private placements with institutional investors abroad through an accelerated book-building process.

With current legislation requiring the state to keep a controlling minority in state corporations, more companies must be added to the pipeline of privatisation offerings, Mr Capralos says. “Privatisation sales help to keep Greece on the international investor map. We’re expecting the finance ministry to bring more state corporations to market and, at the same time, sell down its holdings in smaller companies through the stock exchange.”

Fighting fires

The finance ministry’s current priority, though, is to unravel a scandal involving a €280m purchase of structured bonds by a Greek state-controlled pension fund that has curbed activity on the bond market. An Athens brokerage has been suspended from trading amid allegations that the civil service auxiliary pension fund paid an excessive price for the 12-year bond, issued by the Greek state.

About 200 state-controlled pensions are currently banned from buying structured products and investing in derivatives pending the results of a prosecutor’s investigation. The funds will also have to undergo a special audit. But the scandal has failed to affect share trading, partly because of restrictions on the pension funds’ purchases of stocks.

Under current regulations, the pension funds can invest only 23% of holdings estimated to total €30bn in shares and real estate. Because most funds lack professional managers, their activities are supervised by the central bank. Over the next decade, the state-controlled pension funds will be consolidated as part of broader pension reform.

Bringing domestic investors back to the stock market, however, could be a long process. Rather than invest in mutual funds through their banks, Greek investors have tended to trade stocks through small brokerage firms. Last year, retail and domestic institutions were net sellers on the bourse. Outflows reached more than €5.7bn, and inflows from international institutions totalled €5bn.

“Domestic investment in Greek equities is structurally low, in spite of the growing sophistication of the Greek investor. And Greek investors have been net sellers for the past few years. Many unit holders have pulled out as soon as they made up losses from the period of the market collapse,” says Ms Telioudi.

Banks control 90% of the mutual fund industry, which is heavily tilted towards foreign bond and money-market funds. Of €22bn of assets under management at the start of this year, only €4.9bn was invested in domestic equities – compared with €14bn at the height of the boom. The Athens stock exchange still has a lot of ground to make up.


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