Greece’s avoidance of complex banking products means it has weathered the downturn better than other European countries. Now it is stealing a march on bigger economies by expanding into its near neighbours. Writer Stephen Timewell.

Just as Spanish banks have diversified and expanded into Latin America, the future for Greece’s banks lies beyond the country’s borders. And in a traditional manner, the banks are following their customers abroad and creating new business and banking hubs.

Greece sees itself as a key gateway to countries in its neighbourhood, call it south-east Europe (SEE) or ‘new Europe’, stretching, in effect, from Poland to Turkey. In recent years, more than 3600 Greek firms and 3000 branches of Greek banks have established operations in SEE countries and have invested more than €15bn.

Greece is strategically placed on the east-west energy corridor linking the Caspian Sea to Europe. It also owns the largest shipping fleet in Europe and the third largest in the world.

While many major economies have tended to overlook the countries of SEE, Greek companies, especially banks, have been keen to grasp the potential and opportunities in the region. This expansion has been a prime driver of Greece’s economy and its role as a banking centre for the region.

In the past three years, the Greek economy has been expanding at an yearly rate of 4%, one of the highest in the eurozone. In its spring forecasts, the European Commission estimates that Greece’s growth rate will reach 3.4% in 2008 – double the 1.7% growth rate expected for the eurozone.

Speaking at the recent Banking on Greece conference in Athens, minister of economy and finance George Alogoskoufis stressed his country’s strong growth performance along with its safe banking sector.

“Greek banks are not exposed to complex [banking] products and while the global credit crunch will have an impact on the real economy, Greece’s banking sector will remain safe,” he said.

Cost of funding up

As the collapse of Lehman Brothers and other events in September played out on global financial markets, bankers in Athens escaped relatively unscathed, with no material exposures to US markets but well aware of the increased cost of funding. As one banker said: “The credit crunch will hit hard in 2009, the EU growth rate will be lower and borrowing costs will be higher.”

On October 3, Mr Alogoskoufis followed Ireland’s move in supporting its banking sector by unilaterally guaranteeing all bank deposits. While emphasising that there were no problems with banks in Greece, the ­minister said deposits in all banks that operate in Greece would be “absolutely guaranteed” – a move that is estimated to be worth €230bn.

“In recent days, some citizens, influenced by unfounded rumours, showed nervousness as far as our country's banking system is concerned,” said the finance minister. “Greece’s banking system is completely safe and solvent and I want to emphasise that citizens’ deposits in all the banks that operate in the country are absolutely secure.”

Commenting on the global financial turmoil, Michalis Sallas, the chairman of Piraeus Bank, Greece’s fourth largest bank, said in a statement on October 2: “The Greek banking system faces no risk – since the Greek banks were not exposed to the so-called ‘toxic’ bonds – and remains absolutely healthy.”

Prior to the October announcement Greek law had guaranteed deposits of up to €20,000.

Diversified income

Although Greece is following moves by other countries in Europe to guarantee all deposits, the fundamentals of the banking sector appear sound, with well-diversified sources of income in some of the fastest-growing areas of Europe.

Takis Arapoglou, chairman and CEO of National Bank of Greece (NBG) – the country’s largest bank – is confident the bank’s expansion strategy of recent years will continue to bring results and, while the global credit crunch will bring an increased cost of funds, it is not likely to cause significant damage. “If we are careful, there is no significant reason to be concerned, we are conservative,” says Mr Arapoglou.

In the first half of 2008, NBG Group saw net profits rise by 15% year-on-year to €835m with return on equity up two percentage points to a healthy 26%.

Integral to NBG’s growth was the expansion in its important markets of Turkey and SEE. Finansbank, NBG’s Turkish subsidiary, contributed 29% of total group profit with net attributable profit for the first half of 2008, up 22% amounting to €238m. Units in SEE posted an impressive 74% growth in net profit to €107m, 13% of group profit.

With the addition of 66 branches to the Finansbank network and 127 new branches to the SEE network since June 2007, the banks now have 418 and 695 branches in Turkey and SEE respectively.

Although NBG is located in nine countries, including Egypt and South Africa, Mr ­Arapoglou is not looking for further large acquisitions. “Our three-year plan [2007-09] will not involve any major acquisitions but will focus on organic growth along with bolt-on acquisitions and strict management control,” he says.

The organic growth strategy and expansion outside Greece are also paramount for the Eurobank EFG Group, which has not only established a presence in Bulgaria, Romania and Serbia, but since 2006 has entered the markets of Poland, Turkey, Ukraine and Cyprus. Eurobank has also invested €2bn in the wider region of SEE and central Europe.

Underbanked economies

Eurobank EFG – which is a member of the EFG Group, Switzerland’s third largest banking group – has focused on building networks in the rapidly growing new Europe economies, which are relatively under-­penetrated in banking terms.

In 2007, 228 new branches, business centres and points of sale were established and the total network outside Greece reached 963 units. Net profit from new Europe was €72.6m at the end of 2007, against a target of €60m and losses a year before, whereas net profit excluding the most recent operations in Poland and Ukraine climbed to €115m from €29m in 2006.

The Eurobank branch network is expanding rapidly with 250 to 300 branches opened in the past 12 months. Of the new Europe branches, 60% are less than 30 months old. As Eurobank chief executive Nicholas Nanopoulos explains: “The branch network is not yet mature, there is much more room to expand.”

Bigger contribution

In September, the NE network reached 1253 branches and servicing units led by Poland (320), Romania (289) and Bulgaria (244), with the new Europe network accounting for 69% of the total group network.

In the first half of 2008, new Europe accounted for 17% of Eurobank’s profits but as the branches in these countries develop, the contribution from new Europe is expected to expand markedly to reach between 35% and 40% of the group total by 2010, or about €550m.

Eurobank is confident that the 320 and 180 branches in Poland and Ukraine, respectively, can provide solid growth in retail deposits and opportunities in areas that are relatively underbanked. Total credit/gross domestic product (GDP) ratios in Poland and Ukraine are 42.4% and 61.7%, respectively, but are far below the total credit/GDP ratios of Greece and the euro area countries of 118.5% and 163.4%, respectively.

Improved efficiencies

Eurobank is also confident about driving improved efficiencies in areas such as Poland, where the single technology system has not been fully exploited.

Like NBG and Eurobank, the other Greek banks are following similar models and expanding in the region outside Greece. In 2004, Alpha Bank – the second largest Greek group – had only 70 branches outside Greece. Now it has 447 branches and in the first half of 2008, profits from SEE accounted for 16.4% of the Alpha total. And the contribution of Piraeus Bank’s investments abroad accounted for 24% of its pre-tax profits in the first half of 2008.

Speaking at a September banking conference, Anthony Crontiras, CEO of Greece’s fifth largest bank, Emporiki Bank, stressed the opportunities for Greek banks in SEE. “It is a natural area of expansion for us – it is the most promising area in Europe,” he said.

Debora Revoltella, central and eastern Europe chief economist at UniCredit Group, emphasised the highly profitable nature of the SEE banking sector, which includes Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Moldova, Montenegro, Kosovo, Romania and Serbia.

A market of 58 million people with per capita GDP of €5356 and a banking penetration of 91% (loans plus deposits/GDP), the SEE banking sector saw profits rise by 24% to €2.6bn in 2007 with double-digit growth expected to continue driving growth, to reach an estimated €3.3bn in 2008 and €4.1bn in 2009.

Funding gap growth

But while UniCredit sees profits in SEE, it also sees growth in the funding gap (loans minus deposits), which implies a need for external funding. The research showed that the SEE banking sector funding gap would rise from €7.5bn in 2007 to €35bn in 2010.

In analysing the outlook for Greek banking, most bankers have remained bullish, especially regarding the regional potential and the lack of exposure to ‘toxic’ assets.

As Gikas Hardouvelis, Eurobank chief economist, says: “Greek banks were isolated from the excesses of international banks, yet face a larger cost of funds and a more risky economic environment while the crisis lasts. The pros outweigh the cons for Greek banking and, once the worst conditions of the ­crisis are over, a careful strategy of cautious expansion may lead them to become comparatively stronger.”


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