The retail lending boom triggered by Greece’s entry into the eurozone in 2002 is set to slow this year, as the country counts the cost of staging the Athens Olympics. The European Commission is monitoring Greece’s economy closely as the government of prime minister Costas Karamanlis struggles to bring down a budget deficit estimated to be more than 6% of gross domestic product (GDP) – more than twice the limit permitted by the eurozone stability pact.
The cost of staging the games, which exceeded budget targets by more than €2bn, accounted for most of the overrun. But generous wage and pension increases, together with a slowdown in tax revenue growth, also contributed. And an audit of the national accounts, carried out by the Karamanlis government after it came to power in March 2004, revealed that military spending had been under-reported by the previous Socialist government.
Cuts are essential
Greece has agreed with the EC to reduce the deficit to less than 3% of GDP within two years. Deep cuts will have to be made in public investment – the main driver of Greece’s recent high GDP growth rates, which have averaged above 4% yearly. Economists say that growth this year is unlikely to exceed 3.3%, unless the country can successfully leverage the favourable publicity received during the Olympics to attract more tourists.
Greece’s credit rating was downgraded one notch last December by Standard & Poor’s and Fitch to a single A following the revision of the national accounts – the lowest rating among the 12 members of the eurozone. But appetite for Greek bonds remains strong; the country’s first 30-year bond offering, launched in March, was heavily oversubscribed.
Despite a tougher business environment, lending growth this year is still projected to outpace the rest of southern Europe. “The lending increases we saw last year were exceptional, but the economy is projected to grow relatively robustly this year – although at a slower rate than in 2004,” says Nikos Nanopoulos, managing director of EFG Eurobank, which is controlled by the Swiss-based Latsis group. Consumer loans increased by 37% in the second half of last year after the central bank lifted a €3000 ceiling on lending to individuals – a rise that is not likely to be matched.
Mortgage growth
A surge in mortgage lending is expected this year ahead of the planned introduction in 2006 of valued-added tax on new buildings. Mortgage borrowing by Greek households, at 20% of GDP, is still well below the eurozone average of 39%.
“Greek consumers are still underleveraged,” says Marinos Yannopoulos, chief financial officer at Alpha Bank, the biggest private Greek bank. “Individuals are relatively wealthy. Most people own real estate in their name, so they feel comfortable about borrowing.” While spreads in mortgage lending are shrinking, driven by lower-margin products offered by smaller Greek banks, another year of double-digit growth is projected.
Competition for lending business remains intense among the three leading banks, which together account for 45% of total outstanding loans. EFG Eurobank, increased its market share by 1.2% last year, outpacing Greece’s average credit expansion in every sector. Mortgage and consumer lending increased 45% and 39% respectively. Lending to small and medium-sized businesses increased by 33%.
Alpha saw a 0.2% fall in market share but increased profitability by switching its focus from low-margin corporate business to consumer lending. Leveraging its role as an official sponsor of the Athens Olympics – including the issue of a series of games-related credit cards that involved offering games-related credit – Alpha boosted consumer credit by 51% and mortgage lending by 32%.
A restructuring at National Bank of Greece (NBG) – the biggest Greek bank, which is loosening its ties with the state – contributed to growth of 28% last year in household lending. A voluntary redundancy plan for 10% of the workforce and significant cuts in the branch network are planned. Disposals of non-core assets, which are projected to raise over €550m, would outweigh by a wide margin the estimated €200m cost of restructuring the bank’s pension scheme.
Concern about unfunded pension liabilities, unrecognised bad debt and the clout wielded by Greece’s powerful bank unions – which have fought off several attempts by management to introduce flexible working hours – are factors that have discouraged international players from entering the Greek market. But banks that are already established in south-east Europe are starting to see Greece as part of a regional network. One is France’s Société Générale, which last year acquired General Bank, a small institution controlled by the army pension fund, in the Greek banking sector’s first cross-border privatisation deal.
The state still controls about 40% of the banking market – the highest percentage of any country in the region – mainly through state pension funds, which have significant shareholdings.
A partial privatisation of the Postal Saving Bank is planned this year through an initial public offering on the Athens stock exchange. The government hopes to raise about €450m from the sale of a 25%-30% stake, according to analysts.
Delay in sell-offs
High pension liabilities at other state-controlled banks are likely to delay further sell-offs. Greece’s adoption this year of international financial reporting standards will highlight the problems, as pension fund deficits, together with provisions for future pension outlays and severance payments, will appear on the banks’ balance sheet for the first time as liabilities.
Market sources say that Credit Agricole, which holds an 11% stake in Emporiki Bank (formerly Commercial Bank), Greece’s fourth biggest bank, would be keen to acquire the 9% stake held directly by the state, but only after the bank’s auxiliary pension fund has been restructured. Bank of Attica, in which the state holds a 37% stake, also faces problems with its auxiliary fund. Unions are keen to negotiate a package deal under which the government would refinance the auxiliary funds, but the finance ministry would face opposition from the EC.
Greek banks also face sharp competition in the regional market following the EU accession of central and eastern European countries. International players have increased their presence as higher economic growth rates and increased political stability reduce risk in the west Balkans, consumer lending booms in Bulgaria and Romania as investment increases, and per capita incomes rise in the run-up to EU accession.
NBG, which controls a network of more than 200 branches in Albania, Bulgaria, Macedonia, Romania and Serbia, plans an aggressive expansion through acquisitions as well as organic growth. Profits from south-east Europe rose 32% last year to €58m, led by UBB, the group’s Bulgarian subsidiary.
Romania and Turkey are NBG’s main targets. With just a 2% market share in the biggest market in the Balkans, NBG would be a possible buyer of Tiriac Bank or another medium-sized bank, say market sources. Turkey’s status as a formal candidate for EU membership eases the way for Greek banks to enter that market. But NBG is still expected to seek a partner, either local or international, for a Turkish venture.
Interest in Serbia
Efforts by the Serbian government to accelerate bank privatisation this year have attracted keen interest from Greek banks. Alpha Bank agreed to pay €152m for 87% of Jubanka, the country’s seventh-largest bank (see following article). Piraeus Bank, a smaller private Greek Bank with subsidiaries in Albania, Bulgaria and Romania, has acquired Atlas Bank, a small private bank, for an undisclosed amount.
EFG Eurobank plans to put more resources into Bulgaria and Romania, where it controls banks with extensive branch networks, and into its small Serbian subsidiary. It is expected to make a cautious entry to the Turkish market, possibly by acquiring a consumer credit or brokerage company, according to market sources. “By 2009, we expect to have at least 25% of revenues and 20% of profits originating in south-east Europe. It’s an ambitious but not unrealistic target given the region’s potential,” says EFG’s Mr Nanopoulos.
