All things being equal, the Greek banking sector should be healthy. The four largest locally owned banks compete on a relatively level playing field with several smaller foreign-owned players. There are no giant or state-owned banks distorting and squeezing competition as in the UK, nor is the sector fragmented among smaller, inefficient banks as in Germany.
Before the financial crisis, the business model for most Greek banks had been highly conservative at home. "Unlike those in other countries, Greek banks did not cause the financial crisis - they are its victims," says Gikas Hardouvelis, chief economist of Eurobank EFG Group, one of Greece's 'big four'.
He calculates the aggregate loan-to-deposit rate in Greece at just 81.3% in November 2009, while the capital-to-assets ratio was well above the average for the EU. Profitability was much healthier than the EU average before the crisis, with Greek banks recording aggregate return-on-equity (ROE) of more than 10% in 2008, compared with negative ROE for the EU as a whole.
But all things are not equal. Ever since the October 2009 revelation of a hidden budget deficit by the newly elected government of George Papandreou, which doubled the 2009 figure to 12.7% of gross domestic product (GDP), investors have increasingly shunned Greek government bonds, on which yields rose from less than 4% to more than 7% by February 2010.
Budget overhang
Two of the three main ratings agencies have now downgraded the sovereign below A-. This is the threshold rating for bonds to be accepted as collateral for bank repo liquidity transactions with the European Central Bank (ECB). The ECB temporarily lowered the threshold to BBB- to help banks navigate the financial crisis, but that dispensation is due to expire at the end of 2010. This leaves the third agency, Moody's, appearing to hold a veto on whether Greek banks can use their own government's bonds as repo collateral from 2011 onwards.
Greek finance minister George Papaconstantinou, apparently with full backing from Mr Papandreou, has been making all the right noises. He has laid out a stringent stability and growth plan (SGP) to correct the deficit, reinforced with further spending cuts in February 2010. And he has promised greater independence for the state statistics agency that is under the spotlight after the 'discovery' of the missing deficit.
When asked by The Banker at a conference in January about the Damocles sword that Moody's and the ECB are dangling over the government's head, he refused to shift the blame to either organisation, or to the investors who turned on Greece with such ferocity. "The higher yields on Greek government bonds are warranted given what has happened. But as the EU monitors and approves the execution of the SGP, and as economic reforms are passed, it will be clear that the advantages of playing by the rules outweigh any disadvantages that analysts comment on," says Mr Papaconstantinou.
One of those analysts is Miranda Xafa, a senior investment strategist for Swiss wealth manager IJ Partners, who previously worked at the International Monetary Fund. She does not doubt Mr Papaconstantinou's good intentions, but characterises the market's fear that the Greek government does not have the tools to tackle the problem without external support. In particular, she is concerned that large monthly debt rollovers of more than €10bn each in April and May 2010 will create pressure points for refinancing.
Ms Xafa also warns that the SGP is "very sensitive to underlying assumptions on the differential between interest rates and GDP growth rates". This is especially worrying because, as a eurozone member, Greece no longer controls its own interest rates. The ECB may hike rates to tackle inflation in core eurozone economies such as Germany, even if the Greek economy is growing slowly due to heavy fiscal tightening.
According to Ms Xafa's calculations, if that interest rate/growth differential rises to 3%, then the debt burden will not stabilise. Little wonder that markets demanded nothing short of unambiguous promises of financial support for Greece from its eurozone partners in February 2010.
Liquidity challenge
There is at least one saving grace for Greek banks, Ms Xafa notes. "Greek government bonds are only 8% of Greek banking assets, with 70% of the bonds held by foreign investors," she says. But the rise in government bond yields is squeezing Greek banks on the liability side.
This is important, because the big four banks have used their rich liquidity positions at home to fund expansion in south-east Europe (SEE). The aggregate loan-to-deposit ratio for Greek banking groups including their foreign holdings is 105% according to Mr Hardouvelis, giving an indication of how much liquidity has been pumped into SEE subsidiaries. According to Alexander Kyrtsis, head of Greek and Turkish bank research at UBS, the loan-to-deposit ratios of Greek banks in countries such as Bulgaria and Romania were as high as 200% when the crisis broke in 2008.
As a result, the leading Greek banks have a total debt rollover requirement of more than €12bn in the next two years. This must be achieved "against a wall of issuance from the Greek government and other issuers in the eurozone," says Anthimos Thomopoulos, chief financial officer of National Bank of Greece, the country's largest bank.
Mr Thomopoulos calculates that, even assuming that spreads do not widen further, the 300 to 400 basis point (bps) rise in funding costs will translate into €360m to €480m in extra costs for the four largest banks, equivalent to about 20% of their earnings in the first nine months of 2009.
Unsurprisingly, Greek banks have been relying heavily on ECB repo transactions for short- and longer-term liquidity - to such an extent that the ECB warned Greek banks to reduce this dependence in November 2009 to prepare for the end of its special liquidity schemes on December 31, 2010. Mr Hardouvelis calculates ECB funding at 8.7% of Greek bank assets, compared to an average of 2.2% for the eurozone as a whole, although the total quantity of funding has halved from a peak of almost €80bn at the start of 2009.
George Papaconstantinou, Greek finance minister
Struggling to compete
The higher cost of funds for local banks is particularly significant, given the presence of 27 foreign banks in Greece - although many of these have relatively small operations. Some of the foreign banks whose parents have high credit ratings are apparently able to offer corporate loans at lower interest rates than the sovereign itself is currently paying for capital market funding.
"Foreign ownership does differentiate us in terms of funding at a time when there are problems in the wholesale markets. It is an additional resource that allows us to draw on liquidity on better terms than the Greek-owned banks," says Dimitris Georgopoulos, chief commercial officer for Geniki Bank, which is owned by France's Société Générale.
In addition, says Arnaud Tellier, CEO of BNP Paribas in Greece, his bank can price loans while bearing in mind the opportunity to generate non-interest income through cross-selling the services of the parent group's corporate and investment banking (CIB) unit. This is a business model not open to pure-play Greek commercial banks.
However, not all foreign banks pursue the same strategy, with some preferring Greek subsidiaries to be self-financing. One of those is Millennium Bank, which is 100%-owned by Portugal's Millennium bpc. "We are a Greek bank after all, so we fund our loans in the Greek market. It is more difficult and expensive, and I expect the intensity in the competition for attracting deposits will increase again in 2010," says George Taniskidis, managing director at Millennium Bank.
What one banker refers to as a "deposit war" occurred in the first quarter of 2009, when banks anxious about their liquidity competed on customer offers so fiercely that margins took a significant hit. Local bankers say they learnt their lessons, but the risk persists that one bank may panic and begin a fresh round of deposit rate hikes if wholesale markets remain volatile.
But from the point of view of the Greek banks, the saving grace is that leading foreign-owned banks have not enjoyed great success in the market, even before the financial crisis. While the top four Greek banks remained in profit in the first nine months of 2009, Emporiki (the second-largest foreign-owned bank) recorded a €472m loss, having already lost €492m in 2008. The bank's non-performing loan rates are about double the sector average, and a restructuring plan announced in October 2009 pledges to return the bank to profit in 2011, partly by adopting risk management standards in line with those of its 82.5% owner Crédit Agricole.
Slow to change
The largest foreign-owned bank, Marfin Egnatia, has an owner rather closer to home - Cypriot Marfin Popular Bank, which is planning to consolidate Egnatia entirely during 2010. Marfin Egnatia has been more successful than other foreign-owned banks, staying in profit in 2008, although it dipped narrowly into loss during the first nine months of 2009.
Thanks to Marfin Egnatia's relative success and the strength of its still-profitable parent group, there is widespread market speculation that it may buy up another of the local or foreign-owned lenders in Greece. However, the process of consolidation or restructuring in the sector has been slow. Merger attempts between NBG and Alpha Bank in 2002, or between Marfin and Piraeus in 2007, were not completed. The fairly similar and classical models of the largest banks, with duplicating branch networks, make it difficult to derive benefits from merger and acquisition (M&A) activity.
"There tends to be an impediment in realising cost synergies, as shutting branches is difficult due to a fairly rigid labour market. In the case of NBG and Alpha, for the deal to make sense would have required shutting about 400 branches, roughly equivalent to the whole of Alpha's network, which would have been badly received by the public," says Mr Kyrtsis at UBS.
Mr Tellier of BNP Paribas suggests there is also limited scope for selling individual units, as discrete business lines such as investment banking or leasing finance tend to be too small to appeal to potential buyers. NBG mandated Goldman Sachs to find a buyer for its National Insurance subsidiary in 2009, but ended the search owing to unfavourable market conditions.
Lack of foreign willing
And there is little sign of foreign players being willing to buy, in view of the strategic difficulties at Emporiki in particular. Indeed, the process at present seems to be heading in the opposite direction, with NBG apparently bidding for the leasing assets of a foreign-owned bank.
Mr Kyrtsis says that consolidation still seems possible in the long term, if Greece is compared to similar scale banking markets such as Sweden or Austria, which tend to be dominated by two or three leading players. "That might give Greece the kind of true national champion that could compete externally," he says.
Foreign fields
Precisely because Greek banks have not obtained critical mass overseas, their operations in the SEE region are also under scrutiny for signs of M&A activity. Although SEE assets now account for about 20% of those held by Greek banks, their market share in individual Balkan countries is relatively low. According to Mr Kyrtsis, only in Bulgaria, where the four Greek banks account for 28% of the market, does their combined share exceed that of the single largest player in the country (UniCredit in the case of Bulgaria).
In theory, the banks have committed to maintain the capitalisation of their SEE subsidiaries under the Vienna Initiative of March 2009, agreed between banks active in the region and multilateral lenders. Thomas Mirow, president of the European Bank for Reconstruction and Development - the largest multilateral lender to the SEE region - told a press conference in January 2010 that the Greek banks had stood by that agreement so far.
"There are always potential risks if the situation in Greece itself continues to deteriorate, but we have not yet seen any spillover into the eastern European region, there has been no reduction or withdrawal of Greek bank engagement up to now," he said.
Markus Heidinger, a partner in the banking law practice of eastern Europe specialists Wolf Theiss, says there are signs that both Santander and Deutsche Bank might be interested in purchases in the region, now that valuations have declined a long way from their pre-crisis peak. Asian or even the relatively healthy Turkish banks are also possible bidders.
But Mr Kyrtsis says there is little short- or long-term logic for the Greek banks to sell now. Potential long-term growth rates in underbanked SEE economies are higher than in Greece itself. And even if Greek bank liquidity and capital came under renewed pressure, the sale of individual emerging European subsidiaries (excluding NBG's 95% stake in Turkish Finansbank) would in many cases raise little extra cash.
Assuming a book value multiple of 1.5 times, Mr Kyrtsis calculates the sale value of Eurobank's 5% share in Romania - the largest Greek bank stake in one of the region's largest banking markets - at just €360m, compared to Eurobank's total balance sheet of about €84bn.
Greek banks: wholesale funding rollover (€bn)
