Rate hikes a concern

Alpha Bank’s surprise move to increase consumer, mortgage and credit card rates last week may be partly explained by its desire to boost profits ahead of an anticipated slowdown in retail lending this year. But the action, however, coupled with other major banks’ expressed willingness to review their own lending-rate structure despite the downward trend in euro interest rates, raises serious questions about competition and competitiveness in the Greek banking system in general. Alpha Bank, the country’s second largest bank in terms of assets, announced last week a new set of higher interest rates on mortgages, consumer loans and credit cards and called it a «rationalization of our pricing policy.» Bank analysts and others were quick to point out that Alpha, which traditionally had a relatively large market share in the business loan category but a much smaller share in the lucrative consumer and mortgage loan segments, had taken the lead to cut consumer lending rates in the summer of 2000 and certain rates on mortgages in 2001 in a bid to capture market share in the promising local retail banking. The same analysts noted that Alpha’s top management perhaps felt it had captured a satisfactory market share in consumer and mortgage loans and decided to focus on boosting profits rather than go for a bigger slice in a year. Most analysts believe consumer lending growth will be limited to a low double-digit number at best and mortgage lending growth rates will slow down considerably after surpassing the 30 percent mark in 2002. The expected slowdown is attributed both to general economic conditions as well as the Bank of Greece’s introduction of stricter capital requirements for consumer loans in mid-January. Analysts also pointed out that the rate hike made room for a reduction in the same lending rates later on the heels of the European Central Bank’s (ECB) likely decision to cut its main refinancing rate, which currently stands at 2.75 percent, by 25 or even 50 basis points. The majority of economists predict a rate cut in March or April at the latest. Some even speculated the move may have been aimed at making Alpha Bank more attractive to a potential foreign bank interested in linking up with the Greek bank by acquiring the latter’s 10 percent equity stake (treasury stock). Nevertheless, Alpha Bank’s decision to raise a wide range of lending rates, including variable mortgage rates, combined with statements by high-level officials at Commercial Bank and Piraeus Bank suggesting perhaps a similar move in coming weeks, is startling in two respects. First, it comes at a time of declining euro interest rates. Second, it was taken at a time when data show that lending rates on consumer and variable mortgage loans offered by the five large local banks are the highest or among the highest in the European Union. Although Greek bankers have not disputed that consumer and personal lending rates are among the highest in the European Union, they have long countered that their mortgage rates are among the lowest, if not the lowest, in the EU. This is hard to confirm, however. Figures provided by UBS Warburg show that the spread on a typical variable rate mortgage, that is the difference between the lending rate and the reference rate, usually the three-month Euribor, ranges between 2.25 and 3.25 percentage points in Greece since the variable mortgage rates offered by the five large banks vary between 5.25 percent and 6 percent and the three-month Euribor stands at about 2.75 percent. This spread compares unfavorably to 0.7 points on average in France, 0.9 points in Germany, 1.3 points in Spain, 1.3 points in the Nordic countries, 1.0-1.1 points in Portugal, 1.5 points in Italy and 0.9 points for new mortgages in the UK. If one also takes into account the fact that the five major Greek banks offer deposit rates below the eurozone average, although Greek inflation is among the highest in the eurozone and the EU running at 3.1 percent year-on-year in January, and their average deposit-to-interest bearing assets ratio stands at around 85 percent compared to an estimated 62 percent or less in the European Union, then one has to conclude that these banks have an advantage for two reasons. First, their deposit base gives them access to cheaper funding for their assets than the interbank market can provide for. Second, they can charge much higher lending rates to their customers for consumer loans and more variable mortgage rates than the majority of their peers in the eurozone. This combination of low deposit rates and high lending rates in consumer and mortgage categories explains their stated strategy of expanding into retail banking. At the same time, it says little for the level of competition in the Greek banking sector and retail banking in particular. It can be explained, analysts point out, by the high concentration in the Greek banking sector, where the five large banks are estimated to account for more than 80 percent of the system’s total deposits and loans, as well as high growth rates. They add that access to retail banking requires an extensive branch network and this works as a barrier to entry for new entrants, even large eurozone banks. «There is no so-called perfect competition. It is a high-concentration market, where somebody plays the role of the leader and the others the roles of followers,» says a London-based analyst. Faced with three consecutive years of decline, it is easy to understand why large banks want to shore up their profits and satisfy their shareholders. Analysts point out that their decision to increase rates in the context of high consumer and variable mortgage rates and very low deposit rates may be also indicative of the limits they face in cutting their operational costs. This in turn rings alarm bells about their medium-term competitiveness in a field bound to become more open to competition in the years ahead and a projected slowdown in high Greek GDP growth rates.