Alpha Bank’s surprise 2 percent rate hike for mortgages and consumer loans, which came into effect on Monday, drew strong unfavorable reactions, not only from consumer and business bodies but also from the government. The reaction seems reasonable, for two reasons. First, because the general trend internationally is for interest rates to come down, and second, because the increases are large and hit hard the bank’s numerous clients who obtained mortgage loans at variable rates. It is worth considering the financial background to Alpha’s move. Bank profits have been falling since 2001; far from contributing to profitability, the capital market business has been eroding bank incomes. So the drive to expand into retail banking has been more or less inevitable. Undoubtedly, competition has given rise to excesses as banks, striving to win market shares, ignored risks. Characteristically, it was Alpha that first brought down the basic variable mortgage rate to 5.25 percent, creating a reaction among the other banks which could not but follow suit. That move was a signal that the bank wanted to enlarge its client base, increase its interest income and improve profits. The same applied to the drastic reduction in deposit rates which all banks adopted in order to improve spreads. However, according to all indications, profit margins did not improve enough to produce satisfactory results, while efforts to cut costs have not met with much success. It is interesting that Alpha announced the hike last week at the same time as its new voluntary retirement program, perhaps in order to send a message to analysts ahead of the announcement of its 2002 results tomorrow that it is adopting measures to control costs and improve income. In this sense, the rise was the right move but the reaction may dampen its growth rate. On the whole, it seems that the bank did what it had to do, seeking to make up for the losses resulting from the Bank of Greece’s new rules for higher provisions and the ban on commissions on loans. The additional cost of provisions will be even greater in the case of outstanding corporate loans. The expansion of the loan portfolio requires a higher capital adequacy ratio. If, for instance, a bank grants loans of 1 billion euros, it must tie down an amount equal to 12 percent, that is 120 million euros. Another significant factor is created by the banks’ obligation to include their liabilities to pension funds, according to the International Accounting Standards adopted this year. Further, Alpha is still bearing the weight of amortizations for the acquisition of Ionian Bank five years ago and its sponsorship of the Olympic Games. At the same time, given the stock market malaise, a share capital increase is out of the question. Given this stringency, Alpha was the first to issue a 200-million-euro hybrid bond loan in November and another for 100 million, at a high cost (2.65 percent). Such financial factors provide some insight into the reasons behind Alpha’s interest rate rise, which other banks may follow. The fact that it was done in an «inelegant» way may have a further cost and reduce the intended impact of the move.