Greek banks can do still better, according to a 70-page report by UBS Warburg released this week. Observers note as the most important element of the report the confirmation that the Greek banking system still has a large growth potential, judging mainly by comparison with credit levels in the rest of the European Union. In Greece, total loans as a percentage of GDP were 62 percent in 2001, when the EU average was more than 110 percent. The high growth rates of recent years look likely to continue. UBS Warburg forecasts that Greek bank lending, which grew 18 percent on average in 2002, will advance 16 percent in 2003 and about 15 percent in 2004, at a time when economic activity does not look particularly buoyant. Profitability and asset values also look on the upside, according to the report. Interest margins have also risen, particularly in corporate lending; rates are now more rational in relation to the risk undertaken. UBS also considers that neither lending to small and mid-sized enterprises – which will continue growing appreciably in coming years – nor consumer credit – which seems to have reached a plateau – will come under pressure. The reason cited is that Greek banks now give much greater weight to their profitability and credit risk. This is seen as a particularly positive development by foreign investors. The much greater concern being shown now for results is confirmed by a careful look at banks’ moves as regard rates after the European Central Bank’s basic rate reduction. UBS Warburg is also upbeat about the prices of bank stocks, noting that from now they will not fall short of either the general index of the Athens Stock Exchange, or the average of Europe’s largest 300 banks. At current stock prices, Greek banks have a price-to-earnings ratio (P/E) of 10.3 for projected 2003 profits and 9.4 for 2004 profits, when the respective ratios for European banks are 11.8 and 11.0. The differences amount to discounts of 13 and 15 percent for the two years respectively. UBS says the discount is justified by the unfavorable trends in the cash flows of Greek banks. As regards particular recommendations, all Greek banks are now in Neutral 1 or 2 (1 means greater likelihood of the recommendation being confirmed). National and Piraeus banks remained at Neutral 2; Alpha was lifted from Reduce 2 to Neutral 2. For Eurobank, the recommendation was raised from Neutral 2 to Neutral 1. Emporiki Bank was improved from Reduce 2 to Neutral 2. In summary, UBS Warburg stresses that Greek banks are operating in a favorable macroeconomic growth environment, with risks posed by comparatively high inflation. The positive elements of the outlook include the fact that there is no data pointing to an erosion of the quality of loan portfolios. On the negative side, it notes that payroll cutbacks are very slow.