ECONOMY

A good merger needs fine managers

The proposed merger between National Bank of Greece (NBG), the country’s largest commercial bank, and Alpha Bank, its largest private bank, will clearly change the banking landscape. But even as the potential merger puts to rest, at least for a while, speculation about a potential strategic linkup between a large Greek bank and a large foreign one, likely in the eurozone, it also brings to the forefront another question. Can mergers between local banks increase shareholder value without raising the social costs? The ability of the new bank’s top management team to set clear goals and control costs hold the key to this answer. Undoubtedly, the merger between National Bank and Alpha Bank, pending the required approval from the proper authorities, has sent shock waves through Greece’s banking sector and has the potential to become the catalyst for more national consolidation in the sector. The new merged bank will undoubtedly have the large size required to show up on the radar screens of most active and passive foreign institutional portfolios and have greater firepower – a senior National Bank official estimated it at 4-4.5 billion dollars – to go after a foreign bank, most likely a midsize eurozone bank. However, we should not forget that while size may be important, what counts at the end of the day is earnings growth. After all, the ultimate test for the success of this megamerger, if approved, will be the ability of the new banking entity to generate higher earnings per share growth in the years to come and therefore to boost shareholder value; but this is not an easy task. Analysts and bankers like to remind third parties how difficult it is to integrate new acquisitions and manage merged banks. They point out that National and Alpha Bank are universal banks, that is they offer all kinds of products, which means there are not that many complementarities; and the new bank will most likely place a high priority on exploiting economies of scale. On the other side, top executives from National and Alpha Bank like to stress their past record. National Bank managed successfully to merge with National Mortgage Bank, a subsidiary specializing in mortgage lending, a few years ago and Alpha Bank managed to absorb former state-owned Ionian Bank in a reasonable period of time. Nevertheless, history is not on their side. The majority of big mergers has not produced the desirable results for their shareholders. Moreover, the planned merger between National and Alpha Bank cannot be compared to any previous one in terms of sheer size. Nevertheless the merger, assuming all regulatory obstacles are cleared, has the potential to increase shareholder value. First, it will get a favorable tax treatment in the first couple of years at least, making it possible for the new entity to absorb more easily part of the initially huge costs of restructuring, estimated by some analysts at some 100 billion drachmas or more. Second, strong loan volume growth is expected to continue to boost revenues in the medium term as Greece’s loan-to-GDP ratio, currently around 45 percent, is much smaller than the average eurozone average of 90 percent or more and Portugal’s 80 percent or so. In addition, the large size of the new bank will likely help it reduce some pressure on its interest rate margins. Third, the new bank will be able to realize cost savings on IT and telecoms investments, marketing expenses and others as it simultaneously introduces voluntary early retirement schemes and streamlines its branch network by shutting down branches. Fourth, the new bank will be adequately capitalized and excess equity should be at lower, more reasonable levels. Despite all these positive aspects, the truth is that the potential merger of National Bank with Alpha Bank will face many difficulties as two different cultures come together. Although everybody expects cooperation at the top from the beginning, it is inevitable that the complexities of the deal will put this cooperation to a test and nobody knows how disagreements, which have hampered other big mergers, will play out. It is known that merger problems have produced strains in similar experiments, resulting in increased competition among the members of the board with one side prevailing at the end. Capital market conditions will play a significant role in determining the outcome, since a good deal of revenue for both banks comes from stock and bond trading and related income and fees. If capital market conditions improve, this will undoubtedly help the bottom line and cause fewer headaches and competition at the top. If not, the opposite should be expected to be the case. The merger is undoubtedly in the right direction. Greece needs larger corporations, measured by eurozone standards. However, the ultimate test will be earnings growth, not size. Therefore, the ability of the new entity’s top management to bring together the two different cultures and meet clearly set profit goals within a reasonable period of time without raising employee insecurity will be the key to success.