Faced with sharply declining trading incomes, the five large Greek commercial banks have turned to retail banking to compensate for lost revenues and boost their revenues and earnings in the last few years. Although this shift in strategy has worked relatively well and may be the driver of growth for a few more years, it is ultimately going to run out of steam. In this context, Greek banks have no choice but to look outward if they want to get bigger and obtain new sources of revenues. It is therefore right to say that their future is in the Balkans. Despite signs of slowing down after a streak of years of double-digit growth, there is no doubt that mortgage and consumer loans have room to grow in Greece. This thesis is being supported by the country’s relatively low mortgage and consumer-credit-to-GDP ratio compared to the EU average. In addition, Greek banks can also count on extending more loans to the small, family-owned firms which are generally under-leveraged to bring in more revenues. Asset management and bankassurance along with investment banking may also help a lot, on the condition that markets recover after a three-year drought. Need for future catalysts Even if one takes all the above factors into account and assumes a more lenient cost structure, it is rather easy to detect the need for future catalysts. Given the fact that the Greek economy accounts for a small proportion of European Union gross domestic product (GDP), Greek exports of goods and services are small, only a limited number of Greek companies are extroverted, and local banks are small to medium-sized by European standards, the preconditions for expansion in the main European and US markets may not be there. This, of course, does not exclude setting up subsidiaries or even acquiring small regional banks in some of the developed countries. Nevertheless, it is hard to assign to them any comparative advantages, including know-how, that would make expansion into these markets meaningful and profitable in the medium to long run. In contrast, the preconditions for expansion in the neighboring Balkan countries exist and a few local banks have already taken positions. National Bank of Greece owns a majority equity stake in UBB, Bulgaria’s second-largest bank, and Stopanska, the Former Yugoslav Republic of Macedonia’s largest bank. It also has subsidiaries in other countries such as Albania, Romania and Cyprus. EFG Eurobank Ergasias also owns a majority stake along with AIG in Post Bank, one of Bulgaria’s four largest banks, and has a controlling interest in Banc Post, Romania’s third-largest bank. Alpha Bank has also presence in Albania, Bulgaria, Romania, FYROM and Cyprus. Potential to be tapped «The Greek market consists of some 11 million people and in a few years’ time it is going to be saturated. The neighboring Balkan countries, all added up, make a market of some 50 million people, that is a few million less than the mature French market,» says Nick Karamouzis, deputy CEO at EFG Eurobank Ergasias. «There is great potential for Greek banks there.» Karamouzis is not alone in recognizing the potential as well as the risks involved. Apostolos Tamvakakis, deputy governor at the National Bank of Greece, has the same opinion but holds also an ominous prediction for latecomers. He says the good banks slated for privatization in neighboring countries have already been sold. With the exception of a large Romanian bank, the others have been sold, Tamvakakis says, making it more difficult for local banks to gain access in these markets. If he is right, then only National Bank of Greece, EFG Eurobank Ergasias and perhaps Alpha Bank should be able to reap the benefits of growth in these promising, yet risky, markets in the next few years. For the others, the endeavor may be more costly, since they will have to seek to buy equity stakes in established Bulgarian and Romanian banks from well-known foreign banks and corporations. Initially, Greek banks followed the local companies, estimated at more than 2,000, which started doing business in these countries, by setting up factories, shops and offices. The fact that the banking markets in these countries were underdeveloped helped Greek banks step in and fill the vacuum in the early stages. Notwithstanding the risks, including an uncertain macroeconomic, legal and regulatory environment, the local banks were able to establish their foothold and begin expanding their branch network, boosting it via a few acquisitions along the way. Of course, being present meant Greek banks lived through some of the worst economic and financial crises these countries experienced in the 1990s. Growing stability Although problems remain, there is no doubt that their macroeconomic environment has improved while their banking system remains underdeveloped and under-leveraged, resembling Greece’s some 30 years ago. As National Bank Chairman Theodoros Karatzas said, speaking at the Euromoney Conference in Athens a couple of weeks ago, the economies of these Balkan countries are growing at an annual clip of more than 4 percent while inflation averages some 8 percent versus 25 percent five years earlier. Moreover, the prospect of joining the European Union in a few years’ time has helped make their macroeconomic policies more stable and predictable, further enhancing their economic performance and attracting foreign capital for investments, benefiting the intermediaries in the process. All in all, Greek banks do not have to rely just on local retail banking to boost their revenues and earnings in the year ahead. They have another big, underdeveloped market to tap in their quest for larger size and earnings growth. Whether or not it is already too late for some of them, or simply that some have been more hesitant than others to recognize the potential, remains to be determined. The fact of the matter is that Greek banks enjoy a comparative advantage in these Balkan banking markets and ought to exploit it to the fullest for the good of their shareholders, their country and the best interests of the neighboring countries as well. After all, that’s where their future lies.