Takis Arapoglou, president and chief executive of the National Bank of Greece (NBG) – the country’s largest – says the restructuring plan he has launched is necessary to enable the group to maintain its leading position and increase the return on capital employed, which has been lagging due to lack of coordination and weak synergies. In his first comprehensive interview since assuming his duties as head of the country’s largest credit institution a few months ago, Arapoglou also said NBG has strong growth potential abroad and will press on with its recently announced voluntary early retirement program, which met with considerable reaction. Excerpts of the interview follow. What picture have you formed for the NBG group after a few months at its helm? I consider that the bank has particularly strong elements that make it a market leader. This, of course, does not mean we can relax our vigil. The strong must foresee, plan and work systematically to maintain their lead. The bank has very well trained personnel; it has the full range of products that can be offered in the Greek market. On the other hand, all this needs some «tidying up.» Today, this web of activities functions as a cluster of companies, units and products that mostly operate without coordination. The biggest problem is to get them all to work as a group. The second biggest problem that causes me concern is that there is surplus of capital that is employed in subsidiaries of a non-financial nature – or to a limited extent – and do not yield satisfactory returns. The third big problem is the inflexible framework of labor regulations that undermines meritocracy and prevents us from exercising effective cost control – problems that are found in the Greek economy at large. What are your plans regarding the entire nexus of the group’s subsidiaries and holdings? The investors who buy our shares do not exercise the option for us to manage hotels or for our holdings in cement companies. In the non-financial sector, we shall aim, without haste, at selling companies and holdings at the best possible price and with respect for the market. And on what criteria will the restructuring of the financial sector be based? Things are more complex in the financial sector. You cannot lightheartedly say, for instance: «My insurance arm is not giving satisfactory profits, I’ll sell it.» You must exhaust all efforts at improving its performance, as long as there are synergies. Now, if after two or three years the efforts do not yield results, you review your options. The ultimate criterion will be the return on capital. Today, there are no synergies between the companies in the financial sector of the group. This, I believe, is our greatest weakness. We have a large pool of savings that is dormant. Asset management, for instance, is an activity that can make a significant contribution to our core profitability and we are planning bold moves to tap it. NBG’s competitive position has weakened in recent years and the large private banks are closing the gap. What is your explanation? The previous management carried out drastic write-offs of many problematic loans in the 1999-2000 period and opted for a more defensive strategy in loans, thus upgrading the quality of the portfolio. This meant, for instance, that NBG withdrew from financing small and medium-sized enterprises for lack of the proper control systems. But today, with better risk management methods, we are staging a dynamic comeback. In retail banking, NBG was a relative latecomer. The figures for the last six months show we are regaining our market share in mortgages and have stopped the decline in consumer credit. With the new incentives, linking remuneration with network performance and the new philosophy of target-setting, I believe we are creating the right base for effectively facing the competition. What are your plans for growth? An indispensable element for growth is the strengthening of our position outside Greece. Greece will always be the core of our activities and we shall seek to remain the indisputable market leader, but foreign operations present great growth opportunities right now. In Bulgaria, we have 12 percent of the market; in Romania, our share is very small and we must grow rapidly, as it is a fast-growing market. However, opportunities for buyouts are now very few and the market has become expensive. Therefore, we will rather focus on internal growth. It seems we shall follow the same path also in Serbia and the Former Yugoslav Republic of Macedonia. We are also looking at Russia and Turkey, large and strong markets with ample growth prospects. However, these are very complex decisions and we must study them well before making them. The fiscal situation is a great drawback for the economy. The biggest fear in the market is the slowdown in its growth rates. Do you share such concerns? The global economy seems to be recovering right now. Unfortunately for the time being, Europe does not seem to be responding, which reflects its weaknesses, the dysfunctions and the need for radical institutional changes, particularly in the labor market, so as to bolster competitiveness. Greece is a part of this European economy. Even if we reduce the deficit and tidy up our public finances, inevitably the time will come for us to face the the problem of competitiveness, where we are lagging. I consider that the main measure that must be adopted is the liberalization of labor relations. If we do not acquire a more flexible framework of labor regulations, it is very difficult for the Greek economy to become competitive. This insistence of mine is not dogmatic. But we have to decide whether enterprises such as NBG will constitute an instrument of social policy. If yes, then they must withdraw from the stock market, otherwise they will have to operate like real enterprises on market terms. Both are impossible in the present environment. We remain laggards in attracting foreign investment. What has to be done? The foreign investors have not come for one fundamental reason and several practical ones. The fundamental reason is that Greece is a very small market. The alternative options for foreign capital are numerous and this is something we have to realize. We must focus on two, three at most, sectors where we shall build infrastructure, acquire a comparative advantage and then approach the foreign investors. First of all, we have to look at tourism and find areas of high added value and work systematically to tap their potential. For instance, I believe we have very highly trained and competent people in software and information technology. I recently met the president of Siemens, which plans to set up a research center for new applications in Greece. I asked him why he chose Greece. «For the people, their scientific potential,» was his answer. Policy measures, as in taxation or other incentives, are necessary, they help, but cannot bring investment by themselves. Does the prospect of a rise in interest rates worry you? Are there enterprises facing the specter of bankruptcy? The number of enterprises with big problems is not large and I believe that because we have good rapport with the businessmen involved, we shall solve the problems. In no case is there a structural problem. As regards the bank in particular, an interest rate rise does not imply a problem given that the main bulk of our loans have fluctuating rates. It is, nevertheless, a fact that rising rates usually have a negative impact on the economy’s growth rates. If the GDP growth rate slows down, all enterprises will be affected. But the Greek banking system has a much better capitalization now than it did five or six years ago, and I, personally, do not see a danger. I believe that, provided there are no radical upheavals, of course, a small slowdown in the economy will be dealt with comfortably, both by companies and banks, and by households. The program of voluntary retirement which you announced created a strong reaction. Do you see it indirectly opening up the issue of social insurance reform? We do not link voluntary retirement with the social insurance issue. The rationale of the retirement scheme is the following: Our expenses are considerably higher than those of our competitors’. Characteristically, loans per employee are half compared to competitors’, whereas deposits per employee are exactly level. Particularly after the new collective pay pact, NBG’s expenses have swelled and because of this pressure, we cannot bring new blood to the bank. The voluntary retirement scheme will restrict costs and enable us to hire new people as a percentage of the retirees. Are you concerned that the link that is being made with the social insurance issue will create such a reaction as to freeze the retirement scheme? There is nothing that can stop us from going through with voluntary retirement. We are a public listed company active in a very competitive market. You noted previously that NBG is losing market shares. Can you imagine the results of the group weakening further would be? If NBG does not pay a dividend, the social insurance funds that have large shareholdings in the bank will not be able to pay pensions. I acknowledge that, in practical terms, there is a connection with social insurance but it does not concern our bank. The pressure at this point in time is rather due to political reasons and because some banks have a bigger problem than others. But, recognizing that the retirement scheme will create problems, we are discussing the issue with the union of employees in very good atmosphere and we shall give money per employee to strengthen the pension fund, even though we are not obliged to. Our job in management is to effectively deal with the competition, bolster the position of the bank and bring returns to the shareholders. Banks’ pension system is considered the biggest problem in the sector. Can a mutually acceptable solution be found? I do not believe that such a solution can be found. There is a very large disparity between the different kinds of funds. Besides, the government, in the sense of continuity, has provided for a framework solution.