ECONOMY

IFRS a likely catalyst for a broad restructuring of the banking sector

The introduction of IFRS (International Financial Reporting Standards) from January 1, 2005 may be regarded as a big headache by a number of local listed companies, but may well turn out to be a catalyst for mergers and acquisitions in a few industries. This may be more the case in the dominant banking sector, as long as the adoption of IFRS (often known as IAS, or International Accounting Standards) provides the necessary impetus for resolving the pension issue. Like all EU-listed firms, Greek companies are obliged to adopt IFRS for their consolidated financial statements, starting January 1, 2005. This will have serious implications for many listed companies reporting only under Greek GAAP. It is known that their financial results will become more volatile, ceteris paribus, as financial instruments and liabilities are recognized and fair-value accounting is used for derivatives. Moreover, firms will have to account for defined benefit pension plans with liabilities based on the present value of obligations. Their balance sheets will be extended, increasing their leverage as the lengthening is not accompanied by a proportional rise in equity. In some cases, these and other factors may even force a few firms to exit the stock exchange, something inconceivable to their major shareholders a few months or years ago. Greater transparency On the other hand, the adoption of IFRS will increase the transparency of companies’ balance sheets and facilitate comparisons with their peers across Europe, paving the way for more cross-border M&A deals. In addition to the potential for more cross-border deals, the IFRS accounting treatment may provide the impetus for addressing and resolving longstanding problems, such as the pension issue, opening the way for in-country merger and acquisition deals. A case in point is the Greek banking sector. Top-level executives from the major banks, employee representatives and top government officials have engaged in talks to find a common denominator and perhaps a solution to the thorny pension issue for more than a week. These talks are being held despite the fact that each major bank’s pension fund or funds has its own characteristics, perhaps requiring a separate solution. Whether a common solution acceptable to all banks involved can be found is something to be seen. Still, the adoption of IFRS has made it imperative for some major banks, namely Emporiki Bank and Agricultural Bank, to find a solution and implement it in the next couple of months. Finance Minister Giorgos Alogoskoufis has been quoted as stating he will seek a solution to Emporiki’s pension problem before the end of this month, regardless of the outcome of the ongoing deliberations among bank executives, employees and the state. French interest Given the fact that top executives at France’s Credit Agricole (CA) have expressed interest in increasing their equity stake and assuming the management at Emporiki Bank, provided the issue of the bank’s pension gap is resolved, it is clear that the adoption of IFRS may lead to the first major deal in the Greek banking sector since Societe Generale acquired a majority stake in General Bank back in 2003. Analysts and others believe that a likely deal between CA and Emporiki Bank may not be the only one in the next 12 months or so. According to them, recognizing and taking care of the pension gap deficit facing large banks – with the sole exception of EFG Eurobank Ergasias – should prepare the ground for more cross-border and in-country deals, increasing the concentration in the already oligopolistic banking sector. Although the number of M&A deals will certainly be fewer than those seen in the 1990s – after all there are fewer players in the market now – their importance and scope may be even greater. It should be remembered that the consolidation binge seen in the late 1990s related to the privatization of a number of small and mid-sized state banks. During that period, EFG Eurobank was able to grow faster by acquiring Bank of Athens and Cretabank in 1998 and 1999 respectively and Piraeus Bank by acquiring Macedonia-Thrace Bank in 1998. Back in 1998, the National Bank of Greece absorbed its subsidiary National Mortgage Bank and repeated the same with investment bank ETEVA in 2002. Of course, the mega-deals at the time involved the acquisition of a 51 percent stake in Ionian Bank, which was later absorbed by Alpha Bank and the merger of Ergobank with EFG Eurobank, giving rise to EFG Eurobank Ergasias. With the memories of the failed merger between National Bank and Alpha Bank in 2001 still lingering, many think a mega-merger between two of Greece’s major banks is way off, pointing to rigidities in the labor market, mainly constraints on layoffs linked to overlapping operations and the closure of some branches. Still, these constraints did little to discourage the top executives at National Bank and Alpha from attempting to join forces back in 2001 and Societe Generale from acquiring a majority stake in General Bank. To this extent, increased transparency and a possible solution to the banks’ pension gap under pressure from IFRS may herald a new era of M&A activity in the Greek banking sector. This will be all the more the case if two major Greek banks surprise everybody by seeking a merger between equals, at least in principle. In case something like this materializes and Emporiki goes to the French, one should expect a chain reaction because the two remaining major players will be under pressure to act. Which banks might initiate this chain reaction? It is difficult to say although the omens, stock market and others, are all there. Of course, one should expect more deals among mid-sized banks, with one or two playing the role of the consolidator with or without the help of a major foreign bank. Undoubtedly, the adoption of IFRS intensifies the pressure on listed firms to make their financial statements more transparent and tidy up their balance sheets. Moreover, the need to address the pension deficit problem removes a major obstacle from realizing M&A deals in the banking sector, making it more likely that we will see a revival of such activity in the next 12 months or so. If this turns out to be the case, then the local banking landscape will change dramatically in a way very few had imagined.