Greek retail banking looks set for satisfactory growth rates in the next 10 years and without negative consequences to the quality of banks’ portfolios, according to Emporiki Bank’s financial analysis and research department. According to a recent analysis paper, Emporiki predicts that the expected convergence of the loans to gross domestic product ratio in Greece (75 percent) with that of the eurozone (114 percent) and the US (150 percent) in the next decade can secure sufficient growth for the sector without diluting portfolio quality. Even after a future exhaustion of the healthy retail banking growth rates, Greek banks will be able to use their expansion momentum in the Balkan markets, the analysis suggests. The paper points out that the Balkans are vital for the Greek banks’ further growth. The market shares they have in these countries offer Greece a special strategic role, while these nations’ positive macroeconomic record in recent years has created a stable environment for business activity. For the time being, increased borrowing by Greek households is posing no risks to the banking system, as it is proportionately far behind the eurozone and US averages. In fact, the mortgage credit expansion rate in the eurozone is still rising, along with a simultaneous high rate of property price increases. The brisk pace at which Greek household borrowing keeps rising does not seem to pose higher credit risks, given that the economy’s growth rate remains higher than in the eurozone. The country’s Stability and Growth Pact provides for a 4 percent GDP rise in the 2005-2007 period, while the Organization for Economic Cooperation and Development and the International Monetary Fund forecast growth of 3.3 percent and 2.9 percent respectively for the same period. According to an older Bank of Greece survey, one in every two households has not taken any kind of loan, and 80 percent of the balance of loans corresponded to households with incomes above 15,000 euros per year. Nevertheless, it goes without saying that banks will still have to monitor closely the quality of their loan portfolios and to investigate credit risk in detail, as the majority of consumer and housing loans have a floating interest rate and in case of an unexpected shrinking of disposable income there may be problems in households serving their debts. Credit expansion margins The Emporiki Bank paper notes that in 2004 credit expansion to households remained at high levels (28.5 percent in 2004, from 27.6 percent in 2003 and 32.2 percent in 2002), taking the sum of household loan balances to 44 percent of all credit to households and companies. The rising household credit expansion growth rate is reflecting the climbing trend of consumer credit growth from 24.2 percent in 2002 and 27.2 percent in 2003 to 37.4 percent in 2004; this was partly balanced by the gradual slowdown in the growth of mortgages from 35.6 percent in 2002 to 25 percent in 2003 and 24.8 percent last year. This rises to 27.1 percent if securitized loans, representing 2.8 percent of all mortgages in 2004, are included in the total. In any case, the strong future prospects of Greek mortgage credit growth is indicated by the fact that as a percentage of GDP the balance of mortgages (20.1 percent) is considerably lower than in the eurozone (34.3 percent). The fast expansion of consumer credit in the last few years in Greece was the outcome of mainly structural factors linked to institutional harmonization and economic completion in the context of monetary union. The most important factors were: the gradual liberalization of the banking system, the great drop of interest rates both in nominal and in real terms, the stiffening of competition in the sector and the increased liquidity of banks which stemmed from the reduction of compulsory commitments on their deposits. The impact of those factors was that the consumer credit rise came to 37.4 percent last year and their share in the sum of bank loans to households rose to 33 percent in 2004 from 31 percent in 2003. The total household borrowing in proportion to the GDP in 2004 was estimated at 31.4 percent (from 26.3 percent in 2003 and 22.6 percent in 2002), gradually approaching the eurozone average (50.3 percent in 2004 from 48.5 percent in 2003). Card credit maintained its rising trend in 2004 (23.2 percent) but its share in total consumer credit fell to 45 percent in December 2004 from 50 percent and 51 percent in December of 2003 and 2002 respectively. This decline reflects the trend to substitute borrowing through credit cards with personal loans. Although more accessible to consumers, these loans are more expensive than consumer loans. The latter showed a high rise rate of 60.5 percent during 2004, from 35.2 percent in 2003 and 39.6 percent in 2002, and an increased slice in the sum of consumer loans, at 39 percent, compared with 33 percent in 2003 and 31 percent in 2002. Declining rates The decision by the European Central Bank to leave interest rates unchanged since June 2003 pushed Greek rates lower last year. In 2004, lending rates posted a general decline, most notably in new consumer loans, and the smallest in mortgage and corporate loans. Yet they remain at higher levels than those in the eurozone due to the increased uncertainty of Greek banks regarding possible bad debts and the cost of their collection and the variety among EU states regarding issued loans’ terms. The rates of consumer loans of unspecified duration are higher than those in the eurozone. Although the difference has been cut from 4.4 percent in December 2003 to 3.9 percent in December 2004, it remains at relatively high levels. It is down to the fact that borrowing through credit cards represents a much greater portion of all unspecified-term loans in Greece than in the eurozone. The high credit card rate reflects the category’s greater risk and handling costs. The difference between mortgage rates in Greece and the eurozone is mostly related to the greater time required in this country for the auctioning, if needed, of properties on which loans are secured. Here, compared to the rest of Europe, the collection of bad debts from mortgages and corporate loans is much more time consuming and particularly uncertain.