Just as the Greek government is pushing ahead with legislation to reform the fragmented main and auxiliary pension funds of the banking sector, a trend seems to be under way in the European banking industry. The trend is toward greater consolidation through cross-border merger and acquisition (M&A) deals and, even though it has not really hit Greece’s shores yet, it is likely to do so in the next 12 to 24 months. Even quicker if the government-initiated pension reforms of the key banking sector succeed, removing one of the key obstacles to M&A activity in the sector. The acquisition of a majority equity stake in Geniki Bank by France’s Societe Generale, one of Europe’s 15 largest banks by market capitalization, and Portuguese BCP’s full control of Nova Bank were the last two most significant deals in Greece the last couple of years, following the entry of France’s Credit Agricole onto the local market via its acquisition of a minority stake in Emporiki Bank. Needless to say, the number of M&A agreements reached in the 1990’s far outpace corporate activity so far this decade. This is not any surprise, given the stellar performance of the Athens bourse in the 1990s, the privatization of a few small state-controlled banks, the lower degree of consolidation in the sector and the exit of a few foreign banks from Greece. We should remember that the 1990s were characterized by Alpha Bank’s purchase of a 51 percent stake in Ionian Bank, which it later went on to absorb, and the emergence of EFG Eurobank Ergasias and Piraeus Bank as major powers. EFG Eurobank Ergasias was the offspring of a series of acquisitions and mergers involving Interbank, the Bank of Athens, Cretabank and most importantly Ergobank. The consolidation binge in the Greek banking sector in the 1990s also included the acquisition of the Macedonia-Thrace Bank and Xiosbank by Piraeus Bank and the merging of National Bank of Greece with two of its subsidiaries specializing in mortgages. In 2002, National Bank merged with ETEVA Bank, its investment-banking arm. Top bankers and analysts agree that rigid labor market laws reduce the appeal of in-border M&A deals because they limit potential cost synergies. They also point out that the prospect of high retail growth rates in the domestic banking industry in the next couple of years also works toward delaying such agreements. On the other hand, investment bankers say it is difficult to make the case for cross-border deals as long as the shares of major Greek bank candidates trade close to three times their book value, compared to less then two elsewhere in the eurozone. Even the argument usually put forward here to underscore the growth of Greek banks, that is, their promising Balkan franchises, is somewhat disputed. «Why should a major European bank, such Unicredito, pay a high premium for a Greek bank with extended presence in the Balkans when it can buy Germany’s HypoVereinsbank at less than two times the book value and access the same area through Hypo’s subsidiary Bank of Austria which has an even larger network in that region?,» asked an investment banker at a major US investment bank. Still, Unicredito’s bid in Germany along with Spanish Santander’s merger with UK’s Abbey, Danske’s acquisition of NAB’s Irish operations, the two bids for Italian banks by foreign banks, including ABN-Amro, even the failed talks between Dexia and SPI point to a trend in European banking that cannot be ignored. Banking analysts identify two main factors underlining the trend. First, a number of European banks from major EU countries have excess capital and are eager to deploy it outside their mature home markets, where growth opportunities are scarce. Although share buybacks constitute a safe alternative to relatively expensive acquisitions, banks cannot ignore the second factor, namely size. With their competitors getting larger by bidding abroad, the urge to search for growth outside the home market increases. If they are right, then the Greek market will come into focus sooner rather than later. Within this context, the quest for growth may force them to put less weight on the value of the likely target. This will intensify if the government’s initiative to reform the fragmented pension funds in the banking sector comes together without a hitch. In this case, one should expect France’s Credit Agricole to seek to boost its stake and acquire full control of Emporiki Bank. Analysts say this is a prospect other banks, Greek and foreign, may not stomach, as it brings a new major competitor into the local industry. These banks may have to rethink their strategy, especially the other major French banks with smaller market shares in Greece, such as Societe Generale and BNP Paribas. Note that speculation resurfaced in the stock market last week of a potential deal between BNP Paribas and EFG Eurobank Ergasias. An official at BNP Paribas in Paris denied a report in the local press a few weeks ago, claiming that talks between the French bank and an unspecified major Greek private bank were close to an agreement. Even if Credit Agricole (CA) decides not to boost its stake in Emporiki, other banks, especially Greek, may assume the same role. Officials at major banks have speculated that local banks will express interest in Emporiki if it is put on the bloc, provided CA balks out and the bank’s pension issue is taken care of. The importance of the banking pension issue toward determining future M&A activity may have been underestimated if one shares the same belief as the head of a major Greek bank. According to different sources, the top banker has stated that all the fuss about the government’s pension reform initiative relates to positioning by affected banks for the day after. What is the day after? The day, perhaps two years down the road, when the major Greek banks, facing shrinking net interest margins and slow loan growth, sit down and talk seriously about merging. The financial strength of each major bank at the time will play the most important role in determining the stock swap ratios and therefore decide which bank has the upper hand in that new landscape. This, in turn, means no bank can afford to lose much today. That is, to take a hit for the actuarial deficit of its pension fund and weaken its position. Whatever the scenarios about future M&A activity, one cannot ignore two facts: First, banking consolidation in the European banking sector continues. Second, the success of banks’ pension reforms will remove one of the major obstacles to deals.