If the health of an economy is mirrored in the shape of its major financial institutions, then the Greek economy must be doing as well as the official growth rates of 3.5 percent or more suggest. After all, four out of five large Greek banks have managed to beat consensus expectations since the first quarter of 2003 and the market has awarded them, pulling their stocks up closer to their historical highs. This excellent performance has relied to a large extent on revenues from domestic retail banking and to a lesser extent on revenues from other sources, such as their foreign operations, and cost cuts. However, after experiencing double-digit growth in consumer and mortgage loans, many analysts are wondering whether the glory days of Greek retail banking are coming to an end. Is this the case? There is no doubt that the strong growth rates in consumer and mortgage loans since early 2000 can be attributed to their low starting base. The partial liberalization of such loans became a reality in the second half of the 1990s and full liberalization of consumer loans materialized less than a couple of years ago. Faced with dwindling revenues from market-sensitive sources in the first two-and-a-half years into this decade, local banks were glad to find retail banking revenues stepped in to fill the vacuum and finally lift profits to record levels. Individuals and institutional portfolios that correctly predicted it have been awarded handsomely since 2003 with four out of the five large Greek banks being top performers in European markets. However, following a multi-year streak of excellent earnings, underpinned by strong retail banking revenues, some analysts and fund managers wonder whether the great run of local banks is approaching its end. «Clients and others have been asking since the beginning of the year whether the time has come to sell Greek bank stocks,» says an analyst of the banking sector who works for an international investment house, adding that it seems they are a little disappointed when they hear the «not yet» line. This is nothing new. Similar questions were asked before – such as prior to last year’s Olympics – and the answer was the same. It turned out to be the correct answer since Greek bank stocks rallied again on better-than-expected earnings. «There is greater confidence in the ability of Greek banks to deliver a strong set of results and the market tends to take their guidance seriously,» adds the same analyst, who wishes to remain anonymous. He, like his colleagues, admits that the good performance of world stock markets has helped a lot. In some cases, such as in March, when this turned out not to be the case, Greek banks felt the pinch. Credit stretching Nevertheless, many wonder whether Greek retail banking can continue to fuel earnings growth in the years ahead with the loan-to-GDP ratio approaching about 75 percent. It is a reasonable question to ask, despite the fact that four out of five large banks have built franchises in neighboring countries where households and enterprises are heavily under-leveraged. Well, there is no question that a slowdown in loan volume growth should be on the cards in the years ahead and it is likely to be accompanied by tighter margins since Greece enjoys some of the highest margins in the eurozone. In a report produced by Merrill Lynch on product margins in selected eurozone banking markets in late June, Greece appeared to be offering consumer and mortgage loans with the biggest margins. The slowdown in volume loan growth and margin erosion should characterize local retail banking and they have, more or less, been factored in analysts’ forecasts stretching out to 2007. Whether or not this slowdown is smooth or abrupt is an open question since it depends on other parameters, such as the country’s economic growth and the behavior of large Greek banks in the new environment. Assuming GDP growth rates continue to be strong in the 3.0 percent ballpark or more and the oligopolistic nature of the banking sector is maintained with all large players behaving rationally, one may make a credible case for satisfactory loan volume growth and modest margin tightening well into 2008. The optimists who favor this scenario argue that as long as the Greek economy continues to grow at 3.0 percent or above and the loan-to-GDP ratio stands at about 75 percent, it will take much longer than many anticipate for the Greek loan ratio to reach 100 percent of GDP. They also point out that the official loan-to-GDP ratio in other eurozone countries is understated, in the sense that corporations and households borrow in other forms that are not taken into account when the official ratios are calculated. As far as margins are concerned, they admit they are high by eurozone standards and are bound to come down but in an orderly fashion since no one wants to spoil the market. «It (the Greek banking sector) is a cozy oligopolistic market and it is in nobody’s interest to spoil it,» says a fund manager. Could an outsider come in and upset the existing equilibrium in a bid to grab a larger piece of the pie? Not likely, the optimists answer. The Greek banking market is small and it would not pay for a large bank to come in and develop its franchise from scratch. It is more likely to do so by acquiring an existing player, which means it has little incentive to spoil the market as long as the acquired bank makes good money. Of course, the rosy scenario of a smooth slowdown could unravel if economic growth comes to a standstill for whatever reason and euro interest rates are jacked up by the ECB. It is noted that most retail banking loans are based on floating rate products. If those two things happen, things may get really tough, since loan losses are bound to increase and cost cuts along with a pickup in revenues from subsidiaries abroad may not suffice to offset the impact on their bottom line. Assuming this is not the case, then Greek retail banking can look forward to satisfactory, albeit slower, loan volume growth rates and margins to 2007 and beyond.