The large Greek banks continue to deliver strong earnings growth, beating consensus estimates and propelling their shares to fresh multi-year highs. However, earlier estimates of a pickup in merger and acquisition (M&A) activity, especially among small banks, have yet to be confirmed a month or so before 2005 comes to a close. Will M&A be a major theme for the sector next year? Perhaps, but it will require a catalyst to cause a chain reaction among the big five banks: National Bank, Alpha Bank, EFG Eurobank, Emporiki Bank and Piraeus Bank. Again, the chances of increased corporate activity appear to be greater among small Greek banks. Three of the country’s five large banks reminded the market of their ability to surprise by announcing a strong set of financial results, putting to rest concerns linked to the introduction of IFRS accounting standards. National Bank of Greece, the country’s largest commercial bank, saw its consolidated net income rise 87 percent to 532 million euros compared to a year earlier in the first nine months of the year, beating even the most optimistic consensus forecasts. This was brought about by a 3.9 percent decrease in operating costs and an across-the-board increase in organic and trading revenues. EFG Eurobank Ergasias, the third-largest commercial bank by assets, also posted a strong 54 percent year-on-year increase in its group net income to 385 million euros in the January-September period, well ahead of the consensus. A 36 percent rise in fees and a 23-percent increase in net interest income underpinned the results as loans grew 25 percent year-on-year. Piraeus Bank, Greece’s fifth largest bank, also announced a strong set of results, showing a 49 percent year-on-year rise in consolidated net income to 136.2 million euros in the same period. The pickup in profits was underpinned by a 23 percent increase in net interest income and a 33 percent in fees. If analyst consensus estimates are correct, we should expect them to deliver double-digit earnings growth again in 2006, for some extending into 2007. The home market will continue to support their revenue growth but to a lesser extent as loan growth in retail banking slows down, whereas an increased portion of revenues will be coming from other markets in Southeastern Europe, where four out of the five large banks have a presence and continue to expand their franchises. This development by itself, however, appears to be working against corporate activity in the banking sector, at least in 2006, as the big players do not feel strong pressure on their earnings to act by grabbing a larger slice of the pie from their main competitors. The urgency for M&A activity will be greater, according to this line of thought, when the domestic loan pie stops growing or, at least, grows at a low single-digit rate, stagnating their profit growth. Bankers like National Bank’s CEO Takis Arapoglou, who share this view, contrast today’s situation with the 1990s when mergers and acquisitions were the norm. At the time, the state privatized a few small- and-medium-sized banks such as Bank of Athens and Cretabank bought by EFG Eurobank and Macedonia-Thrace Bank acquired by Piraeus Bank. Ionian Bank was also privatized when Emporiki Bank sold a majority stake to Alpha Bank, whereas EFG Eurobank managed to grow by convincing ErgoBank’s shareholders to merge, giving way to today’s franchise. Nevertheless, one should not forget that the M&A binge was also facilitated by the exit of most foreign banks with small branch networks from the Greek market given the diminished opportunities in capital markets. Putting aside the argument of a growing pie and strong earnings growth, it is also true that Greek labor laws are still too rigid to accommodate the kind of staff reductions required for efficiency reasons if two large banks with overlapping branch networks were to merge. However, these laws were not the major obstacle behind the failed merger of National Bank of Greece with Alpha Bank a few years ago. According to all accounts, disagreements over the distribution of high-level positions among the executives of both banks in the new merged entity played a bigger role. This of course, adds another dimension to an intra-country M&A deal, namely the differences or similarities in corporate cultures, top executives and even large shareholders, which all add up to the same question: Who has the upper hand in the new entity? According to market sources and even bankers who have participated in M&A talks in the past, the clash of personalities was the biggest obstacle in reaching a deal. This explains why we have to see a completed deal among small- and-medium-sized Greek banks, although all of them appear to understand the importance of economies of scale and size in the evolving banking landscape. Of course, this is not to say that we have not seen attempts. Marfin Financial Group (MFG) sought to play the role of consolidator among small banks by announcing a preliminary agreement subject to certain conditions with Omega Bank, but the deal appears to have failed, following announcements by both banks. Marfin also acquired more than 10 percent in mid-sized Egnatia Bank, but even this appears not to have been received well by Egnatia’s major shareholder. Notwithstanding MFG’s fruitless efforts so far, one cannot but see that pressure on small- and-medium-sized banks to join forces grows more and more as time goes on, and 2006 may be that year. Under these circumstances, one should not rule out some friendly mergers, such as investment bank Proton joining forces with Pro Bank, a non-listed retail bank, or even the entry of a foreign bank such as France’s Caisse d’Epargne into the Greek market via the acquisition of a significant equity stake in a medium-sized bank such as Aspis Bank. All in all, the likelihood of a pickup in M&A activity is more likely to take place in the second tier of Greek banks, where the need for economies of scale, complementarity of main activities and synergies is more pronounced. On the other hand, we are again less likely to see a merger among the large five banks in 2006 unless the state decides to truly privatize Emporiki Bank and not just sell the 9.12 percent stake it directly owns. The planned sale of minority stakes in state-owned Savings Postal Bank and state-controlled Agricultural Bank (ATE) in 2006 cannot be regarded as catalysts for a realignment among the big five.