M&A a timely option

The large Greek banks may have to start thinking about possible link-ups with other domestic rivals to produce one or more so called national champions faster than they initially thought since the chances of France’s Credit Agricole SA (CASA) assuming the control and management of Emporiki Bank, the country’s fourth largest bank, by the end of 2006, have increased. The prospect of Credit Agricole increasing its equity stake in Emporiki is by no means certain at this point but it appears to be more likely now than it was a few weeks, or even months, ago and this should not be take lightly by the large Greek financial institutions since it will translate into a boost in competition. A visiting high-level official of the French bank informed Finance Minister Giorgos Alogoskoufis last Wednesday of CASA’s intention to participate in Emporiki’s ongoing rights issue of some 397 million euros in total and offered to buy any rights not exercised by other shareholders. We should remember that CASA owns about a 8.7 percent stake in Emporiki, since it bought it under a special agreement in 2000, and can increase it to more than 10.5 percent via a bond convertible into Emporiki shares. Following the formal notification, Emporiki issued a statement saying the board of directors will decide on how the unexercised rights, if any, will be distributed but sources close to CASA said the 2000 contract specifies that CASA has the right of first refusal. The move to participate in Emporiki’s share capital increase was expected by most market participants since the failure of the French bank to do so would result in the dilution of its existing stake. However, there were some lingering doubts mainly stemming from a series of local press reports questioning this would happen and even predicting the opposite. It is now clear, however, that Credit Agricole wants to assume control of Emporiki, raising its equity stake to more than 33.3 percent «as a first step» on a way to a higher stake, meaning more than 50 percent. This, of course, means that in addition to its direct stake in Emporiki, equal to about 9.2 percent, the government may have to convince the boards of state-controlled entities, such as pension funds, that it appoints to sell their participations as well. Nevertheless, there is a great distance between intention and action. At the Finance Ministry they had been informed that the largest foreign direct investment in Greek banking cannot proceed unless the law to reform the Greek bank pension issue is implemented. The law was passed in Parliament in the summer but is not yet operational. The French want to see the relevant law implemented to judge whether there will be any potential risks For its part, the Finance Ministry has made it clear that implementing the pension law is among its first priorities. A merger catalyst?   Of course, there is no done deal yet and nothing can be taken for granted. It is fair to say though that Credit Agricole and Alogoskoufis share a common vision for Emporiki and this may play an important role in securing an agreement in 2006. This is something other large Greek banks cannot ignore and under normal circumstances should work as a catalyst for M&A (merger and acquisition) activity in the sector. It is known that the profitability of Greek banks depends to a large extent on the loan volume growth of retail banking. After a number of years of strong growth, this is likely to start decelerating next year and beyond, even if the economy continues to grow at a 3.5 percent clip or better. Given the fact that local banks enjoy higher spreads on mortgage and consumer loans than their counterparts in most other European Union countries (the Eastern European newcomers excepted), it is normal to expect some margin erosion. This is a very good reason to start thinking about linking up with another domestic rival, although labor laws do not favor the type of massive layoffs usually deemed necessary in mergers among equals with overlapping branch networks. One may argue that the major banks have tried to cope with possible fatigue in loan growth domestically and the gradual spread tightening by expanding their franchise in Southeastern Europe and the Middle East. Yiannis Pechlivanidis, deputy CEO at the National Bank of Greece, told an economist conference last week that the Greek banks are targeting 20 percent of their total revenues to come from their international activities by 2009, compared to 6.0 percent at present. Still, developments in the domestic market cannot be ignored, especially if a large foreign bank, such as Credit Agricole, assumes control of the country’s fourth largest bank within the next six or 12 months. Admittedly, well-known foreign banks, such as Citibank and HSBC, have offered low spread loans in certain categories without upsetting the equilibrium. The counterargument in this case is that these banks have a small network of branches and feature foreign names that may keep away a number of potential Greek customers. On the other hand, it would be much easier for a large, well-known Greek bank to more effectively sell loans with smaller margins, even if it’s owned by Credit Agricole or any other large foreign bank. One may argue that even a foreign bank would not like to shoot itself in the leg and cause havoc by selling low margin loans in a high-margin market such as Greece, since that would hit its profitability too. Even so, it is unlikely that the entry of CASA or any other major foreign banking group into the Greek banking market will not end up increasing competition. All-in-all, the chances of Credit Agricole taking over Emporiki Bank have increased and, although this is not a sure deal, it is a possibility that large Greek banks cannot shrug off as it entails more intense competition at home. In this context, it would be wise for the large Greek banks to start thinking more about the merits of possible equity link-ups to confront the possible competitive threat more effectively.