Fixed long-term lending rates are banks’ answer to the European Central Bank’s (ECB) recent hike in its key overnight rate to 2.25 percent. Citibank was the first to set the tone, reducing its fixed long-term rates to the lowest levels in the market, while extending the «locking» period to 25 years. Citibank’s general director for retail banking in Greece, Christina Lambropoulou, explained to Kathimerini that the cut, in the face of ECB’s hike, mirrors the intensity of competition in the field as dictated by an international banking group with a good credit rating: «It reflects Citibank’s policy of more aggressive penetration in mortgage credit.» The move to lower fixed rates, conceded Lambropoulou, signifies «a cut in the bank’s profit margin, but which is affordable in the context of its access to low-cost money.» With regard to floating rates, the banking system’s scope of response is limited, she said. Citibank pegs its main rate to the 1-month Euribor and the rise in the last month was due to the anticipated ECB rate increase. Lambropoulou further estimates that «Greek banks with big portfolios in housing credit will rush into passing the 0.25 increase on to floating rates that are directly linked to the ECB rate, since the main aim of maintaining profits dictates the adjustment to trends in money markets.» «Similarly, from banks with high exposure in mortgage credit we should not expect brave moves on the fixed-rate front, while the moves to follow from small banks are seen in the context of the competition for a good market share,» argues Lambropoulou. The expected further rise of the ECB key rate within 2006 by about 0.5 percent will not allow, said Lambropoulou, for «fixed rates at today’s low levels, as these have been shaped after the recent reduction.» «Part of the rise will naturally be passed on to long-term rates.» Citibank’s estimates refer to a period of rate rises which, according to some forecasts, will bring the eurozone rates near 4 percent in the next two to three years. This prospect increases the need for long-term planning by households and constitutes a key parameter of Citibank’s policy. This also explains the bank’s decision to stay away from the war of promotional activity. Adding value Citibank’s policy, according to Lambropoulou, «is focused more on adding value to the product on a stable and permanent basis, an element that characterizes both the fixed-rate and the floating-rate products, so that there is no reason for the bank to resort to such promotional activity.» It is no coincidence that «profitability in both products after the recent reductions is limited, before expenses or bad debts, to 1 and 1.5 percent, so coming out aggressively to tap the increased demand is not within our policy, which is guided by the principle of providing a stable value in our product to the client,» she noted. In consumer credit, the impact of any further rise in interest rates will be direct, Lambropoulou believes, as this is a sector with high bad debts. Just three years after consumer credit was liberalized, experience confirms that the market has not matured yet, and that the trebling of consumer loans in recent years largely took place before the essential infrastructure for the complete monitoring of bad debts, such as the Tiresias database, was in place. The 30 percent ceiling set by the Bank of Greece in the monthly income of borrowers as a criterion for the comfortable repayment of loans is, according to Lambropoulou, a safe criterion but does not apply to a large portion of borrowers. It is quite revealing, she notes, «that many borrowers still devote up to 90 percent of their monthly income to repaying loan obligations.» The grouping of debts in one bank looks like it is gathering force, while the extension of the repayment period will reestablish the balance in the market, which Citibank expects to grow by 15 percent in the next 10 years. However, consumer credit, being the most vulnerable loan category for bad debts, will be the next response field for Greek banks, predicts Lambropoulou, as they will almost immediately pass on any changes in interest rates almost in their entirety. The rush toward housing in view of the forthcoming imposition of value-added tax in newly built houses from the new year, she said, «has made demand shoot up in the latter half of the year, and the rise in new mortgage loans has exceeded 50 percent.» Citibank expects demand to remain at good enough levels in 2006, too, as the market’s capacity will maintain a 20 percent rise. Nevertheless, the commencement of a period of interest-rate hikes will swing demand toward fixed long-term rates, a trend that has already emerged in the new loans issued by the bank. So unlike the broader market, which has an approximately 70 percent preference for floating rates, «new loans issued by Citibank are 50-50 shared between fixed and floating rate, a trend expected to strengthen in the short term,» according to Lambropoulou. Refinancing «The more active penetration the bank is planning in mortgage credit includes moves such as shrinking the approval time for loans from 30 days to 15, while the new field on which competition will focus is the refinancing of old loans,» she said. Lambropoulou further points out that «the privilege of low interest rates must spread to old borrowers who are still burdened by high monthly installments.» As part «of the policy of a more aggressive penetration of mortgage credit through permanent features and not occasional offers, Citibank is planning to simplify the process for refinancing,» she concluded.