Bank boom has not yet run its course, according to markets
Greek banks’ spreads between loans and deposits are starting to narrow in the third year of a lending boom, but growth of their lending and earnings still has enough steam to run through this year and 2007 at least. The banking boom began after Greece abandoned the drachma to join the eurozone in 2001. The sharp fall in the cost of money made borrowing more affordable and stoked economic growth. As Greek demand for credit is starting to be met, however, growth is slowing. Banks are starting to boost loan volumes by lowering their loan rates and compressing spreads, or the difference between what they charge for loans and pay for deposits. «A slowdown is logical down the road. The pace of growth in the domestic market will come down. In two to three years the market will be growing at mature rates,» said Costas Xenos, head of research at Egnatia Finance. So far the squeeze on spreads has not dragged down earnings, because banks have compensated for it by shifting their loan portfolios toward higher-margin consumer lending. «First-quarter results so far show Greek banking growth remains on the agenda. Loan growth has been strong across the board,» Citigroup said in a recent report. «Loan spreads are contracting slowly, while deposit spreads are widening.» Greek lenders have also been plowing profits into the Balkans, where expansion is faster and margins higher than in Greece, and they expect operations there to contribute an increasing share of profits. «We’ll continue to see a smooth compression in loan spreads because of competition. It is inevitable,» Xenos said. «What we would not like to see is the pace accelerating sharply.» Low-level debt Greeks started off the boom with a low level of household indebtedness compared with the rest of Europe, having been discouraged by drachma interest rates in double digits. Household credit has jumped to 38 percent of gross domestic product from 18 percent in 2001. Still, it lags the eurozone’s 56 percent average, leaving room for more growth. Analysts at P&K Securities expect credit to Greek households to grow by 20 percent this year and 15 percent in 2007. That is down from the 26.8 percent growth in 2005 and 28.1 percent in 2004 but is still higher than the average in the eurozone. Now with the easy growth of the last two to three years behind the banks, competition is increasing as lenders try to lure clients to keep loan volumes growing. Over the 12 months to the end of the first quarter, spreads between deposit rates and mortgages narrowed by 15 to 48 basis points to between 1.80 percent and 2.35 percent, Citigroup analysts calculated based on data from EFG Eurobank, Alpha and Piraeus. According to the Bank of Greece, last year the average spread between deposits and overall lending to consumers and businesses shrank by 27 bps to 4.57 percent in December. This was mainly due to competition in the retail segment of the market, the central bank said in its annual report, noting that eurozone lending rates to households remained lower than Greek rates. On floating-rate mortgages, spreads between Greek and eurozone rates have shrunk to 37 from 78 basis points, with the trend sustained in the first two months of 2006. Greek rates are now at 3.89 percent. For now, there is still room for banks to lend more money to households and small businesses instead of relying, as they have traditionally, on large corporations and the government. «Loan growth remains strong enough to keep spread compression mild. The contraction is offset by a shifting asset mix, especially by banks with a relatively lower profit contribution from mortgage and consumer loans,» Xenos said. As for Greek bank stocks, they have risen along with earnings. Alpha Bank shares are up 22.8 percent from a year ago and Piraeus Bank 51.2 percent, versus a 19.7 percent gain in the Dow Jones Stoxx pan-European banking index. Greek bank shares fell sharply in recent weeks amid a worldwide stock market rout, but they still trade at a premium to their European peers. Emporiki trades at about 18.7 times forecast 2006 earnings, Piraeus at 14.9, Alpha at 13.4, EFG Eurobank at 13.3 and National Bank of Greece at 12.2 times, compared with the average multiple of about 11.1 times for banks on the index, according to Reuters Estimates. That premium indicates that the Greek banking boom may be slowing but it still has some time to run.