Greek banks brace up

The good times may not be over for Greek banks as their impressive first quarter financial results show that only the beginning of the end to a period marked by fat spreads and strong retail volume loan growth may be under way. This is a context forward-looking executives cannot miss or misinterpret, increasing the likelihood of a new round of consolidation in the league of the country’s large banks. Taken at face value, the financial results of Greece’s large banks could not be much better. National Bank, the country’s largest bank, saw its consolidated net income rise by 59.3 percent year-on-year to 250.1 million euro in the first quarter, beating consensus estimates. The other large banks, such as Alpha Bank, EFG Eurobank, Piraeus Bank, Emporiki Bank and ATEbank, also produced a 30 percent plus rise in their after tax earnings, underpinned by perky increases in interest income and commission income. The good performance of capital markets in the first quarter and an exceptional 30 percent plus growth in mortgage loans along with some help from foreign operations in some cases explain the good numbers. Fat spreads eroding However, analysts and others who were able to read behind the numbers could easily detect the erosion of asset spreads, usually defined as the difference between the average rate in a loan portfolio and the average funding cost. Although the erosion of assets spreads was not uniform, as some banks managed to do better than others, it was still visible and large enough in some cases to raise eyebrows in the investment community.  Even though the sell-off of risky assets, namely emerging markets and European small caps, is largely blamed for the under-performance of the stocks of Greek banks in May, some pin part of the blame to the faster-than-expected compression of their spreads. It is known that Greek banks have been operating with fat spreads, the richest in Western Europe, in retail banking despite claims to the contrary in the last few years. So, spread compression was inevitable and was expected at some point but apparently not so quickly. «It is one thing to see spreads narrow in an orderly fashion by 0.25 percentage points per year and quite another to see this happening in a quarter. It makes you wonder and take another hard look at your numbers,» says the banking analyst of a European investment house, who requested anonymity. «We are not alone in this. Fund managers can also detect it.» The strong loan volume growth was underpinned by the lowest interest rates in generations and a low degree of leverage among Greek households. It was also held for another reason well advertised by the executives of Greek banks visiting foreign Funds abroad. «The players are rational» was the motto, meaning they knew very well that aggressive loan interest rate cuts would endanger everybody’s well-being, resulting in an unwelcome new equilibrium. But the «cozy club,» as Merrill Lynch characterized them a few years ago, apparently did not expect new players, such as the Postal Savings Bank (TT), to enter the fray and start offering mortgages with lower interest rates. TT was able to do so because of its large and relatively cheaper deposit base and lower operational costs. But competition heated up even more as other banks, such as Emporiki and ATEbank, decided to go for market share, lowering their loan rates. Bank customers also became smarter and started demanding from their banks that they give them the same terms as their competitors or migrate to them. Apparently, some banks, large and smaller, yielded to their demands and this showed up in their assets spreads in the first quarter. But the January-March period was a very good one for banks as mortgage and consumer loans volumes grew at a double digit clip. However, this may not continue in the second quarter and beyond. Signs of fatigue First of all, bankers admit loan growth shows signs of fatigue. This may explain why they started advertising cash back loan schemes to lure customers. Second, the European Central Bank seems ready to hike its official interest rate for the third time since December and banks have vowed to pass any increase to their clients this time around to protect their spreads. However, every banker knows and more so the high level officials of Greek banks and their major shareholders that higher borrowing costs usually bring a noticeable slowdown in loan growth. This is more so if particularly strong growth in consumer and mortgage loans has been the norm for a long period of time and the leverage of households starts to catch up with the rest of Europe. This is not good news, since slower loan volume growth brings forward the expected erosion of asset spreads and this may sometimes take a cataclysmic form that no one had foreseen. Under these circumstances, it is very difficult for high-level executives and major shareholders of large Greek banks to fail to notice what is possibly coming up. This can speed up developments because they all know the answer and this is consolidation to protect pricing power in the face of a potentially significant loan growth slowdown in the quarters ahead. Whether this consolidation will take the form of intra-country mergers and acquisitions or cross-border mega deals involving the tie-up of large Greek credit institutions with international banks in the quarters ahead remains to be seen. Either way, there cannot be inaction. The stakes are high and the players rational enough not to ignore the fact.

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