Why banks must cut their costs

The financial results for fiscal 2001 published by Greek listed companies last week showed a marked deterioration compared to a year earlier. Preliminary data from companies accounting for more than 80 percent of the Greek bourse’s market capitalization confirm that earnings did much worse than sales again last year. The observed divergence between sales and earnings, though, brings back to life an old, well-known theme: cost containment. Can Greek companies, and index heavyweight banks and telecoms in particular, put a lid on operating expenses to boost their bottom line or at least do something to grow out of it? With companies allowed to charge their accounting losses emanating from their stock holdings against their own reserves, instead of taking a hit on their P&L (profit and loss statement), one would expect to see their bottom lines look much better than they did. Despite this, the cumulative results from a sample of 120 large- and mid-cap listed corporations, provided by Marfin Hellenic Securities, show that turnover increased by about 9 percent last year, whereas consolidated pretax earnings fell by about 12 percent. The heavyweight banking sector is a case in point. National Bank of Greece, Alpha Bank, Commercial Bank, Agricultural Bank and Piraeus Bank’s consolidated financial results posted significant declines in net income last year, disappointing analysts and investors alike. Although all of them, with the possible exception of Agricultural Bank, claim to be mainly retail banks, their earnings show the opposite. They clearly behave as if they were investment banks. On an aggregate level, all five banks did well in the net interest income category, but less so when it came to earnings from financial transactions and commission income. Indeed, net interest income rose by about 28 percent in 2001, aided by falling interest rates, which helped boost loan volumes and widen deposit-lending rate spreads. Figures show that outstanding consumer and mortgage loans, which are high-margin loans, grew by about 45 percent and 37 percent respectively. Banks also counted on the positive carry (where the cost of funding is smaller than interest income earned) of their bond portfolios, with some taking advantage of a superb year for government bonds internationally to liquidate their historic portfolios and register huge capital gains which should be viewed as non-recurrent items. On the other hand, weak capital market conditions had a negative impact on earnings from financial transactions, down 44 percent year-on-year, and commission income, down 20 percent. This should not be worrisome, especially with commission income showing signs of recovery in the second half of 2001, and trading income having reached a relatively low base last year. The problem, however, is that Greece’s capital markets do not seem to be in a recovery stage so far this year. So banks cannot count on income from trading-related activities to boost the bottom line. And there are clear signs of a slowdown in lending, which is likely to translate into slower rates of growth in net interest income this year. A slowdown in lending means stiffer competition in this highly promising area, which is likely to mean tighter margins. Where does this lead? Back to the cost side. Indeed, banks like other Greek companies were unable to control operating expenses last year. Operating expenses grew by about 10 percent in 2001, burdened by some non-recurrent items such as costs related to the introduction of the euro. Analysts continue to point out that the sector is overstaffed; at the same time, they have identified untapped areas of growth, such as bankassurance, asset management and retail banking. They add that the overstaffing problem will become more acute when competition intensifies. Yet, in the banking sector, like in any other sectors, nobody seems to offer a solution. The fact that the Greek economy is growing at a healthy clip, mainly thanks to aggregate demand, helps because it buys everybody some time. But it is not certain whether everybody will use it in such a way as to avoid taking more painful measures in the future. Cost containment is a must for Greek corporations. Whether it will turn out to be painful or not, and effective or not, depends not only on the timing and the regulatory environment but also on whether there are competent top management teams that can train and redeploy the human and other resources at their disposal in the most efficient way.

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