Maturity of Greek banks comes with risks

Greek banks’ endeavor into other Southeastern European (SEE) countries has started paying off but at the same time it has altered their risk profile for the worse. With the Greek retail banking maturing fast, this is a one-way street and the only thing they can be sorry about is that they did not go in earlier to be better positioned to take advantage of growth opportunities at a lower acquisition cost. National Bank of Greece, the country’s largest bank, should be one of them. Its stated goal to become a big player in the greater geographical area would have been much harder to achieve without acquiring control of a medium-sized Turkish bank for which it paid a sizeable amount of money at a high P/BV (price-to-book) multiple. On Friday, the National Bank of Greece (NBG) announced it had finally acquired a 46 percent stake of the Ordinary Shares and 100 percent of the Founder Shares in Turkish Finansbank from FIBA Holding, following the approval of the transaction by the relevant authorities in Greece and Turkey. It now remains to be seen what stake NBG will end up getting in Finansbank, following its mandatory offer. Based on figures provided by NBG, the group will have a branch network of more than 1,000 units, following the Finansbank transaction, 46 percent of which will be outside Greece. A combined clientele of more than 10.5 million, being active in a market of 125 million people and a total GDP (gross domestic product) of approximately 750 billion dollars. The group’s earnings before taxes is estimated at more than 1.2 billion euros with its subsidiaries outside Greece accounting for 34 percent. It is not bad but this expansion drive could have been less costly and made NBG’s risk profile more attractive if it had made some moves earlier in large neighboring markets such as Romania and even Turkey. Romanian banks According to investment banking sources, the Greek bank had the opportunity to buy a majority stake in BCR, Romania’s largest lender, early this decade at a very low price compared to today’s norms but decided not to. Needless to say that such an acquisition would not most likely necessitate a sizeable purchase in the more risky Turkish market, mitigating the effect of the Group’s risk profile. NBG submitted a bid for BCR when the Romanian government held an auction late last year but it was too late since other aggressive bidders showed up, willing to pay a large premium for the leading bank of a country slated to become an EU member. BCR ended up in the hands of Austrian Erste Bank for a consideration of 4.4 billion dollars at a P/BV of 5.8 and a P/E of 29.7. NBG has not abandoned its efforts to up its presence in the Romanian market, where its small subsidiary, Banca Romaneasca, had some 50 branches until recently. The Greek bank is one of the two favorites to buy a majority stake in CEC (Postal Savings Bank), which has hundreds of points of sale (POS) in the country but needs a major restructuring to live up to NBG standards and expectations. Romania is not the only country where NBG had set its sights. Turkey was the other one and it is not a secret that top officials at the Greek bank mulled buying a sizeable minority stake, some 30 percent, at Garanti Bank, one of Turkey’s largest banks, late last decade and early this decade. But Turkey’s financial crisis and the bear market in Greece and abroad up to March 2003 combined to deter NBG’s top brass to make such a move, which also carried political risks for the ruling Greek Socialist government at the time. Of course, NBG had made some other smart moves in the SEE countries earlier. The acquisition of a majority stake in the United Bulgarian Bank (UBB), one of the three largest banks in the country, could be characterized as such. But NBG is not alone in not doing more earlier to expand in the region given its strong growth profile and sizeable population compared to the home market. Alpha Bank, the country’s largest private bank, was the first Greek bank to understand the importance of the Romanian market and go in early in the 1990s. However, it did not take advantage of this smart move. In June 2006, Alpha Bank’s Romanian subsidiary had about 50 branches, as much as NBG. Alpha derives 9.0 percent of its group profits from SEE countries today and wants to bring it up to 20 percent in 2008, implementing a different expansion strategy. Alpha Bank is counting on organic growth to up its branch network to 433 units in 2008 from 209 today. Based on first-half results, Alpha Group’s loan book in SEE expanded by 30.3 percent year-on-year and deposits by 40.2 percent. EFG Eurobank Ergasias, the country’s second-largest private bank, was also among the first to expand into the neighboring countries. But it placed a greater emphasis in M&A deals in the Greek market to become one of the country’s dominant banks in a relatively short period of time. After this, EFG Eurobank appears to be taking small, careful steps in building up its franchise in SEE countries, including Turkey, Ukraine and Poland. At the end of the first half, it had an estimated 572 branches in the so-called «New Europe» for a total investment of 840 million euros. Piraeus Bank, a relative latecomer, appears to be stepping up the pace of expansion in neighboring countries while maintaining a presence in the US market via its subsidiary Marathon Bank, unlike the others, and London. This impressive drive, although smaller in size than its main Greek competitors, helped it derive about 16 percent of the group’s recurring profit from its international operations, of which 13 percent came from SEE and Egypt. Already 40 percent of group branches are abroad. Piraeus Bank could have been a much bigger player if it had gone abroad earlier, but since it is a relatively young bank, like EFG Eurobank, it also had to balance that with expansion priorities at home. There is no doubt that the large Greek banking groups could have had a greater presence at a lower cost if they had started their expansion drive earlier. Of course, all major banks are not the same and it is understood that domestic priorities made it harder to deploy financial and human resources abroad. Nevertheless, the fact that the maturity of the Greek retail banking market was easily forecast should have mobilized them much earlier in a bid to enhance their growth profile and lower their risk one.