Banks’ strategy in flux
The vast majority of the major Greek commercial banks did again in the July-September period what they have done well for several quarters: They delivered strong third-quarter financial results, pleasing their shareholders and the investment community in general. However, the launch of aggressively priced loans in the most promising category, that is, mortgages, by a new emerging banking group and Emporiki Bank in the last couple of weeks seems set to threaten one of the major pillars of their investment story – an orderly decline in assets spreads. Their response will impact their future earnings as well as the shape of the banking industry. The first-quarter financial statements of some Greek banks rang bells about the rapid compression of asset spreads, that is, the difference between the average loan interest rate and the three-month Euribor or the ECB (European Central Bank) official rate, putting pressure on their stocks. The worrisome narrowing of loan spreads was attributed to the more aggressive pricing and marketing by banks such as Emporiki, ATEbank and Postal Savings Bank which were not a factor in the retail banking market before. The negative effect on their earnings was magnified by the consequent sharp stock market correction during the May 10 to mid-June period and, in the case of National Bank, by the 3-billion-euro plus rights issue to finance the acquisition of Turkey’s Finansbank. However, the second-quarter results alleviated some investors’ concerns, since lending growth remained strong and spread compression slowed down as banks started passing through the ECB’s interest rate hikes on holders of floating rate mortgages and consumer loans. Gross loans increased by about 20 percent year-on-year in the first half, with total mortgages from commercial banks rising by 32.2 percent to 44 billion euros, total consumer loans by about 25 percent year-on-year to 24.2 billion and business loans by 11.4 percent to 76.3 billion. At the same time, banks managed to earn more from the widening spread between the three-month Euribor and the average interest rate paid to depositors, therefore largely offsetting the impact from the narrowing loan spreads. Banks with large deposit bases, such as National Bank of Greece, ATEbank, the Postal Savings Bank (TT) and «old» banks, were the main beneficiaries, although other banks also managed to gain to a lesser extent. In general, analysts estimate that interest income from deposits accounted for 10 to 20 percent for «new» banks and 25 to 50 percent of total interest income for the older banks with the large depository base. Although this source of income has helped a lot, with total deposits growing by some 15 percent year-on-year with sight deposits and especially time deposits leading the charge, it can do little to offset a larger-than-expected compression of loan spreads in the fourth quarter and beyond. Similar trends to that of the second quarter on the loan and deposit sides appear to be the norm in the third quarter, following the publication of financial statements by Alpha Bank, EFG Eurobank, Piraeus Bank and Emporiki Bank, ATEbank and some smaller banks. However, the most promising loan category in terms of growth prospects and quality, mortgages, appears to be in a state of flux lately as the new bank to emerge from the merger of Cyprus’s Popular Bank and Greece’s Egnatia and Marfin banks has been aggressively marketing aggressively priced mortgages offering, among others, zero percent in the first year and the ECB official rate plus 50 basis points from the second year on. It is noted one percentage point is equal to 100 basis points. Emporiki Bank has also come out with a new mortgage loan featuring a 3.95 percent fixed rate for the first three years. It is understood that Popular Marfin’s mortgage products aim both at gaining a larger market share in the country’s most promising loan segment and introducing the new banking group, whose major shareholder is a subsidiary of state-owned Dubai Investment, to the Greek general public. Emporiki also wants a larger market share and this is its first move under the new management appointed by France’s Credit Agricole. Executives at other Greek banks appear to be gauging the situation and taking a wait-and-see stance at this point since they are fully aware that a price war will hurt their banks’ earnings and stocks. Perhaps the latter explains why they tend to downplay the threat. Executives say in private that the new banking group is going to lose money from the new product, implying Popular Marfin cannot afford to stick to it for a long time. They add that the majority of Greek borrowers consider price, service and proximity to their business and homes when deciding to take out a loan. However, this may or may not turn out to be the case and they may be forced to do what they want to avoid at any cost – a costly price war which will undermine their unique growth story in the European banking sector. Undoubtedly, Greek bankers can still count on strong GDP growth rates in the area of 4 percent in the next few years and a retail loan-to-GDP ratio that is still considerably lower than the average in the EU-15 to produce double-digit growth in loan volumes next year. Nevertheless, such a sharp compression of loan spreads is not factored in any analyst’s model determining their valuation and cannot be offset by a moderately widening deposit spread. Also, the large Greek banks’ expansion into Southeastern Europe has started paying off but it will be some time before it starts showing up significantly in their group earnings. Bancassurance at home is also promising but still represents a small portion in the group’s total revenues and earnings. Asset management could also make a difference but is still not so big. Under these circumstances, the large Greek banks may have to start rethinking their overall strategy if the aggressive pricing and marketing of mortgage products persists and expands in the next few months, compressing loans spreads to EU-15 average levels in such a short period of time. This means some large banks may have to start thinking about their merger and acquisitions options more seriously and earlier than they thought.