Profit growth seen slower but still strong for banks

The year 2006 turned out to be another good one for the Greek banking sector, with strong earnings growth and a pickup in merger and acquisition (M&A) activity. If pundits are right, and we think they are, 2007 will be another good year marked by slower profit growth and perhaps more banking deals. The large Greek banks either surprised on the upside or delivered the promised high earnings growth to their shareholders in 2006, propping up their shares to new highs. Emporiki Bank and ATEbank were the exception, since their shares fell 18.8 percent and 21.9 percent respectively. Others, such as Piraeus Bank and the Postal Savings Bank, saw their shares rise 68.6 percent and 42.9 percent, respectively. Confidence in their ability to deliver strong growth quarter after quarter along with enhanced earnings visibility have played an important role in convincing foreign institutional portfolios to increase their shareholding in the large Greek banks and downplay their more demanding valuations vis-a-vis their EU competitors. In addition to continuous strong earnings growth, 2006 was a relatively busy year in investment deals for the Greek banking sector. Undoubtedly, the acquisition of a majority stake in Emporiki Bank, the country’s fourth-largest bank by assets, by Credit Agricole was one of the major deals of the year. Despite facing strong opposition from various local interests, the French bank was able to end up controlling more than 70 percent of Emporiki in a surprising tender offer in June which caught other contenders off guard. The government presented it as a vote of confidence in the Greek economy and the largest foreign direct investment in the country by a sole foreign entity. Theoretically speaking, the entry of the Credit Agricole Group into the Greek banking sector should increase competition. The acquisition of a 46 percent stake in Turkish Finansbank by National Bank of Greece, the country’s largest bank, was perhaps the biggest deal of the year for symbolic as well as other reasons. The management of National Bank overcame the objections of opposition political parties and the trade unions, successfully completed a 3-billion-euro plus rights issue under adverse market circumstances to finance the transaction which gives the group a branch network of more than 1,000 units in Greece and abroad with an estimated consolidated pretax profit of more than 1 billion euros and a clientele of more than 10 million in a wider market of some 125 million people. The acquisition of a major stake by the Dubai Investment Group in Marfin Financial Group and the triple merger of Marfin FG with Egnatia Bank and the Popular Bank of Cyprus was another major banking deal, giving rise to a bigger, Cyprus-based bank called Marfin Popular Bank. Headed by an aggressive and ambitious CEO, Andreas Vgenopoulos, the new bank is expected to play a bigger role in future M&A deals. The successful initial public offering of the Postal Savings Bank (TT) was another milestone. It is no secret that some of the larger banks would have liked to acquire the deposit rich TT to cheaply fund their loan growth. TT has already made its presence felt in the banking industry like never before, competing with the big players in the most lucrative area, that is, mortgages, by offering loans with tighter spreads by taking advantage of its large deposit base and low-cost operations. If 2006 was a good year, 2007 holds the promise of being better despite an anticipated earnings growth slowdown on the back of slower loan volume growth and narrower margins. Strong home advantage Like before, Greek banks can count on a strong home advantage compared with their EU peers. The economy is expected to grow by 3.7-4.0 percent, which is way above the eurozone average, and experience moderation in inflation. This is an important condition for a cyclical industry such as banking. Pundits also point out that local banks can still count on a still underbanked market with some 32 branches per 100,000 inhabitants, compared to some 100 branches in Spain. Moreover, credit penetration, while rising for years, still lags behind the eurozone average, especially in mortgages. There is little doubt that loan growth over the years will converge to eurozone averages accompanied by smaller margins. Still, relatively low real interest rates and demographics such as foreigners buying second homes and immigrants being able to afford new ones should continue to provide momentum in mortgages. Moreover, new products, such as credit cards, and rising income per capita should also help underpin healthy consumer loan growth. Another argument in favor of local banks being able to exert a high degree of pricing power is the highly concentrated local banking industry. The five largest banks account for some 75 percent of total assets. With the Greek market maturing fast, the large local banks can look forward to their investments in other neighboring markets to take up the slack in the years ahead, although 2007 will not be the most important year for them in this respect. Moreover, at this point, they are well capitalized to finance new small acquisitions in new markets, such as Ukraine. If earnings fundamentals look relatively robust for 2007 at this point despite expectations for further margin compression and loan growth deceleration, the prospect of M&A could help keep bank valuations elevated. The state has made it clear it wants to further reduce its equity stake in the Postal Savings Bank and any signal to loosen control could have helped spark interest from a number of local and foreign players. The government also wants to sell its indirect equity stake, about 38 percent, in Attica Bank and this may spur a realignment in the small-to-medium bank segment and generate interest from abroad. Moreover, it is not yet clear whether Piraeus Bank will approach Bank of Cyprus, the largest Cypriot bank, with an improved bid after the rejection of its first bid by Bank of Cyprus’s board of directors. No one can rule out the possibility that another bidder may turn up if it comes down to that. Even the prospect of a strategic alliance between a major Greek bank, except for National Bank and Emporiki, and a major European bank cannot be ruled out, although an intra-country merger between two major players seems to be a remote possibility at this point. All in all, 2007 appears to have all the ingredients to be another good year for the majority of Greek banks, with strong earnings growth but not as impressive as it was in 2006.

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