Easy bank profits a thing of the past
«No large foreign financial organization is going to take serious notice of a Greek bank whose capitalization is less than 12 billion euros,» says National Bank of Greece (NBG) deputy governor Apostolos Tamvakakis, to make the point that Greek enterprises have to grow in size and that the country needs national business «champions.» In the first interview after the collapse of the proposed merger with Alpha Bank earlier this year, the country’s second largest, he says that a big opportunity was lost. The interview took place a few days after Tamvakakis’s return from Madrid, where he attended the session of the Interalpha Group – encompassing 10 big banks from different countries of which NBG is the smallest by far. He believes that after 2004 profits in the Greek retail banking sector will begin declining, and that a new round of cross-border restructuring moves in the industry will begin. Do you consider that Greek banks can participate in this round? If foreign banks are convinced that the Greek market lends itself to investment, it is quite likely we’ll see such moves here. Presently, however, Greece is not on the radar screen of foreign banks, as the home market, particularly after the crash of stock prices, now requires relatively small investments. For instance, while NBG’s stock market value was more than 10 billion euros in 1999, it has fallen to around 4.8 billion now; in this sense, the Greek market may be considered attractive for such a round of restructuring and a scenario of a large foreign bank offering a 20-30-percent premium for an acquisition in Greece through a share swap is hypothetically possible. How necessary is expansion abroad for a large Greek bank? The answer can only be affirmative. The Greek market is limited and we must create vital space abroad. It is not a coincidence that banks based in small countries, such as AIB, ING or ABN AMRO, grew by becoming outward-looking. If, from a bank in a country of 11 million people, we enlarge our market to 60 million, we not only achieve bigger future profits but also greater flexibility in action and negotiation in a possible redrawing of the European banking map. Nevertheless, expansion requires extreme care, significant amounts of capital, administrative competence, a satisfactory rate of return to investment and proper risk management. Is what you are saying now related to Economy Minister Nikos Christodoulakis’s recent statement of a reduction in the State’s stake in NBG? It is an important decision and I must admit that I was concerned by the initial market reaction to the statement. When the market presses for restructuring measures, it is curious for it to react apprehensively to such an announcement. Let us not forget that direct public interest in NBG is already as low as 13.5 percent, rising to around 20 percent if account it taken of the indirect control through social security funds which are also stakeholders. The fact that the State, as the minister said, will gradually shed part of this stake and in a way that will not affect the price of the share, can only be viewed positively. There are a number of alternative options on how such a decision is implemented. It may be done through a convertible bond loan, or part of the stake may be used in a strategic move or a secondary placement, sold to foreign funds, or through a combination of all the above. One thing is certain, however – the bank intends to fully protect shareholders’ interests. Would a strategic move aim at creating a national «champion?» No large foreign financial organization is going to take serious notice of a Greek bank whose capitalization is less than 12 billion euros, so the answer is yes. National champions are necessary. The more the market is globalized, the greater the need for larger companies. My opinion is that further concentration in the sector is inescapable. The question is old: How many big banks can the Greek market support? My view, which I frequently repeat, is not more than three, and I therefore believe it is a matter of time before another round of concentration begins. Alpha Bank chairman Yiannis Costopoulos said a few days ago that only a merger with NBG could have led to a large, European-sized bank and that any other domestic combination could not have the same result. How are national champions going to be created? Mr Costopoulos is right; I believe we lost a unique opportunity to create something large and viable. I am certain, however, that there are no administrative impasses and that the market will find its course, sooner or later, either through Greece or abroad. Profits and management «The Greek market,» says Tamvakakis, «has already converged with other developed banking markets in Europe in terms of revenues and how easily profits can be made; the easy profits of 1999 and 2000 from operations in the stock market and investment banking are a thing of the past. The end of 2001 also signaled the end of easy profits from bonds. «Banks are now being called upon to replenish such profits from traditional sources such as retail and commission revenue. In Greece we are lucky in a way, because this change was accompanied by explosive growth rates in retail banking (35-40 percent) in recent years. Bank profits may have declined in absolute numbers in 2001, but operating profits rose. This is healthy. We have also noted an increase in the income of certain banks from activities abroad. In NBG’s case, for instance, such income represented 12.5 percent of consolidated pretax profits last year. «It is true that present conditions are not the best but this is universal problem and the Greek market cannot be the exception to the rule. Nevertheless, the significant improvement in operating profits is a fact and conditions look favorable for the trend to continue in the next two-three years through retail operations – particularly through lending to professionals and small firms. Until 2004, the annual growth rate of retain banking is projected at 25-30 percent, in line with trends elsewhere in southern Europe. «Another big issue is cost control. Under present conditions, a satisfactory ratio of expenses to revenues is under 55-60 percent. There are several Greek banks in that region, but they are quite likely to exceed it in 2002. I believe it is the first time that cost control has figured so highly on the agenda of direct priorities. This must be accepted both by management and employees, as the rate of return to investors is at stake. I am afraid the times of easy profits have gone. «All these factors make the role of management even more crucial. The future of enterprises in general now largely depends on the foresight of management to implement correct strategic decisions in good time. «The issue of managerial competence is a sensitive issue. In Greece, we are facing two basic problems; we do not have an adequate number of staff capable of assuming administrative roles in a fully globalized market, and people to staff positions abroad. To the extend that we seek to participate in developments abroad, we must prepare and promote the internationalization of management, even with the participation of foreign executives.»
