Talk of mergers and acquisitions in the top tier of Greece’s banking sector has been around for years but has intensified in the last couple of months on news of the battle for control of Dutch Bank ABN-Amro between Barclays and a group of three other European banks and the equity stake of an activist hedge fund in the country’s second-largest bank. Although merger and acquisition (M&A) activity is likely, the situation may be more complicated than it looks at this point. The majority of top bankers always held the view that M&A among Greece’s top five banks will take place when loan growth in the domestic retail banking market slows down considerably to single digits and spreads come under a lot of pressure. The idea was they should join forces to protect their domestic turf and prevent competition from further eroding their spreads. Not so long ago, National Bank’s Chairman and CEO Takis Arapoglou hinted of possible M&A by comparing the number of large Greek banks to the number found in other European countries of a similar size to Greece. Also, Yiannis Costopoulos, the chairman of Alpha Bank, has repeatedly predicted that the local market will end up with two or three large banks. Nevertheless, reality has defied expectations. The appetite of Greek households for consumer and mortgage loans has been strong, although decelerating in the last few quarters, and spreads have been quite resilient even though there has been more of a trend toward tightening. According to available data, domestic lending volumes, especially mortgages, have been expanding by double digits and spreads have been narrowing, although at different speeds, among the top banks. History teaches that forward-looking agents do not wait for expected reality to set in and usually act before this moment comes. From this point of view, the Greek banking sector has entered the time when red lights are flashing for a pickup in M&A deals. It should be noted that Greece’s five large banks are National Bank of Greece, Alpha Bank, EFG Eurobank, Emporiki Bank and Piraeus Bank. Cyprus-based Marfin Popular Bank (MPB) has also emerged as an important player, given its strong shareholder, Dubai Investment Group. Since Emporiki Bank is 72 percent-owned by France’s Credit Agricole, the most likely participants in potential M&A deals in Greece would be the others and potentially one or more large foreign banks. Outside influence There is no doubt that developments outside Greece may have also influenced the opinion of Greece’s top bankers, who consider likely a major deal in the domestic banking sector in the next few months. The ongoing battle for ABN Amro between Barclays on the one side and RBS (Royal Bank of Scotland), Fortis and Santander on the other side has not gone unnoticed. It is even more significant because the battle has been initiated by the demand of an activist hedge fund, TCI (The Children’s Investment) Fund Management LLP, which holds a mere 1 percent stake in ABN Amro, to break up the Dutch bank and sell it in parts. The news that another activist hedge fund, Centaurus, has a small but not insignificant stake in Alpha Bank, estimated at 3.0 percent, has just added fuel to the fire, bringing to the surface the role of shareholder activism, an almost unknown factor in Greek corporate history. Also, leaks on a foreign economic website, specializing in M&A talk, that British HSBC was also looking into acquiring a large Greek bank, with Alpha Bank and Eurobank being on its radar screen, alerted even more people that something is going on behind the scenes. Last week, Eurobank announced a -1.2 billion rights issue to fund its expansion drive abroad and finance organic growth at home. Greek bankers and others believe that something is going on behind the scenes in the banking sector which could set off a chain reaction of major deals. The minority which disputes it says this is influenced by what is going on abroad rather than reflecting reality at home. They have been right before but this does not mean they will be right again. By looking at each of the large banks individually, one can draw some useful conclusions. First of all, National Bank of Greece appears to be taking a wait-and-see attitude. Simply, it is waiting for others to make the first move before deciding to join in or not, potentially playing the role of the white knight by coming to the rescue of another large Greek bank. Although its main focus is to become a major peripheral player in the greater geographical region, analysts think National would not be indifferent if a major deal among the other big banks threatens its dominance of the domestic banking sector. Moreover, a merger or the acquisition of a major Greek bank would dilute further the stake of Greek social security funds and others linked to the state in the bank’s share capital, helping it to get rid of political influences. Alpha Bank, the country’s second-largest bank, does not have any single shareholder or group of them with a controlling stake. Theoretically speaking, this makes it more vulnerable and the fact it has a growing franchise in Southeastern Europe makes it an even more attractive target. EFG Eurobank cannot be a target unless its major shareholder, EFG Group, which controls some 42 percent of the bank, decides to sell. Based on comparative valuations between the other large Greek banks, Eurobank is the richest. It is also better positioned, along with National Bank, in the riskier but faster-growing area of Southeast Europe. There has been talk of a deal with a large European bank in the past but nothing has materialized so far and representatives of its major shareholder have denied the rumors. Piraeus Bank, Greece’s fifth-largest bank, also has a big free float and no shareholder or shareholders seem to have any controlling stake. Piraeus was initially one of the two targets of Marfin Popular Bank (MPB), the other target was the Bank of Cyprus, but it managed to repel it quite successfully. Finally, it struck a multiyear truce deal with MPB. Postal Savings Bank is also a candidate for acquisition but the government is more preoccupied with selling another 15 to 20 percent stake to bring its own to below 50 percent rather than privatize it at this point. Needless to say, major banks such as Alpha and EFG Eurobank would have sought to acquire deposit-rich Postal Savings Bank had it been available. In general, analysts agree that no major Greek bank has enough cash to buy any other so if there were a deal, it would take the form of a stock deal. They all agree that Alpha Bank appears to be the prime candidate for M&A in the club of large banks at this point. The presence of activist hedge fund Centaurus in its shareholding has raised even more eyebrows. Given the fact that a merger between two large banks, involving Alpha, would require costly voluntary retirement schemes and perhaps bring up the issue of incompatible systems, they think a foreign bank may be more likely to seek to acquire Alpha. Even so, it may have to secure the support of its current management and its influential chairman Costopoulos to succeed. Still, the price tag will not be small. Assuming a control premium of 20 to 25 percent and Alpha’s current capitalization of -10 billion, this translates easily into a -12 to -12.5 billion deal. If one adds the bank’s unfunded pension liability, which some put at -500 million and others at -1 billion, the price tag may get even larger assuming its share price does not fall from current levels. All in all, it is easier to talk about mega-deals in the Greek banking sector than see them happen in reality. The time may be ripe for M&A in the banking sector but still it is not easy given the rich valuation of the banks and the restrictions imposed by the Greek labor market laws, which make it more difficult to attain synergies. At this point though, it seems that if there was a mega-deal, it is more likely to be initiated from abroad.