Fitch on Greek banks’ expansion

Fitch Ratings says in a special report published yesterday that while Greek banks’ expansion into Southeastern European (SEE) and Eastern Mediterranean markets has so far remained relatively modest, the aggressive international growth strategies of most Greek banks could have an impact on the banks’ ratings. «Since the financial sector liberalization in Greece and other SEE countries, the larger Greek banks have invested heavily in neighboring countries, both through acquisitions and organic growth. «The expansion aims at countering anticipated margin pressure in their home market and capturing the strong credit expansion in the region,» says Cristina Torrella, director of Fitch’s Financial Institutions team. The SEE and Eastern Mediterranean banking assets of the four biggest Greek banks have more than doubled since 2005 to account for 13.5 percent of total assets at end-2006. However, the profitability and cost-efficiency of international businesses are, in most cases, still below domestic levels, reflecting continued investments in capacities abroad. Greek banks have significant market shares in most Balkan countries and their branch network in the wider region (including Turkey, Egypt and Central-Eastern Europe) now exceeds 2,000 outlets. Most Greek banks expect their international operations to become a significant revenue pillar in the short to medium term. They also intend to significantly broaden their retail and corporate banking franchises in the region and expect the international branch network to outstrip domestic branches in two to three years. «Banks will, however, have to make sure that credit risks in their growing international operations are dealt with prudently. Otherwise, they risk international operations merely increasing Greek banks’ risk profiles without improving their overall financial performance,» adds Torrella. Also, Greek banks’ present operations abroad are generally small in scale compared to those of major Western European banks in the region, which could be a stumbling block once competition in those markets intensifies. Acquisitions were the main route to Greek banks’ initial growth in Southeastern Europe and the Eastern Mediterranean. However, organic growth is becoming more important, as appropriate takeover targets have become more sparse and pricier, and Greek banks are expanding their already established local operations. Additionally, Greek banks have started expanding into the wider region, acquiring banks in Turkey, Egypt and Ukraine. Acquisitions in Russia as well as expansion into the Caucasus are being contemplated by some banks. «Although international expansion has, in Fitch’s view, somewhat increased the risk profile of major Greek banks, the rating impact has so far been neutral with stronger revenue-generating capacities and regional diversification offsetting higher foreign risks, heavy investments in infrastructure and the buildup of a retail franchise,» says Torrella. While steady organic growth or bolt-on acquisitions are unlikely to affect the banks’ ratings, the impact of larger acquisitions – which are, in Fitch’s view, possible – will have to be assessed on a case-by-case basis. The report, titled «A New Hellenic Empire? – International Expansion of Greek Banks,» provides a country-by-country overview of Greek banks’ international exposure and recent acquisitions.

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