A new frontier for Greek banks
Greek commercial banks were able to boost their profits in the 1998-1999 period by realizing huge capital gains from government bonds and local stocks held in their portfolios on the back of Greece’s successful campaign to enter EMU. The steep decline in convergence-related capital gains and commission income since then has hit their earnings and forced them to focus more on retail banking for growth. Although many segments of retail banking are admittedly underdeveloped, Greek banks may have another option, offering better growth prospects in the long run but at a higher risk: the Balkans. Faced with sharply declining trading and commission income linked to the poor performance of the Athens bourse from mid-September 1999 onward the large Greek banks have shifted resources into retail banking to compensate for lost revenues. This strategy has paid off to some extent, since rising net interest income has partly offset the huge losses from capital market activities. Nevertheless, strong loan volume growth and high spreads earned on mortgage and consumer loans have been unable to give some positive momentum to the banks’ bottom line so far and boost their sagging stock prices. Indeed, Greek banks have underperformed the MSCI European banks index by more than 60 percent since the end of 1999 and by more than 20 percent year-to-date, according to UBS Warburg, which estimates the cumulative average growth of Greek banks at a negative 16 percent versus a positive 6 percent for the other European banks in the period 2000-2003. Most analysts agree that retail banking is underdeveloped and has a lot of growth potential. Its attractiveness is also enhanced by the fact that the threat posed by foreign banks seems to be negligible because the small size of the local market, the reasonable expected return on equity and the investments required to build the necessary branch network and obtain the crucial market share are discouraging. However, a slowdown in loan volume growth amid signs of economic slowdown has prompted many banking analysts to scale down their lending growth estimates for the Greek retail banking sector in the next couple of years. Given the fact that Greek banks have difficulties cutting their administrative costs linked to the expansion of their retail network, as well as staff costs due to existing labor laws and the prospect of social unrest, they have to look elsewhere, in addition to retail banking, to supplement their revenues. Asset-gathering and bancassurance could be the other two areas to boost income. Nevertheless, none can compete against the future growth prospects, however risky, offered by the underdeveloped banking systems of neighboring Balkan countries. Some Greek banks have long realized this potential and expanded in these countries, either by acquiring local banks or setting up their own branches. By all accounts, the National Bank of Greece (NBG) has the largest commitment in terms of investments in the area, estimated by UBS Warburg to account for 13 percent of its equity based on 2001 figures. Alpha Bank comes second, with a 10-percent capital commitment. Although it is true that the economies of the neighboring countries are struggling and their political systems do not have stability as their trademark, they have a few other characteristics which are difficult to ignore. First, the size of their economies, markets and banking sectors is limited compared to Greece’s, and it is therefore easier for Greek banks to expand there without investing too much money. Second, the Greek banking model seems to be the perfect fit for them because though it may not be as developed as in Northern Europe, it is well ahead of theirs. Third, there are more than 2,000 Greek enterprises active in the Balkans and all of them need a reliable bank to do business with. Fourth, the expansion in that area means a bigger size for local banks and international diversification of assets. Southeastern Europe seems to offer the perfect springboard for Greek banks’ entry into the international arena as market players and not as the market users they are in the international financial centers and the eurozone. It offers them bigger size, needed so that they can be detected by foreign institutional portfolios, asset and revenue diversification, as well as a mix of great growth prospects with great risk that has to be managed. The Balkans may turn out to be for Greek banks what the US market was for Asian exporters: the new frontier.
