The year of deposits has begun

A number of major Greek banks delivered a strong set of results in 2007 but the environment is getting more challenging as the Greek economy slows, likely translating into lower loan growth rates. Still, their big battle will be more about deposits and less about loans this year.      The news has been mixed on the macroeconomic front lately. The Greek economy slowed to 3.6 percent in the fourth quarter according to preliminary data from the National Statistics Service (NSS). Although a strong number, it was definitely less than most analysts expected, pulling the gross domestic product (GDP) growth rate for the year to slightly below 4 percent for the year. The Greek economic climate index also fell in January to 100.6 points from 104.3 in December 2007 but this was mainly due to the sharp drop in the consumer confidence index, which showed that Greek consumers may be more vulnerable to what’s happening on the international market than most analysts factor in. On the other hand, the indexes measuring expectations in manufacturing, construction, retail and services all rose in the first months of the year.     Moreover, manufacturing output rose 1.8 percent in 2007 compared to a fall of 0.8 percent in 2006, although last December was not a good month since production fell 1.1 percent year-on-year. In addition, private construction activity – measured by the number of building permits issued – increased 10.1 percent in November compared to the same month a year earlier when activity fell sharply by 34.9 percent. In another positive sign, employment rose last November and unemployment fell to 7.6 percent in November 2007 compared to 7.9 percent a month earlier. It is obvious that Greek consumers are becoming more cautious, despite the fact that employment keeps on rising along with incomes. This may be bad news for Finance Minister Giorgos Alogoskoufis, who naturally wants stronger economic growth rates to close the budget deficit. Even in Greece, consumption accounts for the greater portion of aggregate spending, so the economy blossoms or falters depending to a great extent on consumer spending. However, this is great news for Greek banks looking for deposits to finance the expansion of their loan portfolios in the domestic market and abroad. When incomes and employment rise and consumption does not follow to the same degree, people tend to save more. This is not what the average Greek has been doing for more than five years, according to economists. This is no coincidence. The lowest interest rates in generations, following Greece’s entry into the eurozone earlier this decade, and the banks’ aggressive marketing of loans along with the full liberalization of consumer credit made many Greeks less thrifty and more consumption and asset building oriented. However, the central bank’s figures appear to dispute this assertion at first glance: Total deposits by domestic enterprises and households rose 14.6 percent year-on-year in November 2007 to 190,515.3 million euros. Even if one excludes corporations, the picture does not change much. Domestic households and non-profit institutions saw their deposits go up 12.7 percent to 152,041.7 million euros last November. If one breaks the figures down into sight, savings and time deposits, it becomes more clear what is going on. Balances at sight accounts rose 9.2 percent to 9,155 million euros, while savings accounts fell 5 percent to 71,094.6 million euros. More interestingly, balances in time deposits soared 40.7 percent year-on-year to 71,792.1 million euros according to Bank of Greece figures.    It is clear that the bulk of the increase in deposit balances come from time deposits. This is mainly the result of the campaign by many local banks to offer higher interest rates in their bid to attract deposits as their foreign operations provided them with superb loan volume growth rates but much smaller deposit growth since these countries are relatively poor and have a much lower per capita GDP than Greece. The credit crunch and the difficulties in accessing international capital markets, along with the much higher cost of money, convinced a number of banks to go more aggressively after depositors. As a result, overall deposit growth far exceeded nominal GDP growth of between 7 and 8 percent. In general, deposit growth should go broadly hand in hand with nominal GDP growth, which measures both inflation and the real growth rate of the economy. To some extent, this disparity is explained by liquidations of other assets such as money market, bond and stock mutual fund shares as well as stock selling. The remaining gap may be explained by the repatriation of capital by Greeks, such as shipowners. The latter appear to be growing more confident with local banks and, coupled with the higher interest rates offered to them for large amounts, they seem to have decided to deposit part of their money in Greece.               Of course, offering high interest rates in time and other types of deposits has its drawbacks for banks. It cuts into the spread they earn from deposits, that is, the difference between the euribor rate and their average deposit rate. For the time being, it looks as if this does not constitute such a big problem as they charge higher interest rates on some types of loans, for example, corporate loans domestically, while the loans offered by their subsidiaries abroad account for a greater portion of their loan book. These loans carry a higher margin than they do in Greece.     Signs of the Greeks resorting to more savings due to the turbulence on international financial markets is good news for deposit-thirsty local banks. The same is true of Greeks repatriating part of their money kept abroad. Still, given their projected double-digit loan growth this year and next, the well of local savings may not be enough for local banks. This will be more intense if the deposit rich banks, such as National Bank of Greece, Postal Savings Bank (TT) and ATEbank, decide to strike back and offer competitive interest rates to their depositors who have been lured away by the other banks. So, 2008 may indeed turn out to be the year of deposits rather than the year of loans for Greek banks.