With credit crunch, talk of Greek bank merger resurfaces

The subject of mergers and acquisitions (M&A) in the Greek banking sector has been one of the hottest of the last few years. Yet, with the exemption of the acquisition of Emporiki Bank by Credit Agricole in 2006, no major deal has materialized among the big names. However, there are more reasons now than before to believe that M&A fever in Greek banking will increase this year. The rumor that a top official of National Bank of Greece, the country’s largest commercial bank, contacted his counterpart at Piraeus Bank for a possible deal made the rounds of the Athens Exchange (ATHEX) last week, raising expectations of a mega-deal in Greece’s dominant sector. The news about the contacts was denied by both banks on Friday but few pundits were convinced that the rumor was completely unfounded. As the head of another bank put it, «When there are private talks and no deal, you can deny it.» This was not the first time that speculation that National Bank of Greece has sought a merger deal with another major Greek bank emerged over the last 12 months. The same happened in the summer of 2007 when rumors said National Bank had approached Alpha Bank for a possible deal. During this time, National Bank’s chairman and chief executive, Takis Arapoglou, had been emphasizing the group’s emphasis on expanding abroad. According to some commentators, the sharp fall of Greek bank shares since the start of the year has made it easier for potential hunters. This is partially true. Any deal between the country’s four largest banks will most likely be an all stock deal; that is, there will be a stock swap. In such a case, it is not the absolute level of the market capitalization of each bank that matters but their relative levels. On the other hand, the drop in market capitalization matters more to those who are willing to pay mostly cash for an acquisition. Under the current market circumstances, the latter is more likely for smaller bank where the required sum is not as demanding as it would be for the larger ones. For example, it is more likely to see business interests associated with Egyptian tycoon Naguib Sawiris willing to pay 100 to 150 million euros or less to buy a controlling interest in a small local bank, such as Aspis Bank, First Business Bank or Attica Bank, if it was to be put up by the government, rather the other way around. Nevertheless, unlike at other major banks abroad, such as Bear Stearns, it is not the need of a major capital infusion by others, such as JP Morgan Chase or sovereign wealth funds, that has raised the prospects for M&A deals among the big players in the Greek banking sector. After all, Greek banks appear to be well-capitalized. There are other reasons, some of which are specific to each bank, and are directly or indirectly linked to the ongoing credit crisis which make it more likely to see deals. Funding costs up Greek banks are feeling more and more the pinch of the credit crisis which has not seemed to abate. Their cost of funding continues to rise as interbank money interest rates have gone back up to levels seen in early January and time deposits are being rolled over to higher interest rates. At the same time, banks are finding it more difficult to pass on all of their higher cost of funding to borrowers and this translates into compressed spreads, that is, the difference between what they earn on loans and what they pay on deposits, hurting their profitability. If the credit crisis continues for the entire year, the big banks that rely more on wholesale funding for their loan growth are likely to see their profitability hit harder. At the same time, the large Greek banks have discovered that the quest for growth outside their domestic market carries more risks when international market conditions worsen and/or neighboring economies face problems. This translates into lower stock prices and makes de-risking a priority as a strategy. The latter can be achieved by a major deal in the Greek market. A number of investment bankers think this is a prudent strategy for a bank such as National Bank of Greece with a high exposure in emerging markets, such as Turkey. Some 30 percent of National Bank’s consolidated net income came from its Turkish subsidiary Finansbank in 2007 and this is projected to increase this year and next. However, it is less so for other big Greek banks which earn less than 15 percent of their group after-tax income from their subsidiaries in Southeastern Europe, the Middle East and elsewhere. This means there is less pressure on Alpha Bank, Piraeus Bank and Eurobank on that front. Still, some of the other large banks, apart from National, may have other reasons to want a deal provided the price is right. Market participants say some of their top management executives had taken out loans to subscribe to their share capital increases before the credit crisis unfolded to its full extent. These people are stuck with sizable loans whose collateral, meaning their bank shares, has lost value. So it is in the best interest of the top management to find ways to prop up the shares of their banks and making a major M&A deal may be the only way out, provided a large premium to the current stock market price is offered and if the credit crunch continues. «The first reason for signing a deal is if it serves the best interest of your own people at management. Everything else comes second,» says a senior banker who shares this view. Major banks have also a vested interest to prop up the shares of other banks in which their group holds a minority shareholding, below 5.0 percent, which is not obliged to declare. The case of Postal Savings Bank (now renamed Hellenic Postbank) may fall into this category if pundits are right and it will be a surprise if a local group reveals it holds an equity stake in it in the next 10 days or so. All in all, the continuation of the credit crisis has increased the likelihood that a major deal between the large Greek banks may take place at some point this year, although the dynamic banks that are the targets may resist, asking for a large premium on their current stock market price. Whether the hunters will find it acceptable or not, along with the agreement to share the top executive positions in the merged entity, will determine the final outcome.

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