By all accounts, the financial results of the large Greek banks will be largely in line with those promised to their shareholders but this does not mean the chief executives of some of them will be able to avoid the dilemma – either revise downward this year’s earnings and other targets in their business plans or merge with another. The better-than-expected first-quarter financial results of Citi and JP Morgan, announced last week, eased concerns that they hide more skeletons from the subprime fiasco in their closets. This put on the back burner the disappointing first-quarter results of Merrill Lynch and has paved the way for an advancement of their banking stocks which was felt worldwide on Friday, including in Athens. It may be a welcome development for Greek banks, which have seen their stocks drop more than 30 percent from highs in some cases but cannot change reality at the branch network level. There is a slowdown in loan growth in Greece and abroad like-for-like, that is, without taking into account the new branches, while at the same time their cost of funding continues to rise. Although no top bank executive will admit in public that his or her bank is facing difficulty meeting the targets set out in their long-term business plans, usually extending out to 2009 or 2010, they appear more skeptical in private. The key, according to them, is the duration and the depth of the credit crisis which has yet to show signs of abatement and most admit it may last longer than they thought a few months earlier. The chairman and chief executive officer of National Bank, Takis Arapoglou, admitted this publicly during the annual general shareholder meeting of his bank last week. The top executives of Greek banks now think the crisis may continue well into the third quarter and beyond, testing the limits of some banks. Although they would not admit it publicly, Greek banks, large and small, have been busy looking for extra medium-term liquidity via a number of avenues, including the securitization of their loan portfolios, covered bonds and others. This is in addition to a search for more deposits and is part their strategy to have precautionary cash should things get worse in the future. At the same time, they are facing the pinch of higher money interest rates when they borrow on the interbank market and higher cost of deposits as competition among banks heats up and clients turn away from other forms of savings toward higher-yielding time deposits. Of course, the banks have tried harder to pass a greater deal of their increased cost of funding onto borrowers to avoid getting hit hard by the credit crisis. The reintroduction of non-interest expenses on mortgage loans received a lot of attention in the local press recently, although it is known in banking circles that this process began much earlier. In so doing, banks will have to deal both with slower gross domestic product (GDP) growth rates at home and in the neighboring markets where they have operations. Greek GDP growth, a key variable in loan expansion, has been revised downward to 3.6 percent by the government this year with the central bank taking it down to 3.5 percent. This, along with higher lending rates, increases the likelihood that some of their customers may find it more difficult to service their loans, which in turn means they cannot count on lower provisions for loans in arrears this year to boost their profits. Slower lending Meanwhile, things do not look better in Romania, Bulgaria and elsewhere, where lending is still very robust but has decelerated from last year’s highs. Greek banks have been forced to take additional provisions for bad loans in those countries to compensate for the fact that borrowers have either no credit history or very little. It should be noted that many borrowers in those countries have taken out loans in euros in the previous years and face an increased cost of servicing them since many local currencies have slid against the euro. The situation at Greek banks may not be critical but it getting more and more challenging as time goes by and the credit crisis does not end. To this extent, the prospect of not meeting some of the targets set out in their business plans looks increasingly probable for some of and their top management may be forced to make strategic decisions: either revise downward the targets of the business plans to reflect the new market reality and have their stock take another hit to ease the pressure or speed up an M&A deal. By doing the first, the banks will rationalize their lending practices and avoid the prospect of higher provisions and the writeoffs of bad loans in the future. It is known that chasing ambitious loan growth targets means lending to people who may have not gotten the loans under other circumstances. The subprime debacle in the USA is a vivid example of what could happen if things are left to continue as they have been. By going for the second option, that is a major M&A deal, the top management would stop worrying so much about its reputation among shareholders, since missing some targets of the business plan becomes secondary and would even be lost in the noise created by a new merger deal. Assuming the credit crisis goes on and extends to the end of this year, the top executives of some Greek banks will have no choice but to face reality. Either give in and revise downward the targets of the business plan or make a major deal with another big player before the market senses what is going on and penalizes the stock. It is definitely not an easy decision but will be necessary for some if the credit crisis continues even should the stock market rebound a bit.