The growth story of Greek banks has been confirmed once again by first-quarter results, but banks have also been feeling the heat of the global credit crisis more and more as time goes by. This means they may have a tough decision to make in the coming months if the crisis persists. Impressive loan growth in excess of 40 percent year-on-year in Southeast Europe and strong growth at home confirmed the Greek banks’ well-advertised growth story in domestic and international investment circles. However, rising funding costs took some of the shine off the news and threaten to cause bigger problems ahead unless they are checked. Even more so for banks that have a smaller deposit base than loans and therefore need to rely more on wholesale funding and expensive time deposits to fund their growth. Excluding last year’s one-off gains from the sale of subsidiaries, such as Alpha Bank’s sale of its insurance company to France’s AXA or Piraeus Bank’s sale of a minority equity stake in Bank of Cyprus to Marfin Popular Bank (MBP), core profits at the large four local banks have been in line or better than what was expected by the market. This does not mean that the four big banks – namely National Bank of Greece, EFG Eurobank, Alpha Bank and Piraeus Bank – which largely set the tone, are off the hook. A number of analysts believe it will be hard for them to meet the net profits set by themselves or the market. It is easy to see why. National Bank of Greece reported net group earnings of 401 million euros in the first quarter with market consensus putting the bar at around 1.8 billion euros for the entire year. Eurobank saw its first-quarter net profits rise to 215 million euros, with its deputy CEO Nikos Karamouzis warning of tougher times ahead if the crisis continued, thus helping lower consensus earnings to 960 million euros for the year. Piraeus Bank reported consolidated net income of 138.5 million euros, with the management targeting more than -600 million this year and Alpha Bank published group after tax earnings of 205 million euros with analysts’ estimates converging at -870 million for 2008. Those analysts who are more reserved suspect some of these banks relied a lot on reservoirs of surplus liquidity amassed in 2007 to avoid as much as possible tapping the functioning international wholesale funding markets in the first quarter of this year. The doubters say this cannot go on forever, assuming the global credit crunch does not abate and banks do not put the brakes on their credit expansion strategies. On the other hand, the optimists pin their hopes on the banks’ strategy to gradually transfer the higher costs of funding onto borrowers. This means new loans will carry higher spreads over the benchmark one- or three-month Euribor rate. However, this is easier said than done, which makes liquidity the focal point of their economic performance. At this point, it is generally accepted that gathering deposits has become a priority for all banks, especially those that are small, with little or no access to international markets, and big banks with a loan-to-deposit ratios in excess of 120 percent and strong loan volume growth rates. Customers, individuals and firms have become more demanding about getting better deposit deals due to the present circumstances. Stories of banks paying firms or wealthy individuals high deposit rates in excess of 6.0 percent annually for large sums in the order of 200 million euros or more have abounded on the local market. This is indicative of the liquidity needs of some banks. Of course, the large banks have been actively pursuing other methods to fund their growth, including the securitization of part of their high-quality loan portfolios to get European Central Bank funding, the issuance of senior bonds and also preparing for the issuance of covered bonds. National Bank followed a different route and raised 625 million dollars on Friday by tapping in the USA retail market. National Bank issued preferred shares with no voting rights, taking advantage of the fact it is listed on NYSE. Takis Arapoglou, the chairman and CEO of the bank, has signaled National may raise up to 1.5 billion euros this year. Banks seem to understand they cannot go on relying entirely on Greek depositors to finance their strong growth. On the other hand, a number of international wholesale markets are still closed and those that are open are quite expensive for borrowers with less-than-high credit ratings. Still, sooner or later, the large Greek banks will have to admit that it is better to pay a high interest rate and borrow internationally the funds they need than to rely too much on domestic depositors. If they change their policy, they will be able to afford to lower the high rates paid on domestic time deposits and therefore be better off. This, however, is a tough decision.