M&As may force banks to adopt an anti-crisis strategy

The major Greek banks have so far managed to weather the storm of the global financial crisis better than most of their European peers but it is likely some of them did so without having a clear strategy. This may now change as their top brass expect the crisis to last for a longer period but things may get complicated by the specter of M&As. «It is very simple. You cannot pay out interest rates of 5 to 8 percent on time deposits and make a profit by lending the money at lower rates. However, that’s what many local banks have been doing for many months,» says a maverick top banker at one of the country’s largest credit institutions. «The truth of the matter is there is no strategy. Greek banks have been on automatic pilot for some time, supposedly aiming at meeting the goals in their business plans.» Although the cost of funding has gone up for all of them, different banks have reacted in a different way. Eurobank, for example, was the first to raise their interest rates on corporate loans but saw its lending growth hurt. Bank of Piraeus continued to go for market share. National Bank focused on keeping its good clients. The vast majority of Greek bankers, like others abroad, were caught off guard by the duration and severity of the global financial crisis. Late last year and early in 2008, most of them predicted the crisis would end at some point between April and June-July. Very few bankers expected a normalization in the interbank and wholesale markets this October. Perhaps this explains why they chose to wait out the crisis. Their rationale was simple. It is not smart to alienate some of your customers by cutting their existing credit lines and increasing their lending rates at a time of crisis when you are not sure when things will get back to normal or expect the crisis to subside in the next few months. This is particularly true when you know there are other banks which take the benign view and are ready to welcome customers with open arms. These customers and banks’ other business, such as deposit and sight accounts, may be lost for ever, turning such a decision into a major strategic mistake. However, even those who believe that we may have seen the worst of the financial crisis expect economies to slow down more than previously and international wholesale markets where banks and corporations borrow medium-to-long-term funds to function more smoothly in the third or fourth quarter of 2009. This means Greek banks, especially those with more loans than deposits, will have to pay high interest rates to keep and attract new time and core deposits for a number of quarters to come. This makes it necessary for them to choose a clear strategy. Of course, slower economic growth coupled with higher lending rates will contribute to the further deceleration of loan volume growth and may put more pressure on the interest rate differential (spread) between loan and deposit rates. It is no secret that the combination of tighter spreads between loans and deposits and slower loan volume growth is considered a prerequisite for mergers and acquisitions (M&A) in the sector. The chances of M&A deals in the Greek banking sector were boosted by Marfin Investment Group (MIF) last week. Andreas Vgenopoulos, the strong man and vice president of MIG, announced that the board of the investment holding company will seek shareholders’ approval for a 5-billion-euro share capital increase via a private placement to buy a «Tier One» Greek bank and exploit other banking opportunities in Southeast Europe. The announcement was a surprise but is not taken lightly by the top management and major shareholders of the big local banks, given that MIG already has 1 billion euros sitting in Greek bank accounts. Vgenopoulos said MIG will not aim at Piraeus Bank or the Bank of Cyprus, leaving the impression that his prime target, assuming the company raises enough capital, will be Alpha Bank. So, in a way, MIG may spark a new round of consolidation in the Greek banking sector as major players are expected to position themselves before MIG completes its share capital increase, expected early in 2009. The top management of some major Greek banks will not only have to cope with formulating a new strategy appropriate to the new economic and financial background but also spending a good deal of time to prepare for a new round of consolidation. And this will not be easy.