ECONOMY

Banks’ worries increase

The profits of domestic banks are likely to show a considerable decline in 2009. Analysts have forecast a drop of between 15 and 35 percent over last year. Already provisional estimates about the first quarter of 2009 have been particularly negative. First-quarter data will bear the consequences of the double pressure of the considerable fall in revenues from Greece and the Balkans as well as from the major increase in bad loans. The first problem for bank managements is net interest revenues, i.e. the spread between the interest rates banks use to borrow and those at which they lend to households and businesses. Under the burden of the lack of cash flow, banks began fierce competition to attract deposits in the last quarter of 2008, offering high interest rates that resulted in a higher cost for money. Rates reached as high as 7 percent, forcing the governor of the Bank of Greece to send a warning to banks that they were compromising their credibility. The other major problem for banks was the losses they have incurred in Southeast Europe. The rapid deterioration in the financial conditions in the region has reversed the original picture, meaning that the significant earnings Greek banks used to reap in the Balkans before the crisis could now turn into losses for 2009 and even 2010. A key factor to watch will eventually be the provisions for bad loans, which are likely to post a considerable rise, both in retail banking and in business loans, taking their toll on banks’ financial results. In 2008, banks were forced to more than double those provisions due to the global crisis.