Lenders bracing for action in mergers and acquisitions, but some remain skeptical
Large Greek banks turned out to be among those that benefited the most from the pan-European stress tests, seeing their shares rise sharply. However, consolidation continues to be the dominating theme in the sector, with the government and the central bank being strongly in favor of larger banks. While many in the market are fascinated by the prospect of mega-deals, others remain skeptical, pointing out that 2010 is not 2006 or 2007. Talk of mergers and acquisitions (M&A) in the local banking sector has been a regular topic for some years now but reality shows it was quite premature. It is easily understood why. The top echelon of each large Greek bank had no incentive to enter into a deal with a competitor at the risk of losing some of its privileges – i.e. high positions and bonuses – as long their bank grew fast and produced large profits, keeping shareholders happy. It was easy to do so until 2008 as banks enjoyed ample liquidity and lending rates were at low levels while the economies of Greece and neighboring countries were advancing rapidly. Of course, deals could have been completed even then if it were not for the intransigence of some senior bankers during the negotiations, as some insiders admit today. Even so, it would have been quite different, since the last large bout of consolidation in the 1990s, when the government privatized a few small and medium-sized banks such as Bank of Athens and Cretabank, which were acquired by EFG Eurobank, and Macedonia-Thrace Bank, which was bought by Piraeus Bank. In larger deals, Ionian Bank was also privatized, when then state-controlled Emporiki Bank sold its majority equity stake to Alpha Bank and EFG Eurobank managed to convince ErgoBank’s shareholders to merge, forming today’s EFG Eurobank Ergasias franchise. The M&A deals during that era were facilitated by the exit of most foreign banks with small branch networks from the Greek market as the country’s prospective entry into the eurozone deprived them of big revenues from activities in the capital markets, especially in bonds and drachma trading. Fast-forward to 2008, with the global credit and economic crisis knocking on the door of European economies and banks, when banks realized that aggressive cuts in official rates by the ECB and other major central banks helped bring down interbank interest rates, that is the loans commercial banks charge to each other. However, capital markets where companies raise long-term funds by issuing securities did not return. Liquidity became a big issue for Greek banks with a loan-to-deposit ratio of 100 percent but they managed to convince many investors that they had raised enough capital and other funds in 2007 to weather the market storm. The collapse of Lehman Brothers in the fall of 2008 made things worse as Greek banks competed aggressively for deposits, raising them to very high levels. The liquidity issue eased in 2009 thanks to the ECB’s easing credit policies but local banks could still not raise money on world capital markets as interbank funding had become expensive and short-term in nature. The deterioration of the Greek and neighboring economies where they have a presence made things even worse since a larger percentage of loans were not serviced on time by individuals and companies, eating into their capital. Since then, the new thorny issue has been the sharp drop in the value of Greek government bonds, which many in the market consider a liability since they doubt the country’s ability to make it. Of course, the same bonds could turn out to be a bonanza if Greece passed the fiscal test. So, in addition to liquidity and capital adequacy, sovereign bonds have been added to the reservoir of market worries regarding Greek banks. Although the market has been positive about the idea of a large bank deal, as witnessed by the sharp rise of Hellenic Postbank and even ATEbank shares following a proposal by Piraeus Bank, some bankers and analysts continue to question whether a larger bank will lead to a stronger bank at this point. Their point is simple. If Greece regains access to capital markets, banks will follow and large banks will be able to do so at better rates. If not, local banks will not have access either and will have to rely on the ECB for liquidity. Any bank with a large portfolio of sovereign bonds is currently being viewed negatively by investors as well. So, if two or more banks merge and the new larger banks ends up with a big portfolio of bonds, the risk to the system rises. Moreover, they argue, it may be more difficult to achieve synergies in Greece at a time when layoffs have become easier but recession is hurting more, making it more difficult to fire people en masse and cut costs due to strong resistance by the unions. In addition, they say, the number of bankers who can really make an M&A work is limited in this country, rendering the outcome of synergies more doubtful. Of course, there are counterarguments favoring bigger banking schemes for the bailout of a weak bank and other reasons. Still, the question which has to be answered is whether any new larger bank will be better off in terms of liquidity, capital adequacy and exposure to sovereign bonds than its separate parts. The answer is obviously conditional on the banks taking part in the M&A and certainly market conditions will play a key role. At this point though, conditions are not as bullish as they were back in 2006 or 2007 when M&A deals were the norm at least abroad.
