Merger talk spurs rocky ride

With all eyes on banks unveiling second-quarter earnings figures this week, speculation about lenders being headed for merger activity is resurfacing, creating a bumpy ride for investors. An offer by Piraeus Bank last month to buy government stakes in Hellenic Postbank and ATEbank for 701 million euros raised expectations of more lenders seeking partners in a bid to get through these tough times. Slowing credit growth, rising bad loans and liquidity problems due to Greek lenders having been cut off from money markets support arguments for why they need to get bigger and stronger. Yesterday, it was Bloomberg’s turn to cite brokers from Macquarie Research and UBS as saying that Greek banks need to merge as a result of dependence on European Central Bank funding and worsening asset quality. A few days ago, Reuters quoted a Bank of America Merrill Lynch expert who stressed that «consolidation can support earnings and, at a later stage, access to capital markets.» Apart from market forces, political pressure is also pushing for match-ups. In a report sent to the European Commission, European Central Bank and International Monetary Fund last week, Finance Minister Giorgos Papaconstantinou and Bank of Greece Governor Giorgos Provopoulos said they have commissioned an in-depth study on strategic options in the sector. «The Greek banking system continues to face a challenging environment,» they said. However, experts are split as to who the mergers may involve and the timing of such deals. Eurobank EFG equities research said yesterday consolidation momentum is cooling after Piraeus Bank’s July offer. «The lack of any follow-up to Piraeus Bank’s offer suggests that corporate activity might not be as imminent as thought, rendering valuation of synergies premature,» it said in a note to investors. Other brokers questioned the benefits of potential deals, adding that lenders have access to enough liquidity to get by and are adequately well capitalized to avoid rash decisions. «Consolidation is not necessarily the solution. Improvements in government finances are crucial to helping them borrow again.» The guessing game, however, has created room for investors to cash in on the speculation. Bank shares shed 10 percent this month after climbing 35 percent in July. Yesterday, banks tumbled 3.40 percent, with Alpha and Eurobank EFG plunging between 5 and 6 percent. The beta – a measure of a stock’s volatility in relation to the market as a whole – for Eurobank jumped to 2.18 in the last two months, versus 1.45 in the second quarter of the year. National Bank’s beta rose to 1.53 in the same period, versus 1.264 between April and June. With Piraeus Bank kicking off the reporting season tomorrow, followed by National Bank on Friday, brokers expect more volatility as the merger issue remains open-ended. «The market will be bumpy. It is not clear what will happen and this boosts volatility,» a broker said. [email protected]