New banking model called for

Mergers and acquisitions (M&A) in the banking sector have been the talk of the town for months, interrupted briefly by the recent successful share capital increase of the National Bank of Greece, the country’s largest commercial bank. However, much less attention has been paid to the need for a new banking model, which converges the interests of the shareholders and the top management on one hand, and is compatible with the country’s new norm of slower economic growth ahead, on the other. M&A action, especially in the country’s most important sector, has always caught everybody’s attention, from the government to equity analysts, their borrowers and others. But many efforts have ended up in vain, because the banks could not agree on the terms of the corporate marriage. Although it is not discussed openly, insiders agree that, on a number of occasions, prospective deals did not flourish because the top management of the banks involved did its best to undermine the talks by dragging its feet in various ways, such as raising demands which the other side could not accept. Their main motive, on a number of occasions but not all, was to protect their positions and the privileges going along with them. This was easier to be done during the good times, when the Greek economy was cruising at high speed and banks made a lot of money by providing loans at home and abroad, because they kept their shareholders happy. However, it is more difficult to do so in the new environment of economic recession, compressed net interest margin, sluggish loan volume growth, large provisions for bad loans and Greek state bonds at depressed values. Faced with declining profits, or even losses, for consecutive quarters and the need to boost the banks’ equity capital and liquidity, their shareholders cannot be happy and so they may be more open-minded to other proposals than they would have been in the past. Still, they would not like to be diluted either by having their bank forced to tap the 10-billion-euro-strong Financial Stability Fund set up by Greece and the European Union and International Monetary Fund or consent to a large share capital increase, in which they cannot participate to a satisfactory degree. At this point, the interests of the main shareholders of any bank, who would not like to put more money to shore up its capital, would be either to merge with another complementary bank to boost its capital and liquidity and maintain a major stake in the new larger scheme; sell some of the assets to beef up the bank’s capital; or sell to a large foreign bank. Other large Greek banks with no major shareholders will have to rely more on their top management to cut a bank deal, giving them leverage over the process. All analysts, though, agree it is not easy to find large Greek banks with complementary branch networks at home. Moreover, no foreign bank, except those with a presence in the country, would be interested in acquiring or merging with a domestic credit institution. In addition, only Hellenic Postbank (TT), among potential candidates in the local market, has enough liquidity to complement another in need. But even TT’s potential liquidity is mostly in the form of Greek government bonds, which can be put up as a collateral at the European Central Bank to get cheap cash, and TT is a state-controled bank, so no one knows what the government exactly wants to do with it. So, the choices of the main shareholders and the top management of Greece’s large banks are not as many as they used to be in the good-old times, having narrowed down to just a few. Under these circumstances and given the new norm of slower economic and credit growth rates in Greece in the next 10 years or so, it looks imperative that local banks change their banking model. This model should be based on much lower costs – operational and others – and stricter rules on the quality of loan and bond portfolios. Some private banks have tried to reign in costs and succeeded in containing them. Nevertheless, this is clearly not enough when revenues fall and the markets question their ratio of nonperforming to total loans, suspecting they underestimate the true level of bad loans in their official figures. Whether this, along with the Greek state’s poor public finances, are to be blamed for the Greek banks’ inability to borrow large sums in the interbank market, remains to be seen but something has to be done. Of course, they could address this issue by raising new capital to boost their capital adequacy ratio. This is something any current top management would like to see but with which all banks’ shareholders might not be happy, as we explained before. By changing the old banking model, which was based on growth, to a new one based on low cost, would have the interests of both shareholders and top management converge, experts say. This would be the case because the new model would maximize shareholders’ value and preserve the autonomy of the top managers. Moreover, it would be compatible with the new norm of expected slower economic growth in Greece in the years ahead.

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