Greek banking investments

Greeks have been seeking adventure and profits beyond the shores of their tiny country — population, 11 million — for centuries. “History shows us that it’s only when Greeks look abroad that they achieve,” National Bank of Greece SA Chief Executive Officer Takis Arapoglou told shareholders on May 23.

Arapoglou, 55, is helping to keep up the tradition. On Aug. 18, National Bank closed a deal to buy a controlling 46 percent stake in Turkey’s Finansbank AS, for $2.8 billion. That’s the biggest takeover ever by a Greek company outside its home market.

Greek banks have been a force in southeastern Europe for more than a decade, buying up financial assets for low prices in Balkan countries such as Bulgaria, Romania and Serbia. Now, with growth expected to slow at home, they’re ranging farther afield, with the Finansbank investment by National Bank just the latest example. National is Greece’s largest financial institution, with $77.5 billion in assets.

All four of Greece’s top banks have made recent overseas acquisitions. EFG Eurobank Ergasias SA, Greece’s No. 2 bank, with $57 billion in assets, acquired Turkey’s Tekfenbank AS, for $182 million in May and bought a Ukrainian lender in July. It’s also opening branches in Poland.

No. 3 Alpha Bank SA is looking at Turkey and Ukraine. No. 4 Piraeus Bank SA bought Egyptian Commercial Bank last year, the first Greek banking purchase in the Arab world’s most-populous nation.

Cash Rich

Greek banks have plenty of cash to spend on foreign acquisitions after years of rapid growth in their home market. Borrowing by Greek households increased more than 30 percent a year during the past five years as consumers took out more auto, credit card and home loans, according to figures compiled by Dutch bank ING Groep NV.

Low interest rates and economic growth that’s averaged 3.9 percent a year for the past decade, twice the euro-zone average, have given Greek consumers confidence.

Now, the economy is slowing. Greece’s gross domestic product grew 3.7 percent last year, the lowest rate since 1999. In a May economic forecast, the European Commission projected growth will fall to 3.5 percent this year. As expansion decelerates, consumer confidence may flag, unemployment may rise and spending and borrowing decline. So bankers are moving into faster-growing markets like Turkey, where GDP is up an average of 7 percent over the past four years.

The Finansbank deal was applauded by the government of Prime Minister Kostas Karamanlis, whose New Democracy party dislodged the Socialists in March 2004 on a platform of making Greece more competitive and relaxing the state’s grip on the economy.

Stock Market Rise

Karamanlis, 50, has helped former state-owned companies lure executives such as Arapoglou, once a managing director at Citigroup Inc., from the private sector.

Investors like the strategy. When National Bank offered stockholders 3 billion euros ($3.79 billion) in new shares to pay for the Finansbank acquisition in June, they signed up to buy almost twice as many, according to the bank. And National’s stock had more than doubled in price, as of Sept. 28, since Arapoglou took charge 2 1/2 years ago. The Athens Stock Exchange general index has risen 60 percent since Karamanlis took office.

Politics — local and European — have put a damper on Karamanlis’s program. One important reason the European Commission expects Greek economic growth to slow next year is that the European Union has told Greece it will impose financial penalties unless it trims its budget deficit to less than 3 percent, the maximum allowed under the EU’s Stability Pact. Karamanlis has promised to push the deficit down to 2.6 percent this year, from 4.5 percent in 2005 and 6.9 percent in 2004.

Rigid Labor Laws

Cutting spending or raising taxes to meet that target could crimp consumer spending, according to the government. The Bank of Greece, the central bank, predicted in its annual report for 2005 that Greek growth rates would decline unless the government made the economy more competitive.

Inflexible labor laws have helped keep unemployment high, the Bank of Greece says. Unemployment has hovered around 10 percent for the last four years. Greece has some of the strongest unions and strictest labor regulations in Europe and ranks highest in the Balkans in terms of “employment rigidity,” according to rankings compiled by the World Bank. Companies in Greece, for example, need government approval if they want to fire more than 2 percent of their workforce in a month.

“Although Greece has benefited from macroeconomic convergence with the rest of the EU, it still faces considerable structural challenges that could impair growth prospects over the medium term,” ratings firm Moody’s Investors Service said in a March report.

High Inflation

Public-sector unions’ ability to wring concessions from the government through the threat of strikes has helped force wages and other labor costs up, contributing to an average annual inflation rate for the past five years of 3.5 percent, the highest in the euro zone.

Since Greece adopted the euro in 2001, the unions have softened their stand on privatization. Karamanlis has raised 4.6 billion euros by paring government stakes in seven companies, including Hellenic Telecommunications Organization SA, the biggest telephone service provider, and Opap SA, the third-biggest gaming company in Europe.

Next year, Karamanlis plans to sell government shares in more banks, in the national gas company, in Athens International Airport and in several ports. And he’ll sell more of the state’s remaining 39 percent stake in Hellenic Telecom, he says.

Financial services are a key driver of the Greek economy, alongside tourism, construction and shipping. Greece is the world’s biggest ship-owning nation, and huge growth in the transport of oil and other commodities increased shipping industry receipts in 2005 to 4.6 percent of GDP, or 8.3 billion euros, from 2.5 percent in 1999, according to National Bank figures.

Banks Privatized

Bank credit has helped boost private consumption, which now accounts for about two-thirds of the Greek economy. Big banks that were entirely or partly state-owned have been privatized over the past decade. In November 2004, Karamanlis pushed through the sale of the government’s remaining 7.5 percent stake in National Bank. In August of this year, Credit Agricole SA, France’s largest lender, paid 2 billion euros to take a 72 percent stake in Emporiki Bank of Greece SA, Greece’s sixth-largest bank. It bought 11 percent of the shares from the Greek government and 21.4 percent more from state pension funds.

In contrast to conditions in Greece, cheaper labor, more flexible work rules and fast growth make Greece’s southeastern European neighbors attractive markets. Romania’s economy grew 4.1 percent last year, while Bulgaria expanded 5.5 percent.

Prime New Market

Bankers such as Arapoglou and Eurobank CEO Nikos Nanopoulos consider the region a prime new market. In Turkey, bank loans add up to just 31 percent of GDP, compared with 80 percent in Greece and 117 percent in the entire euro zone, according to estimates by Deutsche Bank.

By setting up business in the Balkan countries, the Greek banks are simply following their clients. More than 3,500 Greek companies are doing business in southeastern Europe, according to Greek government figures, 800 of them in Bulgaria alone.

National Bank, Alpha Bank, Eurobank and Piraeus Bank all set up shop in Albania, Bulgaria, Romania, Serbia and the former Yugoslav Republic of Macedonia in the 1990s, when the region was known more for political upheaval and ethnic cleansing than for mortgage lending.

Alpha established Banca Bucuresti SA in Romania in 1993; it was the first foreign bank in that country of 22 million.

Banking on Serbia

The pace of Greek acquisitions has heated up in the past two years. Last year, Alpha Bank bought Serbia’s Jubanka a.d. Beograd for 172 million euros. Piraeus Bank has acquired three lenders in Bulgaria, Serbia and Egypt. And Eurobank bought Nacionalna Stedionica-banka in Serbia in August 2005.

Michalis Colakides, deputy managing director at Piraeus Bank, says Greek bankers are well equipped to deal with the growing pains of Balkan institutions. “These countries are at a stage of development Western banks are often unfamiliar with,” he says. “They have a high number of small or family businesses and weak government institutions. Greek banks know how to operate in such an environment.”

The newest development is the Greek banks’ move into Turkey. Greece had virtually no economic investment in Turkey seven years ago. Relations were tense, fueled by border disputes and the possibility of armed conflict over the divided island of Cyprus.

That changed in 1999, when both countries rushed to each other’s aid after earthquakes struck Istanbul and then Athens. Cooperation was also fostered by the EU’s decision last October to begin talks on admitting Turkey to the EU.

Regional Powerhouse

With 72 million people, Turkey is bigger than Greece, Bulgaria, Romania and Serbia combined.

Arapoglou says National Bank will seek to acquire as much as 90 percent of Finansbank this year by buying out minority shareholders. Control of Finansbank makes National the biggest lender in the region, with 12 million customers and half of its branches outside Greece. National also owns banks in Albania, Bulgaria, Macedonia, Romania and Serbia.

Patrick Lemmens, who helps manage 3 billion euros at ABN Amro Asset Management, bought National Bank shares after the Finansbank investment. “Something that every European bank is faced with is the issue of long-term revenue,” Lemmens says. “National Bank is looking at an extended horizon.”

Arapoglou isn’t finished. On Sept. 12, National Bank clinched a deal to buy Serbia’s sixth-biggest bank, Vojvodjanska Banka AD, and is competing with Hungary’s OTP Bank Nyrt to buy Romania’s seventh-largest bank, Casa de Economii si Consemnatiuni SA.

High Margins, Low Costs

National Bank is setting the stage for future growth once lending at home slows, Chief Financial Officer Anthimos Thomopoulos told investors on Aug. 31. The bank’s long-term goal is to make itself the leading financial institution in southeastern Europe.

Arapoglou says one reason he’s investing abroad is to raise margins and lower costs. Profit last year doubled to 727 million euros on 2.5 billion euros in revenue and was up 70 percent for the quarter ended on June 30 compared with the same period last year.

In Greece, National Bank has cut its workforce by 10 percent through early retirement programs, resulting in cost savings of about 70 million euros a year, and Arapoglou says he may announce another job reduction this year. The message is clear: Until the Greek government breaks down more barriers to growth at home, the country’s bankers will look abroad.

Source: Bloomberg

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