The Greek Banking Sector
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Capital Link Invest in Greece Webinar Series
Tuesday, July 9, 2024
The fifth installment of the “Capital Link Invest in Greece Webinar Series,” which featured four CFOs of Systemic Banks, took place on Tuesday, July 9, 2024, and focused on loan growth, market competition, profitability, and the digital transformation in Greek banking.
The “Capital Link Invest in Greece Webinar Series ” will culminate with the Capital Link Invest in Greece Forum , which takes place in New York City each year. This year’s event will be the 26th Invest in Greece Forum and will take place on December 9, 2024.
Moderator:
Ms. Eleni Ismailou , Senior Associate in the Research Division – AXIA Ventures Group
Panelists:
Highlights
Watch Replay Session
Loan Growth and Market Competition
The discussion was moderated by Ms. Eleni Ismailou, Senior Associate in the Research Division of Axia Ventures Group, who began by inquiring about loan growth in Greece. Mr. Theodore Gnardellis, Executive General Manager, Group CFO of Piraeus Bank, began by noting that while overall loan growth in Greece has been modest, there has been a significant increase in mortgage production, driven by recent government housing initiatives. Mr. Gnardellis pointed out that approximately 70 billion euros in legacy loans remain with NPL servicers, with a potential 15 to 20 billion euros possibly returning to banks under stringent conditions to ensure they do not increase the risk profile of current performing exposures. He emphasized the need for collaboration between banks and servicers to ensure that restructured loans meet the necessary criteria for reintegration into the banking system.
During the webinar, the Piraeus Bank CFO addressed the topic of lending spreads and market competition. Mr. Gnardellis acknowledged the ongoing and necessary presence of competition within the banking sector, noting that while there has been some erosion in lending spreads, it has been relatively contained. He highlighted that although individual deals might occasionally skew market dynamics, the overall behavior of banks remains rational.
Spreads are adjusting in line with the risk profile of loans and the cost of capital, ensuring that banks can still generate substantial revenue and return capital to shareholders. Mr. Gnardellis emphasized that Greek banks have learned from past experiences, resulting in a more educated and risk-aware sector that avoids reckless lending practices. This cautious approach, developed through years of challenging conditions, now benefits the sector as it navigates current market dynamics.
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Profitability Amid Interest Rate Changes
Addressing the outlook for net interest income (NII) amidst a changing interest rate environment, Mr. Lazaros A. Papagaryfallou, General Manager/CFO of Alpha Bank, acknowledged that while the Greek banking sector has benefited significantly from higher interest rates, the downward phase of the rate cycle is now approaching. He outlined that, although NII has peaked and deposit rates are increasing more slowly than anticipated, the sector's medium-term outlook remains positive.
Alpha Bank has implemented several strategies to protect and optimize NII, including increasing fixed-rate assets and employing hedging tactics to manage interest rate sensitivity. The bank has shifted its portfolio from predominantly floating-rate loans to a more balanced mix of fixed-rate assets and liabilities, with fixed-rate holdings now representing 75% of its portfolio. Additionally, Alpha Bank is expanding its assets under management (AUM) to diversify income streams, which will become increasingly important as rates decline.
Elaborating on the bank's strategy for growing fee and commission income, Mr. Papagaryfallou emphasized several key drivers and opportunities. He highlighted the robust macroeconomic backdrop and increasing financial literacy as crucial factors supporting fee growth. Structural trends, such as the shift toward private sector solutions for health and pensions, government incentives for corporate pension plans, and the rising demand for insurance due to climate change, also play a significant role.
As Mr. Papagaryfallou noted, Alpha Bank aims to leverage these trends by focusing on various business lines. The bank is enhancing its asset management services and has maintained a leading position in non-money market funds. They plan to expand their offerings through partnerships, including a collaboration with UniCredit to introduce unique investment funds. Additionally, Alpha Bank is revamping its retail operating model to better serve affluent and emerging affluent clients, integrating digital banking capabilities to meet evolving customer needs and expand its digital product offerings.
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Transformation and Customer Experience
In the face of increasing competition and the rapid rise of digital banking, Greek banks are actively adapting to the evolving landscape. Mr. Gnardellis of Piraeus Bank highlighted several significant changes and strategies in response to this shift. Firstly, there has been a marked reduction in traditional bank branches, as banks rationalize their physical presence to align with market demands. Concurrently, Greek banks are significantly ramping up their digital investments, with Piraeus Bank, for example, increasing its technology expenditure by over 70%.?
Despite the reduced number of branches, high street presence remains crucial for maintaining customer trust and confidence. Banks are not abandoning their physical locations, Mr. Gnardellis stated, but are instead evolving their branch models to create a more efficient, customer-facing experience. ?Greek banks are also prioritizing digital transformation to improve customer experience. They are implementing omnichannel strategies that allow customers to engage with the bank through multiple touchpoints seamlessly. For instance, customers can apply for loans online and then manage their applications through branches or call centers, Mr. Gnardellis noted.
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Cost Management and Future Investments
Mr. Christos Christodoulou, Executive General Manager, Group CFO of NBG Bank, offered valuable insights into managing costs amid increased investments in digitalization. He noted that Greek banks, including NBG, have made considerable progress in cost management. For instance, NBG has reduced its number of branches in Greece by approximately 40% from its peak, achieving a cost-to-income ratio of around 30%. This cost reduction has been bolstered by the higher income generated from increased interest rates. Despite these achievements, Mr. Christodoulou identified further opportunities for optimization, particularly in enhancing branch operations and operational efficiency, rather than pursuing additional branch closures.
NBG has undertaken significant investments in modernizing its IT infrastructure, including a major overhaul of its core banking system, expected to be completed within the next 18 months. This modernization is designed to improve operational efficiency, provide greater flexibility for product development, bolster defenses against cyber risks, and enhance the overall customer experience by facilitating seamless banking services.?
Looking ahead, NBG is forecasting a low single-digit increase in costs over the next two to three years. The emphasis is on maintaining cost discipline while making targeted investments to advance services and products. Mr. Christodoulou highlighted that despite ongoing cost-containment efforts, prioritizing customer experience remains essential. The bank aims to leverage technological advancements not only to meet current expectations but also to set new standards in service delivery. This balanced approach ensures that NBG can manage costs effectively while continuing to innovate and enhance the customer experience.
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Improvements In Asset Quality
In recent years, a marked improvement in asset qualities observed in the Greek banking sector has been observed. Mr. Harris V. Kokologiannis, General Manager, Member of Management Committee, Group CFO of Eurobank, discussed the impressive improvements in asset quality observed within the Greek banking sector, particularly amidst a challenging macroeconomic environment characterized by high interest rates, inflation, and geopolitical tensions.
Firstly, the Greek economy demonstrated robust growth, with an increase of 2% last year and projections suggesting continued growth of around 2.5% in the medium term. This strong economic performance has provided a stable foundation for the banking sector, Mr. Kokologiannis stated. Additionally, the significant increase in deposits due to surplus liquidity accumulated over the past few years has acted as a buffer against macroeconomic challenges.
The steady decline in unemployment to historically low levels, coupled with resilient real estate prices, has further supported asset quality. A noteworthy measure adopted by Greek banks since May 2023—a cap on interest rates for floating-rate mortgages—has also played a crucial role in shielding asset quality from potential deterioration.
For Eurobank specifically, these favorable conditions have allowed it to achieve a non-performing loan (NPL) ratio of 3% in the first quarter of 2024. The bank expects to maintain this ratio throughout the year, reflecting a continued positive trend. Eurobank's proactive approach includes a counter-cyclical strategy for managing risk, evidenced by a high loan loss coverage ratio of 93% and a cost of risk expected to be close to 70 basis points, better than the initial outlook of 80 basis points.
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Capital and Shareholder Rewards: A New Era for Greek Banks
A significant development in the Greek banking sector came in the form of a regulatory milestone -- in June, Greek banks received approval to distribute dividends for the first time in many years. This pivotal moment marks a new chapter for the sector, allowing banks to reward shareholders directly, Ms. Ismailou stated.
Mr. Papagaryfallou emphasized the importance of this milestone, noting it as a strong signal of the sector’s stability and growth prospects. Mr. Papagaryfallou stressed that all Greek banks “share the same motivation: allocating capital in a way that is accretive to shareholder value.”?He then outlined Alpha Bank’s strategy specifically, which focuses on strong organic capital generation supported by profits and an optimized capital structure. He stated that Alpha Bank plans a mix of cash dividends and share buybacks to build a track record of shareholder returns.
The bank aims to approach European yield levels in the coming years, and it sees potential in buybacks given the current trading levels of its stock. Mr. Papagaryfallou also highlighted that Alpha Bank foresees significant distributions, potentially amounting to 30% of its market cap, with the capacity to do more depending on market opportunities and supervisory approvals. The bank is also considering reperforming loans and assessing inorganic opportunities both in Greece and abroad, always aiming to enhance shareholder value.
Outlining NBG’s strategy, Mr. Christodoulou echoed the sentiment of a strengthened capital position, emphasizing NBG’s commitment to supporting trade expansion and organic growth in Greece. He pointed out the substantial opportunities within the non-performing loans (NPL) ecosystem, which could see a significant amount of loans returning to the banking sector.
Mr. Christodoulou also discussed NBG’s interest in syndication markets abroad, particularly in sectors like project finance, energy projects, and shipping. He stressed the importance of cautious capital deployment in M&A opportunities, ensuring that any investments align with shareholder value creation and do not destroy capital. Buybacks remain an attractive option, given the current trading levels of the bank’s stock.
Mr. Kokologiannis of Eurobank highlighted the bank’s favorable position of having surplus capital, a stark contrast to previous years. Eurobank’s strategy involves a threefold focus: organic growth, M&A opportunities, and disciplined capital deployment.
Eurobank has already demonstrated its expansion efforts through acquisitions in Bulgaria and Cyprus. Mr. Kokologiannis noted the bank's increased stake in Hellenic Bank and various acquisitions in Bulgaria as part of its strategic growth. He emphasized the importance of remaining vigilant and disciplined, ensuring that any deals make economic sense and provide shareholder value.
Eurobank also plans to gradually increase its dividend payout ratio, aiming for 40% next year and 50% by 2026.
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Conclusion
The approval for dividend distributions marks a significant regulatory milestone, enabling these banks to reward shareholders and deploy capital effectively. With a focus on organic growth, strategic acquisitions, and disciplined capital management, Greek banks are well-positioned to navigate future opportunities and challenges, ensuring sustained profitability and enhanced shareholder returns. The emphasis on prudent risk management, strategic growth in fee-based income, and digital transformation further reflects a sector that is resilient, adaptable, and forward-looking.
As the banking landscape continues to evolve, these efforts will be crucial in ensuring sustained profitability and enhanced customer experiences. The strategic focus on capital deployment and shareholder rewards underscores the sector's commitment to delivering value in a rapidly changing environment. This progress towards higher dividends and effective capital management signifies a robust outlook for Greek banks in the coming years.
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