Untitled Document

THE GREEK BANKING SYSTEM AFTER EMU

Ladies and Gentlemen,

It is with great pleasure that I have accepted to address this distinguished audience at a time when the Greek Economy and the Greek financial sector are steadily making their way into the realm of mature markets. It is essential to illustrate the current state of affairs in the business and financial sectors, highlighting the changes that have underpinned their recent evolution.

It is also useful to try and see how fast our domestic financial system is breaking out of its "teenager syndrome". I am referring to the interim stage between two types of market classification, not an emerging market anymore, not yet a fully matured one. Those of you, who have had the opportunity to follow the shaping of the Greek markets in recent months, must have already witnessed the significant progress made towards the end target of entering the universe of mature markets.

This final step is only a few months away and has been made possible by four elements that will also act as catalysts for the continuing growth of our economy and our markets. These are: the macroeconomics of Greece, the dynamic process of restructuring in all business sectors (and notably the financial sector), the central role of Greece in South Eastern Europe and the opportunities generated by the advent of the Single Currency.

I will not trouble you with a detailed analysis of the trends of the Greek economy. Others, better placed than me have already elaborated on this issue. Suffice it only to say that the Greek Government objectives of satisfying the Maastricht criteria in the first two months of the year 2000, and joining the Economic and Monetary Union by the end of the same year are effectively met. In 1999, real GDP growth in Greece exceeded the EU average for the fourth consecutive year (3.5% versus 2.1% respectively). This was achieved in spite of prevailing adverse circumstances such as the Kosovo conflict and the serious earthquake that hit Athens in September.

In this context, the financial sector has led the way in the transformation of the Greek economy and I think it can claim a large share of the progress achieved. Greek banks are now seen as belonging to the most dynamic part of the Greek economy. Facing the challenging task of transforming themselves during the deregulation and liberalization process that marked Greece during the last decade, they have managed to overcome major obstacles and become competitive.

This progress is inscribed in a virtuous cycle of growth in capital and money markets. The Athens Stock Exchange currently has an aggregate market capitalization of about GRD 60 trillion while the general index has gained about 274% percent in the last two years. The yield curve for government securities has been extended to 20 years, a marked improvement over the conditions three years ago when only short-term maturities were issued. Other activities, such as asset management, insurance, mortgage lending and consumer credit have also experienced considerable growth and diversification. A wide range of products is now made available to Greek consumers who develop gradually new consumption patterns and new investment habits.

Looking forward to a new type of markets, Greek banks now invest significant sums of money to apply new technology to their business. At the same time they expand and modernize their distribution network, which apart from the traditional branches and ATMs, now include alternative distribution channels such as Internet and mobile telephony. Although Internet penetration in Greece is still quite low, there appears to be consensus in the market as to the importance of these applications.

The restructuring process in the domestic banking system started in the late 1980's but really gained momentum in the early 1990's. Greek banks have gradually moved from a highly regulated to a more liberalized environment. Naturally, market liberalization coupled with macroeconomic convergence has increased competition in the banking system. This has led to a wave of consolidation, the development of new products and services as well as the geographic expansion of Greek banks in new areas.

There are currently 45 commercial banks operating in Greece and total bank assets currently exceed GRD 38.5 trillion (June 1999, excludes specialized credit institutions), an increase of more than 46% since the end of 1995. There are more than 2500 branches and over 55000 employees.

The impact of foreign banking institutions operating in Greece is rather limited as their presence focuses primarily in treasury and wholesale operations. At the end of 1998, about 87% of assets and 90% of deposits were still controlled by Greek credit institutions. Several foreign banks have been reexamining their strategy with respect to maintaining a retail presence in the domestic market. My personal view is that apart from a small number of foreign institutions with an established presence in retail banking, this area of business will remain largely a Greek theme.

Over the last four years, the marked improvement of key macroeconomic figures, in particular the decline of the inflation rate, has driven down both nominal and real rates of interest. These, along with deregulation, have resulted in a significant increase of demand for loans, especially in retail banking segments of the market such as consumer credit and mortgage lending. This has been an extremely important development if we consider that Greece remains an underbanked economy. In particular, the ratio of insurance premium to GDP is only 1,1 percent in Greece, compared to 5,1 percent in France and 7,8 percent in the UK. On the other hand, consumer credit to GDP is only 2,8 percent in Greece compared to 5,3 percent in France and 12,4 percent in the UK.

Likewise, Greek banks demonstrate the lowest loans to total assets ratio in the European Union, about 35 percent for all commercial banks, while 29 percent of assets are invested in government securities (end 1998 Greek commercial banks).

Falling interest rates have also encouraged depositors to seek alternative forms of investment. The mutual funds industry has witnessed unprecedented growth. Total funds under management have grown from GRD 47 billion at the end of 1990 to almost GRD 12 trillion at the end of 1999. This represents an average annual increase of over 63%. The growth in equity mutual funds is even more staggering. In the past year alone funds invested in the equity market increased by almost 1000% and now stand at about GRD 5 trillion, representing about 41,5% of the total market.

Faced with the coming advent of the single currency and more acute competition, Greek banks have responded to these challenges by entering into a period of consolidation, encouraged in great part by the privatization program of the Greek Government. ~Up to now nine financial institutions has the object of merger or acquisition activity. (Macedonia Thrace Bank, 1997, Bank of Central Greece, 1998, General Bank of Greece, 1998, Bank of Athens, 1998, Mortgage Bank of Greece, 1998, lonian Bank, 1999, Ergo Bank, Xios Bank, Credit Lyonnais Greece).

The planned sale of a 10% stake of the Commercial Bank of Greece and the flotation of the Agricultural Bank to the ASE is by no means set to complete the consolidation process in the Greek banking sector. I believe that there is still need for even stronger and viable financial entities in the Greek market. This need is put in a different perspective when we consider the scale of the unified European market and the particular role that Greek financial institution will be increasingly called to play in South Eastern Europe.

The expansion of Greek banks in the Balkans and the South Eastern Mediterranean goes hand in hand with the trend set by the entire business community in Greece. Many domestic banks have now realized that these markets, although still in financial uncertainty and dominated by political considerations, have significant potential for growth in the long run.

Greek industrial and commercial firms are now laying the foundations to reap the dividends of a comparative advantage in the markets of the region. This advantage is reinforced by our cultural and geographical proximity to these economies and the special advantage dictated by our unique European Union status in this Region. The attraction for Greek banks lays on the high margin business the Balkans and the South Eastern Mediterranean offer at a time when domestic spreads are under pressure. Furthermore, Greek banks can capitalize on their own recent experience in market liberalization and convey their success story to these countries.

The erratic nature of these economies has put off a large number of international investors. A longer-term view though, would point us at what will be the next convergence paradigm of the European continent. Now is the right moment to invest, provided it is done with caution and clear thinking. I believe this has so far been the case for nearly all-Greek financial institutions in the Area.

The tone in today's agenda has unavoidably been set by Europe's single currency and the imminent accession of Greece to the third stage of Economic and Monetary Union. For our markets this will be nothing short of a formidable occasion, soon to become our new economic reality.

There is no doubt that the introduction of the new currency will reshape the financial market in diverse ways: it will intensify competition, it will increase the average size of the banking institution, it will put pressure on costs and it will expand the range of products available to investors and borrowers. Greece's participation in EMU will offer new opportunities; it will simultaneously entail challenges and risks for the Greek banking system as a whole.

However, it should not be surprising that Greek banks have fully supported the concept of monetary unification from its start as they recognized that the substitution of the Drachma by the Euro would present new growth opportunities to them. The stable macroeconomic environment, the lower inflation and interest rates, the elimination of foreign exchange risks and the enlargement of money and capital markets are key elements that are expected to boost growth in the banking markets and present new opportunities and challenges for domestic banks. It is not enough to think solely about the Banks' internal structures; I would invite you to consider what this new environment will do to the most important part of the equation: their clients.

Considering another dimension of the new era we must also take under consideration that the introduction of the Euro is going to induce a major restructuring of both individual and institutional portfolios in Greece. For example, at the end of 1998, only about 7% percent of total assets of Greek mutual funds were invested in equity-linked instruments, primarily due to the high real interest rates paid by Treasury bills and bonds. A year later and many bps down from those rates, equities account for more than 40% of all funds invested.

In this new environment each Greek bank must design and implement a clear and consistent strategy aiming at defining its future role and its capacity to withstand competition. Size, scale of operations, investment in technology and costs will undoubtedly become key factors for determining competitiveness. Although we cannot rule out the possibility that smaller and highly specialized banking institutions will survive by focusing on market niches, the large retail oriented institutions will be more likely to achieve economies of scale and thus be better positioned in the marketplace. I should point out that the Greek banks maintain a strong position in the domestic retail market with long rooted ties to the clientele base. As I mentioned before, this position will be difficult to be challenged, in my judgment, by the foreign banks

A number of initiatives by Greek banks show that they have placed their emphasis on succeeding in the post-EMU era. To name a few, there has been a notable effort to clean up loan and equity portfolios, to manage risks efficiently, to become better capitalized, to invest in technology and its retail applications, to expand business in the Balkans and other European countries, to develop new products and to play an active role in secondary bond markets. Needless to say that Greek banks are working hard to cut down costs and improve their efficiency ratios.

There is no doubt that the introduction of the Euro poses a major challenge for Greek banks. It is up to them to meet the requirements for their competitiveness in the new environment and to benefit from it. Based on our experience so far I am now confident that our financial sector will face the challenge and come out stronger than before.

Ladies and Gentlemen,

Those who had the endurance and foresight to embrace the potential of the Greek market and the Greek financial sector have not been proven wrong; on the contrary, they were brought in a position to reap the dividends of a spectacular convergence trajectory. My speech today will have as its conclusion my belief that there remains still a lot to be seen and gained in our domestic-and now mature- markets.

Thank you.