The lure of retail banking has unexplored liabilities

Although the volatility of their earnings are more reminiscent of investment banks, top officials at Greek commercial banks are busy talking about the next great frontier, which is retail banking. Analysts and commentators have followed suit, paying special attention to the asset side of the banks’ balance sheet, namely loans. Very few, if any, have taken the time to focus on the liability side, namely deposits. So it should come as no surprise that most bankers and analysts alike see banks fighting it out on the asset side rather than on the liability front. They may be wrong. The next phase of competition in the Greek banking system is likely to take place on the liability side, as banks try to attract deposits to fund their loan growth strategies cheaply, in an environment of rising interest rates. As we mentioned last week, global markets have started betting on economic recovery in the US and the eurozone, which is being reflected in their respective yield curves. The two-year Schatz yield hit an eight-month high on Friday, exceeding 4.152 percent; and the 10-year Bund yield, used as a benchmark in the eurozone, hit a year and a half high of around 5.261 percent. The Euribor futures contract, regarded as a market indicator of eurozone interest rates, pointed to short-term interest rates of 3.60 percent, while the European Central Bank’s (ECB) main official rate stands currently at 3.25 percent. If markets are correct, then the ECB should raise its official interest rates this year, prompting commercial banks to do the same. Given the tame inflation outlook in the eurozone, the rise in euro interest rates should not be worrisome, a view already taken by rising equity markets, discounting higher corporate profits ahead. But the combination of better-performing equity markets and potentially higher deposit rates poses a dilemma for the average Greek, a dilemma which local banks cannot ignore. Should he or she continue to shy away from capital markets and still be content to invest in repos and other forms of bank deposits and protect his/her capital, even though that means earning a negative real rate of return? And if he or she cannot trust the Athens Stock Exchange but still wants to increase exposure to equities, should he or she try to buy shares in other eurozone countries directly or indirectly (via mutual funds)? If most Greeks decide they can live with negative real returns and ignore capital market developments, then local banks would have had no major problem. However, a good deal of money placed in repos or other banking instruments belongs to sophisticated individual investors and corporations. It is highly likely that the latter won’t like to miss the train and opt instead for alternative investments, either in Greece or abroad. So, the question is whether local banks will be able to offer these investors higher deposit or repo rates or other attractive investment products to keep them as clients, or else lose out and face a liquidity squeeze which will force them to borrow at higher interest rates in the interbank market to fund their new loans to customers. Borrowing at higher interbank rates entails two choices. First, the bank will pass on the whole increase in its lending rates and risk losing market share; or second, it will pass it on partially or not at all, which translates into tighter net interest margins and, most likely, lower profitability. The problem may not be so acute for large banks with a large deposit base, such as the National Bank of Greece. However, it will prove more acute with small banks, lacking a large deposit base, and perhaps for some large banks that do not have a sufficiently large deposit base to accommodate their fast-growing loan portfolio. How will Greek deposits and repos behave in what will likely be an era of rising euro interest rates? Will they fly to the equity market and alternative investment products offered abroad, or will they stay put? To some extent, the trend will be decided by the deposit rate policy of local banks. Given that small banks and even some large ones need deposits to fund their new loans, it increasingly looks as if a «war» is simmering, and that this will be fought not on the asset side, namely on loan turf, as most bankers and analysts expect, but on the liability side, namely on deposit turf – at least in the first round. The tourism training schools’ facilities at the Hellenikon airport, with a capacity of 250 rooms, could also be converted into accommodation for the Olympic Games. The Mont Parnes casino complex on Mt Parnitha, presently being privatized by the State, is able to provide 500 rooms.