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Greek unorthodox

The young and fast-rising EFG bank shows no sign of slowing -- or of abandoning its American management style.

In Greek banking circles, such remarks abound about the rapidly growing EFG Eurobank Ergasias. Not that bankers want their names attached to such discourtesies. But the attitudes of his peers don't surprise Nicholas Nanopoulos, EFG's chief executive officer. After all, he says, "we're the new kid on the block."

The new kid has been making its presence felt. Since its founding in 1990 by Spiro Latsis, a private banker and scion of shipping and oil magnate John Latsis, EFG has mushroomed into Greece's third-biggest bank, with E31.9 billion ($39 billion) in assets and E368 million in net income last year. It just trails No. 2 Alpha Bank, a 126-year-old private institution with E32.9 billion in assets and E373 million in net income in 2004, and the 164-year-old National Bank of Greece, which boasts assets of E52.9 billion and earned E457 million last year.

Bolstered by a string of domestic acquisitions since the mid-1990s, EFG has emerged as the market leader in several key areas of retail banking: It ranks first in consumer loans, insurance sales and securities brokerage. In many ways the bank's youth has been a plus rather than a minus. EFG has gotten a leg up by investing in information technology that is far ahead of the systems still in use at most Greek banks. And, unlike its rivals, it isn't burdened by an accumulation of costly pensions for employees. The average age of its workforce is 36 -- a decade younger than the Greek industry median. EFG attracts highly educated newcomers and topflight experienced bankers by offering compensation plans that are novel in Greece, such as cash rewards and promotions for employees who meet sales targets and generous stock options for senior managers.

EFG executives concede that their bank's fast-paced, results-oriented approach can rub some competitors -- and clients -- the wrong way. "We have an American style that Greek society doesn't easily take to," says Nikolaos Karamouzis, deputy chief executive officer and head of corporate, private and investment banking. "We target everything, and sometimes people might feel -- mistakenly -- that we are so focused on the numbers that we forget the human element."

Another concern for EFG, one it shares with the whole banking sector, is how to avoid being tarred by the Greek government's ballooning deficit, an Olympic Games hangover that reached 6.1 percent of GDP last year. That record for a euro-zone country led Standard & Poor's to downgrade Greece's sovereign rating to A from A+. Partly because of the sovereign debt problem, EFG's credit rating of BBB+ hasn't been raised by S&P since early 2004 and is lower than those of such comparable EU banks as Banco Comercial Português and Espíritu Santo Financial Group, Portugal's two largest banks, which have A­ credit ratings. "We definitely feel our ratings don't reflect the real strength of this franchise and that we are being penalized," says CEO Nanopoulos. The bigger danger comes if the Greek government fails to shrink the deficit at a moderate pace and is forced to tighten spending so sharply that economic growth sputters. For now few analysts foresee such a dire scenario. Most are predicting at least 3 percent growth this year. The government estimates 3.9 percent.

Quite apart from the state's deficit problems, S&P is nervous about the explosive expansion of private sector credit in Greece: 16.8 percent last year. That's more than three times the 5.1 percent credit growth in the euro zone as a whole. "We are always cautious with financial systems that grow that fast," says Jesús Martínez, an S&P credit analyst in Madrid who covers Greek banks. But he adds that EFG raises fewer alarms than other local banks: "We feel it has a good risk management system in place."

Fund managers are paying attention to what they perceive as fast, well-managed growth at EFG. "They seem to have few bad loans in their portfolio," says Costas Theodoropoulos, Athens-based manager for Allianz Dresdner Asset Management, whose E500 million portfolio in Greek equities includes E11 million in EFG shares. Other investors like EFG's focus on the most highly profitable banking activities, consumer loans and mortgages. "From the very beginning they have emphasized the retail side of the business, which has so far proved a winning strategy," says Nikos Poulakis, portfolio manager at Egnatia Mutual Funds in Athens, which holds about E6 million in EFG shares among its E100 million worth of Greek equities.

Plaudits for EFG from fund managers aren't unanimous, though. Earlier this year Laxey Partners, a U.K.-based fund manager, complained that Greek Progress -- a E129 million closed-end fund that invests in Greek equities and is managed by EFG Telesis, a subsidiary of EFG Eurobank -- was too tightly controlled and influenced in its investment decisions by EFG. In January, Laxey brought the issue up at a board meeting of Greek Progress. EFG vigorously denied the allegations, and its handling of Greek Progress was given a clean bill of health by the central bank and the Hellenic Capital Market Commission (the Greek equivalent of the U.S. Securities and Exchange Commission). The tiff ended in March when EFG bought out Laxey's 25 percent share of Greek Progress for about E24 million -- a 9 percent discount to the market price. "We bought it at a much higher discount, somewhere between 20 and 25 percent, so it was still a profitable investment," says Colin Kingsworth, Laxey's chief executive officer. In June, EFG announced it intended to acquire Greek Progress by offering shareholders EFG stock. But EFG's squeaky-clean image among analysts and credit agencies for corporate governance was slightly tarnished.

Retail banking has been the main driver of growth at EFG, accounting for 52 percent of pretax profits and revenues (the remainder is from wholesale banking). The bank insists its growth is more balanced than generally perceived by outsiders, who think of it predominantly as a purveyor of consumer loans. "We're spending a lot of resources to build up the corporate and investment banking business, along with asset management and private banking, which together contribute almost as much to the bank's profits as retail banking," says deputy CEO Karamouzis.

Like other large Greek banks, EFG is betting on expansion in the Balkans. In the past seven years, it has spent E160 million to acquire majority stakes in banks in Romania, Bulgaria and Serbia -- countries with a combined 40 million inhabitants, or almost four times Greece's population of 10.5 million. But EFG's aspirations abroad go far beyond those of its rivals, who aren't looking past the Balkans. "Our aim over the next decade is to have a presence in Central and Eastern Europe and cover a population of more than 100 million," says Byron Ballis, EFG's head of retail banking.

Domestically, EFG and its peers have little to worry about from foreign banks, which account for barely 10 percent of total Greek banking assets, about the same as they did 15 years ago. During the past decade Western European banks chose to buy cheaper financial institutions in Central and Eastern Europe rather than pour money and management resources into more-expensive Greek banks that until 2003 still operated under government-imposed ceilings on personal loans. A number of big-name foreign banks have even left the Greek market, Bank of America, ABN Amro, Deutsche Bank and Barclays among them.

The score or so that have remained aren't viewed as serious competitors by domestic bankers. "The proper question is why they are not more active in Greece, and the answer is that we know the market better than they do," says Marinos Yannopoulos, executive general manager and chief financial officer at Alpha Bank. Adds EFG's Nanopoulos, "Foreign banks have missed the boat." This has left Greece with one of the most highly concentrated financial sectors in the European Union. Five banks -- NBG, Alpha, EFG, Emporiki and Piraeus -- account for 76.1 percent of the E118.2 billion in private sector credit and 63.1 percent of the E236 billion in the banking sector's assets. With little competition, this cozy club achieves net interest rate margins -- currently at 3.6 percentage points for total loans -- that are among the most profitable in the EU. Loan growth and profits are likely to continue apace because Greece's economy has expanded at close to 4 percent annually over the past decade -- twice as fast as the rest of the euro zone -- and because the Greek financial sector has lagged for so long. "Banking penetration is still quite low compared with other EU countries," says Michael Massourakis, chief economist at Alpha. Private sector lending as a percentage of GDP is only 71.5 percent in Greece, compared with 112 percent for the euro zone as a whole.

A dozen years ago the Greek banking system was in the doldrums. Layers of laws and regulations stifled mortgages, personal loans and money transfers abroad. Because of chronically large current-account deficits, borrowing to purchase cars and other imported consumer products was considered unpatriotic. The central bank established more than 100 interest rates for different types of transactions, in many cases to channel credit at below-market rates to government-favored corporations, state entities and small and medium-size enterprises. "Individual customers weren't consumers -- they were just depositors," says Nanopoulos.

Then, beginning in 1994, Greece enacted a series of bank reforms aimed at making the financial system converge with the rest of the EU and preparing the country for the adoption of the euro in 2001. Consumer and mortgage lending were liberalized. As euro entry neared in the late '90s, Greece's double-digit interest rates fell to euro-zone single-digit levels within a decade. "There was a huge boost in credit demand, not just from consumers but also from corporations that were given a much cheaper way to finance themselves," says Miranda Xafa, who follows Greek banking from Washington as an alternate executive director for the International Monetary Fund. "Suddenly, Greek banking became sexy."

Spiro Latsis, son of the late John Latsis, a onetime deckhand who became a shipping and oil billionaire, was one of the first financial entrepreneurs to notice the new appeal of Greek banking. In 1990, Latsis, who resides in Geneva and is now 58, had launched Euromerchant Bank in Athens, aimed at private and merchant banking. "When restrictions were lifted on consumer lending and the new banking era began, we had to decide whether to remain a wholesale bank or move into retail banking," recalls Nanopoulos, now 53, who, after a career at the World Bank in Washington and then at Carroll McEntee & McGinley, a U.S. government securities primary dealer that is now part of HSBC Holdings in New York, was recruited by Latsis in 1990 to help establish Euromerchant.

The future EFG (the name was adopted in 1997) began its expansion into retail in 1996 with the acquisition of Interbank, a retail bank with 30 branches. Two years later EFG bought the 15-branch Bank of Athens. "More important, it was listed on the Athens stock exchange, which made it easy for us to get listed," says Nanopoulos. Next purchased, also in 1998, was the 90-branch Bank of Crete, a financially troubled state institution. Then, in 2000, came the biggest challenge: the acquisition of the 140-branch Ergo Bank. That transaction, a hostile takeover -- an unheard-of event in the staid Greek banking community -- sealed EFG's reputation as a gate-crasher.

In less than a decade, EFG has metamorphosed from a seven-branch wholesale bank with some 300 employees into a universal bank with 370 branches in Greece, 294 branches in the Balkans, almost 14,000 employees and a market capitalization of E7.94 billion. It is part of the EFG Bank Group, incorporated in Switzerland and controlled by Latsis and his family, who hold 41.2 percent of EFG Eurobank Ergasias. The Greek bank and its Balkan acquisitions represent about 80 percent of EFG Bank Group's assets, with several private banking subsidiaries accounting for the remainder.

Latsis, whose family fortune was estimated by Forbes magazine at $4.4 billion in 2004. He doesn't give interviews, leaves the management of EFG Eurobank Ergasias to the executives and visits Greece only a few times a year. "Nobody has seen him," says Joanna Telioudi, Athens-based head of research at HSBC Pantelakis Securities. "He never participates in EFG road shows."

That's just fine with the bank's senior management. "It's a pleasant experience to be allowed to do your job with no interventions," says Karamouzis. "Not a single time has he picked up the phone to dictate terms or even to ask questions."

But Latsis does make all calls regarding top management appointments. The trio he approved for the most-senior posts -- Nanopoulos, Karamouzis and Ballis -- hold doctorates in economics, as he does. Now in their early 50s, they spent years in public sector finance before moving on to private sector banking with the advent of the 1990s reforms. All three share a desire to shake up a Greek banking world that they see as suffering from the statist legacy of almost two decades of left-wing government, which ended with the 2004 election of the conservative New Democracy government of Prime Minister Costas Karamanlis. "We are still contaminated with the socialist mentality of past decades," says Karamouzis. "That was fine when we were young, but not now that we are running a business."

The commercial mind-set at EFG begins with incentives for employees to meet sales targets. The corporate banking division, for example, has created 32 business centers throughout Greece, staffed by 200 managers whose job is exclusively to provide services for the corporate clients assigned to their center. Managers are pressed to sell those clients a range of products, from simple loans to complex Treasury instruments covering foreign-exchange-rate management. The idea is to get clients thinking of EFG as a "value-adding" bank and account officers thinking of themselves as small-business people offering a variety of products and services. "It's a sell, sell, sell culture," says Karamouzis.

If a business center falls short of the targets, the managers are grilled by the head of business development at corporate banking to find out why. But when a business center meets four consecutive monthly targets, its employees get cash rewards -- and eventually promotions. The top 20 executives at EFG receive up to 70 percent of their total compensation in stock options. Typically, the exercise price is set annually, based on the average share price over the previous six months.

This carrot-and-stick strategy helped EFG gain a 13.6 percent share of the corporate loan market in 2004, moving it into a second-place tie with NBG and within striking distance of market leader Alpha's 16.3 percent share. EFG's corporate banking division -- which earned E92 million in 2004, or 25 percent of the bank's profits -- increased its loan portfolio by 15.3 percent last year over 2003, to E8.8 billion. EFG kept its concentration risk low; the top 20 clients accounted for only 6 percent of total corporate loans.

EFG is already the No. 1 investment bank in Greece. Investment banking and treasury generated E81 million in profits last year, or 22 percent of the bank's total. With E5 billion under management and more than 5,000 families as clients, EFG has also become the country's top private banking entity. "We approach private banking in much the same way as corporate banking," says Karamouzis. EFG has ten private banking centers, staffed by 100 managers.

To push cross-selling more effectively, EFG segments its client base and adapts products to the income and needs of each group. "The higher the income, the higher the cross-selling target," says Ballis, who heads mutual funds and insurance activities as well as retail banking. For clients who are young, salaried employees, the sales pitch will stick to the affordable basics: savings and checking accounts and credit cards. But for more-affluent bank customers, EFG will push seven to nine products, including consumer loans, mortgages, insurance policies and investment accounts.

The design of its branches reflects EFG's desire to sell itself as a more stylish, contemporary alternative to older rivals. On Skoufa Street off tree-shaded Kolonaki Square, in an upscale neighborhood near the heart of Athens, competing bank branches cluster cheek-by-jowl with boutiques. At the NBG branch three rows of upholstered chairs face a long counter attended by numbered clerks. The subliminal message to clients at this formerly state-owned bank appears to be, "Wait to be called by the authorities." By contrast, in the nearby EFG branch clients are attended by employees at curved desks set in small, open, individual spaces.

EFG's alternative ways are paying off. With a 30 percent share of the consumer lending market, it has easily outdistanced NBG (21.1 percent) and Alpha (10.7 percent). This has provoked whispers from rivals that EFG might be handing out loans too easily. "We've all heard the gossip that EFG's credit control supposedly isn't so strict," says Nikos Lianeris, an equity analyst at Proton Securities, a brokerage firm in Athens. "But the published data doesn't support that."

In fact, the nonperforming-loan rate at EFG is the lowest in Greek banking. According to the central bank, NPLs at EFG were 2.9 percent of the total loan portfolio in 2004, compared with the sector's 5.4 percent average. For consumer loans the NPL rate at EFG was 3 percent; the market average was above 4 percent. Only 0.7 percent of EFG's mortgages are in arrears, versus 4.6 percent industrywide. And in wholesale banking, EFG has a 3.4 percent NPL rate, compared with 7.8 percent for the entire sector. "We run a bank, not a charity," says Ballis.

EFG executives claim to have the strictest credit risk management system in Greece. Loans are classified into eight risk categories, each with an automatic minimum loan-loss provision policy, then vetted by a credit committee that includes the account officers and an independent board member whose job is to supervise risk management. "All the scorecards that we use for lending are reviewed and stamped for approval by a risk manager who is not responsible for any budget," says Nanopoulos. And if a loan becomes distressed, it is handled by a review team that doesn't include the account officers. "So, in effect, we get a third opinion," says Karamouzis.

Despite its low NPL rate, EFG intends to slow down the growth rate of its lending, particularly to consumers, which is expected to surge by 33 percent this year after bolting upward by 46 percent in 2004. "We realize that sort of very high growth rate is unsustainable," says Ballis. Within its consumer credit portfolio, the bank is putting renewed emphasis on mortgages.

With a mortgage-to-GDP ratio of 20.6 percent, Greece lags well behind the euro-zone average of 38 percent. Local banks are looking beyond domestic clients for mortgage growth, as more northern Europeans buy vacation and retirement residences in Greece, especially after the construction of new highways and airports in connection with last year's Olympic Games. "It's getting easier for foreigners to relocate here," says Marinos Yannopoulos, executive general manager and chief financial officer at Alpha Bank. "We can become the southern Florida of Europe."

In last year's mortgage market, EFG's 12.6 percent share trailed both Alpha (14.4 percent) and NBG (26 percent). NBG achieved its dominance by absorbing in 1998 the National Mortgage Bank of Greece, a state entity that had a monopoly on mortgages until the market was opened to other banks in the mid-1990s. But EFG believes NBG's mortgage lead isn't insurmountable. "When we decide to go after a market, we always target the top position," says Karamouzis. As examples, he cites EFG's emergence this year as the No. 1 insurance seller (it started from scratch four years ago) and points to the rise of EFG's brokerage operations to its current top spot with a 17 percent market share -- up from 23rd place and a 1.5 percent market share in 1999.

According to EFG executives, the bank has no plans to expand by making major domestic acquisitions. "In terms of existing labor laws and regulations, a merger of big banks in Greece would be too costly, disruptive and difficult to implement," says Nanopoulos. Also, EFG, free of the pension problems that burden its competitors, has no desire to assume them by merging with another big entity. In a report issued in April, HSBC Pantelakis Securities estimated that NBG has a E230 million pension deficit, equivalent to 9.6 percent of 2004 equity; Alpha's deficit is E238 million, or 10.1 percent of equity; and Emporiki is running a E700 million pension deficit, equivalent to a whopping 56.2 percent of 2004 equity. The banks, which have been negotiating with their employees' union and the government since mid-2004, are hoping that Athens will agree to cover at least one third of their pension liabilities.

Even if the pension issue is resolved by the end of this year, there is little urge to merge among the Big Five banks, because they are all making strong profits. NBG and Alpha came close to joining forces in 2001. But neither seems interested anymore. "No bank wants to divert its attention from growth," says Alpha's Yannopoulos. Market analysts tend to agree. "We don't expect any mergers between domestic banks at this point," says Denise Vergot Holle, a London-based analyst who covers Greek banks for Merrill Lynch & Co. "That seems more likely in three to five years, if growth slows and margins come under pressure."

Any attempt in the near future by a foreign suitor to acquire EFG seems even more remote than a domestic merger involving the bank. Deutsche Bank purchased 9.3 percent of EFG in 1998 but sold it in 2003. "They told us they divested to concentrate on their core businesses and holdings," says Nanopoulos. But some analysts' reports, including a March 2005 commentary by Merrill Lynch, have speculated that Deutsche Bank pulled out when it became convinced that the Latsis family wasn't interested in selling EFG. Besides the family's 41.2 percent stake -- worth about E4 billion -- no shareholder owns more than 5 percent. Institutional investors hold about 35 percent of EFG stock, and private individuals account for the remaining 23.8 percent.

Meanwhile, EFG is looking abroad for even bigger growth opportunities than at home. Its buying spree in the Balkans over the past seven years has left it with 96.7 percent of Bulgaria's Postbank, which has 123 branches; a 55.3 percent stake in Romania's 160-branch Banc Post, with an option to buy another 22 percent; and 93.5 percent of Serbia's 11-branch Beograd Bank. EFG's approach in the Balkans parallels its strategy in Greece. "We wanted to get into retail banking in the region, so we looked for banks with multiple branches," says Nanopoulos.

Although Balkan operations accounted for only 4 percent of EFG's net profits last year, the bank is predicting the region will contribute 20 percent by 2009. By then, says Ballis, "we will hopefully be the dominant bank in Greece."