Banks’ mergers & acquisitions influence
on the Greek banks’ profitability
during the recent economic crisis
The strong global 2007 financial crisis led to a relevant crisis, three years later, in Greece that included restructuring of the Hellenic economic and financial sectors, such as the 2012 and 2013 bank mergers and acquisitions. Nowadays, only four systemic banks operate, along with a non-systemic commercial bank, some cooperative banks and a few foreign bank branches. The analysis sheds light on the impact of the M&As on the profitability of the four systemic banks once it was implemented, compared to the profitability of the non-systemic bank. For the analysis, the profitability indices ROA, ROE and NIM ratios, for all banks are calculated and discussed. Wilcoxon Signed Rank Test is employed to investigate whether there is significant difference in the profitability ratios between the pre- and post- mergers and acquisitions eras. The analysis revealed no significant difference in these ratios between the two periods either for each bank separately or for all of them. The analysis also discusses other reasons behind the M&As.
by Ilianna Alexopoulou
Financial crisis is considered to be a usual phenomenon; however, the most recent global one that started in July 2007 and lasted until 2009 is regarded as the worst after the 1930s Great Depression. With regard to the European crisis, weaknesses and institutional ineffectiveness were identified within the Eurozone (Petrakis et al. 2013), where central bankers and other regulators failed to properly handle the crisis and to keep economic imbalances under control. However, according to Kirshner (2014) this crisis introduced transformational ideas. The global financial crisis had threatened the banking world since 2007 (Vukovic et.al. 2009). In Central and Eastern Europe a meltdown in bank profits turning to losses was observed as an inevitable consequence, with the exception of a remarkable growth in the Serbian profitability measures.
In 2010, a relevant crisis exploded in Greece, a consequence of the global financial crisis. Greece entered the European Monetary System in 2002, and being unable to print extra currency, in 2010 it was the first Eurozone country that received financial support by the IMF and the EU, while two more aid packages were provided by the IMF, ECB and EC.
Contrary to other European economies, the onset of the crisis in Greece was not due to the banking sector, however, the last was strongly negatively affected; thus, reforms were necessary as a result of the sector’s highly competitive nature. Also, huge savings amounts were transferred away from the Greek banks, due to escalating fears related of a possible default or splitting away from the Eurozone.
Under such circumstances, mergers and acquisitions (M&As) took place aiming banks to continue being viable firms. Therefore, four systemic banks emerged, while one more commercial bank and some cooperative banks continue their activities, as well as some foreign bank branches. Four banks are referred as systemic, because they manage high assets and it was deemed that they could continue being viable and important for the Greek banking system.
The pre-2010 Greek banking system encompassed state and private owned commercial banks, cooperative banks and many branches of banks headquartered abroad. From 2012 and mainly in 2013, M&A activities restructured the sector so as to be smaller and more coherent. Within this framework, profitability measures before and after the M&As, of the four systemic banks and the other non-systemic commercial bank (Bank of Attica) are being calculated, tested and analysed. The analysis examines if these changes had significant effects on the profitability indices.
Banking Sector M&As Overview
In July 2012 Piraeus bank acquired the “viable” part of ATE Bank, while three months later the same bank purchased all shares of Geniki Bank from the French bank Société Générale. Next year the same bank bought Greek branches of the three Cypriot banks (Laiki Bank, Bank of Cyprus and Hellenic Bank) in March and of Millennium Bank in June. National Bank of Greece was merged with Probank in July and First Business Bank in May, while Alpha Bank acquired in February 2013 the last shares of Emporiki Bank. As far as Eurobank is concerned, it acquired New Proton Bank and New Hellenic Postbank in July of that year. Moreover, in June 2014 Alpha Bank was merged with retail banking business of Citibank in Greece and finally, in April of 2015 Piraeus Bank merged with Panhellenic Bank.
Six cooperative banks halted their operations since their licenses as financial institutions were revoked by the Bank of Greece. In 2012 three of them were obliged to liquidate and the National Bank was nominated their contractor by acquiring their deposits. In 2013 the same happened with three more banks whose deposits were transferred to Alpha Bank. In December of 2015, one more such bank stopped its operations, with its deposits transferred to National Bank of Greece.
Furthermore, financial conglomerates took place in that era, where banks were merged with their affiliates of various financial services, usually with insurance companies. This was allowed by the Second Banking Directive (1989) when, both in the USA and in European Union, historical barriers to services were abolished.
Profitability indices are chosen as they describe both efficiency and performance. The return on assets (ROA) divides the net income of the firm by the amount of the bank’s assets (ROA=Net income / Assets), which reflects how efficiently assets are used to generate profits. Bank’s owners focus on the return on equity (ROE) ratio, which is defined as the net income per unit of capital (ROE=Net income / Capital). The net income margin (NIM) is the difference between interest income and interest expenses as a percentage of total assets [NIM=(Interest income – interest expenses) / Assets]. Figure of the above analysed index ratios for each bank for all discussed years, i.e. 2007 to 2018, is presented in Figure and four descriptive statistics for these ratios are displayed in Table 1. In the summer of 2015 banks were out of duty for three weeks and thereafter capital controls were imposed till September 2019. Data are segmented into pre-M&As era, from 2007 to 2011, and post-M&As, from 2012 to 2018.
A comparison between the two sub-periods will be made and in order to examine if there is significant difference between pre and post M&As performance of the profitability indices, Wilcoxon Signed Rank Test (WSRT) has been employed.
This is a non-parametric or distribution free test for matched or paired data, designed to measure certain group in two different instances and tests the null hypothesis that the median of a distribution is equal to some value. Table 2 provides the test results for the four systemic banks, for all of those as one group, as well as for Attica Bank.
The question if these index ratios differ significantly between the pre- and post- M&As periods, by means of the WSRT within the SPSS package, helps to find out the impact of this policy, while Attica Bank is used as a control bank. Moreover, it is used for the ratios of all banks so that a general conclusion can be drawn. This test measures the significant difference at 5% significant level between the two sub-periods. The hypothesis statement includes the null hypothesis, which assumes that there is no significant difference in the profitability ratios between the pre- and post- M&As periods, as well as the alternative assumption which supports that there is a significant difference in these ratios for these two eras. If the value of the WSRT test result is below 0.05 then the null hypothesis is rejected. On the other hand, in the case of higher value, the null hypothesis is accepted and no significant difference in the ratios before and after M&As exists.
From the results in Table 2 it is obvious that in all cases the null hypothesis is accepted, except for the case of the NIM ratio corresponding to the National Bank of Greece, since all result values exceed the critical value, except for the NBG NIM. That means no statistically significant difference of the profitability ratios is found between the periods before and after the M&As, either for systemic banks or for the non-systemic one. WSRT is also conducted for the systemic banks as a group, taking into consideration for each year the sum of each profitability index ratio. The outcome of this group analysis is that ROA equals 0.681, ROE 0.145 and NIM 0.881. It is evident that no significant difference exists for the profitability ratios between the two eras.
It is found that the Greek banking sector M&As in 2012 and mainly in 2013, did not have affect the profitability of any systemic bank or as a whole. WSRT test shows that the profitability indices differences before and after M&As are indistinguishable from zero. Additionally, even for the Bank of Attica, which did not run this policy, no significant difference between the two periods is noticed in its profitability ratios. Consequently, it is concluded that other reasons may have contributed to the M&As. All these findings are in consistent with most of the previous investigations for M&As in Europe or elsewhere.
The reasons that the M&As did not provide increased profitability can be specific to the Greek economy. Greek economy, already rather weak from the global financial crisis of 2007 entered in a severe financial crisis in 2010. A shrinkage of 25% in the Greek GDP from 2009 to 2015 led to a difficult immediate recovery in all Greek economy sectors. This is also the case for the banking sector, where although there was a concentration, no significant results captured, at least until 2018 as far as the increase in their profitability is concerned. An unusual economic background also existed in the research of Piper and Weiss (1974) that investigated the post-war economy and draw the conclusion that there was no influence of M&As on the profitability.
Throughout the last decades the Greek banking system has altered its variety of activities by extending their financial activities to other than the traditional ones, such as to real estate banking, bancansurrance and services concerning Stock Exchanges. According to Beck et al. (2006) it is less probable for a crisis to appear in economies with more concentrated banking systems even after conducting special relevant controls. In Greece, banking sector was really large in relation to the economic size of the country in the first decade of the 21st century.
Furthermore, the financial crisis made apparent that countries with large banks can run large risks to their public finance, as it was the case of Iceland in 2008 and Ireland in 2010(Bertay et al. 2013). On the other hand, Beck et al. (2006) supported that countries with national institutions that facilitate competition in general, have fewer probabilities to suffer a systemic banking crisis; also they suggested that national bank concentration reduces the likelihood of such a crisis, as well as that restrictions on bank activities increase crisis probabilities.
In Greece, because of the new financial policy which was applied in 2010 as a result of the financial support from the IMF, bank runs were observed at certain times during the crisis,such as before national elections of 2012 and 2015.Depositors drew money from local banks, heading them towards foreign banks of Western Europe that were considered as a safe haven; this led to a liquidity problem. Weak corporate governance in the banking industry is thought to be one of the causes for which the Basel Committee on Banking Supervision has called for better governance mechanisms. Under such circumstances, M&As were of great importance and necessity for banking system’s normality, given the new reality.
The escalation of the Greek economic crisis went side by side with the political turbulence and the widespread of rumours that the country was on the edge of bankruptcy. These rumours further increased the sense of uncertainty and dead-end of the Greek economy, resulting to more political and social unrest. Consequently, M&As were mandatory as Greece was under the financial crises, global at first and then local, which created not only a lot of financial but also social and political problems that led the economy to a significant shrink. Moreover, throughout this era people avoided to trust their money in banks and hence bank capitals felt in such a degree that recapitalisations were demanding for their viability. Since the beginning of the Greek economic crisis because of withdrawals of deposits, bad debts and the PSI of 2012, three recapitalisations have taken place, in 2012, 2013 and 2015. All the above impeded banks from proceeding with their traditional activities for having the appropriate incomes, hence alterations in this sector were demanding. Financial conglomerates took place and banks altered their usual services so as to remain viable.
Lower revenues of banks demanded respective reduction of costs so that losses would be as low as possible. This reality linked with the increasing number of non-performing loans, since the beginning of the financial crisis, led banks to perform poorly. Such circumstances prove that the number of banks in Greece was high and it would be extremely difficult for all of them to survive. Under the new reality, strong negative results would be highly probable, ending up to possible bankruptcies. In such a case, the negative effects for the Greek economy and society might be even more severe in terms of a higher unemployment and a greater instability in the economy as a whole. This would deepen further the financial crisis, and may have worse impact also on banking sector.
Consequently, despite the fact that no significantly important improvement was observed in profitability ratios of banks between the periods before and after M&As, the implementation of this policy was necessary. The number of banks that existed before the burst out of the crises could not survive under the new configured financial situation of Greece since 2010. If such occasion had prolonged, significant financial problems would have be created, with further negative influence to the economy, society and politics. So, via M&As an effort to purge the system from inefficient banks was made.
Mergers and acquisitions are a usual phenomenon during history and appear in various sectors of an economy. There are two main types according to the productivity sector in which the two firms belong to, which are horizontal and vertical. The reasons for such a strategy to be followed are separated in three categories according to the time that benefits need to appear. In Greece that phenomenon appeared in late 1980’s, contrary to rest of the Europe and America.
In general, not all M&As succeed, due to the large variety types among the participating industries as well as due to the fact that M&As do not support improvements. Consequently, the banking sector demands “optimized” banks instead of larger banks in order to be more profitable. However, further research may lead to better conclusions, since until 2015 extra M&A activities took place; an approach that Bernad et al. (2010) and Rezitis (2008) supported where the M&As performance effects should be evaluated in the long run. M&As also have long-run results which cannot be calculated for the era examined here. Further investigation could take into consideration other factors that affect banks’ profitability.
This research is personal and there is no interference with the author’s employer.
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