FINANCIAL STRATEGY

COURSEWORK

“BANK OF PIRAEUS”

CONTENTS

INTRODUCTION…………………………………………..……3

BANK INDUSTRY IN GREECE…………………….…………3

SWOT ANALYSIS OF BANK OF PIRAEUS…………………4

PESTEL ANALYSIS……………………………………………6

CONCEPTS FROM FINANCIAL STATEMENTS……………8

RISK MANAGEMENT…………………………………………...9

CORPORATE GOVERNANCE………………………………...12

CONCLUSION……………..……………………………………..13

REFERENCES…………………………………………………....14

2

INTRODUCTIONPiraeus Bank was founded in 1916. For many decades it served as a private bank and

in 1975 it came under state control, where it remained until 1991.

The main medium term objectives of the Piraeus Bank Group is to maintain balanced

growth in terms of loans and deposits, achieve high efficiency, maintaining high asset

quality and satisfactory capital adequacy. The network has 797 branches (346 in

Greece and 451 internationally) and employs 11,246 people (6,171 and 5,075 respect-

ively). Piraeus Bank Group’s customer deposits at the end of 2011 were €22 bn, with

gross loans of €37 bn and total assets of €49 bn. Piraeus Bank Group, combining busi-

ness operations and social responsibility, emphasis is placed on the protection of the

natural and cultural environment by promoting the green banking idea.

BANK INDUSTRY IN GREECEAccording to Regitis (2010), Public banks market share was decreased and the private

bank market share was increased crucially during the period 1995 -2004. The essence

of changes was the many mergers and acquisitions that took place such as the

Eurobank merged with Ergasias bank and Piraeus merged with Chios Bank. Porter

(1980), created a model which is related to five key forces in order to evaluate the

attractiveness for competition and it could be applied in the Greek bank industry: 1)

Threat of new entrants. The entrance of new banks is almost impossible through fin-

ancial crisis and under the refunding procedure during the 2012. There is a limited

ability to give loans in the middle of a financial crisis and it is related also by the limit

of amount regarding the capital to establish a bank (18.000.000€) in cash. There is a

possibility for the entrance of foreign banks by the acquisition of a Greek Bank. 2)

Rivalry among the existing firms. Regarding the rivalry among the existing banks,

Hardouvelis (2006), based on Eurozone data, indicates that there is a high degree of

concentration of market shares from the four largest financial institutions (National

Bank, EFG Eurobank, Alpha Bank and Peraus Bank), because it is a common fact in

medium size economies such as Portugal, Belgium, where a few number of banks

dominate the domestic market. The intensity of rivalry is influenced by the number of

banks, and in Greece the number is small. The above factors indicate the complexity

of rivalry in the Greek bank industry. The opportunity to improve product differentia-

tion is limited because of crisis and lack of growth in Greece. 3) Bargaining power of

suppliers. The bargaining power of suppliers is to minimized because banks

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themselves are the suppliers of capital. The customers through deposits and other

financial products are also in part the suppliers of capital in the market. The Bank of

Greece has an important role in order to give credit to other banks and to control the

stability of the bank system. 4) Bargaining power of customers. The bargaining

power of customers depends on the kind of customers. The individual customer has

limited power compared to the corporate customer although in an extreme case of

scandal individual and corporate customers can play a dramatic role related to

liquidity of a bank by withdrawing cash. The corporate customer has barging power

regarding the ratios of loan because he can choose another bank with a little cost. But

the barging power of the customer is very weak because the bank is the only supplier

of capital, except the Stock market for listed companies and some special cases of

venture capitals, business angels etc. In this comparison between individual and

corporate customer, the limited strength of individual customer is obvious. 5) Threat

of substitutes. Regarding the threat of substitutes, the Stock market is for listed

companies and for individual customers the bank is the only legal source of capital.

SWOT ANALYSIS OF BANK OF PIRAEUSPiraeus bank covers all financial and baking activities in the Greek market especially

in the section of medium sized and small enterprises, retail banking and leasing.

Piraeus Bank Group, combines business development and social responsibility, by

putting emphasis in Green banking and in protection of the natural environment.

Piraeus bank competitive advantage is that it is a pioneer in the Green banking.

STRENGTH WEAKNESS

Pionneer in Green banking in Greece Increase growth in non payment loans

International presence operation cost

Internet banking

OPPORTUNITIES THREATS

Growing retail market Debt crisis in Greece reduce customer demand

General reforms in Greek economy Increasing competition likely to impact margins

STRENGTH

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A) Pioneer in Green banking in Greece. The Bank has innovative programs, such as

programs to promote green entrepreneurship (Green Banking), which is a strategic

option for growth for the Group. In this context, moreover, in February 2010 Piraeus

Bank Group announced development program to promote investment for

environmental improvement in industrial areas of the country and creating a new

model of green business parks. Especially, in 2010 in all branches of Bank of Greece

the effort is primarily to promote specialized products and all initiatives that promote

green entrepreneurship, while 45 stores were converted to selected centers to promote

green entrepreneurship. B) International presence. Piraeus Bank Group has an interna-

tional presence, focused in South-eastern Europe and Eastern Mediterranean, but also

in the financial centres of London and New York. The Group operates in Romania

through Piraeus Bank Romania with 182 branches, in Bulgaria through Piraeus Bank

Bulgaria with 100 branches, in Albania through Tirana Bank with 56 branches, in Ser-

bia with 44 branches of Piraeus Bank Beograd, in Ukraine with 45 branches of Pir-

aeus Bank ICB, in Cyprus with 15 branches of Piraeus Bank Cyprus, in Egypt with 48

branches of Piraeus Bank Egypt. C) Internet banking.The Bank’s nation wide network

and the electronic banking network of win bank, has received a great number of

awards because of its quality. Win bank directs is the first in the market. Modern

platforms promote customer’s service efficiency.

WEAKNESS

A) Increase growth of non payments loans. The Governor’s of the bank of Greece

annual report (2011), implies that the ratio of loans to delay to total loans amounted to

15,9 % from 10,5% at the end of December 2010. According to Tzathas (2011), at

least 10% of borrowers fail to meet their loan obligations. Maliara(2010), indicates

that the general bad debt rate is 13% on average in consumer loans and credit cards.

According to Vima (2010), the banks had strong objections to the government project

regarding the bankruptcy of natural persons and households and professionals with no

ability to pay back loans.

B) Operation cost. The operation cost of the bank was reduced dramatically from

2010. The effort will be continued with emphasis in payroll expenses. Karageorgou

5

(2011), implies the reduction of wages by 10% to 20%, in order to reduce the opera-

tion cost 50 million a year. The Bank's objective is to not lose a single job.

OPPORTUNITIESA) Growth retail market. There is a significant increase in the number of customers of

the Bank in Greece. The number reached 2.5 million customers at the end of 2011 de-

spite the decline of banking activities in the Greek market. B) General reforms in the

Greek economy. After the completion of the PSI, regarding the Greek bonds, the

adoption of the new economic program will improve the competiveness of the Greek

economy and it will help the recovery of the market. The Taxation system reform

will help consumption and companies to increase liquidity resources. According to

Governor’s of bank of Greece annual report (2011), the recapitalization of banks in

2012, will be an opportunity for reconstruction of bank section. Banks will earn again

the full trust of customers in order to increase the deposits.

THREATSA) Debt crisis in Greece reduce customer demand. Revenues in 2011 amounted to

766.265 from 813.207 million euros in 2010, 1.013.767 in 2009. The signifi-

cant reduction directly influences the profitability and liquidity of the bank. Β)

Increasing competition likely to impact margins. There is a significant pres-

sure on interest rate margins due to highly competitive between the four banks

with high degree of concentration of market shares (National Bank, EFG Eu-

robank, Alpha Bank and Peraus Bank). This pressure influences also the Risk

management to evaluate correctly and precisely.

PESTEL ANALYSIS1) POLITICAL ENVIRONMENT

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According to Governor’s of Greek Bank report (2009), Greece since 2009 has an in-

ability to access international markets due to great deficit that was created by the fin-

ancial crisis. The Greek government in 2010 agreed to accept a strict program in order

to get financial support through EU, IMF, and European Central Bank. Although the

deficit reduced scientifically, the country was under the fear of credit default since the

political instability because of the tough measures that occurred. The regression in-

creased, and the increase of non loan payment as a result. The banks also lost great

amounts of deposits because of the uncertainty in country; many customers trans-

ferred their money to other countries.

2) ECONOMICAL ENVIRONMENTThe measures regarding the program for recovery influence the bank industry and of

course it influences the bank of Piraeus. Indirect taxes are increased and they limited

the consumption. Banks loose liquidity because many customers preferred to transfer

their money in other countries. The recession leads to unemployment and poverty and

of course the number of non payment loans was increased dramatically. According to

Work institute report (2011), this fiscal policy is negative for development because

with the reduction of salaries and increase of direct taxes and austerity measures in

general, the outcome will be very little. The stock market has been influenced by the

financial crisis and the bank stock prices are very low. The lack of big investments be-

cause of bureaucracy and taxation is an important factor. There is always the possibil-

ity to leave the euro zone , voluntary or not, and of course the possibility for default.

Under those circumstances the Greek banks The slow market growth forces banks to

compete against each other for market share

3) SOCIAL ENVIRONMENT

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Greek society is suffering by the strict measures that promote recession and unem-

ployment. According to kathimerini (2012), the percentage of unemployment is 21,7

% . Greece΄s economy is estimated to shrink by about 20 percent in 2008-2012, mark-

ing the country΄s deepest and longest post-war recession. More than 500,000 jobs,

about in 2010, have been destroyed in the process. Loans for medium size enterprises

are limited and that sets barriers to development and creates unemployment.

4) TECHNOLOGY ENVIRONMENTRegitis (2010) indicates the significant influence of information technology, the

deregulation of international markets and the establishment of the economic and

monetary union in Greek bank Industry. Regarding the Bank industry, the Win bank-

ing of bank of Piraeus with many prices, is an example of technological progress. It

helps also the customers to earn time and the bank to reduce time and sources to ser-

vice. Piraeus bank is a pioneer in green banking by promoting energy solutions such

as photovoltaic.

5) LEGAL ENVIRONMENTAccording to IMF (2010) and IMF (2011) “The Memorandum of Eco-nomic and Financial Policies (MEFP) in two periods outlines the eco-nomic and financial policies that the Greek Government and the Bank of Greece will have to implement till 2015. These policies aim to address Greece’s balance of payments problems, correct Greece’s competitiveness gap, support growth and employment; re-store public finances to sustainability; secure financial system stabil-ity and to distribute the cost of adjustment in an equitable way, within our commitment to the common currency”.The Memorandum 1 and Memorandum 2 were approved by Greek parliament in order to promote procedures for reduction of deficit, reconstruction of economy and establish development.

CONCEPTS FROM FINANCIAL STATEMENTS

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 TABLE 1 PIRAEUS BANK RATIOS             2011 2010 2009

ROA (0,16) 0,01 0,41              

ROE (0.81) 0,17 6,85              

NIM 1,54 1,63 2,29

The above indicators can lead to conclusions about the status of the bank the period

2009 – 2011. The financial crisis affected the results of bank. The ROE ratio shows

the reduction from 2009 to 2010. The ROA ratio is falling. In 2011, ROA and ROE,

are negative. There loss because of PSI, haircut of Greek bonds, where all banks had

negative outcomes in their equity. In the year 2009, it shows a large reduction index

(0.41%), due to low net profits, which in 2010 shows net of tax profits, losses and not

profit. Williams (2007), implies that NIM Ratio (Net interest margin), is related to

market share held by a bank, operating costs, the degree of risk avoiding

administrative (managerial risk aversion), the volatility of interest rates, credit risk,

the size of its business bank, the tax cost, quality and management culture and the

liquidity risk. Regarding the ratio of net interest margin (NIM), the growth rates of the

index as an indicator of the pricing of the bank and for the ability to generate profits

from operations, the figures are stable with little difference in the last two years 2009

and 2010 and reduction in 2011. Tsamourgelis (2010) emphasizes the strong indica-

tion for the existence of Greek banking oligopoly by stating that although there was a

reduction of Liquidity between 2008 to 2010, the net interest margin increased from

2.5 to 2.,7 %.There are 66 active banks in Greece and in comparable countries such as

Norway, Finland and Austria have almost the double number of banks. The financial

statements of bank show :A) The shield of the Greek bank liquidity, the cash has

decreased gradually) As it will be explained below in table 2.,as crisis measures, it

has reduced the operating cost referring to the period from 2009 to 2011, including

wage costs.

TABLE 2Amounts in thousands of euro

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2011 2010 2009TOTAL OPERATIONAL EXPENSES 494559 532514 550409

RISK MANAGEMENTAccording to Piraeus bank (2011), The Division of Risk management, the Risk

Management Committee, is entrusted by the Board in accordance with the P.D./

TE.2577/2006 to cover any activity in the Group and responsible for the design of

policy on risk management and capital adequacy. The division of credit group which

is responsible for the secondary evaluation of taking of the credit risk and for the

credit policy. The Commission for the management Assets – Liabilities (ALCO), is

responsible for the strategy regarding the efficiency against business risks. The

Division of risk management group supervised by the group chief risk officer covers

the entire range of activities for all types of risk. The chief risk officer is appointed by

the Board of Directors. A single policy is applied regarding the Liquidity Risk, related

to international practices of engaging liquidity needs for a period crisis of one week to

month. The liquidity risk management is measured by the efficiency of a bank to meet

its payment obligations. In 2009 the adverse liquidity conditions forced the Bank to

expanding its funding sources through securisation of mortgage loans, and corporate

loans and by a loan of 450 million loan from Schuldschein bond and an 50 million

long term (12years), from European Investment Bank. According to Annual Report of

the Governor of Bank of Greece (2011), the domestic credit institutions excluded

from international markets and face the problem of reduce of liquidity from

International monetary fund and European central bank. Liquidity gap analysis is used

in order to evaluate the expected cash flow. Stress tests are used to examine the

stamina of the bank. The Bank participates in the regulation of the Law on

"Enhancing the liquidity of the economy" (Law 3723/2008). The Bank uses stress

testing scenarios (Stress Testing) and assesses their impact on liquidity ratios. Regard-

ing the credit risk, the bank has a special department to assess the measurement of

credit risk by using credit ratings for the creditability of the customer. For the Corpor-

ate customers, system ratings for creditability such as Moody’s risk advisor, special

lending and object finance. Application scoring system is for individual customers.

Stress tests according to Financial Sector Assessment Program are included to evalu-

ate the procedures. In 2010, pan – European stress (2010 EU Wide Stress) testing ex-

ercise of European Banks proved the ability of Piraeus bank to resist to crisis. In 2011

Piraeus Bank participated in the exercise stress test on European level (2011 EU Wide

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Stress Testing Exercise of European Banks) in cooperation with Bank of Greece, the

European Central Bank, European Commission and European Systemic Risk. Market

risk is the risk of incurring losses due to adverse changes in the level or the volatility

of market prices and rates, including equity prices, interest rates, commodity prices

and currency exchange rates, and changes regarding their exchange. Piraeus bank

uses the parametric value at Risk methodology with a one day level period and 99%

confidence level. Estimation of the Value at Risk is compared on a daily basis

against the actual change in the value of the portfolio due to the changes in market

prices. Stress testing scenarios measure the effects of extreme events of the stock

market, on the Bank’s assets and liabilities. Changes in interest rates affect the

amount of the net interest income. Piraeus bank has an effective risk management

procedure, the Interest rate gap analysis to measure the risk through the earnings at

risk, for evaluation of related impact to projects. In the three years period , in table 3.

it is obvious in 2011, that there is an increase in the VAR of the portfolio transactions

of the bank due to increased volatility because of the interest rate risk positions in

Greek bonds. According to Capital gr, Black Rock solutions on suggests the addi-

tional funding needs of about 15 billion euros for local lenders regarding the proced-

ure of recapitalization of Greek banks. There is a plan for sale of its subsidiary of the

Group in Egypt in order to decrease loan portfolios and increase the capital.

TABLE 3

TRADING

BOOK TOTAL

VAR

VAR

INTEREST

RATE RISK

VAR

EQUITY

RISK

FOREIGN

EXC. RISK

VAR

COMMODITIES

RISK VARDIVERSIFICATION

EFFECT

2011 8,29 8,06 0,04 1,02 0,21 -1,04

2010 4,05 0,86 3,08 2,68 0,16 -2,73

2009 9,22 6,4 5,44 3,3 0,13 -6,05

The decrease in VAR, in 2010 from 2009, is due to lower trading-book positions in

bonds. The reduction accompanied by an increase in positions available for sale bond

portfolio that has the price 31.12.2010 VaR € 15,53 million against price VaR € 4,9

million on 31.12.2009. Interest rate risk is the risk of loss resulting from changes in

market interest rates. Changes in interest rates can affect the results of the bank. The

Interest Rate Gap Analysis is a technique that gives safe assessment. The Country risk

is obvious in period 2009 -2011. According to Willkin (2004), “Country risk includes

11

sovereign risk, that a government would fail to cover its sovereign obligations due to

either unwillingness or inability”. Willkin (2004), implies that political risk is related

to unwillingness to pay under the significant influence of financial and economic risk.

Kapopoulos and Lazaretou (2011), indicate that a diversification exists in Greek

banking system although the high degree of lending concentration. Piraeus bank also

has an efficient operational risk management (ORM), framework based on

identification, assessment, measurement, monitoring and mitigation according to the

regulatory requirements. Hardouvelis et al( 2008) imply that the total private con-

sumption expected to fail , adversely affected by the stringent lending criteria by

banks. This policy is against the grow and it sets barriers to medium size enterprises,

Greek banks are supported with 28 billion euros in 2007, in order to promote their op-

eration and cash liquidity in the market. According to Governor’s of the bank of

Greece report (2011) the Economic recession combined with increased taxation leads

to an estimation of bad loans amount of 50 billion euros but the solution for grow is

the taking of risk not to avoid it by reducing loans. An example of consequences re-

garding the effort to reduce the cost, Piraeus bank will proceed to reduce the payroll

cost by reducing salaries or by promoting part time schedule.

CORPORATE GOVERNANCEThe corporate governance mechanism of bank of Piraeus is based on : the composi-

tion of the Board of Directors, the audit committee , risk management committee the

general division of Corporate Governance, the internal corporate governance and op-

erating regulations regarding the transparency and symmetric information , the code

of conduct regarding the obligations of the bank employees, and the general division

of internal audit under act 2577/2006 of the Governor of the Bank of Greece) , the

compliance division and investor relation, Shareholder Information and Corporate

Announcement units. The most essential mechanism is the board of directors, and ac-

cording to Agoraki (2010), a balanced in size and composition (best mix of executive

– independent members rather than exaggerate number of independent), board of dir-

ectors is the solution to agency problem and it enhances the corporate governance in

order to protect the shareholder rights and every third interest party and generally the

society. Staikuras et al., (2007), indicate the significant relations of bank profitability

and size of the board of Directors. But it’s also concluded that the adjustment of non

12

independent members beyond a certain number, limits the performance of the firm

and this problem can be solved by the consultant role of the board. There are also

studies that indicate the disadvantages of independent members of the board, actions.

The Board of directors seems to be balanced in size. The Board of Directors was re-

constituted as a body and designated its Executive and Non - Executive Members, in

accordance with Law 3016/2002, as follows: Six Executive Board Members, three

non executive vice chairmen and eight non executive board members and one Repres-

entative of the Greek Government.

CONCLUSIONAccording to Piraeus Bank report (2011), the fiscal situation in Greece is the most

serious risk for 2012 regarding the liquidity of the Bank and the quality of loan

portfolio. The recapitalization will be a serious measure to respond to possible danger.

According to Capital gr (2012) important indication of improvement is the upgrade of

Fich to B- for Piraeus Bank because the Greece’s debt restructuring and the

recapitalization in the next September. The bank has special procedures in order to

identify the nature of risk.The future plans of Bank of Piraus are the management of

liquidity risk , the capital adequacy , loan quality , and to reduce operation cost. The

Greek banks and among them the bank of Piraeus, survive with the support of Greek

government, IMF, European Bank , especially after the PSI (private section involve-

ment) haircut. Hope (2010) implies regarding the initiative of Piraeus Bank to

acquire 33.04 per cent of Hellenic PostBank for €329millions and also €372m for

77.3 per cent of Agricultural Bank of Greece, as an opportunity to help the entire bank

sector to access funding under the Greek sovereign default. The effort was not suc-

cessful but it emphasizes the character of Greek bank section where mergers and ac-

quisitions are the main strategic movements. The bank industry waits according the

program the recapitalization in September 2012. By supporting the banks, the risk of

default is minimized and the Greek economy will proceed to recovery and reconstruc-

tion.

REFERENCES

13

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