Greek banks are struggling with low fees and commission income levels, according to the European Commission, despite the country's lenders being criticized for hitting customers with excessively high costs for banking services.
With the country's lenders having been caught up in a dated banking model that relies heavily on revenues from wide net interest margins, they have less of an emphasis on fees and commissions.
In Greece's Enhanced Surveillance Report, the European Commission said that net fee and commission income accounts for 14.6 percent of operating income for Greek banks, versus a euro area average of 30 percent, as of end June 2019. This is posing a risk to their financial health.
"Greek banks are particularly exposed in case of a narrowing of their net interest spread in the current low interest rate environment," says the European commission
In other words, if net interest margins come under further pressure due to the European Central Bank keeping rates close to zero for a long period of time then lenders will see a sharp drop in profits as they will not be able to offset the lower interest income with higher revenues from fees and commissions.
How can this problem be solved? Greek bank officials informed the commission that a solution to the problem focuses on differentiating income sources and raising more income from fees and commissions on products such as bancassurance and asset management services.
The problem, however, is that the country's economy does not support the development of these new business activities, at least in the short term. Sharply lower household income levels and low savings do not offer many opportunities to boost revenues by selling bancassurance products and asset management services. Looking ahead, this could be achieved with a stronger economy pushing more private capital into private insurance and portfolio investments under the condition that lenders have prepared suitable for these services.
Attempts so far at increasing income from fees have not met expectations. National Bank's nine month results show that net revenues from commissions rose by 5 percent, versus a 7 percent rise in operating income. As a percentage of operating income, commissions have dropped to 17 percent, from 17.2 percent.
The problem of low commissions is in line with low profitability levels shown by Greek lenders just when they need to boost profits and ease pressure from reducing nonperforming loans.
As pointed out by the commission, return on equity remains low at 2.6 percent against the euro area average of 6.4 percent. Results have been partly boosted in some cases by non-recurrent trading gains, mainly reflecting the positive revaluation of Greek sovereign bond holdings, adds the report.
Other recommendations made by the European Commission to Greek lenders is to further reduce staff levels and costs as a means of improving profitability.