by Her Eleftherias Kourtalis
Eurobank Equities remains positive for Greek banks, maintaining the buy recommendation and pricing in a 24-51% rally. As he points out, the very positive outlook for the sector remains intact, at a time when Greek banks benefit from a combination of solid liquidity and healthy capital “cushions”, while their valuations remain low. According to him, the market will increasingly focus on return on equity, while in the short term some attention is needed in terms of fluctuations in the investment climate, in view of the elections on May 21. He also estimates that the distribution of dividends will start in 2023, with Ethniki at the start, and that in 2024 Alpha Bank and Piraeus will follow.
The global turbulence in the banking sector since early March has tested the resilience of Greek banks, more in terms of sentiment than in terms of fundamentals, as Eurobank Equities points out.
However, the rise in risk premiums accelerated by the fallout from this turbulence led to a sell-off of more than 20% by Greek banks in March. With funding markets now calmer and confidence in the EU banking system gradually restored, the brokerage believes earnings visibility has improved again, which was reflected in the 8 % of Greek Banking Index from March 2023 trough. .
Greek banks benefiting from both strong liquidity (LCR coverage ratio at 200%, among the highest in the EU), healthy capital buffers (CET ratios 1 at 14.9%) and CRE commercial real estate portfolio less risky than in other markets (given adequate forecasts and the state of the domestic commercial real estate market), Eurobank Equities believes that the very positive outlook for the sector remains intact.
In this context, stock exchange raises target pricess, and more precisely at 1.66 euros against 1.63 euros before for Alpha Bank with a 46% increase margin, at 5.90 euros for National Bank with a 24% increase margin and at 3.24 euros for Piraeus against 2.47 euros before, with an increase of 51%, maintaining the buy recommendation for all three.
Commenting on the results for the fourth quarter of 2022, Eurobank Equities points out that the performance of Greek banks has been spectacular, mainly thanks to the impressive growth in net interest income NII (+23% over the quarter) above market expectations. Pre-provision organic PPI revenue also increased 26% quarter over quarter, as higher organic revenue was only partially offset by higher inflated and seasonal operating expenses. Organic asset quality trends were favorable (average NPE at 6.1%, -80 bps over the quarter), while full regulatory capital also improved thanks to positive results and transactions (CET 1 average at 13.7%, +40 bps on a quarterly basis)
As a result, the stock market raises its estimates for adjusted net income in 2023-2024 by 12% and 6% respectivelyincorporating the highest ECB interest rate (300 bps, leaving room for higher levels, given higher market estimates).
It also increases global forecast for the NII of 9% in 2023 (and a further 4% in 2024) forecasting 21% year-on-year growth in 2023, supported by loan growth of 5% combined with NIM’s net interest margin expansion of 43 bps. Eurobank Equities estimates also reflect a progressively higher cost of funding for the evolution of the composition of deposits (term deposits at 28% in 2023), higher deposit betas (0.1-0.6x for sight and term deposits respectively), lower credit spreads, cost of risk at 100bps (compared to 60bps for EU banks during the COVID cycle) and higher MREL costs .
According to his estimates, the NPE index for all banks from 7% in 2022, it will fall to 6.4% this year, 4.9% in 2024 and 4% in 2025.
Regarding the distribution of dividends, forecasts a €0.07 dividend from Ethniki in 2023 (from 2022 earnings), implying a 10% payout rate that will gradually increase to 30% by 2025 and a 20% payout for Alpha and the Piraeus the following year (from 2023 profits) . Although these indicators are not impressive, the recovery of dividends will be the main catalyst for Greek banks to signal a return to normal.
As the brokerage points out, Greek bank valuations remain low, as it believes the market will increasingly focus on RoTE’s return on equity. In particular, as he points out, after many upheavals, Greek banks are up 24% on an annual basis, after outperforming banks in the EU region (14% over the same period). However, valuation remains lackluster with a 2023 P/TBV book value below 0.6x overall, a discount of more than 20% vis-à-vis banks in the periphery of the EU (effectively incorporating a cost of equity of 16%).
SO, the risk-reward profile seems positive, given valuations still under pressure, especially given the continued improvement in Greek banks’ fundamental positions (and capital accumulation), the upcoming divestment of state holdings and the possible return of Greece to the investment category at the end of 2023-beginning of 2024.
With investors gradually focusing on RoTE from capital, the brokerage expects all Greek banks to move up the valuation spectrum as they are on track for double-digit RoTE in 2023 (a high figure for Alpha).
So, reiterates the buy recommendation for all the banks it covers with the caveat that in the short term they are likely to remain sensitive to swings in investment sentiment, especially in view of the main risk event for Greece in 2023, namely the elections of May 21.
