His Eleftherias Kourtalis
Eurobank Equities remains positive for Greek banks, maintains a buy recommendation and sees room for a 24-51% rally. As he points out, the very positive outlook for the sector remains intact, at a time when Greek banks enjoy a mix of strong liquidity and healthy capital “cushions”, while their valuations remain low. According to him, the market will increasingly focus on return on equity, while some attention is needed in the short term regarding fluctuations in the investment climate, in view of the May 21 elections. He also estimates that dividend distribution will start in 2023, with Ethniki at the start, and Alpha Bank and Piraeus will follow in 2024.
The global turmoil in the banking sector since the beginning of March has tested the resilience of Greek banks, more in terms of confidence than fundamentals, as Eurobank Equities points out.
However, the increase in risk premia accelerated by the consequences of this turbulence led to a sell-off of more than 20% in Greek banks in March. With funding markets now calmer and confidence in the EU banking system gradually restored, the brokerage believes that earnings visibility has improved again and this was reflected in the 8% recovery in the Greek banking index since the minimum of March 2023. .
With Greek banks enjoying a combination of strong liquidity (LCR coverage ratio of 200%, one of the highest in the EU), healthy capital buffers (CET 1 ratios of 14.9%) and a commercial real estate portfolio of CRE less risky than in other countries. (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 market raises target pricess, and specifically at 1.66 euros from Alpha Bank’s previous 1.63 euros with an increase margin of 46%, at 5.90 euros from National Bank with an increase margin of 24% and at 3.24 euros of Piraeus from the previous 2.47 euros, with a rise of 51%, maintaining the buy recommendation for all three.
Commenting on the fourth quarter 2022 results, Eurobank Equities highlights that the performance of the Greek banks was spectacular, mainly thanks to the impressive growth of the interest margin INI (+23% in the quarter) which exceeded market expectations. Pre-provision organic PPI profit was also up 26% qoq as higher organic revenue was only partially offset by inflated and seasonally higher operating expenses. Organic asset quality trends were favorable (average NPE at 6.1%, -80 bps in the quarter), while fully loaded regulatory capital also improved on the back of positive results and transactions (average CET 1 in 13 .7%, +40 bp quarterly)
As a result, the stock market raises its estimates of adjusted net income in 2023-2024 by 12% and 6% respectivelyincorporating the highest ECB interest rate (300 bp, leaving room for higher levels, given the highest market estimates).
also increases general forecasts for NII at 9% in 2023 (and another 4% in 2024) forecasting 21% YoY growth in 2023, supported by 5% credit growth combined with NIM net interest margin expansion of 43bp. Eurobank Equities estimates also reflect a progressively higher funding cost to change the deposit mix (term deposits at 28% in 2023), higher deposit betas (0.1-0.6x for demand and term deposits respectively) , lower credit spreads, the cost of risk by 100bp (versus 60bp 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 drop to 6.4% this year, 4.9% in 2024 and 4% in 2025.
Regarding the distribution of dividends, predicts a €0.07 dividend from Ethniki in 2023 (from 2022 earnings), implying a 10% payout ratio gradually increasing to 30% by 2025 and a 20% payout for Alpha and Piraeus the following year (as of 2023 profits). Although these indicators are not impressive, the resumption of dividends will be the main catalyst for Greek banks signaling their return to normalcy.
As the brokerage highlights, Greek bank valuations remain low, while it estimates that the market will increasingly focus on RoTE capital returns. In particular, as he underlines, after many shocks, Greek banks are 24% higher on an annual basis, having outperformed banks in the EU region (14% in the same period). However, valuation remains sluggish with 2023 P/TBV book below 0.6x overall, a discount of more than 20% vis-à-vis banks in the periphery of the EU (effectively incorporating a 16% cost of capital).
Therefore, the risk-reward profile looks positive, given valuations still under pressure, especially in view of continued improvement in Greek banks’ fundamental positions (and capital buildup), upcoming divestment of state holdings, and possible return of Greece to investment grade by end-2023 or early 2024.
With investors gradually shifting their focus to the RoTE of equity, the brokerage expects all Greek banks to move up the valuation spectrum as they are on track to achieve double-digit RoTE by 2023 (high single digits for Alpha). .
That’s why, reiterates the buy recommendation for all the banks it covers with the caveat that, in the near term, they are likely to remain susceptible to fluctuations in investment sentiment, especially in view of the main event risk for Greece in 2023, namely the May 21 elections.