Analysts for Greek banks remain ‘bulls’ despite the strong rally

Her Eleftherias Kourtali

Despite the rally of almost 30% recorded by the banking index on the Athens Stock Exchange, investment houses remain buyers of Greek banks and “see” a further rise in their shares on the board of Athens Avenue.

2022 has been characterized by analysts as the year of the large rotation in shares and “value” sectors, value trade, and the Greek market due to the large “weight” of banks in the index and in the overall trading activity is one of more attractive “bets” this year, something that has already been seen from the significant overperformance of the ATHEX. in relation to the key European indices having occupied the first place in returns but also the significant increase of the turnover.

The lever of this rise was the banking shares which, as at the end of last year and now, continue to receive successive votes of confidence from the international companies, which increase the target prices and put this Greek on their radar very strongly. play. According to domestic analysts, the General Index has shown strong resilience and defenses to international pressures, having moved autonomously continuing the January effect, and is attempting a total return to normalcy with the main lever banks that have been in the lead since the beginning of the year. The increase in the capitalization of banking shares is not a cyclical phenomenon, it is a move related to the change in the outlook of foreign portfolios for the perspective of the country and then the margin for improvement in valuations from the increase in profitability.

One of the main reasons for the bullish attitude of analysts is the fact that the valuations of the shares of systemic banks, even after the rally, are not justified by the change of page made by the industry, with the market, as the euro emphasizes, not has also assessed the progress but also the strong prospects of normalization and achievement of European regularity both in terms of return on equity and NPEs.

The transformational plans of the administrations that are implemented in combination with the implementation of the recovery plan give new “air” to the industry which now leaves behind the problems and risks in its balance sheets, is well capitalized and looks at the development and increase of new loans. .

In addition, the new monetary policy environment with the start of the ECB interest rate hikes, as widely estimated by the market may occur in late 2022 to early 2023, is expected to significantly benefit Greek banks by boosting revenues. and margins, something that will offset with the above any negative (but manageable) impact on their capital the rise in yields and spreads of Greek bonds.

Another “gift” from the ECB to Greek banks is the extension of the waiver it has given due to a pandemic to accept Greek bonds as collateral for financing operations, which is expected to be decided soon and long before the end of the waiver next June, which will further support the liquidity and financing of Greek banks, allowing them to support the economy.

The trump card for Greek banks from interest rate hikes

In the “strength test” conducted by JP Morgan, Morgan Stanley, Axia Research and Goldman Sachs, the possibility of an increase in ECB interest rates combined with an increase in Greek bond yields, the conclusion was that Greek banks have little to lose from their funds and earn a lot in their income by adjusting the floating cost of loans.

JP Morgan economists expect the ECB to raise interest rates for the first time in December with three additional 25-point increases. next year. Greek banks have a relatively high exposure to interest rate hikes, although very low interest rates mean that the benefit will become more visible after the first 50-100 bp increases.

Based on the increases it expects for 2022-2023, it estimates an increase of 8% -11% in earnings per share of Greek banks in 2024, adding an average of 70 basis points to the return on equity ROTE. This can offset the pressure on capital in a sustainable way in the medium term, with the possibility of additional benefit from possible further interest rate increases in 2024.

Interest rate hikes reinforce the positive story of the growth of Greek banks, say Morgan Stanley analysts. Each 50 bp increase in interest rates adds 2% to net interest income for Alpha Bank and Piraeus and 4% for Eurobank, which translates into a positive impact of 6%, 8% and 10% respectively for the year 2023.

Axia estimates that the ECB interest rate will not increase until the end of 2022 and this means that the banks’ net interest income will start to increase from 2023, ie the profit will be backward. For the first 100 basis points of interest rate hike, Alpha Bank (+55 bp in RoTE equity return) and Eurobank (+62 bp), are in the best position in terms of boosting profitability, compared to Piraeus Bank (+35 bp) and Ethniki (+6 bp), due to the different levels of deposits.

Goldman Sachs points out that higher interest rates will boost the net interest margins (NIM) of Greek banks, with each 25-point bond yield increase adding 2% to the levels, which will partially offset the negative (but manageable ) impact on capital.

The rise of spreads is manageable

Regarding the rise in yields and spreads recorded by Greek bonds, with Greek banks holding a large portfolio, analysts point out that the effects are manageable.

As noted by JP Morgan, with the yield on the Greek 10-year bond now hovering above 2.6% from 0.9% in September 2021 and the spread against Germany at 2.3% from 1.1%, the Negative impact on the CET1 capital ratios of Greek banks reaches 40 basis points. It estimates that Eurobank will have the biggest impact at 70 bp. and the lowest National at 10 p.m.

For its part, Morgan Stanley estimates that an expansion of the bond spread by 50 bp, has a small impact on the CET1 capital ratios of Greek banks, of the order of 7-12 bp.

According to Axia Research, the rise in government bond yields and the consequent fall in their prices will put short-term pressure on equity as well as the capital position of banks, due to the negative impact on financial assets. Thus, the house estimates that the “hit” in the CET1 capital ratios of Greek banks will range at 27-67 basis points in the first quarter of 2022 and depending on how many government bonds they hold, which is not welcome but is manageable. Piraeus will be less affected (27 bp decrease in CET1), followed by Alpha Bank with 67 bp. Eurobank with 54 points and Ethniki with 51 points.

However, he stressed that all banks are now well-capitalized, while in the medium term the growing willingness for new loans leading to higher disbursements, combined with a growing interest rate environment, provide a significant positive catalyst for the industry.

Attractive valuations

Greek banks have now faced all the issues of their balance sheet, are expected to record single-digit NPEs, capital indicators have improved significantly from the moves they made in 2021 (AMK, other actions such as AT1 / T2 and swaps), and the liquidity remains abundant and is expected to be further enhanced by forthcoming bond issues within the MREL targets. However, the discount of their shares in relation to the rest of Europe is large and their valuations are very low and are not justified by the improvement recorded in their sizes, as analysts note.

Despite the rally of the industry since the beginning of the year, having outperformed by 12% of the corresponding European industry, Axia maintains its positive attitude. The strong winds (a) of strong domestic lending appetite through macroeconomic improvement, (b) increased commissions on asset management, bancassurance and loan arrangements, (c) lower costs through efficiency programs; and (d) of normalized risk costs still exist. Thus, as he points out, despite the re-rating that has been noted, Greek banks are traded with an average TBV for 2023 at 0.51x, with a 35% discount compared to European banks and a similar RoTE 9.1%.

Therefore, Axia maintains the Buy recommendation for all four systemic Greek banks, while the target price for Alpha Bank is 1.80 euros, for Eurobank 1.50 euros, for NBG 6 euros, and for Piraeus at 2.15 euros. As he emphasizes, the valuations of Greek banks are attractive as they trade only 0.39 times to 0.67 times the TBV of 2023. In terms of profits, the relevant P / E ratios for 2023 range from 5.7x to 7.1x .

Their shares are traded at discounts ranging from 30% to 50% compared to their respective banks in the EU, despite a faster increase in earnings per share (EPS) and an increase in RoTEs of around 10% by in 2024, Optima Bank points out.

This is unjustified in Optima’s view and it expects further re-rating of their shares as soon as the market realizes that business plans are feasible and the goals are achieved. In addition, he expects dividends to return as early as this year (payable in 2023). Specifically, he expects that Eurobank and NBG will distribute approximately 100 million euros each in dividends, from the profits of 2022.

Thus, Optima recommends buy for all Greek systemic banks and prefers NBG from Eurobank and Alpha from Piraeus. The target price for the EIB is 5.42 euros%, for Alpha Bank it is 1.77 euros, for Eurobank it is 1.38 euros and for Piraeus it is 2.01 euros.

Greek banks are at a multi-year turning point, and they leave behind the risks and proceed with the growth, notes the side of Goldman Sachs, which proceeded to upgrade its target prices.

Thus, it now gives a buy recommendation for Eurobank and Alpha Bank and a neutral recommendation in Piraeus, while it does not evaluate the National Bank. For Eurobank it increases the target price to 1.4 euros from 0.65 before, for Alpha Bank it increases the target price to 1.68 euros from 1.12 euros before and for Piraeus it increases the target price to 1 , 70 euros from 1.47 euros before.

As he emphasizes, the shares of Greek banks have recorded a rally of 30% in the last six months, reflecting the progress in the reduction of NPEs, the general operating performance and the macroeconomic recovery. However, the risk perception of Greek banks remains high, with the cost of equity at 14.5% and as he emphasizes, the market has not yet fully assessed the progress of the sector and thus estimates that their shares have further room for growth.

The rally of Greek banks since the beginning of the year, made Morgan Stanley renew its bull scenario for the industry and increase its estimates for net income by 5-10%, based on the rise in interest rates which the ECB will move by 50 basis points by March 2023. It also revised upwards its target prices for its shares, which indicate an increase of 4-12%.

Thus, the new target prices and recommendations are as follows: Overweight recommendation for Eurobank with a target price of 1.24 euros from 1.07 euros before, and equal-weight recommendation for Alpha Bank and Piraeus, with price- target 1.60 euros from 1.40 euros before and 1.72 euros from 1.52 euros before, respectively.