NBG Securities: NPEs ‘chapter’ closes for Greek banks – The 3 conditions for the re-rating of their shares

Her Eleftherias Kourtali

Greek banks are turning the page, overcoming the stage of clearing their balance sheets by NPEs and focusing on supporting economic growth and credit expansion. This is the conclusion of the new report of NBG Securities, where it upgrades its recommendation for Alpha Bank to outperform, maintaining the target price of 1.30 euros, while confirming the neutral recommendation for Eurobank and Piraeus Bank, with a new price- target for the first at 1 euro from 0.85 euros before, and unchanged at 1.50 euros for the second.

The upgrade of Alpha Bank, as the stock exchange points out, is based on the increased growth margins that its share now offers, due to the decline that has occurred recently and from its previous evaluation by NBG. In addition, it made changes to Eurobank’s rating model, incorporating the best-of-expected performance so far in 2021. This also resulted in an increase in the target price. The recommendation of NBG Securities remains neutral as the growth margins are set at 4%.

In the medium term, and subject to a gradual return to normalcy after the pandemic, NBG Securities’ main assumptions continue to be: 1) successful completion of NPE clearing as well as reduction of new NPEs, “Greece 2.0” plan, 3) continuation of cheap financing through the ECB and 4) economic growth in Greece with only targeted restrictive measures.

The discount, profitability boost and dividends

The main factors enhancing the profitability of Greek banks, as noted by the stock exchange, are expected to be the reduced forecasts after the clearing of the NPEs and the improvement of the income from the credit expansion. Greek banking stocks are trading on average with a P / TBV index at 0.5x for 2022, ie at a significant discount of 47% compared to the banks in the region of Europe.

According to NBG Securities, this discount could be reduced if the pending NPE securitizations are completed as planned, if the growth expectations for the Greek economy are met – leading to credit expansion for the banks, and if the bank administrations deal effectively with the over-reliance of their funds on the DTC.

After years without dividend distributions, Greek banks have announced that they will consider this possibility in the coming years. Alpha Bank and Piraeus Bank have indicated 2023 as a possible first year of dividend distribution, while the management of Eurobank stated that it will start a dialogue with the supervisory authorities in early 2022 on dividend distribution. In NBG Securities ‘view, this is a reasonable scenario as the banks’ capital base is now in a much better position than it was in the past. Dividend distribution will attract investors who have been discouraged by their absence in previous years.

No surprises are expected in the third quarter results

Greek banks announce the results of the third quarter within the next two weeks, starting with Piraeus Bank on November 19. While it is expected that the annual net interest income (NII) will decrease due to securitizations, however, it estimates that the NII from the serviced loans will move at stable levels. NIIs continue to benefit from cheap ECB financing, according to NBG Securities. At the same time, commissions are expected to be strong, mainly due to bancassurance, asset management and other activities, while operating expenses are expected to remain stable or decline slightly. Risk costs are also expected to decrease after the reduction of NPEs. Overall, the stock market expects an organically profitable third quarter for Greek banks, excluding losses caused by securitizations.

After NPEs, the focus shifts to credit expansion

NBG Securities appears confident that Greek banks will successfully complete their NPEs clearing plans and achieve single-digit NPEs by the end of 2021 or 2022. This is supported by the good track record they have shown in completing securitizations so far. In addition, it does not expect that the formation of new NPEs will significantly increase their profitability.

With the imminent completion of the clearing of the NPEs, he emphasizes, the focus will now be on credit expansion. As expected, the serviced loans of Greek banks will increase by 21.4 billion euros by the end of 2022 and compared to the first half of 2021, giving a significant boost to both banks’ revenues and their profitability. This will lead to increased ROTE equity ratios, which are expected to move in high single-digit percentages in 2022 and beyond and towards 2023.

“Thorn” the DTCs

However, the stock exchange emphasizes that Greek banks are heavily dependent on the Greek State through their positions in Greek bonds, deferred DTC taxation and guarantees from the “Hercules” scheme, a dependency that increases with each NPE securitization included in this. The low quality of capital, which consists mainly of DTC, and the high dependence on the state make Greek banks less favorable for foreign investors, making the raising of funds more expensive. NBG believes that the quality of capital and the DTC will be the next key issue that Greek banks will have to face after completing the NPE liquidation plans.