Of Eleftheria Kourtali
Greek banks are now returning to normal, with the NPE index expected to fall to 5% next year for the industry as a whole. The new higher target prices. The valuations of bank shares are attractive, with a significant discount compared to the banks of the region and with rally margins of 50% -60%. Turn to new loans and dividend distribution.
The issue of asset quality for Greek banks seems to be a thing of the past and the overall NPE index of the sector should approach 5% by 2022, according to Wood estimates. “The strong appetite for securitization suggests that the execution risk for outstanding transactions is relatively low and we can now safely say that Greek banks are becoming regular financial institutions,” he said.
As a result, Wood is now focusing on increasing loans, margins, commissions and forecasts, ie the key elements that will determine the profitability of the now “clean” Greek banks. The house believes that the investment case for the Greek systemic banks is relatively simple, with the recovery of profitability being visible due to the decent margins and the lower risk cost.
The very simple bullish story
The average bank in the region trades with a price index to book value of P / TBV approximately 0.6x in 2021 in ROTE range 6-7%. This implies an average P / E of 9-10x. In Greece, only Eurobank trades at similar levels with the banks of the region, with P / TBV (0.59x in 2021), however, due to the higher ROTE (close to 8% in 2021 and 10% in 2022), the P / E index is still with a 30% discount to peers. Ethniki, Alpha and Piraeus are negotiating with an even bigger discount (30% in P / TBV terms, about 40% in P / E terms).
Therefore, the valuations of Greek banks, as Wood points out, remain attractive, with Greek banks trading, on average, below 0.5x in terms of estimated P / TBV of 2021E, with the P / E index moving at 6x in 2022 and at 5x in 2023. The house thus reiterates their bullish view on the outlook for banking stocks and sees margins of 50-60% (compared to last Thursday’s close).
Specifically, it recommends buy for all four most systemic banks – maintaining the recommendation for Alpha Bank, National Bank and Eurobank and upgrading from hold to buy the recommendation for Piraeus Bank. In terms of target prices, it upgrades to 1.30 euros from 1.10 euros before the target price for Eurobank, to 4.10 euros from 3.50 euros before the target price for the National Bank, to 1 , 70 euros from 1.50 euros the “target” for Alpha Bank, while for Piraeus Bank now sets the target price at 2 euros from 1.90 euros before.
They leave the NPEs behind
More specifically, as he points out, now that the NPEs are largely off-balance sheet, the investment case for Greek banks is quite simple: a return to profitability, which is largely driven by a reduction in risk costs to a relatively conservative level. of 60 base units. Credit expansion recovery, decent margins (net profit margins over NIM over 2%), opportunity to expand commissions (up to 50 basis points average) and efficient operations (cost / income ratios -C / I- in 50%) are expected to increase their size, enabling Greek banks to record a sustainable ROTE return on equity at 8-10%.
The increase in loans is the new “issue”
Loan growth in 2021 remains low (currently below 1%), despite strong macroeconomic recovery, Wood notes. However, there are many reasons to expect a reversal of trends from 2022 onwards, which are: 1) long leverage period, with loans to GDP now below EU averages, 2) support for corporate lending by the Fund for Recovery and Durability, 3) improving property prices and higher incomes, and 4) a banking system with increasing liquidity (loan-to-deposit ratios well below 100%), with sufficient capital. “We believe that all of the above could support a medium to high single-digit increase in loans in Greece in the medium term,” the house emphasizes.
No further capital action is needed, the dividend debate begins
Following the completion of the capital increases by Piraeus Bank and Alpha Bank, Wood does not expect new increases in the short to medium term. The average total TCR ratio in the system is close to 17%, indicating a “cushion” of 250-300 basis points in order to facilitate the development of risk weighted assets (RWA) and start discussions with regulators on dividends, as he emphasizes. He expects that Eurobank and NBG will pay a small dividend in 2023, from the profits of 2022, with Alpha Bank following the same year.
End in terms of potential risks to the industry, Wood reports the highest COVID-19 related NPE news due to new variations, delays in the execution of the Recovery Fund plan, pressure on lending spreads, weaker pricing in securitization trades, large exposure to industry capital in Deferred tax (DTC) and higher government bond yields.
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Source From: Capital
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