Wood: New target prices for Greek banks and buy recommendation – The implications for the industry of the Russian invasion of Ukraine

Of Eleftheria Kourtali

Wood adjusts its forecasts for Greek banks to take into account the indirect effects of geopolitical risks, concluding that it maintains its positive stance for the industry by seeing margins of 25% up to 41% on the board.

He points out that although it is still too early to make a full assessment, he expects higher inflation to lead to lower disposable income and a milder GDP growth in 2022/2023, leading to slower loan growth and higher risk costs.

Mitigating factors for Greek banks, however, include the timely reduction of the NPEs’ legacy, a resilient and proven return portfolio, the possibility of raising interest rates, the implementation of RRF plans, a good tourist season (with very low base results) and high liquidity reserves between households and businesses.

Overall, although the target of a 10% ROTE equity return for Greek banks appears to be in jeopardy in the short term, Wood expects decent profitability in 2022/2023 and reiterates its positive stance on the industry, with the National Bank and Alpha Bank.

More specifically, as Wood points out, Greek banks have very little direct exposure to Russia and Ukraine, but it updates the key assumptions used in its models for the secondary effects of the crisis. It now forecasts a 4-5% increase in industry loans in 2022-2023 (up from 6-7% previously), a medium single-digit increase in commissions versus expectations for a high single-digit increase in commissions before, and places risk costs at 70-80 base units in 2022, at 60-70 bp. in 2023 and at 50-60 p.m. in 2024 (Wood’s previous case was 60 bp from 2022 onwards). The above updated assumptions lead to reductions in its forecasts by 10-15% in 2022 and 2023, and 5-10% in 2024, indicating a slight delay in the target for ROTE at 9-10%.

The temporary setback, however, is manageable, as Wood points out. It now expects a ROTE range of 8-9% in 2022 and 2023 for Eurobank and NBG, with a target of 10% to be achieved in 2024. For Alpha, it expects a ROTE of 5-6% in 2022, an improvement to 7% in 2023 and> 8% in 2024. For Piraeus, it expects ROTE> 8% from 2024 onwards.

Despite the temporary delay, he believes that the long-term investment case of the Greek banking sector remains intact, ie a visible recovery of profits, driven by decent margins, a healthy increase in loans and lower risk costs. In its forecasts, as it notes, it does not adjust any positive effect from possible future interest rate increases.

In this context, the impact on the target prices given by Wood for the four systemic banks is marginal, as he emphasizes. The impact on target prices from the reduction of its forecasts is limited for NBG and Eurobank and 10% lower for Alpha and Piraeus. Implements normalized ROTE 9% for Ethniki and Eurobank, 7% for Alpha and 6% for Piraeus. The cost of equity is 11% for Eurobank and NBG, 11.5% for Alpha and 12% for Piraeus. In this basic scenario, it sees an increase of about 30% for Greek banks, on average. Its top choice is Ethniki, due to its low valuation and the best capital in the industry, its liquidity and the quality of its assets. In case of rapid de-escalation of the geopolitical crisis, Alpha Bank is the preferred play of higher beta, as it notes.

Thus, it recommends Buy for all four banks, while the target price of Eurobank is at 1.3 euros (unchanged) with a margin of 25%, of NBG the target price is 4.3 euros (from 4.1 euros before) with a margin of 41%, Alpha Bank is at 1.5 euros (from 1.7 euros before) with a margin of 39% and Piraeus at 1.8 euros (from 2 euros before) with a margin of 27% .

Valuations already incorporate a negative result, as Wood notes: in the adverse scenario, it assumes 200 bp. lower sustainable ROTE for 2023, zero long-term growth and increase of 100 bp. at cost of equity. This essentially entails a risk cost close to 120 bp. against the current assumption for 70 bp. The house believes that this would be compatible with a recessionary environment in Greece. The margin for falling in Greek banks, even in the unfavorable scenario is limited, however, in view of the current low valuations in terms of P / TBV (the sector is trading with P / TBV 2022 below 0.5x).