It boils down to a single question The Greek banks’ investment case is predicated on a single question: can NPE ratios decline to European standards (in a reasonable time frame) without capital injection? Positive developments in macro and regulation have improved this possibility from an investor’s perspective, as proven by Greek banks’ outstanding YtD performance (+97%).
We reinstate coverage with a relatively cautious view, as we think aforementioned case will require all domestic/external factors to move constantly in the right direction. Even then, we see long-term structural risks. Eurobank is our preferred name; U/P on NBG and Piraeus Eurobank (Buy) will be the first Greek bank to reach a single-digit NPE ratio (c.9% in 2021E) and normalized RoTE (c.8% in 2020E). Alpha (Neutral) has a high NPE but its robust capital strengthens its hand to frontload the issue. NBG (Underperform) has better liquidity and coverage but its capital quality is low. Also, our LT RoTE target (7%) is conservative.
Piraeus (Underperform) screens inferior in both asset and capital quality. We see a slow recovery in RoTE due to an above-sector run-rate for CoR. NBG (+160% YtD) and Piraeus (+260% YtD) have been the best-performing stocks in 2019. The outlook has been improving Key metrics have been moving in the right direction: 1) Liquidity has improved with rising deposit inflows and regained access to interbank and capital markets. 2) Lower sovereign yields have supported capital ratios, boosted trading, improved the pricing of NPEs, and raised equity valuations. 3) Recovering real estate prices are to raise collateral values, lower impairments and increase borrowers’ willingness to honour their debt. 4) Expectations of a systemic solution to NPEs have also boosted the sentiment.
Hercules APS could be supportive The Hercules APS is based on Italian GACS and is likely to come into effect shortly. It will allow banks to use government guarantees to back a total of c.€30bn in NPE securitizations.
The efficiency will depend on the appetite for distressed Greek assets, effective costs for the banks and capital relief on senior notes. The scope of the problem is high; capital buffer is low The NPE ratio remains at c.40% with c.50% of coverage. The size of uncovered NPEs (c.€40bn) is materially higher than FL CET1 (c.€22bn).
Furthermore, the lion’s share of CET1s constitute of DTCs which prevent banks recognising account losses. Even when the Greek banks reach the 2021 targets, the NPE ratios (c.20%) will be substantially higher than the European average (2%).
Hence, a bank-unfriendly resolution could be an option, if the process disappoints. Additionally, regulators may require an improvement in capital quality if/when profitability recovers. RoTEs to recover but double digits are off our radar We see sustained pressure on revenues: 1) 30% of interest income comes from NPEs; this will be phased out. 2) Downward repricing of loans and securities will hit P&Ls. 3) Strong trading gains are likely to normalize post-2020E.
Revenues look unlikely to reach 2018 levels, despite support from funding costs, income from securitizations and rising fee income. We see room for improvement in costs and expect a decline in CoR. Still, our long-term RoTE forecasts remain at 5-8%; lower than managements’ targets.