The Greek banks have returned to survival mode following the outbreak of COVID-19. After the share price drop of c.63% ytd, the banks are back at distressed multiples, with a P/TBV of c.0.16x for 2020E.
We believe the outlook is very challenging, and loan-loss provisions are likely to absorb the largest part of the Greek banks’ pre-provision profitability over 2020E and 2021E. We have taken a deep dive into the capital buffers for the system, however, and believe that the probability of a forced equity issue is rather low, aided by solid regulatory flexibility.
Thus, we believe that the Greek banks should survive and could rerate substantially once the pandemic is over. In the meantime, we believe investors should be selective. Our preferred picks are Eurobank (BUY, price target (PT) EUR 0.70) and NBG (BUY, PT EUR 2.10) due to their lower NPEs, higher coverage ratios and better ROTE visibility. Macro recovery on pause.
Greece has been very successful in containing the COVID-19 crisis, by introducing lockdowns early. Despite the strong positive outlook in terms of public health, the macro visibility for 2020E remains highly uncertain. According to the Finance Minister, Greek GDP should decline in 2020E, by 4.7% in the base-case scenario, to 8% in a more adverse scenario. Our economic research team expects a decline of GDP by 4.3% in 2020E, with a strong recovery of 4.7% in 2021E. Limited profitability for a two-year period. In our updated forecasts, we have reduced our pre-provision profitability expectations by c.15%, driven mainly by lower loan growth and weaker fees.
At the net profit level, we expect marginal sector profitability in 2020E and 2021E, due to elevated loan-loss provisions, with a ROTE recovery only in 2022E. Even our 2022E ROTE forecasts (6% for the sector) are below our previous estimates (8-10%), due mainly to our higher cost of risk (COR) assumptions. Adequate capital buffers. We calculate the capital and pre-provision profitability buffers for the system as falling in a range of EUR 13-15bn, or c.10% of the net loan book. This implies that, in order to deplete all the buffers and breach minimum OCRs, the new NPEs in the system would need to exceed EUR 30bn (>17% of gross loans and >28% of performing loans).
We see this as extreme and, in our base-case scenario, we assume new NPEs of around EUR 7-8bn, which should be absorbed by the core preprovision profitability of the banks within a two-year period (c.EUR 3bn per annum). In view of the deferred tax credit (DTC) law, the banks cannot take a bigger one-off hit in 2020E and, inevitably, need to spread the loan-loss provisions over a bigger time span (unless there is an amendment in the law). We warn that our COR estimates are highly uncertain at this stage, but should become clearer once the moratorium policies are lifted. Ratings and PTs – be selective. We have reduced our PTs by c.40%, on average, due to our higher COE, lower long-term ROTE assumptions and the introduction of a peer group valuation.
We see substantial upside in all the Greek banks on our base-case scenario but, on a relative basis, the best risk/reward is found currently at Eurobank and NBG, in our view, due to their lower NPE stock, better coverage and higher ROTE visibility. We see Alpha (HOLD (downgraded from Buy), PT EUR 1.00) and Piraeus (HOLD, PT EUR 1.90) as extremely cheap as well (and they could be outperformers in a bullish scenario), but we prefer to stay on the sidelines here until there is more visibility on the pending securitisation transactions.