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M.S. on Greek Banks | Balance Sheet Cleanup Underappreciated

morgan-stanley:-Η-tesla-είναι-υπερτιμημένη,-σύσταση-“underweight”

Progress on NPE securitisation shows the transformative power it offers for Greek banks’ balance sheet cleanup. We see risks on new NPE inflow post-moratoria as likely manageable, and view Greek banks as offering attractive risk-rewards at current valuation.

Alpha & NBG our preferred plays. A deep-diveinto balancesheet cleanup opportunities. With Greek banks still exhibitinghighest NPE (non-performing exposure) ratios in Europe, we focus on balance sheet cleanup opportunities and look at Greek banks’ability to reduce NPEs.

We find that reaching NPE levels of 5% of loans is possible though we expect this to take several years and at significant cost. We use NPE securitisation and sales as our key modeling tools and, in our analysis, we use available cushion of excess capital and loan loss reserves plus build-up of pre-provisioning profit to offset potential losses stemming from balance sheet cleanup efforts.

The Hercules asset protection scheme (HAPS) should help to deal with roughly half of current NPE stock, in our view,and further cleanup could take a number of forms: we model it through only securitisation and NPE sales. NPE reduction opportunities underappreciated bythe market, particularlyfor NBG and Alpha. Despite COVID headwinds, Eurobank successfully completed its €7.5bn Cairo transaction in late 2Q20, bringing its NPE ratio to 15% (vs 37% at YE18). This underscores the power of NPE securitisation and the way HAPS can assist banks,givingus confidence the other banks can follow suit.

The market seems to give credit for asset quality improvement to Eurobank (which trades at 0.3x2020e P/B) but much less so to NBG (0.2x), which we believe could decrease its NPE ratio to 16% by YE21 from 30% currently. Alpha and Piraeus have the highest NPE ratios (44% and 48%, respectively) and trade at 0.1x P/B, but we believe Alpha has a much stronger capital cushion to allow for NPE reduction acceleration. The market prices in a severeimpact on asset quality- akey debate, in ourview.

Loans under moratoria represent 15-24% of performing loans at Greek banks and should a quarter of these turn bad after moratoria expire at YE20, NPE ratios would rise 2.5-4%, which should result in more of a slowdown to balance sheet repair than a new full-blown crisis. While in our base case we believe that postmoratoria NPE formation is likely to be offset by Greek economic recovery, we also believe that if the Greek economy does not improve by mid-2021, the government could extend support programs such as the Gefyra subsidy program for primary residence mortgages. Moreover, we believe that with significant EU recovery fund allocation, the likelihood of bear case scenarios is lessened and recapitalisation risks are more limited vs prior Greek banks crises.

Order of preference

We prefer NBG to Eurobank among banks closer to balance sheet cleanup goals on valuation grounds. We also prefer Alpha Bank to Piraeus among the banks with highest NPE ratios due to better transformation potential i.e.ability to take the losses necessary for dramatic NPE reduction.

Overweight Alpha Bank and NBG

Alpha Bank trades in line with Piraeus at 0.1x PTBV with both exhibitinghigher NPE ratio vs two other systemic banks but Alpha has more room for cleanup than Piraeus and the Galaxy transaction could accelerate it in late 2020 or early 2021: we believe it could cut NPE ratio to 27% by YE21 from current 44%.

NBG boasts the second-lowest NPE ratio and, in our view, will be second-quickest to clean up the balance sheet after Eurobank:a couple of securitisation deals (already earmarked) and it could quickly catch up on fundamentals thus on valuation too, in our view. We model NBG could cut NPE ratio to 17% by YE21 from current 30%.

Equal-weight Eurobank and Piraeus 3

Eurobank is the most expensive but we expect it to clean up the balance sheet the quickest; target multiple of 0.3x PTBV implies being close to fairly valued.

 Piraeus is the cheapest stock at 0.1x PTBV but the largest bad debt burden (we estimate net NPEs will still exceed 200% of tangible equity in 2021e) justifies little upside even from these levels, we believe.

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