Early General Elections Fuel Strong Market Rally Led by Greek Banks – on 26May’19, the Greek PM, following a large defeat in European Parliament and local administration elections to the main opposition ND (9.35% difference), called snap general elections, which will take place on 7July’19. The Greek capital markets, both equities and bonds, welcomed the news, as this implied a shorter pre-election period and hence lower risks for a potential fiscal derailment. Moreover, investors greeted the prospect of a faster political shift toward a more pro-business/growth-friendly administration under a ND-led government. As a result, Greek equities staged a remarkable rally, gaining c15% in absolute terms since the announcement, while Greek 10-year bond yields fell below 2.8% for the first time ever. Greek banks, which are a pure macro play, led the surge, with the sector jumping 32% on absolute levels during the same period.
Valuation Update to Account for Country De-Risking and Improved Banking Sector Outlook – in more detail, we now apply a CoE of 7.0% (from 7.5%), while we also account for a more positive medium-term outlook for Greek banks, in expectation of sustained improvements in their funding profile (namely deposit growth, as the economy recovers, and a gradual return to int’l capital markets), asset risk (declining NPEs despite the challenges), stronger OpEx reduction trends and accelerating profitability. Our revised medium-term assumptions return a new target price of €2.00 for Alpha (from €1.50), €1.10 for Eurobank (from €0.82), €3.00 for National (from €1.90) and €3.30 for Piraeus (from €1.00). For Piraeus, in particular, the improvement is more pronounced, given also the higher-than-expected adj. RoTE in 2018, and in qualitative terms, the recent strategic deal with Intrum and our expectation of a successful Tier II debt issue in the near future.
No Changes in Our Latest (i.e. 22Feb’19) Financial Forecasts at This Stage – i.e. we still expect all four banks to be profitable in 2019-20e, although margin pressure will persist due to falling loan volumes and higher provisioning needs. Our forecasts still suggest healthy net (reported) profitability of €0.63bn on aggregate this year (from aggregate reported net losses of €0.10bn in 2018), before accelerating to €0.94bn in 2020e, with key profitability drivers being the solid fee income generation, further cost containment and the gradual CoR normalisation.
We Remain Positive on All Greek Banks Despite the Rally –As our new TPs still suggest 11-28% upside potential from current levels, we reiterate our O/W rating on all Greek banks under our coverage. Having gained 79% YTD, Greek banks now trade 0.3-0.5x their 2019e TBV vs. c0.7x for their European peers, with further upside potential possible, in our view, assuming a positive election outcome, fast improving economic conditions and restored investor confidence. Moreover, despite the persisting challenges with respect to managing NPEs, we remain optimistic that Greek banks will manage to clean-up their loan books and absorb capital losses associated with NPE offloads without the need for another sector-wide recapitalisation. Overall, we still project Greek banks to remain well-positioned from a regulatory capital perspective, despite their weak capital quality (as a significant part of capital is in the form of DTAs).
Eurobank and NBG Remain Our Sector Favourites –We favour NBG courtesy of its strong capital & best-in class liquidity position, leading coverage levels, sector-low stock of NPE/NPLs and increased capital enhancing potential from the remaining divestments. We also like Eurobank’s significant de-risking/transformation plan, which puts it ahead of domestic peers in NPE reduction and capital adequacy (CAD at 18.2% in Q1’19 pro-forma for the absorption of Grivalia), sector-low group NPE ratio, high NPE cash coverage and strong foreign operations.
Downside Risks: relate mostly to macro headwinds (affecting the level/pace of deposit return to the system, provisioning levels, the realisation of capital gains from GGB holdings, etc.) and the potential resurgence of political uncertainty after the elections (related to ND’s ability to form a strong government). Delivery on NPE reduction targets also remains important.