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Greek banks- EUROXX

So Far Greek Banks Have Maintained Robust Capital Position, Improved Liquidity Profile & Declining NPE Ratios: Although the second wave of the pandemic has further weighed on economic activity (2020e GDP contraction now seen around 10% vs. c8% previously anticipated) and has increased uncertainty, Greek banks have maintained so far their robust capital position (c14.7% CET1 ratio in 9M’20 vs. EU average of 15.2%), and improved liquidity profile (L/D at 83.7%), while NPE ratios continued to decline in H2’20. We now expect new gross NPE inflows in 2021e to be shaped at the manageable level of c€5.5bn, supported by government measures. Meanwhile, the increase in banks’ provisioning costs for expected loan losses have thus far been absorbed by the crystallization of GGB gains (c€2bn for 2020e), hence leading to higher y- o-y adj. net profits in 2020e (excl. securitisation costs/one-off items/disc. ops).

Greek Banks Eye Single-Digit NPE Ratio with the Introduction of H-APS II: In the midst of the pandemic, Greek banks have intensified their efforts to reduce their NPEs and despite the difficult economic juncture, they have successfully implemented H-APS I. The latter is expected to be finalized in H1’21e and reduce NPEs by €31.4bn; that said, Greek authorities & banks also consider to launch H-APS II, aiming to reduce NPEs further by up to €30bn, hence targeting single- digit NPE ratio by 2022e. Looking ahead, the timely/efficient roll-out of coronavirus vaccines as well as the NGEU funds should support a strong economic rebound, which should assist banks to achieve sustainable core profitability. This, coupled with Tier II issues and internal capital actions, should further enhance their capital position in order to support their NPE reduction targets. In our model, we incorporate €16bn securitisations for H-APS II with €2.6bn total capital hit.

Challenging EPS Outlook in 2021-22e on NII Headwinds– We have fine-tuned our previous 2020-22e estimates in order to factor-in the acceleration of H-APS II, the impact of the 2nd wave of Covid-19 and Q3’20 trends. We now expect adj. net profits (excl. securitisation costs/one-off items/disc. ops) of €1,469m in 2020e (from €584m previously; the upgrade is due to higher GGB gains), dropping to €1,285m in 2021e (from €862m) and €1,155m in 2022e (from €1,321m) due to the lower NII owing to the acceleration of H-APS II. All in all, we now pencil-in a 13% 2019-22e adj. net profit CAGR vs. 18% previously. However, looking beyond 2022e, we expect net adj. net profit in 2023e to increase by 50% y-o-y benefited by higher NII (underpinned by new loan generation), higher fees and lower provisions due to the achieved derisking.

Reiterate our O/W Rating on Valuation Grounds – Following a remarkable rally between their Oct’20 lows until end-2020, underpinned by news on efficacy of two vaccines against Covid-19 combined with Moody’s surprise upgrade of the sovereign credit rating (Nov’20), Greek banks are currently in consolidation mode with -13% YTD performance negatively affected by fears on Covid-19 mutations and delays in vaccine roll-out. The core Greek banks now trade 0.14-0.39x 2021e TBV (avg is 0.29x) vs. c0.50x for their EU peers (c0.40x for Italy, Spain & Portugal). In our view, this discount is a reflection of the Greek banks’ lower RoE (at -3.15% in 9M’20 vs. EU avg of 2.12%) and concerns over their high stock of NPEs, coupled with the new generation of NPEs due to the pandemic and their impact of the demanding 2019-22e reduction targets on their CoR, NIM and capital. We also believe that current price levels overlook the sector’s EPS recovery post 2022e and the opportunities arising to address legacy risks such as sensitivities regarding DTCs and/or the creation of a Bad Bank and the acceleration of H-APS II.

NBG and Eurobank Remain Our Top-Picks – 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 due to the substantial NPE reduction achieved post the conclusion of its transformation plan (NPE ratio c15% in 2020e), easing pressure on capital and ultimately the boost in ROTE to c8.9% in 2023e, as well as its strong foreign operations, which offer higher diversification.

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