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GREEK BANKS | Technical factors mask dividend growth and earnings resilience

Solid fundamentals, but technical pressures have been weighing on performance – Despite consistently exceeding profit estimates in recent quarters, Greek banks have underperformed peripheral banks and the SX7E index by c20% and c5% ytd, respectively. While NII headwinds persist, the impact has been less severe than expected, with only a 1% qoq decline in Q2. Banks' resilience is further supported by improvements in asset quality, stronger fee generation driven by lending activity and a 13% ytd increase in AuM, all while upholding one of the most efficient cost structures in Europe (C/I at 33%). As a result, even though Greek banks remain more sensitive to rate cuts compared to their European peers, the projected decline in Adj.RoTE by 2026e is just 4ppts, bringing it in line with peripheral bank averages (c12%, down from 16% in 2023). This indicates that the recent underperformance is more likely the result of technical factors rather than a reflection of weak fundamentals. A key contributor to this underperformance has been the HFSF’s sale of its stake in Piraeus in March, followed by further placements in May (Metlen, Jumbo) and in November (NBG), which created a supply overhang and pressured the Greek market. Additionally, MSCI’s decision not to place Greece on its watchlist for a potential upgrade has delayed a crucial catalyst for reducing risk premiums, further limiting net foreign inflows ytd.

On track for robust dividend growth – Concerns over NIM in a lower rate environment and potential caps on shareholder returns due to the DTC issue are easing. Though NIM compression has started, it is slower than expected, leading to upward revisions in FY24 guidance. Stabilizing deposit costs and renewed loan growth in Q2 set the stage for strong credit expansion over 2023-26e. Coupled with hedging strategies, NII sensitivity is reduced, leading us to expect flat or slightly improved NII for the year, followed by a 6% decline in 2025 and 2% in 2026. On dividend distribution, even under an accelerated DTC amortization scenario (15 years for PSI losses, 10 for post-2015 credit losses), CET1 ratios would continue to strengthen, supporting a 50% payout ratio by 2025e. This would result in dividend yields of c7% in 2024, increasing to c10% by 2025-26e, bringing them closer to or even higher than the c8% yields offered by peripheral European banks

EPS upgrades; we are eyeing c15%/13% adj. ROTE in 2024e/25e – We have raised our 2024-26e adjusted EPS by 9%/9%/4% to reflect Q2 trends. Factoring in a DFR of 3.6%/2.6%/2.1% for 2024-2026e, a slower shift to term deposits (rising to 29% by 2026), and deposit betas of 19% in 2024e, we now expect NII to grow by 1% yoy in 2024 (previously forecasted at -2%), followed by a -6% drop in 2025 and a c2% decline in 2026. Fee generation remains robust (2023-26e CAGR of 9%), with controlled OpEx (C/I 34-37%) and a gradual decline in CoR (to 0.56% by 2026). Overall, we believe Greek banks are well-positioned to navigate rate reductions, targeting sustainable RoTE of >10-13% post-2025e (and 11-17% in 2024e).

Valuation: raising PTs, Piraeus staying top pick – With the 3 banks in our coverage still at 4-5x 2024e PE and 0.5-0.9x P/TBV, currently incorporating a CoE in the mid-teens, overlooking the resilience of revenues, capital optionality and improved asset quality, there is further upside in our view. Coupled, with conservative 2025e RoTE estimates of c11%-14%, attractive valuations, and catalysts such as increased dividends and earnings upgrades, the investment case is compelling. As such, we reiterate our “Buy” for all banks on higher PTs (estimate upgrades), with Piraeus remaining our top pick given the solid execution and an attractive risk/return profile, with the current valuation failing to capture its recovery story and double-digit sustainable RoTE (13.7%/12.9% for 2025/26e).