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GREEK BANKS | Overlooked and undervalued but bumpy road to re-rating

Fundamentals vs sentiment; Structurally positive, tactically cautious – We believe that Greek banks are on a strong fundamental footing, with rising rates set to provide a significant tailwind for earnings in 2022-23, barring a domestic recession outcome next year. That said, share prices have moved out of sync with fundamentals, with Greek banks up just by 3% ytd (albeit outperforming a c13% decline for EU banks) and still trading at a hefty c25% discount vs EU periphery peers. With sentiment being uber bearish and Greek banks’ share prices incorporating on average cost of equity in excess of 20%, we do see validity in the argument that a lot of bad news is priced in and believe that the risk-reward balance is tilted to the upside in the long run given the ultra-low valuation (0.3-0.5x 2023e P/BV). That said, we argue against a sustained rally in the near term given the uncertainty around the impact of higher rates on economic growth and asset quality and the still precarious external environment.

Macro outlook will be the overriding factor – Overall, we believe that Greek banks have some significant offsetting factors against the global macro headwinds, including: i) the start of a new credit cycle following 10 years of deleveraging; ii) the resilient Greek economy given its dependence on tourism and the boost from EU funds; iii) the accelerated rate hike path boosting NII; iv) the asset quality normalization that took place in the last 2-3 years and v) the rising real estate prices which are still significantly below peak levels. All the above coupled with ongoing fiscal offsets are likely to mitigate the effect from the energy crisis, thereby leading to a manageable deterioration of NPE trends in our view. Besides their higher sensitivity to rate hikes vs their EU peers, Greek banks also have additional levers to pull including continuous cost–cutting (through digitization, VES and network reduction) and acceleration in fee generation.

Stronger earnings momentum on rate hikes; raising net profits materially – We have raised our 2022-24e factoring in the solid Q2’22 and latest developments (NPE transactions, energy crisis, more hawkish rate path, management guidance). We now incorporate ECB’s Deposit facility rate (DFR) at 150bps by the end of 2022e and 200bps by the end of 2023e, with the resulting increase in NII more than offsetting the higher MREL-related costs and the higher impairment losses (increased by c20bps on average per annum to 95-70bps over 2022-23e) driven by prudent provisioning on Stage 1 & 2 loans and an assumed deterioration in NPE organic trends in view of the macroeconomic uncertainties. We also reprofile our performing exposure forecasts envisaging 7% CAGR over 2022-24e. All in all, we have increased our adj. net profit forecasts for 2022e/2023e/2024e by 26%/9%/29% for the 3 systemic banks under our coverage, mainly filtering through the stronger core revenues.

Raising PTs on earnings upgrades; Reiterate our preference for NBG – We have recalibrated our valuation methodology switching to a simplified Gordon Growth Model based on 2024e returns and forecast book values. The positive effect from the earnings upgrades is partly offset by the increase in our assumed cost of equity to reflect the tighter monetary policy settings and elevated risk premia. With Greek banks trading at 0.3-0.5x 2023e P/TBV the risk-reward skew looks positive justifying a ‘Buy’ for all banks under our coverage. Within this space, we continue to favour NBG courtesy of its best-in-class liquidity and capital position, 2nd best asset quality and sustainable RoTE at c10% post 2022e.