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GREEK BANKS | Solidified fundamentals but re-rating may take a pause for now

Strong fundamentals despite macro uncertainties – We remain constructive on Greek Banks’ 2023 outlook, despite the uncertainty around the impact of higher rates on economic growth and asset quality, the still precarious external environment and the trickier political backdrop. Notwithstanding the challenges, the fundamental dynamics for the sector are quite solid, with the overriding driver being the benefit from asset re-pricing in the light of rate hikes and the volume growth. Q3 results were indicative of this dynamic, with NII increasing c10% yoy, supported mainly by the widening of NIM (faster repricing of loans) and loan growth staying robust (performing exposures +12% yoy), leading to upgrades in mgt guidance while paving the way for Adj. RoTE >9% on average for 2022-23e for the system.

Increasing focus on funding costs – Q4’22 is set to integrate all positive catalysts, namely: 1) the faster repricing of loans vs deposits; 2) the still robust loan growth; 3) relatively low MREL-related costs (vs future costs upon €8-10bn of issuances in 2023-24e). As such we expect it to mark the peak of NII, with NII run-rates being diluted in the coming quarters by the increasing pass-through of interest rates to depositors, the higher volume of MREL issuances and potential pressure on lending spreads. That said, NII is still primed for very strong growth in 2023 (+14%), quite a compelling proposition with risks tilted to the upside we reckon. Meanwhile, the warmer-than-expected winter has eased fears about a natural gas crisis while leading to cooling inflation trends, something that bodes well for asset quality trends.

2-digit EPS upgrades; eyeing c8.5-10.5% adj. ROTE in 2023e– We have raised our 2022-24e estimates significantly (14%/18%/8% for 2022-24e) factoring in the solid Q3’22 and latest developments (NPE trends, more hawkish rate path, management guidance etc.). We now incorporate a terminal ECB’s Deposit facility rate (DFR) at 250bps for 2023e (leaving room for upside risk given economists’ consensus calling for a 3% DFR), with the resulting increase in NII more than offsetting the higher MREL-related costs and the uptick in our CoR (raised by c5bps on average to 99-73bps over 2023-24e) as we prefer to embed some conservatism regarding stage migration in the light of the recent support scheme for vulnerable households. We also recalibrate our fees income forecasts envisaging a 2.2% 2022-24e CAGR post the initiatives of Greek banks to reduce fees charges.

Raising PTs on earnings upgrades; Positive risk-reward skew, shifting preference to Alpha – Greek banks performed in sync with their periphery peers in 2022 returning c11%, as the mid-year sell-off in the aftermath of the Russian invasion in Ukraine was followed by a risk-on period (Q4’22). Having gained another 12% ytd, Greek banks now trade at 0.55x 2023e TBV as an aggregate (incl. Eurobank), still a 22% discount vs their European peers (effectively embedding a cost of equity of c16% vs c12% for EU Banks). The risk-reward skew thus seems positive given the still depressed valuations, especially in view of the ongoing improvement in their fundamental positions (and capital build-up), the upcoming divestment of the state’s holdings and Greece’s potential return to investment grade status in 2023. As such, we reiterate our “Buy” ratings for all banks under our coverage, with the caveat that in the short-run, they are likely to remain prone to swings in investor sentiment, especially in view of the key risk event for Greece in 2023, namely elections in Q2’23. Within this space, we shift our preference to Alpha, taking into account the balance between fundamentals and valuation, especially as it is the only Greek bank still trading below its pre-war levels having significantly underperformed its peers.