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GREEK BANKS | Upside hard to ignore as fundamentals re-take center stage

Banks’ fundamentals outlook intact – The global banking sector turmoil since early March has tested the Greek Banking sector's resilience, more in terms of sentiment than in terms of fundamentals. Still, the rise in risk-premia precipitated by the fallout of SVB/CS led to a >20% sell-off in Greek banks in March. With funding markets now calmer and confidence in the EU banking system gradually restored, we believe visibility on earnings has improved again and this has been manifested in the c8% bounce in the Greek bank index since the March 2023 trough. With Greek banks enjoying a combination of strong liquidity (LCR at c200%, among the highest in the EU), healthy capital buffers (CET 1 at 14.9%) and a CRE portfolio entailing less risk than in other markets (given adequate provisioning and the state of the domestic RE market), we believe the outlook remains intact.

A stellar Q4 with guidance upgrades… – Greek banks reported a stellar Q4, mainly thanks to impressive NII growth (+23% q/q) which outstripped market expectations. Core PPI also popped 26% q/q, as higher core revenues were only partly offset by inflated and seasonally higher operating expenses. Organic asset quality trends were supportive (avg NPE ratio at 6.1%, -80bps q/q), while regulatory capital on a fully loaded (FL) basis also improved q/q thanks to positive bottom line and transactions (avg CET 1 at 13.7%, +40bps q/q).

… driving higher estimates; we are now eyeing c8.3-10.7% adj. ROTE in 2023e – We have raised our 2023-24e adj. net Income by 12%/6% mainly filtering through the Q4’22 beat while incorporating a higher ECB rate (DFR 300bps, leaving room for upside risk given higher consensus estimates). We have lifted our aggregate NII forecasts by 9% in 2023e (and another 4% in 2024e) envisaging c21% yoy NII growth in 2023e underpinned by c5% loan growth coupled with c43bps NIM expansion. Our estimates also reflect a gradually higher cost of funding on changing deposit mix (term deposits at c28% in 2023e), higher deposit betas (0.1-0.6x for sight and term deposits respectively), lower loan spreads, c100bps CoR (vs 60bps for EU banks during the COVID cycle) and higher MREL costs.

Valuation still subdued; market to increasingly focus on RoTEs – After several twists and turns, Greek banks stand 24% higher ytd, having outstripped their EU periphery peers (14% over the same period). However, the valuation remains subdued at 20% discount vs their EU periphery peers (effectively embedding a cost of equity of c16%). The risk-reward skew thus seems positive given the still depressed valuations, especially in view of the ongoing improvement in Greek banks’ fundamental positions (and capital build-up), the upcoming divestment of the state’s holdings and Greece’s potential return to investment grade status in end 2023/H1’2024. With investors gradually shifting their focus to RoTEs from capital, we expect all banks to move higher in the valuation spectrum given they are on track for 2-digit RoTEs in 2023e (high single-digit for Alpha). 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 on 21st May. Among Greek Banks, Piraeus offers the highest upside potential to our PT despite its recent outperformance which has been largely driven by the strongest progress in asset quality, RoTE and capital formation, with this momentum tempering our concerns over the risks stemming from its weaker CET1 starting-point.