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GREEK BANKS | Valuation remains out of sync with sustainable RoTEs

March underperformance sparked repositioning opportunity; risk-reward compelling – Greek bank shares had a strong start to 2024 (until Feb) closing the valuation gap vs EU periphery peers buoyed by the stellar 2023 profits (adj. RoTE of c16%), successful B/S de-risking (NPE ratio c4%) and improved market liquidity post HFSF’s placements. However, in March they suffered a bout of underperformance (>15%), with the relative 2024e P/TBV discount widening to c20% (and the P/E discount even higher) on concerns over their sensitivity to the rate cutting cycle and uncertainty over the size of dividends (SSM pending approvals). More recently the shares have partly caught up with the upward movement of their EU peers, but still remain at >20% discount. The case thus still looks very compelling, with the low valuation coupled with: 1) projected RoTEs of 14%-12% in 2024-26 (above c12% for EU periphery banks), 2) superior lending growth prospects vs EU peers (mid single-digit %), 3) diligent cost management, 4) improved fee generation, 5) deposit hedges cautioning the downside from rate cuts, and 6) decreasing provisions, which are poised to offset NII normalization. On the focal point of dividends, we expect the build-up of excess capital, which surpassed €4bn in 2023, to enable dividend payouts of 10%-20% in 2024e and up to 50% by 2025e, alongside the prospect of share buybacks.

Q1'24 earnings season set to start on a strong note – The Q1’24 earnings season begins with Piraeus tomorrow, followed by NBG on May 1st, and Alpha Bank/Eurobank on May 16th. We expect a robust quarter, with aggregate Core PPI at €1.29bn, just -1% q/q compared to the record Q4’23. Deposits’ hedging losses, increased funding costs and seasonally soft credit expansion are likely to drive a 3% q/q decline in NII, quite a robust performance given the stellar Q4’23. These are set to be partly offset by lower OpEx qoq and a slight uptick in the underlying CoR (to c76bps, +5bps q/q, in line FY’24 guidance). Overall, we see Adj. Net Income at €851m, translating to Adj.RoTE (post AT1) of c16%, surpassing the annual guidance in most cases.

… driving further earning upgrades to our numbers; RoTEs 11-16% in 2024e – We have raised our 2024-25e adj. EPS 3% in 2024-25e to reflect Q1 trends. Inputting DFR of 3.8%/2.8%/2.5% in 2024-2026e, a lower shift to term deposits (33% peak in 2024) and deposit betas of 20% in 2024e, we estimate c2%/c8% NII decline in 2024-25e and +1% in 2026e corresponding to a NIM of 2.6%/2.4%/2.4% respectively. Additionally, we still expect solid fee generation (2023-26e CAGR of c7%), buoyed by strong macro and robust asset management activities, with OpEx remaining under control (C/I ratios in the 35-38% range). Furthermore, CoR ought to gradually decline (to 0.58% by 2026e), reflecting improvements in asset quality. Overall, we argue Greek banks are set to navigate rate reductions effectively, being primed for sustainable RoTE >10-13% post-2025e (and 11-16% in 2024e).

Valuation: raising PTs, Piraeus staying top pick – With the 3 banks in our coverage still at c6x 2024e PE and c0.7x P/TBV, there is further upside in our view, especially as current prices still incorporate CoE in the mid-teens failing to reflect the resilience of revenues, significant capital optionality and improved asset quality. With these in mind, we feel the combination of still conservative estimates (2025e RoTE c12%), attractive valuations, and upcoming catalysts (reinstatement of dividends, further earning upgrades) make up a compelling case. 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.