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GREEK BANKS | Build Back Better

Balance sheet repair largely accomplished – 2021 was a landmark year for the Greek banking sector characterized by the remarkable progress on balance sheet repair. After a decisive implementation of their ambitious strategic plans, banks achieved a sharp decline of NPEs (to ca 11% from 45% in 2018) while through a number of actions they managed to preserve comfortable regulatory capital buffers over and above regulatory requirements.

Focus on profitability from now on – We reiterate the view that the market is clearly shifting its focus on profitability prospects, contrary to the situation in previous years when balance sheet dynamics were at the epicenter of investors' discussions. A sharp reduction of LLPs coupled with lower OpEx and higher F&Cs should turn all banks profitable in 2022. Against this background, NII trends will be closely monitored given their importance and the anticipated weakness as a result of the NPE reduction.

Important tailwinds ahead – i) Greece’s strong recovery to underpin fundamental and market sentiment, ii) potential rating upgrades likely to lead Greece to an investment grade status, thus attracting investors from a larger pool, iii) the recent ECB decision for GGBs was quite supportive and may underpin upgrades, iv) HFSF may launch its divestment plan leading to banks’ eventual full re-privatisation, and iv) on top of the idiosyncratic/domestic factors, Greek banks may be favored by the international rotation into value stocks in anticipation of higher rates.

Expect valuations to move higher – Greek banks trade at 0.5x P/TBV on 2022e, at c15% discount to EU periphery peers. The relative discount has narrowed significantly compared to the recent past, mainly as a result of the remarkable balance sheet repair. Looking ahead we believe Greek bank stock valuations will move higher on the back of the following factors: i) further convergence to EU periphery peers as a result of the positive profitability prospects, ii) rerating of the EU banking sector on the prospect of higher rates, iii) growing TBV starting from 2022 and iv) the market’s increasing focus on earnings multiples.

Change in estimates - Our new aggregate PPI estimates are revised up by 5% on average for the 2022-23 period, mainly reflecting higher core revenues, while our net income estimates are lifted by 7% on average despite slightly higher provisions. We reiterate the view that sector earnings will start recovering from 2022 onwards, albeit at different pace depending on the status of each bank.

Higher PTs on earning upgrades, no change in ratings – We reiterate a ‘Buy’ rating on National Bank as we believe it still offers a very compelling combination of strong fundamentals and attractive valuation, despite its strong performance recently. We also retain a ‘Buy’ recommendation on Piraeus Bank as we find its risk/return profile attractive at this stage, given that the group is well on track to complete its clean-up plan. We also keep our ‘Hold’ rating on Alpha Bank as, despite the progress made on the implementation of its strategic plan, it trades at a less attractive valuation compared to peers, in our view.