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GREEK BANKS | Vaccines, Visibility, Valuations

Visibility gradually restored; we remain constructive – In past reports, we had been arguing that the lack of visibility was the key reason for banks’ low valuations, while contending that more visibility would be likely towards year-end. Greek banks’ recent rally (>120% off Oct lows) confirms our view, we believe. Looking ahead, the positive news on the vaccines’ front raises optimism for return to normality sooner than later, while gradually restoring the much-needed visibility. In addition, Greece is expected to be a key beneficiary from vaccines distribution in EU given its exposure to the re-opening theme, while the EU recovery fund should further underpin economic prospects. We reiterate our constructive stance for the sector.

Remarkable resilience in a challenging year; de-risking to accelerate in 2021 - Greek banks’ operating performance proved resilient in 9M’20, despite the adverse backdrop. Core PPI rose 5% on the back of flattish core revenues and lower opex. As expected, CoR stayed elevated (at 200bps) but profitability was relatively comfortable, boosted by GGB-related trading gains. We expect efforts for balance sheet repair and earnings recovery to intensify further in 2021. NPE securitisations will play a key role leading to significant de-risking, but also to lower revenues and a hit to regulatory capital, which however will remain comfortably above requirements. Indicatively, banks plan to offload c€24bn NPEs (40% of the domestic stock) in the next 6 months while more are likely to come.

Key estimate changes – Key changes to our numbers include lower NPEs related to C19 (corresponding to c30% of debt moratoria vs >50% assumed before, albeit still more conservative than banks’ guidance), lower provisions, higher core revenues and lower opex. Our new aggregate PPI is lifted 5% on average for 2020-22 on the back of 2% higher revenues, while our net income projections increase by 11%. On that basis, we now expect earnings to recover faster than we had anticipated before, although profitability should be relatively contained until 2022, i.e. with RoEs in the mid-single digits on average, given the need for balance sheet clean-up.

Valuation – Greek banks currently trade at c0.27x P/TBV on 2021 estimates, at a c50% discount to EU periphery peers and close to 1std above their historic average discount. While this may not look too attractive at first glance, given the deeper historical discount, we believe the past may not be indicative of the future. We expect a gradual convergence of the valuation gap as banks intensify clean-up efforts in the next 1-2 years, underpinned by economic trends and state support.

Buy on Alpha Bank, NBG, reinstate Hold on Piraeus – We have lifted our PTs significantly following the upgrade to our estimates. We maintain a positive stance for NBG (Buy, TP €2.73), as we think it offers a clear path to earnings recovery, and Alpha (Buy, TP €1.25), given its attractive valuation coupled with its capacity to accelerate NPE clean-up. We reinstate coverage on Piraeus (Hold, TP €1.24) with a relatively cautious stance as we believe the re-privatisation effort may prove costly for existing shareholders.