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GREEK BANKS | On the right track

Strategic plans on track – Management teams report good progress on strategic plans with most actions taking place on time and within budget. The swift implementation of the strategic plans transforms banks’ balance sheets and operations, on the one hand, while giving a strong signal to the market about their determination to return to normality as soon as possible, on the other.

 Significant divergence in Q3 2021 earnings – This was another quarter with several one-offs distorting the underlying trends and significant divergence between individual names. The impact from banks’ clean-up effort was evident in both NII and provisions, while F&C income growth, OpEx and organic asset quality trends were among the key positives of Q3 earnings.

 Management teams optimistic on asset quality & loan growth – During the earnings calls, management teams highlighted the better than expected trends on organic asset quality trends, which alleviate concerns about a new wave of pandemic-related NPEs. Moreover, they expressed their confidence that loan growth will be much stronger as of next year which, coupled with the anticipated F&C growth, will underpin their top line trends.

 Core operating trends to deteriorate further before bottoming out – We expect core PPI at sector level to deteriorate further before it starts improving owing to NII further weakness overshadowing better trends in F&C and OpEx. With just a few transactions pending, the long term target of NPE ratios’ convergence to the rest of EU is now much closer, with the majority of the clean-up costs expected to be registered in Q4 2021.

 Focus on profitability, positive prospects ahead - Looking  ahead we believe that investors will focus much more on the profitability prospects for 2022 and beyond which will be the key driver of their performance. Greek banks are envisaging RoTEs between 5% and 10% for 2022, with the positive macro backdrop providing significant tailwinds for their operating performance. Potential rating upgrades could also attract more investor interest.

 Remain positive, no change in our estimates – Based on the above we retain a positive stance for the sector’s fundamentals and market performance. We leave our estimates unchanged at this stage, with our projections being on the same direction with those set out in the banks’ strategic plans, albeit embedding some extra conservatism.

 Valuation leaves plenty of scope for upside; NBG our preferred choice  – Greek banks trade a tad above 0.4x P/TBV on 2022e, still at c25% discount to EU periphery peers. Taking into account the positive profitability prospects, we believe some further convergence is likely in the future, while expecting growing TBVs and a shift of focus to earnings multiples to lead stocks higher in the valuation spectrum. NBG remains our preferred choice given its attractive valuation coupled with a strong set of fundamentals.