EUR 508.94 For Business Accounts Only

Overstressed concerns

Weak performance so far in H2 due to stress test concerns – Greek banks’ performance has been weak in H2 (-26%) mainly as a result of concerns related to the banking sector’s health ahead of the upcoming stress test especially given the IMF’s unconstructive stance, in our view. Greek banks now trade at 0.3x P/TBV on 2018 estimates, once again at a deep discount (ca 70%) to EU peers or close to 1std from 3yr avg discount. Interestingly, their performance exhibits negative correlation to GGBs during H2 2017 (-26% vs 185bps improvement in GGB yields), similarly to 2015 ahead of the previous comprehensive assessment.

We think 2018 is different than 2015… – We feel optimistic for the stress test and overall on asset quality for the following reasons: i) banks start from a significantly better position in terms of regulatory capital, ii) far better macroeconomic environment, iii) much more efficient NPL resolution framework and iv) Ifrs9 “regulatory arbitrage” opportunity. Consequently, we are of the view that a sizable recap requirement would stem from a significant change in ‘policy’, such as the one expressed by the IMF (more capital for faster clean up), or total failure to show progress on NPL clean up during the coming months, rather than inherent balance sheet weakness. We highlight that banks have been achieving their NPE reduction targets so far, while some have adopted even more ambitious ones.

…and thus expect a re-rating in the coming months – In our view, banks’ fundamental progress and stress test outcome will be the key drivers for their performance in the short term as opposed to the last few years when  performance was driven mainly by program reviews. We expect a sector re-rating and catch up to GGB’s positive performance, given our positive outlook for the sector. However volatility is expected to remain a key characteristic until there is more visibility among the majority of investors about the outcome of the stress test.

Lower profitability estimates on NII pressure and higher CoR – We have adjusted our estimates to take into account the following factors: i) anticipated pressure in NII due to deleveraging and lower asset yields, ii) higher CoR by ca 10 bps on avg given regulatory pressure and acceleration of NPL sales (65% more NPL disposals vs initial plan), iii) first implementation of IFRS 9 which we estimate at 8% of LLPs on average for the sector, equivalent to EUR 4.7bn or ca 15% of TBV. Still, we anticipate banks’ net income to improve in 2018-19 as CoR should remain on a downward path, albeit at a milder rate than previously estimated, however RoEs should remain in the low to mid-single digits on a recurring basis.

Lower TPs as a result of lower estimates – Our new TPs are somewhat lower than previously due to the downward revision of our estimates. We keep our Buy recommendation on National Bank (TP at EUR 0.41) and Alpha Bank (TP at EUR 2.70) which we think offer a good combination of strong fundamentals (high coverage on NPEs and regulatory capital) and attractive valuation, while we retain our ‘Hold’ recommendation on Piraeus Bank (TP at EUR 3.27) given its weaker fundamental position relative to peers (lower coverage, higher NPEs, complex capital structure). We note that at our TPs, banks would stand at 0.45x P/TBV.