We have not become structurally positive but we are meeting the Greek government halfway in its U-turn towards implementing the adjustment program; we assign an OWN IT rating on Eurobank (0.39x TBV 2016E)– the only Greek bank with upside (+30%) from current levels based on RoTE/CoE implied P/TBV valuation without accounting for future capital returns. It will be a bumpy ride for Greek equities in H1 as the 3-seat majority coalition government is tested by the last socially sensitive structural reforms (pensions, farmers). Our estimates are conservative; deposits is the single most important metric/indicator for assessing both the sovereign and the banks in 2016.

ECB CA 2015 results (AQR + 2.5YRS stress tests) revealed a capital shortfall of E4.4bn (baseline) and E14.4bn (adverse); hardly a surprise given latest speculation in the press and overall expectations; Alpha and Eurobank scored better and theoretically enjoy an easier task accessing private investors; their equity proposition at baseline (2017) 0.39x TBV/2.5x PPP and 0.31x TBV/1.7x PPP (post money) on our calculations compared with 0.66x TBV/3.2x PPP for NBG and 0.62x TBV/4.6x PPP for Piraeus (see details inside our research note); baseline P&Ls imply weak RoTE 2017 < 4% for either bank; next steps: a) banks will submit capital plans by Nov 6; b) GR government will announce CoCo portion and preferred stock treatment in HFSF injections; c) recap will take place by year-end (book-building process).

In this RG F4T we focus on the recapitalization of the Greek banks. Our aim is to outline the most important aspects of this process which authorities aim to complete by year-end and before the bail-in directive kicks in. As per most recent press stories the recap amount will not exceed E15bn – i.e. much lower than the E25bn reserved in the 3^rd bail-out, with banks seeking c. E5bn of private money. We are not happy with such an amount; we believe more funds would be needed to enjoy bigger chances of cleaning up bad loans -> lowering loan rates -> resume lending -> help Greece grow. Deposits would then return into the system. If press reports are right and banks raise E5bn of private money under baseline assumptions and the rest as contingent capital, this would actually turn to be an ‘important privatization’ by the Syriza-Independent Greeks coalition government, against their pre-election rhetoric. In the meantime we expect DTC and preference shares (NBG, Eurobank) will, at some point, backfire. Alpha Bank screens better than its peers, which was also the case in 2014 stress tests. All in, we fail to see how the no.1 problem of NPLs is addressed. We do not rate the banks. More to follow as stress test results are published this Saturday.

Stress test assumptions have not been disclosed yet therefore we are assessing banks’ capital needs using our own AQR (NPE & Collaterals), PPP (mitigating) and DTC (cap % TBV) scenario. Alpha and National screen best (expected). We believe banks should exploit the full E25bn recap money as the second best thing to a bad bank that could bring normalization closer; adjustment program targets up to 2017 look more realistic than ever; a solid government coalition emerging from next week’s elections would be the best bet towards a sovereign recovery. We are not rating the banks.

With ELA maintained at Friday’s level the Greek government had to impose capital controls and keep banks closed until after the referendum takes place. The Greek economy has entered unchartered territory but we are certain economic activity will freeze. In this context we are withdrawing our ratings (previous DOI) and target prices on Greek banks. At this stage, the number one priority for the sector….to access this report contact@researchgreece.com