Imagine someone is cutting off your energy/gas supply (QE) while pounding you with heavy artillery weapons (interest rates). The focus is on surviving the war with the help of your allies (ECB)*. Our mid-year strategy report is about which equities can get through stagflation with the least casualties. As we noted in our Feb note: ‘’ […] risk aversion will show up here too. And when it does, fundamentals will be the differentiating factor.’’
Getting through the crisis
We recommend you own OPAP, Jumbo, PPC, Alpha Bank, ADMIE; since our Feb note, we have added NBG and Motor Oil. Investors should consider adding OTE below E16; also, switch from TEN to MOH, PPC and/or ADMIE; from ELPE to MOH; from MYT to PPC; and from SAR and Fourlis to Jumbo. We favor cash flow generation and dividend yielders; energy infrastructure plays; plus, interest rate and oil price winners.
Early elections?
It is becoming consensus view the govt will go for early elections in Sep-Dec this year instead of July 2023 to a) preempt worsening macro conditions next year and b) to make sure political instability does not get in the way of the sovereign earning investment grade. The only positive market scenario would be for this government to be re-elected. This is our base case.
There will be two election rounds: the first one, lacking bonus seats for the first party, will surely yield a hung parliament; while the second round, could require a two-party coalition. The ruling party needs 37%-38% of second round votes vs. 31%-36% fetched in current polls.
The power of higher discount rates
Call it multiples de-rating or DCF hurdle rates going up. It is the same thing. With interest rates on the rise, the valuation on equities is going down. Banks can decouple given a) their CoE was elevated prior to monetary tightening and b) their NII and equity stand to benefit from higher interest rates – on the conditionality inflation does not dislocate asset quality.
10.9x P/E and 6.4x EV/EBITDA 2023E
Are the trading multiples of our Greek universe** (excl. banks). Down from 15.1x earnings and 6.7x EBITDA in 2022E terms (driven by energy stocks); slightly down vs 15.5x P/E and 7.4x EBITDA in Feb on 8% lower market cap (and +6% EPS revision). Banks trade 0.37x TBV 2023E down from 0.56x TBV in our Feb note, with our estimates broadly unchanged.
The calls that have not worked
Compared to our February strategy note: our OI calls on PPC, ADMIE Holdings and Alpha Bank have not worked. But, except for PPC (taxes, receivables), the miss is not attributed to weaker fundamentals or a change in strategy. Within our DOI calls, Terna Energy and Hellenic Bank have had a great performance on M&A grounds.
*Metaphorically speaking / with the utmost respect to the war raging in Ukraine
**Prices as of June 17
What’s new? We summarize the main points from Q1 2022 results released last week. Clean PPP for the 4 banks stood at E765m, unchanged from E762m in Q4 2021. Clean pre-tax income came in at 533m from E469m in Q4 (+13% qoq) thanks to an equivalent reduction in impairments.
Three things stood out: a) big one-offs for yet another quarter with their equity impact partially offset by OCI movements, b) normalizing or already normalized CoR and c) anemic (excluding Alpha) net lending growth. Needless to say, all banks reiterated pre-war/crisis RoTE targets towards 10% in 2022-2024 and painted a bullish picture for NII in case of rising rates (not included in RoTE guidance).
Our base case scenario is Greek banks will weather the geopolitical crisis even if they must deal with a short-term spike in their bad loan ratios. They have limited to zero exposure to RUS and UKR. This saves them any direct impact, but their business will be indirectly affected as consumers see their disposable income weakened by inflation. This is where the government steps in, absorbing some of the pain via its subsidy scheme for electricity and fuel costs.
All in, we reiterate our cautious stance on the sector as illustrated in our consistently lower than guided RoTE targets (7-7.5%% vs. 9-10%). We expect GR banks will keep trading at a 20%-25% discount to their EUR peers. Trading wise, this answers the question about when their share prices will go up. We recommend investors follow and buy Alpha (OI) and NBG (OI) on weakness, on the conditionality that the crisis does not escalate beyond the two countries.
What’s new? Q4/FY 2021 results did not include any surprises, other than 2022 net income / RoTE outlook revised downwards by -10% / -100bps (we attribute this to the more aggressive NPE reduction achieved in 2021) while not accounting for the UKR-RUS war / geopolitical consequences; also, there is no mention on 2024 targets, unlike SCI’s Project Tomorrow presentation nine months ago calling for 10% RoTE. Alpha Bank delivered E330m of clean net income / 6% of adjusted RoTE in 2021, in line with Project Tomorrow guidance. NPE targets for c.E3.0bn in 2022 was reiterated, followed by >12% FL CET1 and the intention to resume dividends out of 2023 earnings. At this point we will repeat the thoughts we made around Eurobank’s updated targets: The important point is that the outlook does not account at all for the UKR-RUS war currently raging and its consequences on the macro landscape or asset quality driven by higher energy prices and the potential of stagflation. In this sense, analyzing the guidance is rather meaningless.
In this note we are addressing the main themes surrounding Greek Banks. Part of the note is in Q&A form. Themes include new lending, DTA, interest rates and valuation. We present our estimates for 2022-2024 in the spreadsheet attached.
The power of momentum. What GR banks lack in mass, they make up for in velocity. They have stormed into 2022, with their share prices up by an average 25% YTD. Out of all the possible reasons why, none is more convincing to us than their low P/TBV multiples at the end of 2021 and the so-called ‘January effect’. The fact they are all up by the same rate, implies they are treated like a single investment case.
