As expected, the ECB changed the TLTRO III terms to eliminate the carry trade and wipe out the excess liquidity from the market, in its fight against inflation. It also lowered the interest rate paid on minimum reserves.
With Greek Banks holding E51bn of ECB funding, we estimate the impact to be a negative -15%/-21%/-214bps on their 2023 NII/PPP/RoTE – but is 100% muted by the equivalent positive impact from the interest to be earned on their E59bn deposits with the ECB. The only possible exception is Alpha Bank, which could be net negative.
The above is isolated to 2023 as most of their TLTRO matures in December. Still, it would not be a surprise to see early repayments, especially since the ECB added three additional such dates to the calendar. 10 TLTRO III auctions took place between Sep 2019 to Dec 2021, each with a maturity of three years. Greek Banks raised most of their TLTRO on ECB’s Dec 2020 auction.
What did the ECB decide? Recalibration of TLTRO terms and lower remuneration on minimum reserves…

In this note we outline the investment summaries of all Greek names we cover. We start off with a few points on macro and politics and our OI rated names, highlighting any changes compared to our previous assessment in June 2022.

Inflation, inflation, inflation
Real GDP grew by +7.8% yoy in H1 reflecting strong domestic demand (+9.5% yoy) and rebounding tourism (beating record 2019), while the inflation rate ran +12% yoy in the 12 months to September, pushing nominal GDP even higher at +16.9% yoy. This is important because it dilutes the public debt/GDP ratio (from 199% in 2021 to 170% in 2023, IMF), without increasing the financing needs of the sovereign (1.5% GDP annual), as most of the sovereign debt is fixed at low rates (76% owed to official creditors), and it allows the government to spend both during the pandemic (20% of GDP) and the energy crisis (2% of GDP).

The catalysts for 2023 include GDP growth staying in positive territory, winning back investment grade and to avoid a political turmoil from scheduled elections. This is our base case scenario for Greece. However, we cannot escape our conservative disposition. Therefore, we keep a single OI rating among GR banks (NBG) while upgrading Bank of Cyprus to OI. We stick to our OIs on OPAP (dividend yield), PPC (renewables), Motor Oil (renewables) and Jumbo (valuation).
OTE looks more attractive below E16/share and the same goes for Hellenic Exchanges below E3/share, which we consider to be a proxy for the banks, assuming you can afford to invest in a such low market cap name. We urge readers to ignore any sirens singing ‘everything is a buy’ in Greece. We believe the day of reckoning is here and fundamentals play the key role. Our GR universe (x-banks) trades 6x EBITDA and 10x earnings 2023 while on a dividend yield of 5%. These multiples are cheaper than four months ago (6.7x EBITDA and 10.9x earnings) thanks -mainly- to the market de-rating.

What’s new? Bank of Cyprus announced on Friday it has rejected three consecutive cash offer proposals from private equity Lone Star, with the highest one at E1.51 per share, valuing the bank at E674m or 0.40x TBV actual Q1 2022/FY 2022E. BoC’s board rejected the offers as fundamentally undervaluing the bank, and strongly urged shareholders to take no action at this time. Reportedly, Lone Star has until Sep 30 to make an official offering directly to BoC’s shareholders.
Conclusion. We expect M&A speculation to prevail in the short-term trading of the stock and until it becomes clear whether Lone Star (or a counterbidder) will make an official offer. On our 2024-2025 TBV/RoTE/CoE estimates, BoC’s equity is worth E2.08 – E2.19 per share or an implied 0.63x – 0.69x TBV 2024-2025. We reinstate our Price Target at E2.1 (middle of the E2.08-E2.19 price range) and upgrade our rating to OI.
If we incorporate the full impact on NII from higher interest rates, as per BoC guidance, valuation rises to E2.69 per share and the implied P/TBV at 0.83x 2024E. As we noted in our latest Q2 Wrap Up research note on Greek banks, we have a strong conviction that, under our base case scenario assumptions, BoC has no reason to trade below the average 0.43x P/TBV 2023E of its Greek peers or even below the 0.50x-0.54x P/TBV 2023 of best NPE/CET1 positioned Eurobank and NBG.
What should shareholders do? If you believe BoC’s RoTE will not exceed 5% by 2024 you are better off selling at any price close to E1.5 per share. Our base case scenario is that BoC’s RoTE will reach 7.5% in 2024 and rise to 8.3% in 2025; both below management guidance for >10% RoTE 2024, driven by the c. 30% uplift in NII (starting in 2023) from higher interest rates.

What’s new? Inspired by IMF’s recent blog, that places Greece among the 5 least affected EU countries from a full Russian gas cutoff, we outline our thoughts and arguments below as to why Greece is probably a better investment case than what is implied by the energy crisis, inflation- recession fears, and the ongoing impact from the pandemic.

Conclusion. Our base case scenario is that a) Greece can avoid a recession in 2023-2024 even if the war in Ukraine continues beyond 2022 and Russia cuts off the gas supply to Europe entirely; b) Greek banks should be net gainers from higher interest rates; c) ECB will continue to support the sovereign, lifting its chances to earn investment grade rating and d) New Democracy will win the elections whenever these take place (early or on time).

OI picks plus DOI picks at lower prices. In this context, we recommend investors own NBG, Alpha, OPAP, PPC, Jumbo and Motor Oil (our OI rated names) and consider OTE and Hellenic Exchanges below E16.0/share and E3.0/share respectively. We also reiterate our suggestions, flagged in our mid-year strategy update on June 2022 (‘War on Equities’), to switch from TEN (post M&A) and MYT to MOH and PPC; from ELPE to MOH; and from SAR and Fourlis to Jumbo.

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