What’s new? Greek Banks have reported Q2 results and have -finally- published their IFRS reports. In this note we summarize the most notable points. Banks trade at 0.46x TBV 2022 on our estimates. Next year is less predictable and banks are not providing any guidance whatsoever. What should investors do? If you are relaxed about 2023 go with NBG and Piraeus Bank. If, like us, you prefer to be on the safe side, stick with NBG.
Conclusion. Just when banks have brought down NPE ratios to single-digit levels (securitizations), can afford to lend (RWA/capital wise) and are looking more and more like banks again…stagflation/macro/energy crises overhang is weighing down on their valuation, preventing their P/TBV from re-rating.
We are keeping only NBG with an OI rating thanks to its high coverage/high FL CET1. If stagflation concerns abate, NPEs prove manageable and NII goes up on higher interest rates, you should also consider Piraeus and Bank of Cyprus, which offer the biggest risk-reward upside under such a scenario. Eurobank and Alpha have further upside from current levels, but not big enough to compensate investors for the risk involved, in our view.

What’s new? Piraeus Q2 clean PPP went up by +8% qoq driven by NII and fees +6-7% qoq, while clean pre-tax and net income grew by an even higher rate at +18% and +44% qoq respectively, the latter thanks to zero taxes booked this quarter. CoR at 83bps (incl. service fees) and annualized RoTE at 10% (from 7% in Q1), partially reflecting lower CET1/TBV than its Greek peers. The NPE ratio went down to 9% with coverage at 46%. FL CET1 remains the weakest link at 9.5% or 10.2% pro forma for H2 actions (RWA reliefs /corporate deals).
Management raised FY 2022 guidance on lending, normalized total income and normalized RoTE, although under ‘normalized’ the bank includes M2M securities gains. Even so, core/clean 2022 RoTE should end up higher than previously expected. There was no guidance on 2023 numbers (as was the case with all other GR banks).
Conclusion. We reiterate DOI and withdraw our price target on low visibility in 2023. It is quite tempting to OI Piraeus given the 100% upside implied by conventional valuation tools (RoTE/CoE).
However, the uncertainty on 2023 macro conditions combined with the regulatory capital requirements framework forces us to draw a line on any back with a FL CET1 below 12%. The risk/reward profile is attractive only if the NPE ratio stays below 17% (from 9% currently), otherwise the bank will be breaching 9% CET1, triggering recap speculation/discussions.

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.

What’s new? Piraeus Bank (CFO & IRO) held an update call with the sell-side this morning, discussing macro and banking trends. The bank painted a totally different picture than the one implied by war-energy-inflation dynamics…

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