What’s new? Alpha Bank was the last GR bank to report Q3 results yesterday. General picture: Banks are doing a good job with NPEs, which are going down (securitized) fast, while new NPEs are negligible. Normalizing CoR drove annualized pre-tax RoTE at 8%. However, a good part of pre-tax income reflects NPE and TLTRO income, to go missing in 2022. Loan balances are not moving despite gross disbursements (banks blame repayments) and DTA weight on TBV and CET1 continues to look bad. The recent Covid-Omicron-variant correction means banks are now trading 0.44x TBV 2022 with Eurobank (0.60x) and Piraeus (0.31x) standing out. Eurobank thanks to foreign earnings contribution and Piraeus due to weak CET1 (in our view). Banks insist on reinstating dividends. We consider this quite tricky, given the large amounts of DTA and state guarantees. New loans remains the real catalyst, in our view.

The next time you feel like mocking equity analysts on the ambiguous and/or arbitrary valuation assumptions backing their stock recommendations, do yourself a favor and go through the equity valuation of Cairo Mezz (CM) and Phoenix Vega Mezz (PVM) performed by Big 4 accounting/consulting firms. In the context of NPE securitizations, Eurobank and Piraeus Bank (respectively) established entities with the objective to hold mezzanine and junior notes that were not sold to third parties; they distributed the shares of these entities to their shareholders for free; and they floated them into the Greek stock market. Following PVM’s recent floating, investors asked our opinion about these entities and what we believe their worth is. Our view is they are not worth much (if anything at all). Investors should treat them as highly speculative trades. CM trades 0.64x TBV while PVM trades 0.82x TBV; the former at par with Eurobank’s own P/TBV; the latter at a huge premium to Piraeus P/TBV. We find this simply inconceivable.

Piraeus reported Q2 results communicating a strong set of numbers, especially on P&L and loan disbursements. After going through the numbers, and although we do not yet have the full IFRS report (will be available on August 8), we conclude the numbers do not look as great. In fact, were it not for NPE income (to be lost), TLTRO income (to be gone as well) and trading gains…there is not much left to cheer about. Only strong fee generation, which nevertheless is within short- and medium-term guidance. Not to mention Piraeus is incorporating a lower quarterly number in the short term.

We have set up a Scorecard for Greek Banks. Placed side-by-side, you can see which bank scores good or bad in P&L items; balance sheet; asset quality and capital. We are also showing their theoretical valuation based on a) their own RoTE 2022 guidance and b) our own RoTE estimates.

Good Morning RG readers! Following a pause for Q4 reporting season, we resume our RG Banking Blog.

ALPHA (mkt cap E1.91bn; P/TBV @ 0.32x); NBG (mkt cap E2.35bn; P/TBV @ 0.45x); EUROBANK (mkt cap E2.81bn; P/TBV @ 0.56x); PIRAEUS (mkt cap E2.49bn; P/TBV @ 0.48x)

We will start with, quite important, sovereign news. S&P upgraded Greece’s rating by one notch to BB and maintained positive outlook. The upgrade was rather unexpected. The new rating is two notches below investment grade, which Greece has not seen for a decade. The agency expects Greece to grow by 4.9% this year and by +5.8% in 2022.
Basic underlying assumption: the main message from banks’ business plans and RoTE guidance (9%-10% by 2022-2024) is aggressive loan targets of E25bn-E30bn cumulative by 2023 (net of repayments). This is +20% more than outstanding net loans as of Dec 2020. Driven by EU recovery fund money that will co-finance 170 projects, investments and reforms included in Greece 2.0. Without new loans, there will be no replacement of NII income lost from NPE reduction or any fee & commissions generation. Important to remember that NBG and Alpha speak of pre-tax RoTE whereas Eurobank and Piraeus about net income RoTE.
Two leagues: it is quite clear that NBG and Eurobank are in one league and Alpha, Piraeus in another. The former two stand out in terms of NPE reduction and FL CET1 but also carry what we call an MSCI inclusion premium. Their premium P/TBV and YTD performance reflect speculation of being included in MSCI Greece, with the Index review to be announced on May 11. What about the other two? We expect them to (keep) moving together.
A league of its own. Piraeus is a question mark as although the SCI price was at E1.15, the stock closed +13% higher at E1.99 with P/TBV at 0.48x. If it stays there, we expect Alpha to follow. It would be strange to see Piraeus (or Alpha) at par P/TBV with NBG, given its slower NPE reduction plan and lower FL CET1.
DTA paradox: conceptually, carrying large amounts of DTA on balance sheet is not a good thing. Especially in the case of GR banks where DTA equals 95% of TBV, o/w 66% in the form of DTC which counts as reg capital. Here is the paradox: Alpha has the lowest DTC, both in abs and % terms, at E3bn (= 39% of TBV pre-Galaxy). But its overall DTA is higher than Eurobank or NBG. According to regulation, the excess amount (DTA-DTC) is deducted from FL CET1 capital. Well not all of it, but any amount >10% of equity. So when the bank takes a hit on equity (eg. Galaxy), it suffers from a disproportionate hit on FL CET1, as the amount of non-guaranteed DTC to be deducted goes up. We believe this is the reason why Alpha is not more aggressive on NPE reduction. What can be done? The only way to improve this is to follow Eurobank’s example which wrote-down E160m of DTA in Q4 2020 (ideally without reducing DTC).
NBG to reverse Frontier loss in 2021? The thought popped up when we read IFRS notes describing the NBV of Frontier loans stood at E2.6bn, supposedly after the E0.4bn hit. The NBV compares with senior notes of c. E3.0bn estimated by the bank (it has applied for an amount of up to E3.3bn). This makes us wonder why take the hit to begin with? And whether it will be reversed once the senior note tranche value is finalized. If this is the case, NBG will be reporting at least E500m of one-off gains in 2021, o/w E200m in GGB gains booked in Q1. Not bad.
NBG consumer loans. We were quite surprised to see a Greek bank advertising consumer loans on TV recently. NBG offers between E300 to E2,000 in cash, without collateral, for a period of 12-48 months @ 3M Euribor + 14.20% (ouch!). The bank reported L/D of 55% in Q4 and aims to bring NPE ratio down to 6% by 2022. Consumer NPEs stood at just E318m in Q4 2020.
That’s all! Thank you for reading!
Market Caps based on last day closing; P/TBV based on our 2021 estimates pro forma for securitizations.