Regime Change : From Sell into Strength to Buy the Dips
Notable rerating to >0.4x TBV from <0.2x
Lower Greek sovereign yields, expectations for less uncertainty in the political landscape which could imply higher sustainable GDP growth rates and expectations for NPEs reduction with no need for dilutive capital instruments have enacted strong equity flows in the Greek banking universe. The outlook for profitability has improved with banks outlining plans for notable NPEs stock reduction (sds NPEs ratios by 2021-2023, down from mid 40s) along with targeted high sds RoEs by 2021-2023. Besides any negative political landscape development and lower than estimated pricing for NPEs (through scheduled sales/securitizations), we believe the investment case has likely changed to “buy the dips” rather than “selling into strength”. Valuations need to come off recent highs (>0.4x TBV for Greek banks on average) to entice a new wave of interest as discount to European peers have diminished notably (from -70% to less than 40% on average and in some cases such as Eurobank to <10%). We would buy the dips in a correction.
NBG still our preferred Greek bank – Eurobank’s pro-activeness largely in the price
We stick with our relative preference for NBG, as, despite liking Eurobank as the most proactive and first Greek bank to reduce NPEs ratio to sds levels, it is likely largely priced at 0.63x TBV if accounting for the estimated losses following the targeted securitization of €7.5bn NPEs (c€1bn of net losses). NBG looks as having more upside from current levels and valuation wise, at 0.43x it trades at a notable discount to Eurobank. We explain our preference for NBG in this note.
Piraeus Bank rerated on relief that capital strengthening will not require dilutive instruments
Piraeus Bank has staged a remarkable performance, as investors have been applauding Mgmt’s efforts to strengthen its capital without dilutive instruments, resulting in a rerating to about 0.26x TBV. Sound execution of the NPEs reduction plan is essential to justify further rerating.
How much capital buffer is there ?
a) Applying the price implied by the recent Pillar securitization on the mortgage NPEs, b) assigning a 5% pricing for consumer NPEs, and c) extrapolating the pricing for reduced and remaining NPEs, we calculate NBG could withstand deconsolidation of its corporate NPEs up to low teens (on nominal value) without resorting to replenishing its CET 1 ratio. For Eurobank, the respective pricing would be at low 20s and for Piraeus at low 40s.