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Greek Banks
A more conservative look on Greek Banks – 1Q08 results preview
The liquidity crunch and the continued strong demand a nd growth of loans has increased Greek banks interest for
deposits and has resulted in a fierce competition in the domestic market, especially on time deposits. Current time
deposits spreads have turn into the red while anecdotal evidence shows that in certain cases, time deposits spreads
have gone as low as -90bps with rates offered from more distressed banks in the region of 5.5%-5.6%. From
another point of view inter-bank rates seem to stabilise at much higher levels, indicating the difficult operating
environment for banks. The elevated cost of funding could potentially affect loan growth and asset quality could be
at risk given the lower GDP growth and the lower levels of disposable income.
Given that the crisis seems not to be over yet, we revisited our models taking a more conservative stance on our
overall assumptions. In general, we have downgraded our estimates by some 7% on overage, factoring in lower
deposit spreads, lower loan volumes, lower commissions (given the slump in equity markets) and softer trading
gains. Our current estimates are some 7% below consensus and c. 9% below the bank’s business plan targets.
Regarding our target prices and recommendations, we reiterate our Buy ratings on EFG Eurobank (TP EUR 25.2),
Piraeus Bank (TP EUR 25.8) and Alpha Bank (TP EUR 25.2). EFG Eurobank is our new top pick given its welldiversified
business model (presence in seven counties and no significant dependence in just one market), the
strong momentum in domestic deposit growth (domestic deposit market share is way below its “physical” size), the
significant upside potential from foreign operations (two of its franchises were still on the red in 2007) and the
undemanding valuation, (now trading at par with its European peers against a 30% historic premium). We have cut
our rating to Accumulate on National Bank (TP EUR 37.2) due to its increased risk profile, given its sizable
dependence on Turkey, where the geopolitical risk have increased and the danger on its NII that relate with its hefty
deposit spreads and its favourable deposit mix, both being at risk. We have downgraded Hellenic Postbank to Hold
due to its recent rally, reiterating our EUR 13.8 target price. Finally, we reiterate our Sell rating on ATEbank and our
Hold rating on Bank of Cyprus, cutting however our target prices to EUR 2.6 and EUR 10 respectively. We value
both banks on a discount against their Greek peers, on risks due to their high dependence on domestic deposit NII
which is at high danger given the price war on deposits, both in Greece and in Cyprus.
Apart from our more conservative assumptions, we also present a sensitivity analysis on deposit spreads being
further pressured, on loan volumes being softer than currently expected, on higher provisions and on trading income
being softer than expected. We believe that these will be the factors most at risk should the crisis is prolonged.
Admittedly, this should not be the case for 2008 earnings but if the crisis is continued, it will defiantly impact FY09
results. Under this bearish scenario, we identify a potential 30% additional downside risk to our (already cut) earning
estimates. On NII alone, Greek banks could potentially lose up to EUR 1.1bn on their domestic deposit net interest
income if time deposit spreads turn to -40bps and the system deposit mix turns to 60% time / 40% core (from 50/50
in FY07). The impact on earnings varies significantly from bank to bank, with the average hit being 14% for the 4
major Greek banks (NBG, Alpha, Piraeus, Eurobank) and over 35% for ATEbank and Hellenic Postbank.
Regarding 1Q08 performance and despite the challenging operating environment, we expect another robust quarter
for Greek banks with strong volumes and core profitability generation. In our view, the first quarter should not be
indicative of the impact of the crisis as all Greek banks entered the year with excess liquidity while loan demand and
growth continued unabated. Still, in terms of bottom line growth, the difficult comparables of 1Q07 that included
many one-offs and the weaker trading gains of this quarter, should present negative growth for the aggregate level
of profits of our banking universe. We expect the aggregate level of net profits of our banking universe to post a 17%
negative growth with four out of the seven banks reporting lower net profits compared to 1Q07. On the other hand,
the strong growth of core revenues (NII + commissions) and the milder growth of operating expenses should lead
Greek Banks to announce robust core profit growth. We forecast a robust 16.4% growth of core profits for our entire
banking universe. On the spread front asset side spreads are seen rising while deposit spreads should be further
pressured. Foreign operations should post strong results with impressive loan growth and booming profitability.
Contents
Executive Summary....................................................................................3
A closer look on deposits..........................................................................5
A stress test on volumes, provisions and trading gains .................. 10
1Q08 results preview............................................................................... 14
Sector valuation........................................................................................ 17
Company profiles..................................................................................... 18
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