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Now discounting a more optimistic outlook for the
Greek banking sector in the context of improving
market risk conditions. Following a comprehensive
analysis of margin dynamics in the domestic market, we
conclude that the increase in domestic NII seen at most
banks in 2Q09 was the start of a recovery trend. In the
short term, we still see potential for loan repricing,
mainly on the banks’ corporate books, and for more
rational pricing on term deposits (helped by better
conditions in the debt markets). In the long term, given
the large base of sight deposits and their relatively low
loan-to-deposit ratios, Greek banks should be
beneficiaries of a change in the interest rate cycle. We
account for this potential in our Bull case scenarios.
Alpha (OW) remains our top pick; upgrading EFG
from UW to OW: Alpha should benefit the most from
the margin trends described above, due to its exposure
to corporates (c. 60% of domestic book), its funding
position (deposits account for 70% of total funding) and
the fact that it suffered more from deposit competition in
4Q08. Also, given its conservative loan portfolio, the
bank should revert faster than others to mid-cycle
profitability. At EFG we still expect a harsh deterioration
in asset quality in the next few quarters. However, we
are now more comfortable about the bank’s capital
position and less bearish about some of its SEE/CEE
operations, which allow us to focus on the bank’s
earnings potential in the long term.
Downgrading NBG to EW: We believe the market
overestimates the potential growth of domestic margins,
given bond hedges and the benefit of low rates to the
bank’s domestic mortgage portfolio (40% of book) in
2009. Although we subscribe to the thesis of earnings
momentum in Turkey, we believe this is widely
discounted in the bank’s premium valuation (2.3x
P/tangible NAV 10e). On a long-term reading, we think
that consensus underestimates the cost of risk of the
bank’s Turkish operation and hence overestimates
NBG’s sustainable RoE.
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