What is the Real Value of Greek Banks?

Greek Banking Sector

The Greek banking system is built around four large systemic banks, whose summary statistics you can see in the table below. All four banks have undergone a significant restructuring process, whereby both the asset value and the market capitalization went down a lot. In addition, a number of reverse stock splits that were expected to boost the stock prices did not work, as you can see from the graphs, the prices are at the all-time lows.

	Total Assets, mn euro	Market Cap, mn euro	P/BV	Stock Performance, 01/2015 – 06/2018
National Bank of Greece	62,854	1,619 down from ~5bn 2014	0.28
Piraeus Bank	59,222	858 down from ~5.5bn 2014	0.11
Alpha Bank	59,012	1,945 down from ~6bn 2014	0.28
Eurobank Ergasias SA	56,789	1,394 down from ~2.7bn 2014	0.34

Source: Company publications, Bloomberg

Profitability and NPEs

Greece presents an interesting case right now. On the one hand, the Greek banks are relatively undervalued in the sense that they have been trading below the book value for the past few years. The P/BV have gone even further down after the last Greece update in March, now trading in the range of 0.11-0.34 price-to-book value.

But on the other hand, we believe that the lows are yet to be reached. Although fresh liquidity has been injected into the Greek banking system, it seems that most of this liquidity has been used to recover the losses from bad loans, and not to grant new credits to the economy. The analysis of profitability showed that all four banks do not report stable incomes, in the sense that Net Income figures interchangeably show positive and negative figures with every new publication. In addition, with IFRS9 coming into effect since the start of 2018 new loan impairment and other reporting rules may also be affecting the Net Income figures.

In order to overcome this problem, plus the fact that the bank assets as well as liabilities are shrinking, it is possible to estimate profitability using the Net Interest Margin (NIM). It is the ratio of interest earned net of expenses over the bank’s total interest-bearing assets. The ratio is immune to the drastically decreasing firm value given that net interest income is proportional to the firm’s assets value.

With regards to Greece, the NIM have been decreasing over the past 6 quarters, with NBG, Piraeus and Eurobank netting around 2.5-2.7%, with only Alpha Bank managing to stay over 3% mark. As a point of reference, the average for the healthy banking system such as the United States is 3.3% as of the 1st quarter 2018. However, comparing U.S. NIMs vs the Fed rate across time, we came to the conclusion that when the economy is close to the zero lower bound, the NIM can be anywhere in the range of 2.9% to 3.8%, while with the recent rate hikes the NIMs have been increasing slowly but steadily. This implies that while the ECB is keeping rates negative close to zero, Greek banks might see fluctuations in the net interest margins, and it should not be a cause for concern.

Source: Company publications, FRED

On the other hand, considering the amount of non-performing exposure (NPE) of Greek banks, the situation is worrisome. The NPE exposure of Alpha and Piraeus has been above 50% over the 6 quarters examined below; those of NBG and Eurobank have been decreasing. However, a decrease of 3-5% over this time frame is definitely not going to impress investors, who are expecting a much faster convergence to the European NPL average of 4.81% (as of the 1st quarter 2018).

Source: Company publications

Macroeconomic Environment

Greece formally got out of its bail-out programme last August. The macroeconomic conditions have been dramatically improving in the recent years and Greece is growing again. It has avoided political crises and have implemented very important structural reforms. The markets seem to appreciate that and have placed Greece back in the game or, at least, on the bench.

GDP grew by 1,4% in 2017 and is set to grow by 2,5% in 2018. The fiscal balance is positive by about 4bn euro and exports are on the rise. Greece’s huge tourism industry is booming and recording new highs every year. The credit rating agencies have improved the ratings of Greece, more specifically S&P rates Greece at B+ as of September 2018 (while in August 2015 it was at CCC+). Two weeks ago, during the Thessaloniki International Forum, the Prime Minister announced that the corporate tax will be reduced from 29% to 25% in the following years and also introduced a programme that is going to make Greece attractive for foreign investments.

A successful 30bn euro bond swap took place in November 2017 and exchanged 20 old series of bonds for 5 new series. This significantly improved the liquidity of the Greek bond market and was probably the decisive factor in updating the credit rating of Greece. Moreover, the balance of deposits in the Greek banking system has returned to 145bn euro from the low of 120bn euro in 2015-2016. Last but not least, the dependence of Greek banks on the Emergency Liquidity Assistance (ELA) has fallen from 115bn euro in 2015 to 5,4bn euro as of most recent data.

Trading Strategies

Given the above-mentioned analysis, we believe that in the short-term uncertainty regarding the exit of Greece from ELA is yet to be seen. As remaining to be seen are some serious steps concerning the decrease of the non-performing exposure of the Greek banks. These two factors make us believe that the banks’ stocks will face new lows in the short run. However, given the overall improvements in the economy, the strong NIM figures of all banks except for National Bank of Greece, and extremely low price-to-book values make us believe that they are worth considering as a longer-term investment.

On the other hand, it may be a good idea to focus on the non-financial side of the stock market. The Athens Stock Exchange has been down since the beginning of the year, driven mostly by the fall of the major banks. However, the banks’ weight in the index is unreasonably high accounting for 18.32%, while their market cap is only 5.76%.

In particular, it is notable that during the last 3-4 months the stocks of the biggest and strongest Greek companies Opap, OTE, Mytilineos, Grivalia are trading in a very narrow range. For Example, Opap in the last 3 months is trading between 8.75 and 9.80. OTE is trading between 10 and 11.50. Mytilineos is trading between 7.90 and 8.80. Grivalia is trading between 8 and 8.80. What is common for all these stocks is that they all have very strong fundamentals and are leaders in their respective sectors and all run stock repurchasing programs. Opap is paying dividends close to 7% each year, OTE is paying dividends of 5%, Mytilineos 5%, Grivalia 5%. All these companies each year produce bigger EBITDAs and net incomes reflecting the more and more improving situation of the Greek economy. So, finding one of these stocks in their bottom range we believe it will be a very good buying opportunity. The movement between the bottom and the top limits and back has happened numerous times in the last months and even weeks. OTE is the number one player of telecommunications in Greece with turnover exceeding 3bn. Mytilineos is an energy and steel producing company, with big exporting activity. Grivalia is the biggest Greek real estate investment company. One could characterize these companies as the safest bets of the Greek Stock Market.