Some major changes in the region have pushed Nomura to review its assessment of the Greek banking industry. In a report from Monday, April 28, Nomura expressed bullish sentiment for this recovering economy in the peripheral European region.
The report said that their earlier estimates were lowered because of a lackluster growth scenario,
Our caution on certain Greek banks was based on a number of factors. Those included an uncertain February stress test that could have resulted in as much as a EUR 20bn capital shortfall, a sovereign whose yields have been highly distressed, and a weak outlook for the economy weighing on credit losses.
However the environment has changed now, the report says that strength in Greece’s economy has now led to a revision in GDP expectations. Additionally the sovereign bond yields improved by 250 bps in just three months, which put the country back in the global bond markets.
Nomura says that Greek banks will continue to post losses through 2014 but the fall in non-performing loan charges and better operating incomes will help in making profits in next year. The report goes on to say that Greek banks are better positioned to show growth than other mid-sized southern European banks.
Specifically, Nomura estimates a return of 12% by 2016 from Greek banks’ equity. The ROTE (return on tangible equity) will be driven by increased cost savings and revenues from consolidation in the Greek banking industry. Additionally higher number of recoveries from non-performing loans could take up ROTE to 14% in 2016.
National Bank of Greece is trading at higher multiples
Nomura rates National Bank of Greece (NYSE:NBG) at Reduce, and says that the bank is trading at multiple of c1.4x 2014E TBV, which is relatively higher compared to its peers. National Bank of Greece’s shares have fallen 40% YTD, Nomura has negative outlook on National Bank of Greece’s short-term margins. The report says that Greece’s largest lender will feel the heat from rise in interest rates and fall in currency in Turkey, where National Bank of Greece is constantly expanding its business. Nomura’s estimates a cost/income ratio of 40% for the Greek banks in 2016, however National Bank of Greece will likely have higher costs, again due to its business in Turkey.
National Bank of Greece confirmed that will increase capital by 2.5 billion euros which will be formalised in May. Nomura said that this would allow the bank to offset higher cost of risks and Basel 3 impacts. The potential discount from the capital increase could also open an entry point for buying up shares, as the bank’s free float rises.
Greek banks, a favorite among hedge funds
Greek banks, a favorite among hedge funds
According to FT, John Paulson has significant positions in both Alpha Bank and Piraeus Bank. David Einhorn also has a position in Alpha Bank. According to the latest quarterly letter, Alpha Bank is among Greenlight Capital’s top five holdings. Einhorn said that the fund participated in Alpha and Piraeus’ recapitalization. The fund bought shares of Alpha in April of last year, the position includes warrants that would allow the fund to buy more shares over a period of 4.5 years.
National Bank of Greece was a major position of Contrarian Capital, however the fund sold the stake in 4Q2013. Israel Englander’s Millennium Management also wrapped up its stake in National Bank of Greece at the end of last year.
Nomura upgrades Alpha Bank, Greece’s second largest bank
Nomura has specifically switched its thesis on Greece’s Alpha Bank, the country’s second-largest lender, upgrading it from Reduce to Buy. The analysts think that the shares are cheap and the future is bright for Alpha Bank as it pulls higher capital ratios and operating incomes. The report increased earnings estimates for Alpha Bank and pushed up the price target to 0.75 euros from 0.23 euros. Nomura further adds,
“We believe that the improving macroeconomic sentiment and the increasing interest in Greek banks, translated into additional fund flows, could be positively reflected in stock prices and with Greece regaining market access, we believe it is now appropriate to use a near normalised discount rate for a given level of ROTE. We also regard as positive the increase in the four banks’ free float after recent capital increases. We believe Alpha Bank is relatively better positioned owing to its lower valuation, higher capital ratios and its relatively higher operating income.”
The report says that Alpha Bank A.E. (ADR) (OTCMKTS:ALBKY) will be negativey affected by the capital increases at its competitors Eurobank and National Bank of Greece (NYSE:NBG) in the short term but the lower share prices could be an opportunity to make an entry into this investment. Nomura thinks that among its peers, Alpha is trading at a lower valuation and thus more likely to go higher in current scenario.