National Bank of Greece (ADR) (NYSE:NBG) has been upgraded from Neutral to Outperform by Piraeus Securities reflecting the bank’s improved risk/return profile.

Natasha Roumantzi of Piraeus Securities’ positive rating on NBG echoes JP Morgan Cazenove analysts’ recent upgrade of NBG from Neutral to Overweight.

National Bank of Greece’s enhanced Equity Tier 1 ratio

Piraeus Securities investor report dated May 22, 2014 points out thanks to National Bank of Greece (ADR) (NYSE:NBG) concluding its recent Eur 2.5 billion SCI at Eur 2.20 per share, the bank is able to cover the capital requirements under BoG’s stress tests for both the Baseline (Eur 2.18 billion) and the Adverse scenarios (Eur 2.5 billion).

The analyst points out that BoG released its assessment report for the capital needs of the Greek banks for June 2013-December 2016 using (i) CLPs on total loans in Greece and abroad and (ii) the estimated operating profitability of the banks, based on conservative adjustments of the restructuring plans submitted to BoG by the banks during Q4 ’13. The capital needs were estimated at Eur 6.382 bn under a Baseline scenario and at Eur 9.417 bn under an Adverse scenario.

The analyst notes the Baseline used a Target EBA Core Tier I of 8% and the Adverse used a respective ratio of 5.5%. The analyst points out that Greek banks addressed the aforementioned requirements through share capital increases. The following table highlights the process for computing capital needs in the Adverse scenarios:

Capital needs-Adverse Scenario National Bank of Greece

Staff exit enhances NBG’s PPI

Turning attention to the Q1 preview, the Piraeus Securities analyst anticipates National Bank of Greece (ADR) (NYSE:NBG)’s pre-provisions income at Eur 370 million and with provisions at Eur 355 million, leading to a small net profit of Eur 4.0 million. NBG’s core PPI (excluding trading) is seen up by 24.5% QoQ, primarily due to the anticipated reduction in costs by 12.4% QoQ driven by the 2,500 employee exit plan.

The following table captures NBG’s Q1 ’14 preview as estimated by the analyst:

NBG's Q1 preview

Using Gordon’s growth model, the Piraeus analyst estimates an end-2014 share price of National Bank of Greece (ADR) (NYSE:NBG) at Eur 3.63 (as against Eur 4.81 previously). The analyst points out that the revision reflects the dilutive effect of the SCI and lower Finansbank value (1.2x book vs 1.4x previously) to better reflect market values ahead of a planned sale of a 20% stake.

The analyst notes this is the weighted average of the values derived under three tangible book value scenarios, which partly incorporate recent BoG’s stress test provisioning and profitability assumptions, resulting in a price range of Eur 4.39 to Eur 2.36 per share. The following table highlights end-2014 target value for National Bank of Greece (ADR) (NYSE:NBG):

NBG's target value computation