Foreign reports remark on big profits of Greek banks

The big rise in Greek banks’ profits makes the recent rally in their share prices, even the premium at which they are sold, understandable, according to four recently published reports. The reports were published by investment banks UBS and Salomon Smith Barney (SSB) and two of them by international credit rating agency Moody’s. Certainly, all reports have their caveats, but both investment firms have increased their target prices, while Moody’s appears certain about the banks’ good credit ratings and sees no downside. The Greek banks’ advantage, but also the source of potential danger, is their rapidly expanding loans portfolio, which boosts their profits but may, in the end, lead to an increase in the number of non-performing loans, threatening their credit rating. UBS Specifically, Swiss investment bank UBS remarks that Greek banks have a price-to-expected-earnings (P/E) ratio of 11.9 compared to 11.4 for European banks, that is, a small but not negligible premium. However, the Greek banks’ profits are expected to increase by 25 percent in 2004, compared to an average of 13 percent for European banks. Indeed, UBS believes that this rate of profit rise will continue into 2005. It bases this forecast on the favorable economic climate in Greece, for which it estimates an average gross domestic product (GDP) annual growth of 3.6 percent in the period 2003-2005, compared to 1.6 percent for the eurozone. It also expects an average annual increase in loans of 14 percent, especially in the market segments where profit margins are highest (retail and small and medium enterprises). It estimates that costs will not grow faster than inflation and that the sector’s capital base will improve. Of the five banks it follows, UBS singles out Alpha Bank as the most attractive stock. Piraeus Bank is also attractive, while UBS goes neutral on National Bank, Eurobank and Emporiki Bank. For Alpha Bank, it improved its recommendation to Buy 1 from Buy 2 and kept the share target price at 21.1 euros. For Ethniki, it improved its recommendation to Neutral 1, from Neutral 2, an a target price of 18.9 euros per share. It kept Eurobank at Neutral 1,but increased the target price to 15.7 euros, from 14.5. It raises its recommendation for Emporiki to Neutral 2 from Reduce 2 and its target price to 15.2 euros, up from 14.7. Finally, Piraeus Bank is graded at Buy 2 and its target price is 10.5 euros. SSB Salomon Smith Barney remarks that Greek banks have increased their spreads in a low-rate environment and «drastically» improved on their previous year’s performance. It is most positive about National Bank, whose target price it increases to 19.4 euros per share, from 14.8. Alpha’s target price rises to 18.4 euros from 13.5. Moody’s Moody’s focuses on longer-term trends. It says banks’ credit rating is stable and «supported by the gradual transformation of the banking system, which is strengthening its institutions, and the good growth prospects for financial services in the country’s relatively underbanked market.» But it warns banks’ risk profile increases due to high loan growth. It also says banking is one of Europe’s most concentrated sectors.

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