The bank stock slump has gone on for too long and valuations are now exceptionally low, say senior credit sector officials. However, analysts questioned on the issue by Kathimerini say the problems that Greek lenders are facing will not be overcome quickly, justifying the pounding the sector has sustained on the Athens stock exchange.
In the last month alone the banks index has dropped 27 percent, or 65 percent of the stock value of the four systemic lenders (National, Alpha, Eurobank and Piraeus) after the most recent recapitalization in 2015, and 88 percent of that following the 2010 share capital increase.
This storm of pressure on Greek banks in recent months has seen their total stock value shrink to just 5.7 billion euros.
The key issue for local lenders is their very high ratios of nonperforming exposures (NPEs), according to the head analyst of a major European bank who is monitoring the Greek market.
He told Kathimerini that this is one of the main reasons for the pressure on Greek bank stocks. The NPE ratio must be brought down, and the targets for some banks look more challenging than others. On the other hand, some banks have high capital adequacy ratios.
Investors think that the targets will be hard to attain, leading to the likelihood that another capital raise will be required; yet it will be very difficult to find fresh capital, the analyst added: “Therefore Greek banks will try to do it steadily on their own.”
Another reason is that local banks trade on very thin volume, and this is a big problem when it comes to share price performance as just a few moves can make a big difference.
A third reason is the weaker delivery in the last quarter. The results season was somewhat disappointing, the analyst noted, with weaker-than-expected capital build-up by the banks. Losses were higher than expected, due mostly to non-recurrent items and a negative impact from the portfolios available for sale.
Another factor worth considering is that investor appetite for banks in Europe is limited, judging by the performance of bank indices (the eurozone index is down 15 percent since start of year). At the same time, we must not forget the emerging market (EM) headwinds and volatility that has contributed to the pressure around Greek assets. Money leaves EMs and Greece is an emerging market.
So domestic plus external factors explain the underperformance of Greek banks, the analyst stressed, adding that the Greek economy’s low growth environment is not helping either. And a return to normal lending practices will be critical to revive the economy.
“I think it is a combination of factors that explain the weakness in Greek bank stocks,” Athanasios Vamvakidis, managing director and head of European G10 Foreign Exchange Strategy for BofA Merrill Lynch Global Research, told Kathimerini.
“The Greek economy’s recovery has been weaker than forecast. Although banks are meeting their nonperforming loan targets, these targets are more ambitious looking forward. Capital controls remain. The market for Greek assets more broadly remains illiquid, still dominated by short-term speculators. The overall sell-off in emerging markets this year has also affected Greek assets as investors are cutting risk exposure more broadly. Greece has effectively entered a long pre-election period and some market participants have decided to cut their exposure,” he noted.
As Citigroup banking analyst Maria Semikhatova predicts, NPE reduction will remain in the market’s focus, while pressure on net interest income and earnings will persist.
“The Greek banks are working on NPE reduction targets for 2020-2021 which are likely to remain aggressive given the still high NPE levels foreseen by the end of 2019. The management teams of the banks under coverage aim to bring the NPE ratios below 20 percent and we estimate the sector will need to reduce NPEs by another 36 billion euros in 2020-2021 to bring the ratio to 15 percent, which will require a supportive macroeconomic backdrop, visible recovery in the real estate markets and increased activity in the secondary NPL market,” she wrote in a note.