Banks’ shares too expensive?

The premium enjoyed by Greek stocks is hard to justify, according to the latest research on the domestic bank sector by US investment firm Merrill Lynch. The research, published earlier this week, recommends mostly a neutral stance on Greek banks – that is, investors should hold on to their shares – despite estimating that bank loans will continue their double-digit growth until 2006, at the earliest. The Merrill Lynch analysts remark that the Greek banks’ average share price-over-earnings ratio (P/E) for expected 2005 earnings stands at 14, while the average P/E for European banks is 9. «In our opinion, it is difficult to justify this premium… we believe that shares of Greek banks do not offer great value to investors,» the report’s authors say. This argument is supported by the fact that the estimate average annual rise in profits for Greek banks during the period 2003-2005 is 21 percent, equal to that of European banks, while return on equity is 14 percent for Greek banks and 20 percent for European banks. Given this situation, Merrill Lynch maintains its «neutral» recommendation for the largest three banks – National, Alpha and EFG Eurobank – as well as its «sell» recommendation for Emporiki Bank shares, «despite the favorable opinion we have of the new Emporiki management and the restructuring plans, and its recent underperformance.» We note that the report was published before the announcement of half-year results for Alpha Bank and National Bank, on Wednesday and Thursday, respectively. On average, Merrill Lynch expects an average rise of 17 percent in year-on-year second-quarter profit and an average drop of 7 percent compared to first-quarter results. The year-on-year rise will be the result of 16 percent credit growth and stable profit margin. However, income from trading shares and securities will decline 48 percent compared to the exceptionally strong results of the first quarter. Merrill Lynch further remarks that its estimates about end-year profits is 1 percent lower than the average of analysts’ predictions and 8 percent lower for 2005. On specific estimates about banks’ earnings, Alpha is the only bank for which has revised its 2004 earnings estimates upward, even if by a paltry 1 percent. For the same bank, it revises downward its interest net earnings and commission earnings estimates, although it maintains its cost estimate. Finally, it revises downward its earnings per share estimate for 2005 – by 4 percent – because of a projected decline in the credit expansion rate to 13 percent. Merrill has proceeded into a significant downward revision of Emporiki Bank’s earnings per share – by 41 percent in 2004 and 23 percent for 2005 – following briefings by Emporiki’s management about its restructuring timetable. For 2004, it has reduced its estimates about net income from taxes by 4 percent and about net income from commissions by 3 percent, but has increased its estimates regarding provisions for bad loans by 22 percent. For 2005, it has reduced its earnings estimate by 2.5 percent and increased cost estimates by 3 percent. Concerning EFG Eurobank, Merrill Lynch has revised its profit estimate by 4 percent for 2004 and 5 percent for 2005 due to reduced income from its main activities. It has also revised estimates about net earnings from interest and commissions in the second quarter by 15 percent and 12 percent, respectively. For the same quarters, it expects that Eurobank will announce an increase of 38 percent in pretax profit year-on-year but a 5 percent drop compared to the first quarter. The reason for the big annual increase is a 19 percent rise in net income. For National Bank, Merrill Lynch has revised its earnings per share estimates by 2 percent downward for 2004 and 7 percent upward for 2005 because of additional net income from interest.