Top Greek banks have great potential, CSFB report says

Investment bank Credit Suisse First Boston said that prospects for the top three Greek banks over the next three years are good. It believes National Bank’s prospects are best, followed by Alpha Bank and EFG Eurobank. «Despite the post-Olympic gloom, we believe the outlook for the next three years remains positive. First, in our view, the above-average GDP growth expected for Greece for this year and next and the modest loan penetration in the country should lead to double-digit loan growth. Second, although in the medium term there should be some form of margin correction, we think the high sector concentration and the lack of not-for-profit banks should allow margins to remain well above those in other countries. «Finally, the sector’s strong liquidity and solvency levels should allow the banks to keep expanding into the Balkans, which over the medium term should offer good growth opportunities,» the CSFB report says. Despite the fact that the three stocks have performed quite well over the past year, CSFB believes that there is still room for improvement. Thus, it sets a target price of 23.70 euros for National Bank, 23.40 euros for Alpha Bank and 20.80 euros for EFG Eurobank. All three banks gained significantly yesterday on the news of the report, driving the Athens Stock Exchange general index past 2,400 points for the first time since June 16. «During the past 12 months, Greek banking stocks have been some of the best-performing of the European banks. We believe this is owing to strong revenue generation on the back of increased loan demand, high interest margins and strong fee income, as well as cost control, which has boosted the banks’ average return on equity (ROE) to 14.8 percent in 2003 from 10 percent in 2002. During the first half of 2004, the combined earnings growth for the three Greek majors was 45 percent, with a further ROE expansion to 18.5 percent from 14.8 percent at the end of 2003,» the report says. «The strategies of the three banks concerned are fairly similar, although they are at different stages. Apart from the common focus on cost control, a dominant theme is household lending penetration, through either mortgages or consumer loans, or both. Another theme is the optimization of the existing excess equity through either RWA growth or share buy-back programs. Finally, as a way to grab new growth opportunities, most banks are trying to expand into the Balkan region. «In this report, we initiate coverage on Greece’s three largest banks by market capitalization as well as assets. Of the three stocks, we prefer NBG, given its strong potential for restructuring and revenue optimization. Unlike other banks, only by re-engineering the business can NBG deliver significant earnings growth therefore it is relatively less dependent on the cycle. We have an Outperform rating on the stock and a target price of 23.70 euros. «We also initiate coverage on Alpha Bank with a Neutral rating and a target price of 23.40 euros. Although on 10.1 times 2006 estimated adjusted earnings, the bank is arguably the least demanding and after strong progression in the past two years, we believe the potential for ROE improvement is lower relative to the peer group. «Finally, we rate EFG a Neutral, with a target price of 20.80 euros. Although the bank is arguably the best managed in the sector and has the highest ROE profile, on a 2005 estimated share price over net asset value (P/NAV) of 3.4 times, we believe that is mostly incorporated in the share price.» CSFB explains the higher target prices it has assigned despite the fact that the stocks appear overvalued, compared to other European banks. «In terms of valuation, on conventional multiples, the sector looks expensive. At current levels, the combined Greek majors trade on 12.3 and 10.6 times 2005 and 2006 estimated adjusted earnings, respectively, compared with 10.6 and 9.5 for the European banks sector. The 2005 estimated P/NAV multiple is 2.3 versus the sector’s 1.9. However, multiples are more in line with other high-growth potential Eastern European banks. To a large extent, we believe this is justified by the sector’s higher growth prospects, which should translate into a greater improvements in ROE. We expect the combined ROE for the three majors to increase from 14.8 percent in 2003 to a peak of 22.7 percent by 2006. This compares with an estimated expansion from 11.5 percent to 15.2 percent for the European sector over the same period. In addition, the relatively low levels of banking penetration in Greece and the potential for cost restructuring in some of the banks should allow returns to be maintained over a longer period of time,» the report says. The report praises the appointment of new National Bank chairman, Takis Arapoglou, a former high-level Citibank manager, and says it guarantees that the bank will undergo the necessary restructuring. «In our view, the appointment of Takis Arapoglou as the group’s new chairman and CEO earlier this year is a good step toward further operating restructuring and an increasing focus on equity optimization as a way to create shareholder value,» CSFB says. «By the end of this year, management will announce a business plan with a set of financial targets and the means to achieve them. Overall, by delivering on these targets, we believe NBG could secure significant earnings growth during the next few years. For example, if the bank was able to redirect its strong deposit base out of bonds and into customer loans at their prevailing yields, without changes in the loan mix, it could potentially enhance net interest income by 370 million euros, on our estimates. In addition, in the asset management business, if NBG could reduce the weight of money market funds to the peer group standards, it should improve margins from the current 48 basis points (0.48 percent) to nearly 100 bp (1 percent), with a boost to revenues of approximately 40 million euros. On the cost side, the acceptance of the voluntary redundancy plan by half of the 1915 employees would yield savings of 44 million euros per annum.»