Investors see even more upside in bank stocks

The rally of bank stocks continues unabated, with foreign investors leading the buying spree. This week, National and Emporiki reached year-highs, while the other big banks, with the exception of Alpha, are close to their year-highs. What attracts investors is the fast expansion of the domestic banking sector and the great prospects of the Balkans market, where Greek banks have invested heavily. Banks have by far outperformed other sectors in the past few years with their high growth rates and spectacular profits. The very fast credit expansion rate, especially in mortgages and consumer loans, has boosted the sector’s profitability, which keeps setting new records with each successive quarter’s results. In the first nine months of the year, after-tax profits on a consolidated basis in the largest bank, National, surged 87 percent compared to the same period in 2004. EFG Eurobank Ergasias and Piraeus Bank also posted record profit gains, 54 percent and 50 percent respectively. Banks’ prospects look very bright for 2006, as well. Bank managers estimate that credit expansion will slow somewhat but the pace will remain fast. Specifically, they forecast that housing loans will expand at a rate of 20-25 percent, consumer loans by 15-20 percent and corporate loans by 10-12 percent. Profits will not grow as fast because their leap in 2005 was partly the result of extraordinary circumstances, such as the great reduction in National Bank’s operating costs resulting from the early retirement scheme implemented in 2004 (and which depressed earnings that year). The spectacular rise of bank share prices since April 2003 does not seem to deter foreign investors. Reports from foreign investment houses upgrading share price targets are coming fast and furious, with the latest round coming after the announcement of the nine-month results. National Bank’s stock is the darling of foreign analysts and this is reflected in a virtuous cycle of price rises and glowing reports: As a result, National Bank’s price has risen 47.4 percent, double the performance of the banks’ sectoral index and far faster than the general index (29.3 percent at the time of writing). This performance comes on top of two equally spectacular years. Since December 31, 2002, National shares have risen 281 percent, compared to 190 percent for the banks’ index and 105 percent for the general index. There is a downside to this rise, however. Capitalization has reached dizzying heights – in National’s case, 4.5 times the bank’s book value. Emporiki Bank has gained 41.7 percent this year, mainly because of the prospects of its sale to a bigger bank, most likely France’s Credit Agricole, and the severance of its last ties to the state. Investors are essentially betting on this outcome when buying the bank’s shares. Third among the «big five» banks – which also include Alpha Bank and EFG Eurobank Ergasias – in performance is Piraeus Bank, whose stock has risen 38.5 percent this year. Piraeus Bank is the year’s pleasant surprise.