Upbeat prospects maintain bank stocks’ momentum
Bank share prices keep rising in the Athens Stock Exchange (ASE), propelled by strong investment interest and lifting the valuations of banks. The National Bank of Greece and EFG Eurobank are now trading with their price per book value (P/BV) ratio at 4, while the other major banks are a little lower. The higher the index is than 1, the more overvalued the stock is, but this is not always negative. (Conversely, a stock with a P/BV ratio lower than 1 is not always a good investment.) Bank officials recognize that valuations are now at particularly high levels and incorporate exceptionally optimistic forecasts both about the progress of corporate profits in the next two years and the general financial environment internationally. They do note, however, that the current situation justifies this optimism as the financial state of the eurozone is improving while the margins for growth and increase in profits in the domestic market are still very big. Despite the very rapid credit expansion of recent years, particularly in retail banking, the scope for further growth is great: Household debt as percentage of the gross domestic product (GDP) came in end-September 2005 to 35.9 against 56.6 percent which is the eurozone average. The same figure for corporate credit in Greece is at 43.9 percent, while in the eurozone it comes to 57.1 percent. Good earnings forecast What makes the big difference for the banking sector is earnings and their great prospects for further expansion in the coming years. A moderate forecast for earnings in 2006 sees them at 30 percent higher year on year, an enviable figure. Therefore, while earnings in 2005 took the price per earnings (P/E) ratio close to 20, with the earnings expected in 2006 the ratio will go down to 15, provided stock values remain stable. The ambitious expansion of local banks to neighboring countries and the broader region of the Mediterranean creates great expectations. Greek banks have undertaken significant investments and are waiting for much more from the future development of the region’s states. Restructuring These expectations are bolstered by the considerable restructuring of forces expected in the banking sector in the next few months. The privatizations (Emporiki Bank, Bank of Attica) and the part-privatizations (ATE Bank, Postal Savings Bank) that are being prepared will certainly create more than just a ripple in the sector. Foreign financial firms say repeatedly that the combination of high profits and Balkans prospects is why they include Greek banks among their favorite stock choices. Notably, foreign institutionals continue to strengthen their positions in bank shares despite the steep rise in banks’ valuations. As a result, this positive framework for the sector, along with the favorable climate in stock markets internationally, is attracting the interest of investors. From the start of the year the General Index of the Athens market has enjoyed a rise of 6.15 percent, while banks have risen by 6.7 percent. Challenges Greek banks are facing a number of challenges for 2006, the biggest of which is consumer credit, particularly credit cards. Growth in mortgage credit is expected to range around 20 percent, down from 25 percent last year, while in consumer credit growth will probably be limited to 18 percent from 25 percent in 2005. Banks will also place emphasis for one more year on strengthening their alternative networks of banking products and services distribution. Their main objective is the technological upgrading of cash machines (ATMs) to accept the new credit cards. Banks are further examining the possibility of using ATMs for offering consumer products such as tickets. ATMs will soon be virtually everywhere, as the program to expand their network provides for their installation mainly outside stores and in areas which do not have bank branches. The technologically advanced ATMs will offer better deposit management options, such as immediate deposit of an amount in a client’s account and the payment of debts. The machines will also be connected with the client-based systems of banks, allowing for the projection of personalized information messages while a transaction is proceeding. A key parameter in the competition among banks in 2006 will be the correct risk management through the use of the appropriate systems so as to diminish the risk of more bad debts. Banks will then have to gradually adjust to the new regulations of the Basel II capital accord, which calls for better organization in these departments. Another major challenge will be the further expansion of banks in the broader region of Southeastern Europe. This is not going to be easy, though, as the region is now the focus of big international bank groups which are vying for the few privatization opportunities left, aiming to dominate the broader market that has very important growth prospects. This is confirmed by the particularly high prices recently paid by major international groups for the acquisition of banks in the Balkans.
