BofA-ML (full note attached)* Ratings & POs cut after incorporation of capital-raising risks
We think that the risk of capital raising is increasing for Greek banks, even assuming a positive political outcome. For us, the risk stems from the potential for stricter ECB requirements aimed at capital quality and/or provisioning levels, or domestic regulatory changes, such as debt-relief programmes or required write-offs. In this report, we value the Greek banks under four scenarios and find an average, to arrive at new POs. We think the market needs to be convinced that there is no dilution risk before valuing these banks using traditional methods such as Gordon
Growth model or comparable multiples. We cut our PO for Alpha Bank by 48% to €0.30 (Neutral, down from Buy), for Piraeus Bank by 66% to €0.33 (Underperform reiterated), and for Eurobank by 47% to €0.10 (Underperform, down from Neutral).
* Four scenarios, three of which suggest capital needs
- Scenario 1: Gradual recovery of the operating environment and banks’ financials in 2016-17, no additional capital needs. If we were to value Greek banks on this scenario, they would deserve to trade at 0.6-0.8x P/BV, and our
implied POs would suggest significant (65-89%) upsides.
- Scenario 2: Capital needs due to the exclusion of eligible DTA from banks’ capital adequacy ratios (even if not imminent). We estimate potential capital needs here at €1.6-3.0bn per bank, and additional share issuance at 33-63% of share count (post increase).
- Scenario 3: Capital needs due to an increase in provisions required by the ECB. We estimate potential capital needs here at €2.1-5.5bn per bank, and additional share issuance at 54-72% of share count.
- Scenario 4: Capital needs due to negative domestic regulatory changes, which would require write-offs at Greek banks. We estimate potential capital needs here at
Citi - Greek Banks - Difficult Operating conditions but crisis valuation (Full note attached)
* Volatility High but Declining — Due to political and macro uncertainties, Greek
banks’ stock price volatility spiked in February 2015 to 10% daily standard
deviation, before declining to 5.7% in March. This is 2 to 3 times the 2014 average
daily volatility of below 3%. The next event: in the coming weeks, Greece needs to
repay close to half a billion Euros of IMF loans (9th Apr) and refinance €2.4 billion of
treasury bills (14th/17th Apr). For bank stock price volatility to "normalise" investors
needs to see agreement between Greek government and the Eurogroup on reform
proposals and implementation of a follow-up action plan.
* Deposit Outflow High but Slowing — Since end-Nov 14, around €28bn or 17% of
deposits have been withdrawn from the Greek banking system. The biggest outflow
was in Jan 15 (€12bn) with declining outflows in Feb (€8bn) and in March (€3-4bn
or c2% of system deposits). The funding gap has been filled by temporary ELA
funding. As of end of March, Eurosystem funding reached 28% of banking system
assets (vs c30% at 2012 peak) or €110bn, of which €71bn are ELA funding (vs
historical peak: €135bn/€120bn). We estimate the 2015 NII hit for each Greek bank
to be below €100m lower yoy (c6-8% of Greek NII) due to higher ELA funding cost
and deposit outflows, primarily during 1H15.
* Delayed NPL Recovery — Consensus 2015 Greek GDP has been revised down in
recent months on the back of renewed macro uncertainties. Citi economists now
expect 2015 GDP to contract by 0.2% (vs GDP forecast of +1.3% -6M) before
increasing to 1.5% in 2016 (vs GDP forecast of +1.6%, -6M). 1Q15 NPL formation,
particularly for mortgage loans, has increased due to moral hazard reasons. We
estimate system NPL to peak in 2016, one year later than our previous forecast.
* Capital Headwinds — We expect Greek banks to make a loss in 1H15 due to
lower NII and trading income as well as higher provisions, vs prior forecasts. This
should erode Greek bank’s capital position. Moreover, GGB 2Y yield was up 6.5ppt
in 1Q15, similar to 4Q14. The AFS reserve hit to equity and capital in 4Q14 could be
repeated in 1Q. Except NBG, whose capital should benefit from divestments, we
expect other Greek banks’ fully loaded B3 CET1 ratio to be down c50-150bps yoy in
2015. Excluding DTCs, Eurobank’s capital remains the lowest.
* Buy, Revised TP — Greek banks’ are currently trading on crisis valuations of 0.40x
trailing P/B, even lower than the Jan 15 post-election levels. Our base case is that
Greece remains part of the Euro Area. But our EPS estimates have been cut: 2015
by 80%-96% for 2 banks and from break-even to negative for the other 2; 2016 by
11-61%; 2017 by 2-31%, reflecting lower NII (ELA funding) and trading income
(higher GGB yields) and higher NPLs/loan losses (delayed economic recovery,
moral hazard). We increase cost of equity for Greek banks from 12% to 14% (sum
of Citi average 2015-16 10Y GGB yield forecast of 8% and 6% ERP). We revise TP
for Greek banks (Alpha: €0.47; Eurobank: €0.16; NBG: €1.74; Piraeus: €0.61).
Given the large drops in share prices YTD we reiterate our Buy ratings.