If anyone had asked analysts and institutional investors back in early 2002 to name their least favorite sector on the Athens bourse, they would most likely have pointed to the banking sector. If one asked the same people to name their favorite sector a year and a half later, they would most likely say banks. They were right. Bank profits fell in 2002 and stocks plummeted but their earnings rebounded strongly in 2003, providing impressive stock returns to their faithful. Most investors are positive for bank stocks again this year. And again, they are right. Unless there is a major upheaval in the international financial markets or/and in domestic politics, bank earnings should rise further, paving the way for stocks. Moreover, one should not ignore the possibility of M&A activity in the sector heating up this year.
Greek banks managed to outperform their European peers last year, counting on an unexpectedly strong earnings performance which forced Greek and foreign analysts to upgrade repeatedly their profit forecasts and target prices. These upgrades lured first some foreign funds and later a chorus of local mutual funds, investment companies and wealthy individual investors, some of whom were heavily underweight bank stocks and were caught by surprise.
The bank index returned 57 percent last year, outperforming the local general index by 34 percent and the Eurotop 300 bank index by 42 percent. The returns of some individual bank stocks were even more impressive, with Alpha Bank gaining 109 percent last year to close at 23.98 euros. Its stock ended at 24.98 euro on Friday. National Bank of Greece shares recorded impressive gains of 70 percent to close at 20.74 euros on December 31, 2003. They are currently trading above 22 euros.
There is no doubt that the valuations of Greek banks are demanding at this point when compared to their European counterparts. Although there are differences among banks, the Greek credit institutions appear to trade at a higher P/E on forecast 2004 earnings, a higher price-to-book (P/BV) ratio and a similar return on equity (ROE). This is why some analysts are looking for confirmation of the upward earnings trend along with some positive surprises to justify fresh upgrades and keep the stock momentum going. The release of their 2003 financial accounts may provide such an opportunity, especially if some recent leaks turn out to be true.
Loan growth potential
Notwithstanding a few soft areas, the case for double-digit earnings growth in 2004 is strong. Unlike many of their European peers, local banks can count on high GDP growth rates — in the area of 4 percent or better. This, along with still low private sector credit penetration, can help sustain loan volume growth in excess of 10 percent with greater emphasis on mortgages, consumer loans and loans to small and medium-sized companies. This trend underpins the improving asset mix as banks seek to replace bonds with retail loans.
Spreads in some loan categories banks are regarded as relatively large and therefore one could argue they may not be sustained in the medium-term. Large local banks have proven quite resilient in maintaining them along with favorable deposit spreads even in the face of the European Central Bank (ECB) cutting the official euro rate. Of course, this is partially explained by the tendency of Greek households to stick with their bank and not shop around, though there are some individuals with large deposit accounts who actively seek higher interest rates from small banks eager for funding.
If the strong loan growth, the maintenance of favorable spreads and the improving asset mix should boost net interest income further, the double-digit loan volume growth along with the improving equity markets should increase non-interest income, especially from commissions and trading. Banks appear to benefit not just from loan-based fees and from asset gathering activities (mutual funds) but from a deliberate effort to shift customer money into fee-based products. The latter is facilitated by the prevailing low interest rates. All-in-all, this should translate into satisfactory revenue growth, estimated at between 8 percent and 12 percent for the five large banks on average this year.
Of course, to deliver the strong earnings growth envisaged by most analysts, banks should continue to rein in costs and this is a good bet. Although some voice concern over pre-election hirings at some large state-controlled banks, there is no reason to believe that private banks will not stick to their plans for limiting cost growth to an absolute minimum. Even in large state-controlled banks, one would expect cost control to become the overriding concern after the general elections, so at the end of the day, cost growth should not exceed expected inflation in most cases.
Another factor that may add to the surprises could be the contribution of foreign subsidiaries to the group profits. This should be expected to increase further this year, with National Bank of Greece and EFG Eurobank leading the pack. Still, the overall numbers are not big enough to influence their bottom line materially.
Last, but not least, one may wonder whether the upcoming general elections could bring mergers and acquisitions again to the forefront. The acquisition of a considerable stake in General Bank by France’s Societe Generale should not upset the existing equilibrium in the banking sector for the time being. It represents, though, a potential competitive threat to the largest Greek banks two years down the road and should not be ignored. This, in turn, is more likely to prompt France’s Credit Agricole to up its equity stake in Emporiki Bank and assume its management. Aside from this, one should expect consolidation to become again the watchword in the banking sector. Although consolidation may knock first on the door of some small and medium-sized banks, one should expect it to emerge in the big boys club later on. The likely relaxation of labor laws governing layoffs by the new government may provide a hint. So, in addition to strong earnings delivery, Greek banks may have much to offer this year.
Greek banks managed to outperform their European peers last year, counting on an unexpectedly strong earnings performance which forced Greek and foreign analysts to upgrade repeatedly their profit forecasts and target prices. These upgrades lured first some foreign funds and later a chorus of local mutual funds, investment companies and wealthy individual investors, some of whom were heavily underweight bank stocks and were caught by surprise.
The bank index returned 57 percent last year, outperforming the local general index by 34 percent and the Eurotop 300 bank index by 42 percent. The returns of some individual bank stocks were even more impressive, with Alpha Bank gaining 109 percent last year to close at 23.98 euros. Its stock ended at 24.98 euro on Friday. National Bank of Greece shares recorded impressive gains of 70 percent to close at 20.74 euros on December 31, 2003. They are currently trading above 22 euros.
There is no doubt that the valuations of Greek banks are demanding at this point when compared to their European counterparts. Although there are differences among banks, the Greek credit institutions appear to trade at a higher P/E on forecast 2004 earnings, a higher price-to-book (P/BV) ratio and a similar return on equity (ROE). This is why some analysts are looking for confirmation of the upward earnings trend along with some positive surprises to justify fresh upgrades and keep the stock momentum going. The release of their 2003 financial accounts may provide such an opportunity, especially if some recent leaks turn out to be true.
Loan growth potential
Notwithstanding a few soft areas, the case for double-digit earnings growth in 2004 is strong. Unlike many of their European peers, local banks can count on high GDP growth rates — in the area of 4 percent or better. This, along with still low private sector credit penetration, can help sustain loan volume growth in excess of 10 percent with greater emphasis on mortgages, consumer loans and loans to small and medium-sized companies. This trend underpins the improving asset mix as banks seek to replace bonds with retail loans.
Spreads in some loan categories banks are regarded as relatively large and therefore one could argue they may not be sustained in the medium-term. Large local banks have proven quite resilient in maintaining them along with favorable deposit spreads even in the face of the European Central Bank (ECB) cutting the official euro rate. Of course, this is partially explained by the tendency of Greek households to stick with their bank and not shop around, though there are some individuals with large deposit accounts who actively seek higher interest rates from small banks eager for funding.
If the strong loan growth, the maintenance of favorable spreads and the improving asset mix should boost net interest income further, the double-digit loan volume growth along with the improving equity markets should increase non-interest income, especially from commissions and trading. Banks appear to benefit not just from loan-based fees and from asset gathering activities (mutual funds) but from a deliberate effort to shift customer money into fee-based products. The latter is facilitated by the prevailing low interest rates. All-in-all, this should translate into satisfactory revenue growth, estimated at between 8 percent and 12 percent for the five large banks on average this year.
Of course, to deliver the strong earnings growth envisaged by most analysts, banks should continue to rein in costs and this is a good bet. Although some voice concern over pre-election hirings at some large state-controlled banks, there is no reason to believe that private banks will not stick to their plans for limiting cost growth to an absolute minimum. Even in large state-controlled banks, one would expect cost control to become the overriding concern after the general elections, so at the end of the day, cost growth should not exceed expected inflation in most cases.
Another factor that may add to the surprises could be the contribution of foreign subsidiaries to the group profits. This should be expected to increase further this year, with National Bank of Greece and EFG Eurobank leading the pack. Still, the overall numbers are not big enough to influence their bottom line materially.
Last, but not least, one may wonder whether the upcoming general elections could bring mergers and acquisitions again to the forefront. The acquisition of a considerable stake in General Bank by France’s Societe Generale should not upset the existing equilibrium in the banking sector for the time being. It represents, though, a potential competitive threat to the largest Greek banks two years down the road and should not be ignored. This, in turn, is more likely to prompt France’s Credit Agricole to up its equity stake in Emporiki Bank and assume its management. Aside from this, one should expect consolidation to become again the watchword in the banking sector. Although consolidation may knock first on the door of some small and medium-sized banks, one should expect it to emerge in the big boys club later on. The likely relaxation of labor laws governing layoffs by the new government may provide a hint. So, in addition to strong earnings delivery, Greek banks may have much to offer this year.
3287.99
1275.09