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Merrill Lynch Downgrades Greek Banks

Merrill Lynch said it has downgraded National Bank of Greece and Alpha Bank to Underperform. 

In a report, Merrill Lynch reduced price-target of Alpha Bank to €1.1 from €2.2, while price-targets of National Bank and Piraeus Bank were decreased to €0.8 and €0.1 from €3.5 and €0.4. Merrill Lynch said also it has removed the investment opinion on Eurobank.

The bank said that Greek banks have rallied significantly since last weeks announcement, “much to our surprise”, adding that the risk to Greek bank equity holders remains substantial.

Capital shortfall using Q2 2010 Core Tier I and additional write-downs from moving the PSI in line with the new agreement are estimated to result in a capital shortfall of €13.4 billion, well within the €30 billion made available to Greek banks.

While estimates ignore mitigating actions from the banks (deleveraging, asset disposals, etc.) Merrill Lynch believes that it will be difficult for the banks to completely close the gap. The remaining funds will be made available by the Hellenic FSF, but it is unknown still how punitive the terms will be for existing shareholders.

However, ML assumes that any capital injection will be made at a significant discount to prevailing share prices and largely in the form of common equity. This will most likely result in a majority government ownership in the sector overall.

The American bank sees significant capital deficits for Greek banks factoring in the new PSI, a very uncertain macro outlook, and potential for further losses from the ongoing Blackrock Solutions review.

Even though its possible to argue that much of the hypothetical dilution is reflected in the share price (0.1-0.3x NAV), ML believes the current rally will be short lived. 

“We see significant dilution risk and believe that shares will underperform the wider sector” said Merrill Lynch.
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