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Deutsche Bank for Greek Banks: The long road to recovery

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Deutsche Bank forecasts a strong recovery in fundamentals for the Greek banking sector over the coming years, reflecting four principal drivers: 1) higher margins, as funding costs normalise; 2) improved fee generation, as economic activity recovers; 3) better cost efficiency, reflecting consolidation synergies and standalone initiatives; and 4) lower credit risk costs, as economic conditions improve. 

Deutsche Bank initiates coverage of National Bank of Greece and of Alpha Bank in a report dated March 10, saying that the target prices also reflect its assumption that 25% of delinquent loans could become performing over time.

The bank stresses that after a very difficult period for the Greek banking sector, sees strong prospects for profit recovery and growth. For the first time in six years, real GDP growth is likely to move into modest positive territory in 2014. Improved confidence is driving down funding costs, a trend the bank expectw to continue this year and next. Credit risk costs are already falling; as the economic recovery picks up steam the Bank expects loan quality could also improve. Higher economic activity should support growth in fees, while significant sector consolidation opens the door to cost synergies and creates a more favourable long-term industry environment. For its coverage universe it sees revenue growth of 10% p.a. to 2018, and pre-provision profit growth of 18% pa.

The target price of 4.50 euro for National Bank of Greece offers 30% potential upside, says Deutsche Bank, which also stresses that NBG has better loan quality and liquidity than its peers and carries less integration risk, adding that recent pullback presents a buying opportunity. Also Deutsche Bank says that NBG is already profitable, while it sees ROA rising 30bps p.a. to 1.2% in 2018, when ROTE should reach 21.9%. Recent difficulties in Turkey have hurt sentiment, but its projections for this market are around 30% below the industry consensus, and it values NBG’s Turkish operations at a ~20% discount to current market value. Downside risks include the bank’s relatively lean capital base (10.2% CT1 ratio in 2013E).

As far as Alpha Bank is concerned, Deutsche Bank says that it has inferior loan quality and liquidity metrics relative to NBG, and therefore arguably should be better geared to the  improving industry cycle. The Emporiki Bank acquisition should generate meaningful synergies, and it expects Alpha Bank to move into profit in 2015. It also sees ROA improving by 40bps p.a. from 2013, to reach 1.4% in 2018; ROE should rise to hit 11.7% in this year. However, considering also the recently announced EUR1.2bn capital increase, Deutsche Bank believes the current share price leaves the group fairly valued.

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