|· Greek Banks Investor Trip:
We hosted an investor trip to Athens on 6th July and met the management of four Greek banks and Bank of Greece. We are cautiously optimistic on Greek banks following the trip based on improving macro-economic outlook and increasing clarities around Greek banks’ NPE reduction targets. The valuation is getting very attractive at 0.2x 2016 P/TB especially after the c50% price decline from recent peak in May on Brexit and Italian banks’ NPL concerns.
· Early Signs of Economic Recovery:
Recent key economic indicators suggest there are signs of improvements in Greek economy. Manufacturing PMI rebounded in June to 50.4 (above 50 means expansion). Unemployment showed a continued downward trend in 1Q16 to 24.9%. There is a net inflow of 76k new jobs in May, mainly driven by tourism sector. International arrivals at Greek airports were up 7% yoy from Jan-Apr 2016. Greek Tourism Confederation (SEFE) expects tourism arrival to be up 5% yoy in 2016 to reach 27.5m. The economist from Bank of Greece expects the impact of fiscal austerity to be muted as the fiscal impact is likely to be neutralized by government’s arrears payments (€7bn). Better economic outlook has resulted in falling gross NPL formations for Greek banks.
· NPE Reduction Target in Focus:
The Greek banks have submitted to BoG and SSM in May their NPE/NPL reduction targets, which is expected to be disclosed by BoG in September. The Greek banks would be monitored quarterly against the targets by BoG. While the NPE reduction target could vary by banks, we consider a 30-40% reduction in the absolute level of NPLs by end of 2019 a realistic target, driven by a combination of debt restructuring, foreclosure, asset liquidation and write-offs. Currently, the Greek banks restructure c5% of its NPL per quarter, it would take Greek banks on average 4 years to restructure the NPLs. The re-default rate of recently restructured loans range between 25% to 50%.
· Adequately Capitalized for Now:
A key concern investors have is that Greek banks NPE coverage ratio could fall as the banks write off the fully covered NPEs. There could be a risk of increased provisions to maintain the current coverage ratio. The banks and BoG officials we met sounded sanguine about the provision level of Greek banks. They believe the banks’ NPEs are adequately provisioned for after the AQR exercise last year, which was based on very tough macro-economic and collateral value assumptions. The collateral value were heavily discounted (c40-50% haircut vs June 15 price), taking into consideration of liquidation cost. The Greek banks’ coverage ratio should be allowed to fall as banks dispose loans. BoG official also expects very limited impact from IFRS9 on Greek banks.