Q1 19 results revealed some further pressure on NII, with lending yields on a downward trend, small NPEs negative formation, while banks reiterated their NPEs stock reduction targets.
Profitability. The aggregate NII fell €28mn with mixed performance, as NBG/Piraeus Bank grew their NII while Alpha/Eurobank recorded qoq losses. Lending spreads were stable for NBG qoq, while for the remaining banks the spreads weakened between 9 and 15 bps qoq indicating pressure from restructurings. Operating income grew 1% on trading gains, opex fell 13% qoq on easy comps/continued reduction of workforce/branches. PPI grew 19% qoq and LLPs fell 40% qoq mainly in the wake of easy comps on Q4 one-offs. Bottom line profitability at €199mn (+10% qoq).
Guidance. Mgmt teams guided for mixed NII performance (with Alpha Bank expecting the largest pressure yoy), higher fees income yoy, lower opex and CoR within the 1.5-2% range, all for 2019. Piraeus Bank and NBG introduced guidance for 2023 and 2022 respectively with ambitious targets, including 9-11% RoEs and sds NPEs ratios.
Asset Quality. The total NPEs stock fell by €3bn qoq to €83bn, mainly on sales/write-offs, with the NPEs ratio at 44.5% from 45% by Q4 18 and cash coverage at 51.3%, flat qoq. In general, NPEs negative formation trends slowed notably in the quarter.
Capital. CET 1 capital for the system fell by €0.7bn qoq to €25.3bn, with the CET 1 ratio at 15%, down 40bps qoq, on RWAs of €169.5bn, up €1bn qoq. Alpha enjoys CET 1 ratio about 200bps north of the average. DTC accounts for 62% of CET 1 capital. On a FL basis the ratios range between 10.8% and 14%, which indicate the road ahead would be tough and would require healthy PPI generation to fully offset extra likely provisioning on sales/liquidations.
Investment Case. Lower Greek sovereign yields (below 3% for the 10yr) and expectations for less uncertainty in the political landscape which could imply higher sustainable GDP growth rates have enacted strong equity flows in the Greek banking universe. The outlook for profitability has improved with banks outlining plans for notable NPEs stock reduction (sds NPEs ratios by 2021-2023, down from mid 40s) along with targeted high sds RoEs by 2021-2023. Besides any negative political landscape development and lower than estimated pricing for NPEs (through scheduled sales/securitizations), we believe the investment case has likely changed to “buy the dips” rather than “selling into strength”. Valuations need to come off recent highs (0.4x BV for Greek banks on average) to entice a new wave of interest as discount to European peers have diminished notably (from -70% to less than 40% on average and in some cases such as Eurobank to <10%).