Morgan Stanley: The new target rates for Greek banks

Morgan Stanley concludes that Greek banks will continue to outperform. The agency shifts its preference to more defensive deposit bases and turns to National Bank (Overweight) from Eurobank (Equal-weight). Piraeus Banh remains its top choice.

Greek bank shares have risen about 65% on average this year, supported by earnings upgrades (+39%), structural macroeconomic recovery and cheap valuations. “We believe that investors’ focus will shift to long-term sustainable returns,” the house writes.

Positive prospects

According to Morgan Stanley‘s report, the positive outlook for loan growth, higher interest rate environment and declining provisions can lead to a return on tangible equity (ROTE) of around 12% in 2025 for Eurobank and National. For Piraeus and Alpha Bank he sees a ROTE of 10.5% as he expects more visibility on fee income.

Greek banks are expected to achieve net interest income (NII) growth averaging +38% y-o-y in 2023, supported by a 73 basis point improvement in net interest margin (NIM) expansion, benefiting from interest rate increases in ECB.

Fall

For 2024/25, Morgan Stanley forecasts an average fall of 4% per annum, reflecting the ECB’s lower interest rates from a peak of 4% to 2.5%, according to forecasts from its macroeconomics team. However, positive interest rates mean that NIMs in 2025 are around 2.3% on average, still above 1.8% in 2022. This, together with the average annual loan growth rate (CAGR) 7% in 2022-25 supports ROTE remaining above 10%.

Estimates

The house’s 2023-25 earnings estimates are 17-20% above market consensus, Morgan Stanley notes, meaning it still expects earnings upgrades. However, he sees the development of financing costs as the biggest “delta” for estimates. Her analyzes assume that the share of term deposits for Greek banks moves from 23% on average in 1Q23 to 45% by 2025, with a deposit beta of ~17% on average at year-end 2023 ( against 8% from Q1 2023). Each 5% increase in deposit betas has an average impact of ~3% on 2023 earnings, he estimates.

With a 36% average upside to price targets, we like the Greek banking sector as a whole, he notes. However, with deposit betas as the “key”, it shifts its preference to National Bank (Overweight) from Eurobank (Equalweight), given: i) National’s greater inclination towards retail deposits (77% vs. 62% for Eurobank) and the higher share of retail deposits (79% vs. 62%), indicating a relative competitive advantage in terms of funding cost trajectory, ii) low LDR ratio (64% vs. 73% for Eurobank from Q1 2023) , iii) higher NPE coverage (88% vs 76% as of 1Q23) and iv) capital levels (CET1 FL16.5% vs 15.5% as of 1Q23).