An end in sight for the Greek bank tragedy?
2018 has been a landmark year for Greece, having officially exiting their third bailout program in August. However, while standing on its own feet for the first time in eight years, the effects of Greece’s long-standing woes are still being felt. Nowhere more so than the Greek banks, who have suffered significantly this year. As we look ahead to 2019, we ask whether the fortunes of the Greek banks are on the brink of change. And to start, it’s important to understand why Greek banks are trading at their current levels.
Firstly, there are external factors that have contributed to their downward spiral. The European bank index is down 30% year to date. Headline risk in Italy, the current riots in France and ongoing risks of Brexit have also created a negative sentiment towards European assets. European growth has disappointed this year, and Greek growth has decreased too. Greek banks are a high beta play on European growth.
However, there are also several internal factors that have come into play. The market is increasingly nervous about the Greek government’s U turn on the fiscal side since leaving the program, dodging the promised pension cuts and announcing sweeping tax breaks in September. While it’s not a good sign that the government is not following through on its promises, Greece has built up a healthy fiscal buffer, so we view this more of a headline risk rather than anything for significant economic duration. Another important factor is the upcoming election, rumoured to be taking place between March and May next year. Right now, Tsipras is lagging his opponents in the polls, but the margin is small and given the uncertainty, the market is waiting to see what the result will be.
More specifically, the non-performing exposures (NPEs) in Greek banks are still at a high level. As of the second quarter or 2018 they stood at $86 billion, representing 48% of assets. Although they are being reduced, they are still at elevated levels, prompting Greek authorities to propose an ‘asset protection scheme’, similar to the model used in Italy. The proposal involves transferring NPEs to a special-purpose vehicle.
So what will be the main trigger for Greek banks to rebound? On a valuation basis, they do seem to be trading cheap relative to other European banks, or peers in similar countries. And the good news is that they have a good liquidity profile, with stable deposits. Looking at the valuations and research reports, we see upside anywhere from 40-50%, up to 100% depending on the bank. But for this to happen, we need stabilisation in European and Greek growth, need to clear the Greek elections and need to see a clear steady reduction in NPEs though the proposed asset protection scheme. Our view is that we are on the brink of change and Greek banks represent a potentially profitable trade, but timing is key and we believe it pays to be a bit more patient.
Manos Papatheofanous, APQ Global IAC Member