Bank shares soar 60% on Athens bourse 

Banking shares have returned to the forefront, featuring in an awakening of the Athens bourse, after a long period of "hibernation" and heavy losses.

The domestic market is on a strong uptrend channel, for the third consecutive week, creating expectations for a change in the long cycle. As of November 6, the profits of the banking index exceed 60%, while a jump of 23.6% has been recorded by the General Index, an increase accompanied by a large increase in trading activity.

The turning point was the news, on Monday, November 9, for the development of effective vaccines against the coronavirus, marking the beginning of the end of the pandemic. On that day, the General Index closed with gains of 11.46% while the banking index jumped 26.98%.
The domestic market, according to market sources, is entering a new cycle, after the previous ten-year decline, a recovery fueled by the expectations of dealing with the pandemic and the gradual return to normalcy from 2021, but also the opportunity created by the EU’s Recovery Fund and the utilization of resources amounting to 32 billion euros.

Expectations for banks are high. The faster return of economies to normal, after the development of effective vaccines, will allow banks to clean up balance sheets from bad loans. Eurobank and soon Alpha and National Bank will already find themselves with a bad debt ratio below 15%, while Piraeus Bank is also accelerating its pace.

At the same time, bank executives are optimistic that the new non-performing loans created by the pandemic will remain low, creating expectations for a definitive solution to the problem in 2021. It is noted that banks may have new tools in 2021, for dealing with non-performing loans, such as the BoG's proposal to create a bad bank (if adopted by the government) but also the extension of the Hercules plan.

Additionally, many analysts estimate that the recovery of the economy will allow banks to return to a path of strong profitability. With the economy returning to an uptrend from 2021 and expectations of growth accelerating thereafter, banks can achieve high profitability by tackling the issue of non-performing loans. It is noted that they have made very large reductions in staff and store network, achieving a drastic reduction in operating costs.

Resolving the uncertainty for the next day of Piraeus Bank also helps the climate. At the same time, the restoration of visibility and improved market psychology have forced various small and large hedge funds that for years maintained short positions for sale in domestic banking shares, to change position - today only Lansdowne Partners maintains open positions.

Low starting point

The bank share gains over the last 3 weeks may be impressive, but if you look at the big picture and where the prices were last December, the shine is instantly lost. From the end of December 2019, bank shares are 50% in the red, while losses for the General Index are at 20%.

Even more characteristic, on how low bank shares are, is the comparison with 2015. In 2015 the share capital increases in the context of the 3rd recapitalization took place at historically low price levels due to the fact that the sector was under capital controls and the country was a step away from exiting the euro.

Today, prices are from -51% (National) to -81% (Piraeus) lower than 2015 levels.

According to analysts, if the expectations for the recovery of the economy and the final solution of the problem of non-performing loans are confirmed, then the industry will permanently leave behind the problems of the past and will enter a new era.

The big risk is focused on the possibility that the estimates for a gradual recovery from 2021 will not be confirmed, with the economy remaining stuck in anemic growth. In such a case, new non-performing loans could be much higher, overturning plans to consolidate their balance sheets and return to profitability. Additional challenges for domestic banks are the stress tests that the ECB will conduct in 2021 and the possibility of a faster withdrawal of supervisory support measures, if the economies return to an upward trend.