Why Greek banks shares have rallied 80 pct higher

Even the most optimistic investors have been surprised by the momentum of bank shares. With gains of more than 80% in a few weeks, bank shares have emerged as the protagonists of an impressive stock market run, a rally that anticipates the return of the country to normalcy.

The sharp rise in banking shares is reminiscent of other times, the glorious days of the stock exchange in the 1990s, while after many years the industry is not weighing the market down but lifting it higher. The jump in bank shares is attributed to a number of reasons:

• The gradual return to normalcy (after the arrival of the vaccines) is seen keeping new NPEs from the pandemic at the low range of estimates, allowing the successful completion of non-performing loan sales transactions such as Alpha Bank's Galaxy project, the acceleration new securitizations such as Phoenix and Vega of Piraeus Bank and the Frontier securitization of National Bank. It will also allow for the launch of new securitizations, while large benefits are also expected from the EU’s Development Fund.
• The market seems to believe that new tools for dealing with bad debt, such as a bad bank and Hercules 2, will help lenders deal definitively with the problem. Many analysts point to the prospect of banks returning to strong profitability after tackling NPLs and having drastically reduced operating costs in recent years via staff reductions and a shrinking branch network.

At the same time, there is an aggressive turn of investment funds from technology and "work from home" stocks to traditional sectors, such as banks. Finally, the change in the trend in the domestic market is certainly forcing many funds that had negative position in Greek banks to close their positions.

All of the above have helped contribute, more or less, to the strong gains, however, the point that makes Greek banks stand out are their very low valuations. Bank stocks had fallen to levels that discounted extremely negative developments, scenarios that have nothing to do with reality.

Shares in Alpha Bank and National Bank may be showing gains of more than 90%, with a jump of 70% for Eurobank and 45.1% for Piraeus Bank but from the beginning of the year, based on yesterday's closing, they continue to show heavy losses: Alpha Bank -58.7%, Piraeus Bank -65.9%, Eurobank -43% and National Bank -42%.The low starting point may justify the absence of a correction despite the steep short-term gains, although sooner or later there will be liquidation of gains, as is always the case in markets.

The chaotic distance between the valuations of Greek and foreign banks is reflected in the price to book value index (P / BV). Piraeus Bank trades with P / BV of 0.08, Alpha Bank with 0.14, NBG with 0.26 and Eurobank 0.34 when the European average of banking stocks trades with 0.5 and banks like Intesa Sao Paolo at 0.63, BBVA at 0.6, BNP Paris at 0.54, Banco Santander at 0.542.

Challenges and risks

Of course, this gap does not exist by chance: Greek banks suffer both from the poor quality of their capital (as a large part is deferred tax) and from weak loan portfolios, with the ratio of non-performing loans in Greece being ten times that of the euro area: 36.7% compared to less than 3% in the euro area.

Domestic banks remain weak, a special case in Europe that could even be shaken by a return to normalcy by a rapid withdrawal of supervisory support measures or the holding of tighter stress tests.

However, the market does not seem to be so worried about the risks, anticipating that the normalization of conditions on the pandemic front, expected strong global growth from 2021 and the opportunities created for Greece by the Recovery Fund will help the industry deal definitively with the problem of non-performing loans paving the way for the return to a strong profit trajectory