The year ahead is going to be the first test of resilience for the Greek banks in a
decelerating growth environment. The main challenges to address are the slowdown
in credit expansion both domestically and in SE Europe, the rise in provision
charges to over 100bps from historic lows, increasing costs the impact on earnings
and book value from the participation in the government support scheme and finally,
sufficient cost containment to support operating efficiency.
The banking sector index has lost 13% ytd further to the 74% annual loss in 2008,
partly because concerns have been discounted and party due to the massive sell-off
in Greek stocks. We see the prices stabilizing at current levels at least for the next
couple of quarters, although M&A rumours could at any time spiral a rally. At these
levels the Greek banks trade at historic lows on a 2009e P/BV of 0.8x and P/E of
7.1x with average weighted RoE at 11%, which still stands higher than the 9% RoE
of the international peer group (source Factset).
Returns to ordinary shareholders will be impacted in 2009 by the dividends
distributed to the preferred shares under the government support scheme. It is
important to note, however, that the Greek banks do not hold toxic assets and
therefore once external factors, such as the global economic downturn, recover the
banks will be well placed to revert to healthy profitability levels. The participation of
the majority of the banks operating in Greece in the government support plan will
help maintain credit expansion in the system close to a satisfactory growth level of
10% and ensure that the real economy receives adequate liquidity injections.
We downgrade our recommendations for the National Bank of Greece and Piraeus
Bank to Market Perform and overall take a neutral view on the sector. We reduce
our earnings estimates by 53% for 2009 and 2010 accounting for the expected
deterioration in asset quality and the increased provisions.

The first recession test for the Greek banks – A threat to asset quality
The Greek GDP grew by 3.1% in Q308e but by only 0.4%qoq as the deteriorating
macroeconomic environment has mainly impacted investments in real estate by 32.7%
and in construction by 18.3% (source National Statistics Service). GDP growth for 2008
is expected to decelerate to 2.9% according to the Eurobank EFG Economic Research,
below the 3.2% target set by the government’s budget. According to the European
Commission’s latest revision, GDP growth will decelerate further in 2009 to 0.2% and
show slight pick-up in 2010 to 0.7%, outperforming the estimated figures for the
Eurozone of –1.9% for 2009 and 0.4% for 2010.
A puzzling situation has also developed in the region of SE Europe, where so far the
Greek banks enjoyed hefty growth rates in an environment with GDP growth of 6%-8%
on average, but will now have to settle with significant slowdown of 2%-3% at best. SE
Europe contributed 17%-28% of net profits for the large banks in the first half of ’08 and
therefore a hard landing in the region will not only hurt group earnings but will also
jeopardize asset quality as on average c.20% of group loans are allocated outside
Greece. Despite the unfavourable short-to-medium term obstacles we still think that the
longer-term prospects for SE Europe remain attractive.
Cost efficiency and liquidity are the strongest weapons for the banks under the current
circumstances.
Stretched public finances
The FY2009 budget was submitted in Parliament in December 2008. The Ministry of
Finance revised FY2008 GDP growth down to 3.2% with inflation at 4.3% down from a
previous estimate of 4.5%. FY2009 GDP growth is estimated at 2.7% from the previous
forecast of 3.0%. The budget deficit is expected to reach 2.0% of GDP in FY2009 from
2.5% in FY2008 (with the previous estimates at 2.3% and 1.8% respectively). The
Public Investments Program is reduced to 3.4% of FY2009 GDP from 3.9% of FY2008
GDP (down 8.8% yoy to