European Banks 26 January 2009
Greek Banks
Analyst: Geoff Dawes, CFA geoff.dawes@fpk.com +44 20 7663 6041
From growth to valuation
• Growth no longer. The Greek honeymoon has ended. After several years of double-digit EPS growth and
associated high valuations, the banking system has run out of steam. Wholesale funding is at a premium
and so volume growth will be constrained by the ability to gather deposits. Growth has also taken its toll.
While it was the basis of the investment case just a short time ago, it drove the banking system towards
higher margin, higher risk business: notably consumer lending and emerging Europe.
• Back to valuation. With the Greek banks now effectively ex-growth, it is necessary to look at valuation and
potential profitability. Much rides on the Greek banks maintaining ROE levels above those of European
peers. The stocks may offer value on a P/E basis but are still early in the downgrade cycle. We believe
consensus ROE forecasts are too high, particularly where earnings are most at risk from margin
compressions at home and rising loan losses abroad. We see ROEs falling to single-digit levels for much of
the system over the next two years. This is in line with the current implied ROE for the Greek banks sector.
• Domestic growth stalling. The Greek banks benefited from a highly supportive domestic economy, which
helped to fuel increasing banking system penetration and lending volume growth. We do not believe the
case for Greek economic resilience. The economy is unbalanced, with high current account and fiscal
deficits. Adjustment is needed and output is the most likely mechanism. Sovereign spreads suggest that
concerns about the implications of this are growing. The Portuguese economy stagnated in similar
conditions several years ago we see Greece in a more difficult position now.
• SEE risks increasing. As well as domestic market turbulence, the international exposures of the Greek banks
pose substantial risks. The story of economic risk in SEE (Bulgaria, Romania, Ukraine in particular) is well
known. From a Greek perspective, we highlight that new vintage household lending has been a focal point for
growth in the region. We are highly cautious on the lending exposure of EFG and Piraeus Bank in SEE.
• Initiating coverage, backing Alpha. We initiate coverage on Alpha Bank (Outperform), National Bank of
Greece (NBG) (In Line), Piraeus Bank (Underperform) and EFG (Underperform). Macro issues have
dominated the investment argument over the last half year and we expect this to continue. Between banks,
there are however distinct differences in the risk-return profile. We believe Alpha Bank’s more conservative
profile should insulate profitability from rising loan losses. We prefer caution on the other Greek banks,
particularly EFG and Piraeus Bank, due to the focus on new vintage consumer lending in Greece and
emerging Europe.

Table of contents
Investment summary: from growth to valuation .................................................................................................. 5
Growth no more...........................................................................................................................................................5
Economic troubles ahead............................................................................................................................................7
Sector profitability premium not sustainable.................................................................................................................8
Finding value in Alpha .................................................................................................................................................9
Growth vs valuation ............................................................................................................................................. 11
How to value a Greek bank ..........................................................................................................................................12
Premium growth stocks no longer.............................................................................................................................12
Consensus optimistic on returns ...............................................................................................................................14
Profitability under pressure...........................................................................................................................................16
Profitability: what happens next?..................................................................................................................................20
The impact of the state support package ...................................................................................................................22
Capital to come .........................................................................................................................................................23
Greece without the growth .................................................................................................................................. 25
Greece becoming a drag? ............................................................................................................................................26
Domestic lending, domestic deposits .........................................................................................................................26
Are high margins sustainable? ..................................................................................................................................27
Domestic losses ........................................................................................................................................................29
The Greek economy: structurally unsound....................................................................................................................31
Banks, consensus still relaxed ..................................................................................................................................31
Imbalances and consequences.................................................................................................................................32
Portugal: the right case study?.....................................................................................................................................35
The Portuguese stagnation .......................................................................................................................................35
From imbalance to stagnation ...................................................................................................................................36
Portuguese banking profitability erosion ....................................................................................................................37
Risks to New Europe............................................................................................................................................ 39
Stressing the international position...............................................................................................................................40
Breaking down the exposure.....................................................................................................................................40
EFG, NBG most exposed..........................................................................................................................................41
Consumer lending the key risk..................................................................................................................................42
Stressing losses ........................................................................................................................................................43

Overextended in fragile markets...................................................................................................................................45
Credit-fuelled growth .................................................................................................................................................45
More imbalances.......................................................................................................................................................46
The risks of FX lending..............................................................................................................................................47
Turkey to prove more resilient...................................................................................................................................48
The downside risk .....................................................................................................................................................48
Financial forecasts and investment theses ........................................................................................................ 51
Alpha Bank ...................................................................................................................................................................52
National Bank of Greece ..............................................................................................................................................54
EFG ..............................................................................................................................................................................56
Piraeus Bank ................................................................................................................................................................58
Appendix: Greece and SEE economic data........................................................................................................ 61
Greece – economic and banking sector data ................................................................................................................62
Bulgaria – economic and banking sector data...............................................................................................................64
Poland – economic and banking sector data.................................................................................................................66
Romania – economic and banking sector data .............................................................................................................68
Turkey – economic and banking sector data.................................................................................................................70
Ukraine – economic and banking sector data ...............................................................................................................72