Greek Banks: The Good And The Bad From Q3 2016

| About: Alpha Bank (ALBKY)


Greek banks are still well capitalized and reserved.

The NPL disposal process is painfully slow with little progress.

The good news: new NPL formations seem to have bottomed out.

Deposits are getting back into bankaccounts and reducing liquidity risks.

In the first quarter of 2016, the 4 major Greek Banks (NYSEARCA:GREK) have not been able to significantly reduce Non-Performing Loans (NPLs). This week the third quarter results have been published giving us some new data points for further discussion.

First of all, the capitalization (CET1) of all Greek banks is still standing strong. Especially compared to the Q3 results of 2015, which was just before the re-capitalization at the end of 2015.

Source: Q3 results official filling.

One of the major problems for the Greek Banks is the amount of NPLs. Unfortunately the amount of bad loans is still in the 34%-39% range, and has not seen a significant reduction. Progress is painfully slow.

Source: Q3 results official filling.

On the surface, this is bad news but some important things are going on if you dig a bit deeper. Eurobank (EGFED) and Piraeus (OTCPK:BPIRY) have actually started to dispose NPLs, while Alpha bank (OTCPK:ALBKY) and National Bank of Greece (OTCPK:NBGIF) only had very modest new NPL formation. The main reason for the NPL ratio not to drop is that the denominator, total gross loans, also went down. A growing Greek economy with healthy new credit growth would therefore be a blessing for the Greek Banks.

The cash reserves the Banks have provisioned for the NPLs, called the NPL coverage ratio, has been more or less stable at comfortable levels. Note that Piraeus and Eurobank even provisioned some extra cash, which is a good and prudent development in my opinion.

Source: Q3 results official filling.

The second major problem for the Greek Banks (apart from the NPLs) is the liquidity in the country. Currently, all four banks are on ELA life support because the Greeks took their savings out of the banks. It is believed there is a lot of 'under-the-mattress' money in the country, and the last 2 quarters have shown that deposits are coming back to the banks. This is great news and the results are immediately observable in the loan to deposit ratio:

Source: Q3 results official filling.

What stands out is the low Loan/Deposit ratio of NBG and the relatively high one for Alpha. Since NBG is the only bank with a deposit surplus I would argue that from a liquidity point of view, NBG is still the safest bet. If the current momentum continues it should be possible for the remaining 3 banks to get close to the 100% mark in 2017. It will be interesting to see what the liquidity developments will be when the capital controls in Greece get gradually relaxed.

Finally, let's have a look at how the Greek Banks compare in profitability. ROE and ROA figures might have been appropriate here, but the financial statements of these 4 banks have been so full of extraordinary one-time costs that quarterly comparisons go all over the place. Instead, I suggest we use the net interest margin as a profitability proxy:

Source: Q3 results official filling.

Interestingly enough, Eurobank is the big laggard while the other 3 banks have almost exactly the same interest margins. The reason for Eurobank's underperformance is not explained by its lower loan yield. It actually earns higher yields on gross loans than the other 3 banks. The fundamental cause is that Eurobank has higher funding costs in 2 ways. It has a different funding structure with relatively high interest expenses for derivatives, and secondly it pays customers more for their deposits:

Source: Q3 results official filling.

NBG is not really in need for additional deposits as they already have a surplus. Therefore, in my book, it makes sense that they have been lowering deposit rates faster than the competition. The other 3 banks have more urgent needs for deposits to solve their liquidity problem, so I also understand the pricing position of Alpha and Eurobank.

To wrap things up, I think the Greek banks are still well capitalized and reserved. The NPL disposal process is painfully slow and little progress has been made. However, it's worth nothing that new NPL formations seem to have bottomed out. Additionally, some real improvement has been made with getting deposits back in the Greek Banks and hopefully that trend will continue in the coming quarters.

Disclosure: I am/we are long EGFED.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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