With the Greek banks’ stress tests entering the final stretch, and as macroeconomic assumptions of the basic and unfavorable scenarios are being finalised, according to the assessment of the Swiss bank UBS, the outcome of stress tests on Greek banks is unpredictable and depends heavily on the negative scenario.
However, according to the Swiss bank’s basic scenario, banks’ current capital is sufficient to complete, in accordance with targets, the reduction in non-performing loans by by 2019. However, if we suddenly have negative events or a change in the policy of managing non-performing loans, there could be a capital deficit in the banking sector.
Long-term prospects, collateral value uncertain
Long-term prospects of Greek banks remain extremely uncertain, as they depend on the sustainable recovery of the Greek economy as well as on the management of non-performing loans.
For some analysts, in practice, a number of issues remain open, some of which will be crucial in determining the final outcome of the stress tests, such as how the liquidation value of collateral will be valuated.
According to market analysts, a possible revision of the liquidation value of collateral based on market prices may be an unfavorable for domestic banks, as there may well be a large differential when compared to the initial assessment of liquidation value.
However, for UBS, which started to cover Alpha Bank and Eurobank, medium-term challenges – including the implementation of of IFRS9 and SSM assessment – appear to be manageable, according to its basic scenario, at current levels of funds and the projected PPIs for 2018-2019.
Analyst Mate Nemes , CFA of the Swiss bank, recommends a «neutral position» for the shares of Alpha Bank and Eurobank, with target prices of 2 euros and 0.97 euros respectively.
While the industry looks attractive, as it trades at 0.3 times its internal value, the increased risk costs reduce the Tier 1 ratio to low single-digits, at least until 2019.
UBS emphasizes that with lower net interest income, gradual reduction of extraordinary factors and higher commissions, bank revenues are expected to decline by about 5%. With the restructuring of branch networks and voluntary exit plans, operating costs will continue to decline, but not to such an extent as to offset the lower revenues.