Banks: Welcome to the new reality!

By Demosthenes of Triga

The big money is out! Greek banks will return to limited returns on equity, with the top and bottom of these returns falling within a reasonable range of volatility with a long-term upward trend, while dividends are expected to gradually strengthen and consolidate. Welcome to the new reality!

The four Greek banks are expected to announce their second-quarter results in the next two to three weeks, according to the schedule. Rating agencies have given Greek banks investment grade, and the earnings yields have been pleasing to investors, as they are the first profits in at least 15 years. But what happens from now on? Can they move higher? And what is their relationship with the rest of Europe?

Earnings Announcements and Bank Profits

Key performance indicators for European banks

Based on return on equity, Greek banks are slightly above the European average at 13.9%, compared with the EU average of 13%, with countries such as Portugal and Italy higher, according to European Central Bank data for the first quarter of 2024. The profitability ratio is of great interest to investors because it is the ratio of profitability to equity.

Another indicator of great importance to the banking industry is the net interest margin (NIM). The NIM is the ultimate indicator of a bank, as it tells us how well it is performing its core business. That is, how much it earns on the money it lends after deducting the money it pays out to depositors or any other form of financing it. Based on this indicator, Greek banks rank fifth among the 16 countries for which the European Central Bank publishes data, at 3.4%, compared to the EU average of 2.5%, while Portugal ranks sixth on the list at 3%.

In terms of capital adequacy, Greek banks, despite the significant improvement they have shown in recent years, have CET1 and Tier 1 indicators that place them in the penultimate position, ahead of Spain. In particular, the CET1 ratio stands at a satisfactory 15.5%, while the Tier 1 ratio stands at 16.1%, with the EU average. In the first quarter of 2024 to reach 17.8% and 18.8% respectively.

The banking sector is closely linked to the course of the Greek economy. I believe that the model that the country has lived in the last decade will not be forgotten by all generations that lived through it. The forecasts of both the Bank of Greece and international organizations give a growth of about 2.3% for 2024, while the forecasts for 2025 indicate 2.5%.

Thus, the loan-to-deposit ratio, which finds Greece in the penultimate position, leaves promises for increased lending, with margins remaining for growth of the numerator of the fraction. The ratio in Greece is 60%, while the average in the European Union is also above 92%, a figure that is not a cause for concern.

Of course, the big question mark for banks is whether the loans they will grant will achieve the desired interest rate outcome, while at the same time the adequacy of the borrower will be such that the bank does not create new non-performing loans.

Finally, we are left with the hoarseness of Greek banks, and non-performing loans, where the corresponding indicator remains the worst in all of Europe, but has shrunk significantly. More specifically, the non-performing loans ratio reached 3.8% in the first quarter of 2024, compared to 1.8% of the EU average. Spain comes in second from last on the list with 2.9%, almost one point lower than Greek banks, while Portugal comes in third from the bottom with 2.6%.

In conclusion, you will tell me that all this is in the past and the market is looking to the future. But it is clear that the profitability of Greek banks for 2024 and 2025 has peaked. Even for 2026, which I think is too early to talk about, the forecasts show stagnation in terms of profitability.

Finally, I will not dwell on the fact that earnings are satisfactory, but on the fact that it is not possible to see strong growth in profitability. It is clear that the price-to-book ratio is still at low levels, at least for Piraeus Bank and Alfa Bank, but National Bank and European Bank have a valuation around unity. Perhaps a little below the European average, as some ratios (NPLs, CET1, Tier1) remain worse than the average for European banks!

Banks: US Financial Sector Weight in Q2

The financial sector will be at the heart of the market from July 12-19, with more than 40% of the S&P 500 companies expected to report their Q2 earnings. Companies that have reported and are expected to report include Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Wells Fargo, etc. The financial sector is expected to post the seventh highest earnings growth rate (YoY). Of the eleven sectors for Q2 2024, it is +4.3%.

At the industry level, three of the five financial sectors are expected to show earnings growth in Q2 (YoY), led by insurance at +31% and the capital markets industry at +23%, which is also the most profitable. The biggest contributors to the industry earnings increase. If the insurance and capital markets industries are excluded, the financial sector would show an estimated YoY decline of -6.4%, instead of a 4.3% YoY increase in earnings.

The other two sectors are expected to show a decline in profits, led by the banking sector, which is expected to show a decline in profitability by 10%. If banks were excluded from the financial sector due to their weight, the sector would have achieved a rise of 14.8%!

The interest rate environment remained marginally negative in the second quarter, albeit slightly lower than in the first quarter. The 10-year yield rose 17 basis points to 4.37%, from 32 basis points in the first quarter, indicating further revenue losses.

Markets still believe in the possibility of a 25 basis point rate cut in September and December.

Looking ahead, market estimates point to financial sector earnings growth of 0.4%, 40.9% and 5.9% for Q3 2024, Q4 2024 and Q1 2025, respectively.

Lower parts count with foreign vendors

Foreign investors’ participation in the total market capitalization of the Greek market in June amounted to 65.08%, compared to 64.97% on May 31, 2024, registering a marginal increase of 11 basis points. Excluding the participation of the HFSF (€1.76 billion or 1.9%) in the total market capitalization of the Greek market, foreign investors’ participation amounted to 66.35%. Capitalization AA and on 28/6/2024 was estimated at €91.85 billion, compared to €93.98 billion in the previous month, i.e. a contraction of 2.3%, against a GDP loss of 1.9%.

Foreign investors were net sellers of €66 million, compared to outflows of €249 million in May (due to Mytileneos and Jumbo). The overall positive result for the six months thus reached +€366 million.

The largest outflows came from the UK with €81 million, followed by Germany with €72 million, while Switzerland came in third with €5 million. In contrast, France led the way with €45 million, followed by the Cayman Islands with €28 million, while Ireland came in third with €17 million with just four tokens.

Foreign unitholders accounted for 61% of total transactions (buys and sells) in June 2024, down from 68.7% in the previous month. The countries with the highest portfolio value for June were the United States with a total value of EUR 12.9 billion, Cyprus with a portfolio value of EUR 10.5 billion, and Germany with EUR 5.5 billion.

Total active shares fell to 21,876, a 14-month low and 23% below the average for the first half of 2024. The decline is understood to be mainly due to domestic investors, with foreigners still only a few hundred.

Investors’ participation in the capitalization of AA Company

Agenda (16-21/7/2024)

Dividends and capital reductions continue.

Austriacards shares (€0.10/share) will trade ex-dividend on Tuesday, Attica Bank and Minerva held an ordinary general meeting, while the Bank of Greece announced bank loans for the second semester.

On Wednesday, Motor Oil and Mouzakis called an extraordinary general meeting.

On Thursday, Vioter held an ordinary general meeting, while Ilyda shares will trade without the right to receive the 2023 dividend, amounting to 0.02 euros per share.

Kepenou Mills, Optronics Technologies and Quality & Reliability held their ordinary general meeting on Friday, while Attica Holdings shares will trade without the right to the 2023 dividend, which is €0.07 per share. The rights to the shares and the CME, as well as the rights to the FTSE/ATHEX Large Cap index, expire on the same day.

The focus is on the second quarter financial results announcements.

Retail sales for June in the United States will be announced early Tuesday afternoon.

On Wednesday morning, inflation in Great Britain and a little later in the Eurozone for June will be announced, while in the early afternoon new housing starts for June in the USA.

The European Central Bank is expected to announce its interest rate decisions for the euro on Thursday at 15:15, while 15 minutes later the Philadelphia Fed manufacturing index based on July data in the United States will be published.

On Friday morning, the US Producer Price Index for June will be announced.

* Demosthenes Tringas is a Certified Equity and Market Analyst at Beta Securities – [email protected]

** Quoted from Kefalio newspaper