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Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

At Q319,<a href="https://www.smartkarma.com/entities/piraeus-bank-sa" target="_blank" data-smartkarma-citation="entities:22603:1" rel="noopener">Piraeus Bank SA (TPEIR GA)</a>reported a PH Score™ of 10 revealing benign trends in core indicators as befits a positive restructuring narrative. The bank is transforming the way it does business vis-à-vis risk and digitalisation. The Intrum NPE servicer agreement is beneficial, freeing up time/resources, enabling the bank to hit its "Agenda 2023" targets based on growth and efficiency. Management has a tightrope to navigate in winding down NPEs of 52% and eschewing a capital raise while hoping that the economy continues to heal, supporting self-help initiatives. A more risk-averse global context would hurt.A Greek government scheme designed to help banks reduce toxic debts is a catalyst after an EU ruling that it does not breach rules barring its member states from providing unfair financial assistance. Greece’s scheme, “Hercules”, will allow the government to guarantee a slice of bad debts that banks sell on to specialist investors. The Greek solution is modelled closely on “GACS” in Italy to underpin multibillion-euro bad debt securitizations. Financing vehicles sell slices of risk to fund managers or other specialist buyers. A number of buyers of distressed assets, credit funds, and servicer providers are now active in Greece having moved on from other “Club Med” jurisdictions. This will deepen the nascent securitization market and make the proposition, now backed by government guarantees, all the more attractive. The market is underpinned by on-line/physical real estate auctions, and RBU activity via proprietary and third-party platforms.Politics is a tailwind too with a new market-oriented government which values enterprise culture.Piraeus trades at a P/B, FV, and Earnings Yield of 0.24x, 3%, and 12%, Despite dilution, related to a CoCo transaction which exerts a high interest expense toll, these are still attractive metrics though we caution on the impact of “other noninterest income” on the bottom line. (Piraeus has €2bn or so outstanding contingent convertibles that convert at 5.71). We would stress though that valuations are far from demanding across Europe and the Greek discount has narrowed.On balance, we recommend Piraeus shares as we see share price appreciation backed by fundamental momentum (benign P&amp;L and B/S dynamics). We are mindful that soft top-line growth, still weak Loan growth, Capital levels, and lingering Asset Quality challenges weigh on the bank and earnings quality could be better. Piraeus is arguably the riskiest of the 4 main Greek banks as testified by high NPE ratio and a low LCR and NSFR. However, NPEs will progressively reduce, supported by positive securitization arrangements, the new primary residence protection law, better real estate prices, and the tightening of sovereign bond yields. Piraeus currently is readying two securitization projects worth €3bn in NPEs. The bank is transitioning towards more opportunity, with superior underwriting standards and risk controls, after years of “putting out fires”, and now manages its legacy exposures within a revitalised market framework. <div class="content-highlight">The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was backtested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles according to Score. </div>

At Q319,Piraeus Bank SA (TPEIR GA)reported a PH Score™ of 10 revealing benign trends in core indicators as befits a positive restructuring narrative. The bank is transforming the way it does business vis-à-vis risk and digitalisation. The Intrum NPE servicer agreement is beneficial, freeing up time/resources, enabling the bank to hit its "Agenda 2023" targets based on growth and efficiency. Management has a tightrope to navigate in winding down NPEs of 52% and eschewing a capital raise while hoping that the economy continues to heal, supporting self-help initiatives. A more risk-averse global context would hurt.A Greek government scheme designed to help banks reduce toxic debts is a catalyst after an EU ruling that it does not breach rules barring its member states from providing unfair financial assistance. Greece’s scheme, “Hercules”, will allow the government to guarantee a slice of bad debts that banks sell on to specialist investors. The Greek solution is modelled closely on “GACS” in Italy to underpin multibillion-euro bad debt securitizations. Financing vehicles sell slices of risk to fund managers or other specialist buyers. A number of buyers of distressed assets, credit funds, and servicer providers are now active in Greece having moved on from other “Club Med” jurisdictions. This will deepen the nascent securitization market and make the proposition, now backed by government guarantees, all the more attractive. The market is underpinned by on-line/physical real estate auctions, and RBU activity via proprietary and third-party platforms.Politics is a tailwind too with a new market-oriented government which values enterprise culture.Piraeus trades at a P/B, FV, and Earnings Yield of 0.24x, 3%, and 12%, Despite dilution, related to a CoCo transaction which exerts a high interest expense toll, these are still attractive metrics though we caution on the impact of “other noninterest income” on the bottom line. (Piraeus has €2bn or so outstanding contingent convertibles that convert at 5.71). We would stress though that valuations are far from demanding across Europe and the Greek discount has narrowed.On balance, we recommend Piraeus shares as we see share price appreciation backed by fundamental momentum (benign P&amp;L and B/S dynamics). We are mindful that soft top-line growth, still weak Loan growth, Capital levels, and lingering Asset Quality challenges weigh on the bank and earnings quality could be better. Piraeus is arguably the riskiest of the 4 main Greek banks as testified by high NPE ratio and a low LCR and NSFR. However, NPEs will progressively reduce, supported by positive securitization arrangements, the new primary residence protection law, better real estate prices, and the tightening of sovereign bond yields. Piraeus currently is readying two securitization projects worth €3bn in NPEs. The bank is transitioning towards more opportunity, with superior underwriting standards and risk controls, after years of “putting out fires”, and now manages its legacy exposures within a revitalised market framework. The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was backtested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles according to Score. 

Piraeus Bank SA

Piraeus Bank: A Port of Call