No sign of improvement in the Greek banking sector sees Merrill Lynch, according to a report.
Greek banks recorded better than expected results in the first quarter of 2011, although expectations had been low. Despite this, Merrill Lynch has significantly cut its forecasts because of a weaker volume outlook, and a worse asset quality outlook.
As a result of the lower earnings forecasts and a higher implied probability of a restructuring (looking at CDS spreads), ML has cut price objectives by an average of 25% and maintains a cautious outlook for Greek banks.
Ratings are kept unchanged. Neutral for Alpha Bank and National Bank, Underperform for Eurobank and Piraeus Bank.
Alpha Bank’s target-price is set at €4.2 from €5.2, with Eurobank’s target-price being reduced at €2.7 from €3.8. Target-prices of National Bank and Piraeus Bank have been formed at €5.4 and €1.1 from €7.3 and €1.5 respectively.
Regarding earning per share, Merrill Lynch expects losses of €0.17 for Alpha Bank and Eurobank, €0.54 and €0.05 for National Bank and Piraeus Bank respectively.
Regarding Greek banks’ dependency to European Central Bank, Merrill Lynch believes it would be difficult for Greek banks to materially reduce ECB reliance.
As for risks posed by sovereign exposure, the bank said that at the end of Q1 the large four Greek banks had a total sovereign exposure of €39.7bn, more than 2x their combined NAV.
“Our analysis suggests that a material write-down of the principal would leave the Greek banking system significantly undercapitalised. We don’t think a write-down on the sovereign is a material near term risk, but given significant execution risks in the austerity programme, it cannot be excluded. Until the market is convinced that a write-down scenario is highly unlikely, we don’t see Greek banks re-rating materially”, Merrill Lynch noted.
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