Greek bank stocks are on the rise in anticipation of midweek earnings reports. According to Barron’s cross-border deals could be in the works for Greek banks as the government continues to discuss bailout conditions with creditors.
In particular, Greece’s largest bank – Piraeus Bank SA (ATH:TPEIR, Financial) – was expected to deliver its first yearly profit, according to Bloomberg. Since the bank’s positive announcement last September, Piraeus Bank SA shares appreciated 30.8% while ADR shares climbed 19%.
Earnings performance
Piraeus Bank reported fiscal year 2016 results March 31. The $1.5 billion bank delivered 1.13% decline in core banking revenues* to 2.4 billion euros ($2.56 billion) and 3.7 million euros in losses after taxes instead of profits – compared to 1.9 billion losses in 2015.
*Core banking revenues were derived from adding net interest income, net fee and commission income, dividend income, net income from financial instruments designated at fair value through profit or loss, results from investment securities and other results.
In review, Piraeus Bank recorded higher losses on derivatives, which dented its overall core banking revenue*. Nonetheless, the bank delivered lower loan, tangible and intangible impairment losses and lower provisions.
“2016 was a pivotal year for Piraeus Bank. In financial terms, the year marked the stabilization in the bank’s performance, especially during the second half of the year, with improving market conditions. Liquidity and asset quality has improved, along with net results performance. At a corporate level, the year was characterized by the structural change in the composition of the bank’s board of directors, in accordance with best international practices and supervisory regulations. These structural changes further strengthen the bank for the benefit of its shareholders, customers and employees. The appointment of Mr. Christos Megalou as CEO of the bank in early March 2017 marks a major step in the strengthening of the bank’s board of directors and its corporate governance, which builds on significant progress made during 2016.
"Piraeus Bank delivered against its restructuring plan in 2016, supporting the economic recovery in Greece, as the largest bank in the country. An important factor for the bank’s successful turnaround is, of course, a stable political and economic environment, which will contribute to the restoration of confidence.
"In this context, the bank’s strategic pillars going forward have been set and are the following: a) best practices in corporate governance with substantial presence of experts with extensive international experience on the board of directors; b) sustained profitability of our core business; c) swift implementation of the restructuring goals; d) exit from nonstrategic activities that will free up resources strengthening our core banking platform; and e) initiatives related to digitalization and innovation, which will reduce operating costs and further enhance operational efficiency and customer experience." – George Handjinicolaou, chairman of the board of directors
Despite delivering operational losses compared to the expected yearly profit, Piraeus Banks shares fell 7.8% last Friday.
Valuations
Piraeus Bank – although with no earnings – trades at grade discount compared to its peers. According to Reuters data, the largest bank in Greece had price-book (P/B) value of 0.19 times vs. industry figure of 2.38 times and price-sales (P/S) ratio of 0.62 times vs. industry figure of 4.69 times.
Meanwhile, no dividends were issued in the last 12 months.
In terms of 2017 expectations, Piraeus Bank had forward P/S and price-earnings (P/E) ratios of 5.7 times and 0.62 times.
Total returns
Piraeus Bank ADR shares (BPIRY, Financial) that once traded for $602 per share now trade at 35 cents had definitely represented far worse inverse performance when compared to the Standard & Poor's 500 index performance.
According to Morningstar data, Piraeus Bank returned a 91.3% total loss to its shareholders in the past three years compared to S&P 500’s positive 13.3% returns. This year alone, Piraeus ADRs returned 20.5% total losses compared to the index’s 17.2% gain.
Piraeus Bank
Piraeus Bank SA was founded in 1916 and is a Greek multinational financial services company with its headquarters in Athens. In 2016, Piraeus Bank derived 91.5% or 2.2 billion euros from Greece.
(Financial Data)
Other than being the largest bank in Greece, Piraeus Bank had the market shares in the image above.
According to Reuters, Piraeus Bank operates in three segments: Retail Banking, Corporate Banking, Investment Banking, as well as Asset Management and Treasury.
Retail Banking
The Retail Banking segment includes the retail banking operations of the bank and its subsidiaries, which are addressed to retail customers as well as to small-medium companies, such as deposits, loans and letters of guarantee among others.
Corporate Banking
The Corporate Banking segment includes facilities related to corporate banking, provided by the bank and its subsidiaries, addressed to large and maritime companies, such as syndicated loans, project financing and imports-exports among others.
Investment Banking as well as Asset Management and Treasury
The Investment Banking segment includes activities related to investment banking operations of the bank and its subsidiaries, such as investment and advisory services, underwriting services and public listings as well as stock exchange services among others.
Performance measures (some)
Net interest margin
According to Piraeus, net interest margin is derived from net interest income over average beginning and end of period total assets excluding assets of discontinued operations.
In 2016, net interest margin was at 2.68% compared to 2.66% in 2015.
Cost-to-income ratio on a recurring basis
Total operating expenses net of impairments on a recurring basis over total net revenues on a recurring basis (2).
In 2016, Piraeus Bank recorded a 55.9% cost-to-income ratio compared to 56.9% in 2015.
NPL/nonperforming loans ratio
Nonperforming loans are loans in arrears over 90 days past due over gross loans and advances to customers (before impairments).
In 2016, the ratio declined to 37.5% compared to 39.5% in 2015.
Coverage of loans in arrears over 90 days (NPLs) ratio
According to Piraeus, the ratio is derived from cumulative provisions of loans and advances to customers over loans in arrears over 90 days past due.
In 2016, loan coverage over nonperforming loans was 69.5% compared to 65% in 2015.
Common Equity Tier 1 ratio (phased in and fully loaded)
Common Equity Tier 1 (CET1) is regulatory capital over risk-weighted assets with phased”in implementation excluding items in accordance with Basel III definitions.
According to Investopedia, CET1 is a capital measure that was introduced in 2014 as a precautionary measure to protect the economy from a financial crisis. It is expected that all banks should meet the minimum required CET1 ratio of 4.50% by 2019.
In 2016, CET1 phased in for Piraeus Bank was at 17% compared to 17.8% in 2015. CET1 fully loaded, meanwhile, was at 16.2% in 2016 compared to 16.6% in 2015.
Net revenue and profit/losses attributable to shareholders
(Press Release and Annual Financial Report)
Cash, debt and book value
As of December, Piraeus had 3.07 billion euros in cash and balances and 69.5 million euros in issued debt securities with a debt-equity ratio of 0.007 times compared to 0.01 times in 2015 (1).
Of Piraeus’ 81.5 billion euros assets, 0.35% were identified as intangibles while having a book value of 9.82 billion euros compared to 10 billion euros in 2015.
Cash flow
(Annual Financial Report)
In 2016, Piraeus Bank delivered 521.8 million euros in cash flow from operations compared to 520 million euros in cash (out)flow in 2015.
In review, Piraeus Bank recorded positive cash flow changes to cash and balances with Central Banks, debt securities-receivables, loans and advances to credit institutions, other assets and amounts due to customers.
Capital expenditures including intangible assets purchases were 349.5 million euros leaving Piraeus Bank with 172.3 million euros in free cash flow compared to 813.8 million euros free cash (out)flow in 2015.
(Annual Financial Report)
As mentioned earlier, Piraeus Bank did not provide any dividends but repurchased 524 million euros in Treasury shares. As seen in the image, the bank raised 1.21 billion euros in share issuance net expenses in 2015.
Greece gross domestic product (GDP) growth
(Greece GDP, Piraeus Bank Financial Data)
Piraeus Bank
“In 2016, the Greek economy declined marginally by -0.1% versus -0.3% in 2015, based on seasonally adjusted data. However, the negative outcome of fourth-quarter 2016, combined with the increased uncertainty in first-quarter 2017, jeopardize the initial growth expectations for 2017.
"The 2017 outlook is highly contingent upon the completion of the second review and any new fiscal consolidation measures. Key points are the timely disbursements, the implementation of privatizations and the improvement of the economic climate along with the further liberalization of capital movements.”
Conclusion
Despite early expectations that Piraeus Bank was to deliver profits in 2016 operations, the bank – excluding tax credits – did not deliver but demonstrated lower losses.
In review, Piraeus still demonstrated a high nonperforming loan ratio compared to world average of 3.913%, according to World Bank Group. Banks in the U.S., in comparison, had an average of 1.47%.
The bank also seemed to have not diluted its existing shareholders in fiscal 2016 after the restructuring that occurred in late 2015.
(Piraeus Bank SA, Bloomberg)
Meanwhile, a 562% upside can be achieved should Piraeus Bank Greece shares trade at book value of 9.8 billion euros. Being conservative and cutting the book value more than half would still indicate a 32% potential upside. Same calculations may be applied in the bank’s ADR shares.
Considering all the risks, Piraeus Bank is a buy with 45 cents per ADR share target price.
Noted
- Debt securities
(Annual Financial Report)
2. According to Piraeus, this excludes the extraordinary expense of the year 2015 for the employee retirement scheme and extraordinary revenue from participation in VISA, as a result of the sale of VISA Europe to Visa Inc. (V, Financial) on June 21, 2016.
Disclosure: I have shares in Piraeus Bank ADR.
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