26/10/2017 17:04
Wood and Company announced today lower estimates for Hellenic Bank. “We remain cautiously optimistic on Hellenic Bank due to its distressed multiples, good capital and a high NPE coverage ratio. Although the progress in lowering NPEs has been considerably slower vs. its larger peer, Bank of Cyprus (BOC), we do expect an acceleration following the agreement with NPL management company APS. Still, we believe that it could take some time for the agreement to filter down into a lower cost of risk, while the bank must also deal with the two key challenges: 1) its low NIM, in view of the excess liquidity, with an L/D ratio of <50%; and 2) the high C/I ratio (close to 70% on our 2017E). We are therefore downgrading the stock to HOLD from Buy, and reducing our PT to EUR 0.85/share, from EUR 1.40/share previously”, says the report.
According to the Wood and Company, APS deal a step in the right direction. Hellenic Bank has created the first debt servicing platform in Cyprus, in a joint venture with APS (Hellenic 49%, APS 51%). The JV was established in June 2017 and APS Cyprus has acquired the bank’s internal arrears management division, with a 10-year servicing agreement for managing Hellenic’s NPLs (EUR 2.3bn) and real estate assets (EUR 150m).
“We stress that the assets remain on the bank’s balance sheet; however, we do view the deal as positive. In our opinion, APS should have the experience, capacity and motivation to deal more effectively with the NPE challenge, following the weak progress by the bank, itself”, the report adds.
The loans to deposit ratio stands at 48%, well below most of the banks in the region. This liquidity buffer was an advantage during the 2013 crisis, as Hellenic avoided having to utilise expensive ELA funding; but is currently a burden on the P&L, mainly due to the cost of placing funds with the ECB (40bp). Thus, the low L/D ratio currently seems to be a liability, rather than an asset, at least as long as interest rates are low.
“We do not expect a substantial change in NIM during our forecast period. Thus, we expect the C/I ratio to remain high, despite attempts by the management to lower costs. As a result, in the near term, the key driver for improving profitability is mainly provisions. In our forecasts, we expect provisioning charges to fall to 130bp in 2018E and 100bp in 2019E. The bank has a decent NPE coverage ratio (60%)”, says the report.
“In our view, the bank’s capital is solid, with a 13.6% fully-loaded CET1 ratio, vs. a minimum SREP ratio of 10.5%. The quality of capital is also superior to the Greek banks, since its DTA exposure is immaterial”.
“We prefer to remain on the side-lines until we see more progress in the management of NPEs, and a sustainable return to profitability. The stock trades at a big discount to Bank of Cyprus in terms of P/TBV (0.28x on our 2018E vs. 0.56x for BOC), but is at a premium in terms of P/E”.
According to the Wood and Company, APS deal a step in the right direction. Hellenic Bank has created the first debt servicing platform in Cyprus, in a joint venture with APS (Hellenic 49%, APS 51%). The JV was established in June 2017 and APS Cyprus has acquired the bank’s internal arrears management division, with a 10-year servicing agreement for managing Hellenic’s NPLs (EUR 2.3bn) and real estate assets (EUR 150m).
“We stress that the assets remain on the bank’s balance sheet; however, we do view the deal as positive. In our opinion, APS should have the experience, capacity and motivation to deal more effectively with the NPE challenge, following the weak progress by the bank, itself”, the report adds.
The loans to deposit ratio stands at 48%, well below most of the banks in the region. This liquidity buffer was an advantage during the 2013 crisis, as Hellenic avoided having to utilise expensive ELA funding; but is currently a burden on the P&L, mainly due to the cost of placing funds with the ECB (40bp). Thus, the low L/D ratio currently seems to be a liability, rather than an asset, at least as long as interest rates are low.
“We do not expect a substantial change in NIM during our forecast period. Thus, we expect the C/I ratio to remain high, despite attempts by the management to lower costs. As a result, in the near term, the key driver for improving profitability is mainly provisions. In our forecasts, we expect provisioning charges to fall to 130bp in 2018E and 100bp in 2019E. The bank has a decent NPE coverage ratio (60%)”, says the report.
“In our view, the bank’s capital is solid, with a 13.6% fully-loaded CET1 ratio, vs. a minimum SREP ratio of 10.5%. The quality of capital is also superior to the Greek banks, since its DTA exposure is immaterial”.
“We prefer to remain on the side-lines until we see more progress in the management of NPEs, and a sustainable return to profitability. The stock trades at a big discount to Bank of Cyprus in terms of P/TBV (0.28x on our 2018E vs. 0.56x for BOC), but is at a premium in terms of P/E”.
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