Greek & Cypriot Banks

What The Bond Markets Saw
• Tough Times — Greek Government Bond (GGB) yields rose around 150bps in the three months to early 2010. The GGB/Bund spread almost tripled from its recent trough, up to around 300bps. The sovereign bond market turbulence spilled over into banks' funding costs. Fiscal consolidation should mean slower real economic growth. Result: lower NIMs, slower volumes, higher LLP, higher taxes and higher COEs.

•Country Risk Fears Hit Funding — Greek banks can access the repo market but they are paying a "Greek premium" compared to peers. And the availability of repo funding has been tightened. Substantial ECB repo funding may have to be replaced by end 2010. But senior debt refinancing needs are relatively limited, even for the Greek banks with LDRs above 100%.

•Lower ROE Banking — Greek banks ROEs averaged around 20% during 2005-08. Including the two Cypriots, peak ROEs were pushed into the high 20s. In 2009, the six banks we cover in this note should earn a 10% ROE. And we expect a trough 2010 ROE of 8%. We expect ROEs to recover in 2011-12 to the low-teens.

•Could the Bond Markets Get Better — Sovereign spreads tightened start of 2010, with the 10-year GGB/Bund spread narrowing 25 basis points in the first week due to a general increase in risk appetite. The successful Greek sovereign issue on January 25th pulled down bond spreads and pushed up bank stocks. If bond spreads do improve further, we look for the most beaten up stocks to bounce the most (eg Piraeus -49%, last 3 months).

•Difficult Near Term Results — 4Q09 results will be hit by the "one-off" tax charged on 2008 parent earnings as well as the usual year end housekeeping (which may be exaggerated by the deteriorating macro environment). In addition, a new CEO at NBG may clear the decks. 4Q09 NIMs should be relatively stable but 2010 looks tougher. We estimate aggregate Hellenic banks profits will decline 68% qoq to $336 million in 4Q09.

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