Contrary to common perception, based on real high frequency data and ‘changes’ that we observe, we believe 1) the economic outlook has changed for the better, 2) the legal infrastructure and reforms re financial sector, especially the NPL is in place, and 3) the banks are in advance stages of planning and implementing reduction of NPLs and restart core banking activities.
To ‘pre-view’ economic ‘turn’ we look at traffic data of Athens toll-way. Our reasoning is simple: unless there is economic benefit for paying a toll to save time and arrive at any given destination, there is no rationale to do it. The toll-way we look at is Athens’ ring road (which is the main economic hub of the country) and the following is the chart of the traffic:
Source: Data is sourced from the Attiki Odo Tollway operator owned by Ellaktor S.A.
The ‘red line’ in the chart above represent 2016 data through to May on a seasonally adjusted basis. As it can be seen clearly, the traffic level is clearly higher in 2016 vs. 2014 and 2015. In fact, beginning February 2016, the number is higher than that of 2013. [Greek GDP in 2013 was EUR180bn vs. EUR176bn in 2015].
The chart above also indicates traffic but is based on annual data. As it can be seen from this chart, the traffic bottomed in mid-2014 at around 189k per week and is currently running at an annualised rate of 202k per week.
From these two charts, it is clear to us that there is improvement in the real economy which is not reflected in market prices.
This economic uptick is also confirmed by the latest manufacturing PMI which printed above 50 (50.40), a level seen during the initial green shoots post the 2nd banking recap when the economy started to pick-up prior to the dissolution of the government in mid 2014.
With the completion of the review, all laws relating to NPL were passed by the Greek government. A clear indication of removal of final impediments to ‘implementation’ came through (to our mind) with the resignation of the three directors of HFSF (Hellenic Financial Stability Fund => Greek government owned banking recap fund). The three directors were appointed by Syriza post coming into power and it was clear from the ‘way’ the three communicated and ‘voted’ on issues related to NPLs, that they were not in favour of changes in the laws allowing banks to ‘clear’ NPLs. Post the resignation of the three HFSF directors, we saw an announcement from National Bank of Greece about their ‘plan/strategy’ on NPL reduction [recall HFSF is the major shareholder of NBG].
Looking at the NPL data also indicates something to us:
The data in the above charge pertains to Piraeus Bank, one of the most aggressive (historically speaking) surviving lenders in the Greek market. As it can be seen from the chart, NPL formation has declined significantly (1Q16 indicate negative formation). Our meetings with the Greek banks suggest that there is anecdotal evidence of a change in the attitude of borrowers towards payment culture.
Based on the extensive contacts that we have with the banks, we believe that the NPL reduction plan will be submitted to the Bank of Greece for approval, most likely in the early half of the 4Q16. Our view is that the plan would entail roughly halving the NPL (bringing them below 20%) by 2018/19 which would involve roughly 1/3rd to 50% of re-profiling (restructuring), roughly ¼ of the book being written off and the remainder being sold at low prices either completely or into JVs based on performance recovery participation contracts. As it stands today, cash provisions on a system-wide basis stood at Eur58bn, tier one capital stands at Eur 34bn and collateral value against NPL stood at Eur55bn. This is against total NPL of Eur87bn.
The Greek banking system, post the last recap and provisioning is well positioned to process aggressive NPL reduction strategy. 3 of the 4 banks have RBU (restricting business units) already established with NPL, NPE (non-performing exposures) and potentially doubtful loans transferred into the new unit.
The banking sector is prepared fully to deal from a legal and internal perspective (they have been prepared for the last 4 months). The hurdle they have faced since the beginning of the year is the strike of lawyers (they have been on strike since the beginning of the year) and this has delayed some parts of the planning by the banking sector.
We think that the market will become more aware of how far ahead these banks are in terms of dealing with legacy issue (mainly NPL) by mid 4Q16 as approved NPL plans trickle through.
These banks trade at 0.2x tangible equity, at levels lower than some of the banks (eg. Italian) which still have to go through the process of raising capital (i.e. dilutive issues). We, therefore, are quite comfortable holding on to our exposures here and we expect the following events over the coming period to be reflected in the share prices: