Hedge Funds Take a Shine to Greece

By a number of measures, Greece is back in the game. Untouchable for investors for the best part of a decade, the southern European nation returned to the 30-year bond market last month, successfully tapping buyers flush with cash and hungry for yield. Optimism that Greece’s post-pandemic rebound will be more impressive than the rest of Europe’s has also drawn investors to one of the biggest plays on the country’s growth potential: its top banks.

The recent run in bank shares has been spectacular, with the market value of three of the country’s four largest lenders more than doubling in six months. Hedge fund notables such as John Paulson have been placing bets on Greek banks, whose path to sustainable profitability looks clearer now with bad-loan ratios at some firms on course to drop to below 10% thanks to mammoth disposals.

Nonetheless, investors shouldn’t count on a bump-free ride.

Hedge Funds Take a Shine to Greece

From the uncertainty surrounding the country’s much-needed return of tourism — the sector accounts for about one-fifth of Greece’s economy — to banks’ ability to increase revenue again, the once toxic banking industry is only just emerging from intensive care.

Take National Bank of Greece SA and Eurobank Ergasias Services and Holdings SA, the two lenders that have gone furthest in cleaning up their balance sheets since the sovereign debt crisis. Their valuations, now about 50% below book value, place them at a premium to several of Europe’s biggest banks such as Italy’s UniCredit SpA and Deutsche Bank AG.

Though the valuations reflect in part the expectation that the two Greeks banks will achieve a higher return on equity by 2022, the pace of Greece’s economic expansion through next year and beyond isn’t guaranteed. And yet the two banks have earmarked a surge in annual fees to offset a decline in interest income.

Meanwhile, Piraeus Bank SA has just raised 1.4 billion euros ($1.7 billion) to help fund its clear-out of bad loans. The deal saw hedge fund star Paulson double down by buying more stock and attracted investors including BlackRock Inc. and Fidelity. Finding acquirers for the bank’s bad loans shouldn’t be too taxing, but it’s further behind its Greek peers in improving profitability.

The Greek state is still an investor in all four top banks and it’s unlikely to abandon them having come this far. The four lenders — National Bank, Eurobank, Piraeus Bank and Alpha Bank AE — control about 90% of the market.

However, for the economy to grow at a healthy clip of 3.6% this year and 5.7% in 2022 — and support bank earnings beyond the bad-loan disposals — domestic demand and consumption will need to recover to offset the possibly modest rebound in tourism, according to the ratings company Moody’s. It helps that Greece relies mostly on visitors from nearby European nations, but with the pace of the vaccine rollout still uncertain across the European Union, just how strong the season will be this year remains largely guesswork.

Much of the country’s medium-term growth will depend on Prime Minister Kyriakos Mitsotakis’s deployment of the EU’s Next Generation pandemic recovery funds and market reforms. Growth in Greece could expand by as much as 18.3% by 2026, as a percentage of 2020 economic output, or by as little as 8.3%, S&P said. The rating company upgraded Greece's long-term foreign currency debt to BB, two levels below investment grade, earlier this month.

The degree to which new bad loans may build up if the economy fails to recover is unclear. The country’s central bank estimates that fresh bad debt may reach 10 billion euros in the next 18 months, offsetting in part the 17 billion euros or so of existing soured loans that banks are expecting to offload in the next 12 months, according to Moody’s. While the ratings company has changed its outlook for the country’s banks to positive from stable, it says capital weakness remains a concern.

Absent an economic revival, and a resulting pickup in lenders’ revenue, Greek banks may not be able to count on cost cuts beyond closing branches and cutting employees. In a concentrated industry, consolidation isn’t really an option.

Greek banks have certainly come a long way since they were rescued as part of the nation’s bailout, and years of credit contraction may finally turn into growth. But a lot still needs to go right.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

©2021 Bloomberg L.P.

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