The Capital Cycle Podcast - Greek Banking Odyssey

Episode Date: June 30, 2025

The remarkable revival of Greek banks following a turn in the capital cycle. Edward Chancellor talks to Laura Fyfe, an Emerging Markets Analyst.For more information, or to access select articles from Marathon’s Global Investment Review publications which accompany this podcast series, please visit www.thecapitalcycle.co.uk Hosted on Acast. See acast.com/privacy for more information.

Hello and welcome to another episode of the Capital Cycle podcast. I have with me Laura Fife and Emerging Markets Analyst at Marathon. Laura, very nice to see you again. Nice to see you as well, Edward. Thank you. So we're going to talk about a piece you've recently written on the investment opportunity provided by Greek banks. But before we dig into that topic, you have some thoughts on why investors should adopt a more dynamic approach to investing as opposed to what you call essentialism, which is not actually a term I'd heard before, what you call essentialism. I'm thinking of in terms of prejudice of having

formed an idea. But tell the listeners what you mean by essentialism and why investors shouldn't be too essentialist. I would say that essentialism is the concept used by a psychologist to describe the ascribing of fixed or finite, unchanging qualities or essential. qualities to two different things. And that essentially evolved from when we were cavemen and women. That enabled us to distinguish between threats and food that was safe for us to eat. However, we still find ourselves subject to heuristics like essentialism, even in modern day. Why is that a problem? It's not always a problem. It kept us safe for hundreds of years, but I think it can also lead, unfortunately, in many instances, to biases and assuming that things

stay exactly the same as they always have and it can underappreciate some dynamism. So when it comes to Greece, at least from the bond investors' perspective, the essential view is that Greece hasn't been a great credit. You know, Greece is the only country to have defaulted on its bonds before it actually gained independence, which is actually quite a feat and probably never going to be achieved by any other country. And then since then, Greece is one of those countries where half-in-lawful, its life as a modern republic since independence, it has been in default. So it's, let's say,

essentially been a relatively poor credit. But from a stock market perspective, you're saying it's time to rid this essentialist perspective. And 15 years ago, Greece led the periphery of Europe into the sovereign debt crisis, the sovereign bonds of Martin. And the banking system was more or less wiped out and Greece, the country that founded democracy, was then downgraded humiliatingly to emerging markets status, which is why you an emerging markets analyst, why you're covering Greece today. Tell me why you think the Greek banks are interesting from a capital cycle perspective. I would say that the Greek banking industry presents a really interesting case of supply rationalization and consolidation. So before this crisis that you just mentioned, there were more

than 40 banks in the system and today, only four being the National Bank of Greece, Eurobank, Piraeus, and Alpha Bank comprise 95% of sector assets, which is a really high degree of concentration and not seen many other countries in the world. Specifically within this industry structure, we find one company in particular, National Bank of Greece, quite interesting, and that's a company we initiated a position in last year. Before we talk about the banks in more detail, Greece has largely recovered from its sovereign debt crisis and its economy is relatively strong.

There's still a lot of debt out there. Tell us what the Greek debt is relative GDP and the general fiscal circumstance. So Greek debt is about 154% of GDP as we record this episode. But the countries recently enjoyed a credit upgrade, as have the banks. You've seen three major rating agencies have upgraded both the sovereign and the banking industry companies last year. The fiscal surplus is about 3%. And bond yields now trade quite close to Germany's, which in 2015 that might have been an unthinkable closing of the gap.

And the economy is relatively robust and people still go, surprising enough, on holiday degrees, isn't they? Surprisingly enough, yes. Yes, it's actually growing faster than most of the rest of the Eurozone. So above 2.5% there's rising profits, lower unemployment, things are looking at for the country. And what have the banks been doing? The banks have spent about 15 years focusing exclusively on repair, restructuring, rebuilding. And over this time, as you might expect, credit creation has been relatively constrained and investment depressed. Some statistics that evidenced this quite well is that the Greek gross fixed capital formation to gross domestic product,

has averaged only 14% over the past decade. That's one of actually the lowest rates globally and half the emerging market in global averages. And then on the banking side of things, domestic bank credit to the private sector as a share of gross domestic product is also quite low. So that's around 50% as compares to above 80% elsewhere in the Eurozone. You say that the bank's lending has been extremely conservative

from a balance sheet perspective. Yes, yes. So they were sort of focused on reshoring themselves. and didn't do much lending, which results in today an industry-wide level of about 69% in terms of loan to deposits. And for National Bank of Greece, the company I mentioned, were invested in, that's even lower at 64% in 2024. The reason you're flagging this is that from this position of conservatism and relatively low investment in Greece, there is this capacity for a pickup in the credit cycle in Greece. Yes. And you also think the bank

are overcapitalized? So now that we've had a decade of this inward-looking recapitalization and repair, the banks have actually shored themselves up so well as to be overcapitalized and have achieved quite strong fundamental metrics. So non-performing loans are down to about 2% at the industry level and at 1% for National Bank of Greece. From the industry being up at about 40% of non-performing loans back 10 years, ago. Now, interest rates started to rise in 2022. And banks, as we know, like a bit of a yield

cut that tends to boost their net interest margins. And you've been seeing that in Greece? Yes. So they're sort of weaned off life support, so to say, at a time that coincided with some of the most substantial interest rate increases we've seen in three decades. So that was what I would call a bit of a golden era in terms of Greek banking profitability. The sector emerged as its new consolidated, refreshed state, and there was sort of a favorable confluence of Project Hercules, which enabled banks to clean up some of the non-performing exposures we just mentioned in 2020, and since 2020, they've sort of been on their own, so to speak. So the regulators are off the backs of the banks?

Yes, and in fact, they actually approved the paying of dividends last year, which was a big step in terms of confidence, and combined with the upgrades from the rating agencies, that's improved investor confidence, although from very low levels, and I think the banks still look. From low essentialist. Yes, yes, exactly. And tell us why you like National Bank of Greece in particular. So I like National Bank of Greece the best because it is the lowest cost, simplest, and most conservative of the four major Greek banks.

But more importantly than that, it's actually low cost, simple and conservative in absolute terms. I think it's positioned to earn perhaps a low teens return on equity sustainably. From what current level? It's averaged about 16% over the past three years, but as we mentioned, that was in the context of an especially favorable set of conditions. So perhaps going forward through the cycle, it might normalize to around a low teens level. And you say that it has what they call a sticky deposit base?

Yes, yes. Customers trust National Bank of Greece with almost 60 billion. million euros of deposits and 80% of those are held in what's called CASA accounts, so current and savings accounts, which are the best type of funding for a bank because they're the lowest cost. So core deposits or CASA deposits comprise 77% of national bank agrees net funding, which results in an industry-leading funding cost of 71 basis points, which is quite impressive. And the bank has very strong capital ratio, but you're saying it's not quite a strong as reported, but still pretty strong. Yes. So it has the highest capitalization as well as

non-performing loan coverage of its peers, and again, high in absolute terms. So it's common equity tier one ratio, or what we call the CET1 ratio, which is a measure of the highest quality capital that a bank has relative to its risk-weighted assets. That has outshone peers averaging 17% since the pandemic, 19% in the most recent reported results, which comfortably clears just under a 10% regulatory minimum and is well ahead of the average for large global banks. So, Lori, you think that the bank's cap ratio is not quite as high as reported. Tell us why. Correct, correct. So I think that for the industry as a whole, the CET-1 ratios are overstated. However, the overstatement is declining and should continue to over time.

So the reason it's overstated is because a significant share of the numerator, the capital numerator, is comprised of deferred tax credits. And regulators allow for this, but given their state guaranteed promises rather than tangible capital, I would tend to consider those as lower quality. And a deferred tax credit means that when future profits come through, they're not taxed. and so that can be added to the capital.

So I suppose it's an intangible form of capital. Yes. But the bank is profitable. So you can see a pathway to those deferred tax credits actually being used. Exactly. And so in my calculations, I actually haircut those promises, if we can call them that, by half, which brings the CET ratio down to 13%, which is actually still well clear of the minimum and in line with the global average for leading large banks.

but more importantly than this for National Bank of Greece specifically, capital quality is set to improve in the DTC share this should have by 2027 and reduced to zero by 2032. Now, tell us your thoughts about management. Marathon likes to have management aligned with outside shareholders. Yes, so National Bank of Greece's chair and CEO are both shareholders, and the chair is a former finance minister. The CEO has been with the company for 15 years as well, so we believe that they're both experienced and aligned with us. As well, they've demonstrated conservatism, both in terms of the balance sheet management, as we've just spoken about, but I think also importantly, in not making any major acquisitions since 2014, and it was one of the only banks not to be

fully nationalized and to remain Greek-owned. However, the Greek state remains the largest shareholder. Yes, yes. On the whole, having a government as your larger shareholder doesn't always work I grade for other shareholders, but it tells us whether that's a potential problem. So the Greek state currently owns about 8% of National Bank of Greece, having divested down from 18% in October last year. I think the main risk of having the government as a shareholder is that they might be hoping to induce a National Bank of Greece to support the Greeks rather than support foreign shareholders. They're attempting to pay out about 60% of earnings next year, So it's quite a high payout ratio, and they've enjoyed quite high levels of profitability as well.

So I think the risk is that these distributions could be curved. Likewise, the DTC share could be reduced, although it hasn't been in many other parts of southern Europe. And furthermore, the banks could be required to step in and support certain social initiatives. So we've seen recently that the government has asked the banks to donate about 25 million euros to the rebuilding of schools, for instance. And the rate cuts from the European Central Bank, does that squeeze the potential net interest margin for the Greek banks? Yes, it does, and it sort of ties back to the concept of essentialism and viewing things as static when, as evidenced by recent rate cuts, they're ever-changing. This will put some pressure on MBG's profitability for sure and also slow the rate of capital generation, which will contribute to the bringing down of the DTCs. However, given, as we've talked about, Greece as a country and the banking sector in general,

both appear to be quite underinvested. Hopefully, a pickup in some of those levels should offset some of the profitability decline. Profitability for National Bank Greece won't simply be a yield curve play, but through actually making productive loans. Yes. A quick word on valuation or why you think it's a relatively attractive stock? So we talked a bit about how National Bank of Greece has sustained about a 16% ROE since the pandemic. But if we think that it's sustainable ROE is closer to 14%, it would trade on a 13% normalized earnings yield,

which is computed as the reciprocal of the ratio of the price to book and the sustainable ROE. If we wanted to be even more conservative, we could assume an 11% sustainable ROE, which would imply still a double-digit yield, and both of those scenarios would assume no growth, which a double-digit return seems pretty attractive in the context of both emerging market and global equity yields in the range of 5 to 7 percent. Very good. And tell me why investors haven't yet got the message, then why are the investors not more excited? I think perhaps the narrative hasn't caught up with the fundamentals,

and also banks inherently are quite opaque, and they, They, as a business model, have limited control over their fate, given they're often leveraged and they're linked to interest rate fluctuations. National Bank of Greece is no different. However, it seems to have a high degree of relative attractiveness. So, Laura, give us your punchline then. Well, I think essentialists might see a bank which is bound by chronic country instability, but capital cycle investors like ourselves would see a bank which appears to be strength.

strengthening in what looks like an under-invested sector of an under-invested economy. So to earn a 10% return from the current valuation levels, National Bank of Greece, for instance, would only need to grow at just over 4%, which is only half the rate its management team already projects. And it also gives us an 8% cash yield in the meantime. Investors are still cautious, first of all, because they're biased against Greece. They may have somewhat of a fixed mindset. However, banks are also essentially opaque business models and quite risky and hard to analyze. So I think it's an interesting capital cycle opportunity, but not one without risk. Thank you very much, Laura.

Thank you. Thank you for your time today. I hope you will listen to the next edition of the capital cycle. This communication is provided for information purposes only. Please refer to Marathon's website and the Global Investment Reviews for further information, including important disclosures.