Egnatia Financial Services has lifted its price target on the share price of Hellenic Bank Group to CYP 1.27 per share and reinstated its buy recommendation, on the back of improving fundamentals.
Hellenic Bank delivered a strong set of FY05 results with Net Profit reaching CYP 7.5 mln above its estimate of CYP 5.2 mln. Profitability was driven primarily by the strong growth in non interest income (+14.4% YoY), as well as the significant reduction in provision charges (-48.4% YoY) to 141bps of gross loans.
The better than expected 2005 preliminary results, vindicate the declared belief in the capabilities and resolve of HB’s revamped management team to deal head on with the main issues and problems which had been plaguing the bank.
“We had previously indicated our positive stance towards the new management and it now appears that it passed its first material test. We are confident that this push towards rationalising the operational processes and efficiencies of HB and the improvement of the quality of the loan portfolio will continue and translate in better than up to now expected 2006 figures,” said Egnatia in its report dated March 15.
Management targets a reduction in its cost to income ratio to 69% in FY06 as well as a reversal of the loss making position in its Greek operations. Egnatia have proceeded with the upgrading of its previous estimates underpinned by increased volumes, an improved asset mix, and successful costs containment.
We have thus revised upwards our EPS figures for 2006, 2007 by
32% and 24% respectively, yielding a 2-year CAGR for EPS at 76.2%.
We choose to value HB at a lower PER multiple compared to our peer universe despite its significantly stronger EPS growth. We applied a 20% discount (vs local banks) on our target P/E multiple, to capture: (1) its as yet sluggish expansion in Cyprus and Greece, (2) the uncertainty
of the quality of its loan book, and (3) its high earnings volatility. We therefore adopt a target PER’07 of 12x.
We add back the excess capital per share assuming an optimal Tier 1 ratio of 7.5%. Our new target price is thus upgraded to CYP 1.27 per share from the previous CYP 0.76 per share, implying an upside potential of 46%, Our Buy recommendation is reiterated, concluded Egnatia.
