Citigroup sees Greek Postal Bank as a takeover candidate

Citigroup has initiated coverage on Greek Postal and Savings Bank (PSB) with a Hold/Speculative Risk (2S) rating and €17 target price, which is slightly lower than current price, but Citigroup analysts note that the Bank is a potential consolidation candidate.

PSB is a domestic Greek Bank with access to the Greek Post Office network. As a result, the company has access to the largest distribution network in Greece. In addition, PSB’s highly successful deposits passbook is held by about a quarter of the Greek population. PSB’s loan to deposit ratio is the lowest in the Greek market, implying substantial excess liquidity which could be reallocated into lending.

Management intends to double its retail market share by 2009, and Citigroup analysts believe this target is achievable. “We expect an increase in PSB’s lending market share to result in margin expansion.”

However, PSB’s growth is not without execution risks. Greek lending margins are under pressure, and PSB’s aggressive pricing is not helpful to the system. Also, the company’s ample liquidity is invested in long dated bonds, with yield falling as the book matures. Although the management team did diversify its investments, the amount of risk taken may have increased. Finally, PSB’s expansion in the consumer market may require additional loan loss provisions.

The Greek state is still a majority owner of PSB, with a 65% stake, but the government has repeatedly announced its intention to dispose of a further 15%-20% stake in the company. An eventual placement would be helpful to the company’s restructuring flexibility. In addition, should a placing be completed, PSB could become a potential takeover target. However despite the current M&A focused environment, PSB’s valuation remains rich, even if we adjust for a possible takeover premium.

A disposal of at least 15% of PSB’s shares would increase the free float to more than 50%. Those Greek banks that are deposit constrained could find PSB’s high liquidity attractive. “We estimate that a domestic player could offer a premium of EUR4 per share,” Citigroup analysts note.

PSB has the largest distribution network in Greece, including 136 ‘own-brand’ branches and access to 820 post office branches. The company has about 2.8m active clients (almost a quarter of the Greek population). Despite the breadth of its network, PSB’s 8th placed market share in total lending points to an opportunity to increase new production. “We believe the recently announced (and aggressive) target of doubling retail market share to 10% within the next 3 years is achievable. In addition, we believe there could be potential for further upgrades to targets.”

PSB is the most liquid of the Greek Banks: the loan to deposit ratio of just 45% is well below Greek peers. This provides a cheap source of funding and an attractive opportunity for redeployment into lending. This could be achieved by cross-selling to existing deposit-holding clients, but also to new customers through PSB’s extensive branch network.