HSBC ups Marfin Popular target to EUR 9.40 per share

…neutral rating maintained

 

HSBC have revisited Marfin Popular Bank’s (MPB) investment case in order to reflect a stronger medioum term earnings growth outlook, following better than expected Q1 2007 earnings and the inclusion of MIG related fees in forecasts and valuation.

Overall HSBC have raised their target price to EUR9.4/share (from EUR8.3/share previously) for a potential total return of 10.3% from current levels of EUR8.5/share. HSBC have maintained their Neutral rating on the stock.

On 2008e P/E, MPB trades at a 7% premium vs its Greek peers and a 9% discount to its European peers. MPB’s valuation looks more compelling on 2009e multiples. In terms of 2009e P/E MPB trades at discounts vs both its Greek and European peers (3% and 14% respectively), while offering a superior 3-year EPS growth outlook (2006-2009e EPS CAGR of 41% vs 19% for the Greek banking sector and 17% for European peers). Despite a stronger earnings growth outlook,HSBC analysts view this discount warranted by MPB’s significantly weaker earnings quality. Tellingly, core banking profits before taxes will account for only 65% of 2009e EBT vs 87% for Alpha, 86% for Eurobank

On book multiples, MPB trades at significant discounts vs both its Greek and European peers, justified by its lower levels of ROE.

All in all, HSBC analysts acknowledge that MPB’s underleveraged balance sheet, high capital adequacy and aggressive planned branch openings provide scope for superior medium term growth. “However, we believe that MPB’s valuation largely captures its outlook and prospects,” note HSBC analysts.

 

MIG capital increase impact

MPB, which currently controls 97% of MIG, will not exercise its rights and will see its stake being diluted to around 6%-6.5%. That said, it will provide investment banking services to MIG for an annual fee of 1% of MIG’s net asset value.

Based on this, HSBC are significantly raising their 2007e-2009e forecasts to reflect: a) the inclusion of MIGrelated revenues, b) a stronger NII outlook mainly as a result of improving asset quality trends and loan recoveries in Cyprus but also due to a somewhat stronger loan volume growth outlook and c) stronger expected trading and other income. Overall, HSBC raised their 2007e, 2008e and 2009e recurring EPS forecasts by 32%, 20% and 24% respectively. The inclusion of MIG explains about 44%-46% of the upgrade.

“We are now looking for 2006-2009e recurring EPS CAGR of 41%. We expect ROE to reach 19.3% by 2009e with the cost to income ratio to improving to 38% (from 50% in 2006 excluding all one-off items). Although our bottom line forecasts are broadly in line with management’s business plan targets (MPB guides for 2006-09e EPS CAGR of 44%), we expect a somewhat different earnings mix. In fact, our NII forecasts are between 4% and 6% lower than management’s forecasts for 2008e and 2009e respectively, as we take a more cautious view on the evolution of the group’s lending spreads and NIM. That said, we believe that the contribution of trading and other

income to the achievement of the group’s profitability targets will be substantial.”