HSBC “overweight”” on Bank of Cyprus with EUR 15 price target”

HSBC has initiated coverage on Bank of Cyprus Pcl (BOC) with an overweight rating and a target price of EUR15/share, implying a potential total return of 33% compared to current levels of EUR 11.50 per share.

Bank of Cyprus is the key beneficiary of the ongoing restructuring of the Cypriot banking market, while at the same time it is gaining market share in Greece, notes HSBC in an investment research note dated November 26, 2007.

“BOC is a defensive play with strong liquidity and minimal dependence in wholesale funding, while it offers an attractive earnings growth profile, the highest ROE among the banks we cover and an undemanding valuation,” notes HSBC Pantelakis Securities SA analyst Sophia Skourti.

 

Attractive growth prospects, defensive characteristics…

BOC is Cyprus’s largest bank with an estimated market share of 30% in deposits and 28% in total system loans. It is also the only foreign bank to have made successful inroads into the Greek market through a purely greenfield strategy. In the Cypriot market, BOC will, in HSBC’s view, benefit from the ongoing market restructuring triggered by the introduction of stricter capital and liquidity requirements for cooperative banks (currently controlling 23% of deposits and 26% of loans), while in Greece BOC is one of the few banks continuing to expand its network aggressively. BOC is a deposit rich bank with a loans to deposits ratio of 77% and, hence, dependence on wholesale funding is very low, a feature which HSBC consider a big plus in the current environment. Furthermore it offers and attractive growth outlook, underpinned by the ongoing restructuring of the Cypriot banking sector, continued market share gains in Greece and expansion into new higher-growth and more lucrative markets.

 

…and undemanding valuation

HSBC initiate coverage on BOC with an Overweight rating and a 12-month target price of EUR15/share, implying a potential total return of 33%. Since October 11 2007, the stock has lost 18.1%, limiting its y-t-d gains to 9.4%. The stock currently trades 9.7x its

2009e EPS, broadly in line with the Greek sector average and a discount to European peers, although it offers a significantly higher EPS growth potential. Specifically, HSBC estimate BOC’s 3-year EPS CAGR at 26%, which is 18.5% higher than the Greek sector’s average and almost 2x its European peers’ average.

“We consider current price levels as a good entry point in a fast growth, defensive and high ROE story.”

HSBC forecasts Bank of Cyprus net profit at EUR 493 mln, slightly above the Bank’s own estimate of EUR 486 mln profit compared to EUR 317 mln reported in 2006. For 2008, HSBC forecasts Bank of Cyprus profit at EUR 563 mln and for 2009 at EUR 655 mln.