Citi reduces price targets on Greek & Cypriot banks

Citigroup Global Capital Markets has slashed its price targets on Greek and Cypriot banks despite the fact that it remains overweight and believes that the fundamentals are still good for the sector.

During 1H08, Greek and Cypriot banks stocks declined 36%. European bank stocks declined 33% over the same period. Citi analysts believe the fundamentals of Greek banks – growth, profitability and balance sheets – to be far better than European peers.

“We see no reason to change our fundamental view,” says Citi. While challenges exist for Hellenic banks, Citi analysts believe they are manageable and their 1H stock price declines more than discount these headwinds. Citi does not change its bias, keeping 7 Buys, 2 Holds and 1 Sell, but Citi analysts cut their weighted-average target price by 14% which still leaves a 40% upside potential.

Reflecting Weaker Equity Markets — Citi analysts believe the large declines in stock
markets do have a negative implication, however, for both earnings estimates and
valuations. In this note, they factor in reduced fees and trading income from capital
market activity. “Our average estimate cut is -7% for 2008E and for 2009E
(calculated on a market cap weighted basis). In addition, reflecting investors'
apparent unwillingness to pay as high multiples as pre credit crunch, we also
increase our cost of equity assumptions: Greece & Cyprus 11% (from 10%),
Balkans 13.5% (13%), Turkey 17% (13%).”

Strong Core Banking Trends — Citi analysts think Greek and Cypriot economic activity in 2008E will slow versus 2007, but banking growth rates still look strong. Latest system loan growth in Greece is 19% yoy and deposit growth 14% (March), while in Cyprus it is 35% and 25% respectively (April). 2Q08 results season should reflect this strong volume growth, some margin stabilisation and weak capital markets income. Most Greek bank senior executives have reiterated their commitment to existing public guidance. 2Q08 results season starts 30th of July.