Q419 showed good momentum

Attica’s reported Q419 results were above our forecasts, with both revenue and operating expenses better than expected. These more than offset the impairment charges coming in higher than forecast (148bp of net loans vs 112bp). The pre-provision operating loss was €1.0m for the quarter compared to our forecast of an €8.3m loss. After factoring in loan impairments and associate income, the reported pre-tax loss was €7.5m vs our loss forecast of £12.3m.

The year-on-year comparison is greatly affected by the Metexelixis securitisation, which occurred in Q419 and significantly shrank the loan book.

The significant revenue beat was due to a strong increase in fee income and other operating income (essentially gains on securities). Fees rose (with no special one-offs) by 138% quarter-on-quarter and 27% year-on-year to €3.3m. This strong growth was driven by lending and account/network fees – both more than doubled from the previous quarter. Revenue was down by 1% year-on-year, but up 36% on the previous quarter at €18.2m and 16% above our forecast of €15.8m.

Attica Bank has been successful in reducing its operating costs. Q419 operating expenses of €19.2m were significantly lower than our forecast of €24m. This was driven by general administrative expenses rather than payroll. The company has guided that there were no one-offs to lower these expenses.

As expected, the company used its deferred tax assets to offset its reported pre-tax losses. As such, we believe that the pre-provision operating and underlying pre-tax lines remain the more relevant measures of progress than reported net profit.

Balance sheet momentum was slower than expected, with loans growing 1% q-o-q (we expected 4% growth). Although origination is up, growth in net loans at this stage is still tepid with many loans maturing. There was little change in this quarter in the size of non-performing loans and their level of provisioning. Non-performing loans (NPL) represented 46.5% of gross loans and provisioning cash coverage remained at 33%. Total NPL coverage (ie with collateral) also remained unchanged q-o-q at 120%. On 23 April, Attica announced an agreement with specialist Greek finance company QQuant to outsource management of €453m of its NPLs (this is about half of total NPLs). This was one of the steps that Attica had indicated it would take to free up management resources and focus on rebuilding the business. Most of these NPLs tended to be smaller loans that were more time-consuming to manage.

There were also no surprises on the capital front. The statutory CET1 was 11.4% (our forecast 11.7%), with fully loaded CET1 at 8.1% the same as our forecast. Balance sheet liquidity remained good with a loan to deposit ratio of 59% (Q319: 62%) and Attica’s deposit cost edged slightly downwards in the last quarter of 2019.

Attica’s strategy of expanding its product range and client base while containing costs remains in place. Its stated aims are to double the loan book in three years, and double the assets in five years. The targeted segments for growth on the business side are energy, green power and infrastructure. The big energy and infrastructure projects, which are needed in Greece after years of under investment, are still likely to happen. Furthermore, this is the type of investment that the Greek government will view as useful to help stimulate the economic recovery.

In the retail segment, the sole target segment is mass affluent professionals. The aim is also to sell more financial products, especially loans and insurance, to a very under penetrated client deposit base.

Attica still plans to purchase a digitalisation platform and believes this is more cost-effective than building it in-house. This is a core part of Attica’s strategy of servicing and targeting clients with a dual modern (digital) as well as traditional client relationship approach. Attica’s successful cost-cutting is enabling it to offset the cost of this digitalisation. Cost-cutting measures still to be implemented include selling more non-core banking assets such as real estate and centralising its bank office by moving to new headquarters.

The bank still plans to carry out further securitisations to cut its legacy NPLs to zero by 2021. We understand that it is currently making plans for a third securitisation. We note that market conditions could affect timing.

Before COVID-19 reared its head, Greek GDP growth expectations were around 2% for 2020 and 2021. The IMF’s World Economic Outlook report in April 2020 now forecasts that Greek GDP will decline by 10% in 2020 and then rebound by 5% in 2021. This compares with -7.5% (2020) and +4.7% (2021) for the EU area. The IMF assumes that the pandemic only fades in the second half of 2020 as containment measures are gradually rolled back. There is still considerable uncertainty regarding the evolution of the pandemic and the associated economic cost.

Banks are highly cyclical companies and we expect Attica Bank to see a rise in impairments and a slowdown in balance sheet growth. Given considerable uncertainty currently, management has not provided specific guidance in terms of impairments levels. The bank said that it is minimising the operating risk from COVID-19 and ‘adjusting efficiently to the COVID-19 era’. Management has also noted that the impact on impairments will be felt not only this year but also in 2021 and, to a lesser degree, in 2022.

There has been a coordinated action between the Greek and European authorities to shore up the economy and the financial system. Several measures have been taken including fiscal, monetary and regulatory measures and packages. The actions can be split into: 1) regulatory relaxation regarding capital and increasing liquidity; and 2) pumping new money into the economy through the banking system. The positive side of COVID-19 for Attica is targeted actions by the government to support the funding of corporates in 2020 and of the recovery in 2021.

The ECB has eased the conditions for targeted longer-term refinancing operations (TLTRO III). This is important in providing liquidity and funding to companies. It cut the interest rates in TLTRO III by 25bp until June 2021 and eased collateral terms for banks, including a waiver on accepting Greek sovereign debt instruments in Eurosystem credit operations. The more flexible collateral terms include smaller haircuts on collateral valuations, easier conditions for the use of credit and higher risk tolerance. An example of these rules is a reduction in the non-uniform minimum size threshold for loans from €25k to zero for smaller business. In particular, these changes are geared to help support lending to smaller companies, which is a core focus for Attica Bank.

The ECB also announced a €750bn Pandemic Emergency Purchase Programme (PEPP) in March. This is a new asset purchase programme for private and government securities aiming to reduce risks to the monetary policy transmission mechanism.

The EU has set up a Coronavirus Response Investment Initiative (CRII), which allocates €37bn of cohesion money to be spent across the EU to strengthen healthcare systems, support SMEs, short-term schemes and community-based services.

The European Investment Bank (EIB) offered €2.5bn in financing for liquidity to Greek banks to support new corporate loans. This is part of the €40bn of funding that can be mobilised by the EIB to support companies under pressure from the economic impact of the coronavirus. These loans are backed by the EIB and the EU budget. The financing works as dedicated guarantee schemes to banks as well as liquidity lines for working capital support for SME and mid-caps. There is also some money allocated for asset-backed securities purchasing programmes to allow banks to transfer SME loan risk.

In terms of bank regulation, banks have been given the flexibility of only recognising a loan as defaulted (and requiring higher levels of impairments) if it is 90 days overdue. Submission of the strategy for non-performing exposure has been postponed until further notice. EU-wide stress tests conducted by the European Banking Association (EBA) have been postponed until 2021.

At the Greek government level, the key measures were: (1) cancellation of the Greek government primary surplus target of 3.5% for 2020, allowing the government greater fiscal stimulus; (2) a €6.8bn support package for businesses, involving both direct funding and government guarantees; and (3) financial support schemes for unemployed, self-employed and affected workers (€800 per person per month). There were also postponements of some business tax liabilities.

In our previous note, Refocus and grow, published on 11 March 2020, we estimated that Attica would have to raise 300–500bp of equity to fund its balance sheet expansion. This is equivalent to €117–193m based on risk-weighted assets (RWA) at the end of 2020 and based on the assumption that the CET1 could trough at 7% in 2021. At the midpoint of the range of our assumptions, we have the CET1 reaching a trough of 6.3%. Therefore, while we think the range is still in line with our current assumptions, the actual numbers might be skewed to the upper end of the range.

As before, this has an effect on the valuation as we should assume the inevitable impact of the share dilution from raising capital (see Valuation section on pages 6–8).

Although Attica’s Q419 results were encouraging, the economic impact and uncertainty resulting from the COVID-19 pandemic have led us to lower our earnings forecasts. As mentioned above, it is difficult to get a clear idea of the impact of the pandemic and so the numbers may be considerably higher or lower in the future, particularly due to the impairments.

We have cut back lending and business volumes in 2020. Management has guided to adding €300m in net loans and this is the number that we are now using – from €1.55bn in FY19 to €1.85m in FY20e (previously €1.9bn). We have therefore cut our forecasts for loan growth by 3% to 19% y-o-y. We have reduced NII by 11% (37% y-o-y) and fees by 2% (to 129% y-o-y). We expect the pace of growth to be towards the end of 2020 as Greece starts to recover from the lockdown. Fees growth will be driven by expanding the client base and new core products such as insurance as a result of the alliance with Interamerican Insurance, part of Achmea, the Dutch insurance group, which is expected to kick in 2021.

The anticipated economic recovery means that we assume the impact of the crisis will be significantly less visible by 2022 – we have only cut our revenue forecasts by 2% in FY21.

Strong cost performance in Q419 and the heightened need to be careful with costs has led us to cut our cost assumptions by 2% in 2020 and we keep cost inflation around 1% pa.

We have reduced our pre-provision operating profit forecast for 2020 from €15.4m to €10.1m due to the lower revenue assumptions mentioned earlier. As the economy continues to recover in 2021, the pre-provision forecast adjustment is much smaller – from €40.3m to €39.4m.

Loan loss charge (LLC) assumptions are the most difficult as we do not know the extent and depth of the recession, nor the pace of the economic recovery. The bank expects the bulk of the impairments to come in 2020 and 2021, and we have raised our assumptions for these years from 134bp to 197bp of net loans in 2020 and from 128bp to 177bp in 2021. There is a considerable risk of deviation from these forecasts. We have therefore presented an analysis of pre-tax profit sensitivity to changes in the LLC rate. We use 2021 as a base year as this is the first year in which we expect Attica to achieve an underlying profit – ROE of 0.9%. If we flex the base case by moving the impairment charge by 10% in either direction, the ROE goes up to 2.2% or -0.4%. With a 20% increase in the LLC rate, the pre-tax loss amounts to €4.6m and the ROE is -1.7%.

We have cut underlying pre-tax profit (which is the key indicator) forecasts from an €8.8m loss to a €24.5m loss for 2020 due the higher impairments and lower revenue forecast. The higher impairments result in underlying pre-tax profit falling from €12.4m to €2.7m in 2021. By 2022, the reduction is only 15%, from €35.4m to €30.2m.

The most significant risk factors for Attica Bank are as follows:

Execution risk: the bank plans to grow its balance sheet significantly over the next few years. Such a fast pace of growth may bite later if credit quality turns out to be poorer than anticipated. There is also the risk that the bank is not able to hire the people needed to help drive this growth.

Cost structure requires a lot of growth: with a high cost to income ratio and low profitability, the delta in terms of revenue or cost variance can be high. Recent results have been short of previous guidance.

Capital: the bank will need to raise equity to drive growth. Although we believe the current share price already incorporates capital concerns, it might be more earnings dilutive than envisaged. In addition, there is no guarantee that enough capital will be raised to deliver the planned expansion.

COVID-19: banks are highly cyclical companies and the final impact of COVID-19, eg the depth of the crisis as well as the strength and speed of the subsequent economic recovery, is still unknown. The key impact is on asset quality and impairments. The pandemic and its economic consequences could also delay Attica’s planned securitisations, as well as the rights issues needed to fuel its expansion.

Regulation: regulation is constantly changing and may result in tougher or more expensive compliance standards.

Greek bank shares have dropped sharply due to economic concerns about the COVID-19 pandemic, with share prices falling 30–50% since our outlook note published on 11 March. However, Attica’s share price has been more resilient, falling from €0.23 to €0.22 over the same period. Greek banks are trading on an average P/BV of 0.18x (excluding Attica), ranging from 0.12x for Piraeus to 0.26x to Eurobank. Attica is trading at a P/BV of 0.23x. At such depressed ratings, the market is pricing in significant losses driven by impairments for Greek banks and their likely need to raise equity. It is also driven by investor sentiment of great uncertainty regarding the trajectory of the COVID-19 pandemic and the ultimate economic cost.

Although consensus earnings estimates have come down, stocks are trading on very low P/E ratios. The market is clearly pricing in considerable earnings risk. Forecast ROEs (3.0% for 2021, 4.7% for 2022) do not correspond to trading P/BVs. Furthermore, since we estimate a loss for Attica Bank in 2020 and ROE of only 0.9% in 2021, this hampers P/E comparisons with peers. Attica’s 2022 ROE of 6.8% (albeit also with earnings risk and paying no income tax) is in line with banks such as Eurobank and NBK.

We continue to model Attica Bank’s valuation based on the assumption of a rights issue. On our assumptions, the bank’s fully loaded CET1 will drop to below 7% in 2021 and 2022. Since we believe it will have to operate on 10–12% in the future, we think Attica will have to raise equity. This is something that management has already highlighted and which the market expects. We have assumed a possible share issue at €0.20 per share (vs the current share price of €0.22) in late 2020 (or perhaps in 2021 depending on market conditions). We are assuming that 300–500bp of capital will be raised and Exhibit 5 shows the impact on FY21e EPS dilution – from 55% to 67%. The amount raised based on our estimates ranges from €111m to €185m. As before, we neither assume any gains on non-core asset sales (although likely) nor any gains from securitisations. That said, Attica has previously been able to make capital gains from selling the junior note on securitisations.

Based on our current estimates and assumptions, profitability should start to normalise in 2022. With no right issue, the estimated FY22 ROE is 6.8%. For 300bp to 500bp of raised equity, the estimated ROE ranges from 4.7% to 5.3%. As Exhibit 6 shows, 2021e P/BV would increase from 0.23x (no capital hike) to a range of 0.40–0.48x.

As we previously stated, the bank is currently losing money and needs capital and therefore investors need to take a longer view. COVID-19 has made recovery a longer and more arduous process.

In our valuation, we use the (ROE-g)/(coe-g) formula with about 2% (close to inflation figure) growth and a COE of 12%. To justify the P/BV of 0.40–0.48x (after rights issue dilution), the ROE needs to be c 5–6% by about 2021. On our assumptions, this is achievable but with some considerable risk, as noted in the Sensitivities section on page 6 and with the added uncertainty of COVID-19. We do think that Attica could sustain an ROE of 7–8% in the longer run if it delivers on its expansion plans while retaining good control on credit quality, and if the Greek economy recovers strongly from the COVID-19 recession and then remains buoyant. Small business lending can be a profitable niche, particularly with good relationships, and smaller banks can make a difference in service quality that bigger banks do not always deliver to smaller business clients. Again, this suggests there is upside potential at the current price of €0.22 if Attica raises equity and meets our forecasts.