Greek banks: still bearing gifts
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Article Type
BondTalk
Topic
Banks
Published
November 14, 2023
Read time
4 mins
Author
Alexander Pelteshki, CFA
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It has been over 24 months since we turned positive on the Greek banking sector. This has been one of our highest conviction calls in credit markets, for reasons that we have extensively discussed and here. The sector has had strong total returns year-to-date, and we continue to expect steady fundamental performance from the Greek banking sector going forward. Strong fundamentals combined with attractive all-in yields make Greek bank debt a core building block for our portfolios, which we discuss in detail below.

 

Fundamentals

 

Greek banks have seen their fundamental profiles improve meaningfully. The combination of an improving sovereign economic backdrop with a higher interest rate environment has positively impacted their ability to generate returns (Figure 1). This has allowed the banks to increase profitability closer to the European sector average, making room for both further deleveraging (Figure 2) as well as for capital growth.

 

 

Credit rating

 

The fundamental credit improvement has been formally reflected in the credit ratings of the banks as well as the sovereign. For reference, Greek government bond debt was rated BB- in 2019 (SandP) but has seen a three notches upgrade to BBB- now, which is an investment grade credit rating. Alongside that, regional Greek banks credit rating profiles have moved up materially too. For instance, Alpha Banks credit rating was at Caa1 in 2021, but has moved all the way up to Ba3 in Oct 2023. Similarly, the ratings of Piraeus and National Bank of Greece having also moved higher.

 

Credit Rating Profile - Moodys

 

Credit Rating Profile - Moodys

Source: Aegon AM, Moodys.

 

Credit performance

 

The most tangible impact has been on the junior layers of the capital stack. As core equity capital is growing, the risks of a credit event for the At1 and T2 debt of the Greek banks is decreasing materially.

 

 

Source: Aegon AM, Bloomberg.

 

This has finally been reflected in the markets too. Year-to-date, Alpha Bank AT1s have been one of the best performing bonds across all junior subordinated debt in the European banking sector. Similarly, recent debt issuances at the Tier-2 level from National Bank of Greece as well as Eurobank has attracted significant interest from investors, which has further benefited performance for Greek bank debt.

 

 

Source: Aegon AM, Bloomberg. From 3/2/2023 to 3/11/2023.

 

Still bearing gifts?

 

Going forward we anticipate that Greek banks will continue their deleveraging journey, which we expect to be translated into additional positive credit rating action from rating agencies. Admittedly, the bulk of the deleveraging is already behind us. From here on, we expect to see further gains mainly in efficiency as well as profitability which we believe will act as a tailwind for the Greek banking sector. Most of the fundamental gains so far have resulted in capital upside for the bonds, but not without volatility along the way. Going forward, while we still see room for additional capital gains, we anticipate that Greek bank bonds will become a much steadier, income focused proposition for our portfolios.

 

Note: Aegon AM holds positions in the bank bonds mentioned in this article.

Important disclosures

Author

Alexander Pelteshki, CFA
Portfolio Manager

Alexander Pelteshki, portfolio manager, is a member of the investment grade and multi-sector portfolio management team. He specializes in top-down asset allocation, global strategic bond and global credit portfolios.

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