greek banks re-capitalization jpm

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CEEMEA Equity Research26 March 2013

Greek Banks: Re-capitalization and mergers in progressFeedback from Athens; capital injections to support 2014-15 recovery; lot of heavy lifting completed

CEEMEA Banks

Paul Formanko AC

(44-20) 7134-4718

[email protected]

Rohit Nigam

(44-20) 7134-4719

[email protected]

Anna V Marshall

(44- 20) 7742-2762

[email protected]

J.P. Morgan Securities plc

See page 15 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Private capital 10%-participation c.€2.8bn out of c.€28bn is needed for NBG/€1.6bn, Alpha/€0.5bn, Piraeus/€0.7bn to accelerate return to majority private ownership by 2015-17E, after practically a full wipe-out of old shareholders post-PSI €37bn loss responsible for>90% of sector with an estimated €41bn capital deficit. Based on our conversations in Athens, both Alpha and Piraeus may be potentially closer to securing minimum 10% participation (refer to table 9); top 3 banks to require c.€28bn out of c.€41bn identified and €50bn full package re-capitalization estimate for the sector, funded by HFSF. While Cyprus exposure could delay the process (deadline April/May), c.€5bn of HSFS unallocated buffer should be sufficient to cover Cyprus’ bank restructuring.

Fragile sentiment seems to be improving after an ‘extreme’ 2011-12. While JPM has been UW Greek banks since May/2010; 1) completion of recapitalization followed by 2) merger synergies (3 banks account for c.>80% market w. pricing power), 3) normalization of asset quality (following 6-years cum. 25% GDP contraction w. NPL’s peaking c. 30-35%); and 4) NIM expansion (driven by re-gained access to ECB replacing expensive c.€100bn ELA), could re-start organic capital rebuilt and earnings rebound on a 2-year view. Deposits (€15bn, c.8% of sector since June/12) and liquidity (ECB access) returning, first signs of corporate lending rebound in Jan-Feb; several investment projects re-started. However, NPL trends remain difficult with >25% Q4/12E, and expected to peak 30-35% in 2014E broadly in line with the ’adverse scenario’ based on Blackrock estimates and more severe than estimated for Ireland (refer to table 4.)

Near-term, 3-6 months re-capitalizations may offer long-term shareholders and previous owners ‘a path to a future control’ and a call option on Greek recovery, but it is unlikely to be sufficiently attractive for the mainstream investors (refer to table 10) until asset quality rebound expected from 2014 onwards is materialized reducing future risk of further capital raising. Preferred stocks to play periphery and Cyprus impact: 1) OTP Bank (PT6200 / 40% upside potential) with 13% equity/asset ratio and improving ROE/dividend, 2) Erste (PT32 / 40% upside potential) expect Romania to turn; 3) Sberbank (PT RUB136 / 37% upside potential), with no Cyprus exposure (please refer to the alert from our Russian team).

Implied valuations of Greek banks post recapitalization- looks demanding

Source: J. P. Morgan calculations. Prices as of COB Friday 22 March 2013

€mn Current mkt cap Adj Tangible Equity Capital raised Equity post issuance Mkt cap post issuance Implied P/NAVAlpha 404 2,254 4,571 6,825 4,975 0.73Piraeus 265 -3,134 7,905 4,771 8,170 1.71NBG 859 -6,138 9,756Eurobank 143 -2,444 5,839NBG + EFG 859 -6,315 15,595 9,280 16,454 1.77

Top 3 banks would hold c.81% of deposit market in Greece

Deposits Mkt share

Bran-ches

NBG 36,656 22% 542

Eurobank 19,800 12% 402

NBG + Eurobank 56,456 34% 944

Alpha 20,529 13% 414

Emporiki 11,838 7% 323

Alpha + Emporiki 32,367 20% 737

Piraeus- ATE 28,867 17% 812

Geniki 2,019 1% 104

Piraeus + Geniki 30,886 19% 916

Laiki 6,000 4% 173

BoC 6,511 4% 187

Millennium 2,943 2% 119

Total Piraeus 46,340 28% 1,395

Source: Company report. Deposit levels as of 9M12.

Branches as of 2011

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Paul Formanko(44-20) [email protected]

Table of ContentsRecap of the banking sector underway.....................................................................3

Recap terms ............................................................................................................7

Implied valuations in the recaps...............................................................................8

Some positives within the sector............................................................................10

Risks remain .........................................................................................................13

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Recap of the banking sector underway

We believe successful recapitalization of the Greek banks, which have been crippled post losses incurred on their Greek sovereign exposure (bonds and loans) is one of the key cornerstones in Greece’s path to normalization. To that effect, the Bank of Greece (BoG) has estimated total capital requirements for the system (€50bn, c.25% of GDP), which should ensure core banks maintain acceptable capital levels over 2012-14 and adequate resolution for banks not earmarked for public sector funds. In this section, we highlight the key details behind the BoG’s recapitalization plan:

Identification of core and non-core banks – NBG, Alpha, Eurobank and Piraeus were termed as core banks and suitable for recapitalization using public funds. Rest of the banks were deemed non-core and had to be recapitalized via the private sector (by April-13), failing which they would be resolved. We highlight that ATE and Proton bank have already been resolved, while Emporiki and Geniki have been taken over by Alpha and Piraeus, respectively (with Piraeus being in exclusive talks over acquisition of Millennium bank), after these banks were fully recapitalized by their previous owners.

Breakdown of the €50bn:

€40.5bn was attributed to capital needs for all Greek commercial banks

Impact of completed resolutions and recapitalizations €1.4bn

Costs of potential future restructuring €3.1bn

Capital buffer of €5bn (which we believe could be used to address Cyprus exposures)

Calculation of banks’ capital needs: €40.5bn capital needs for the banking sector was calculated as follows:

BoG started with 2011 core tier 1 capital levels of banks, excluding PSI losses (incurred till that date), preference capital and any HFSF funds received till that date. This starting capital position was then adjusted for the following

Total losses emanating from the PSI – including bonds and sovereign loans subject to terms of PSI. Greek banks suffered losses of €33.9bn from bonds and €3.9bn from sovereign loans, taking the total loss for the system to €37.7bn (o/w core banks €28.2bn), representing c.78% of nominal exposure. Among the core banks, Alpha bank had the least amount of GGBs; however it suffered from its sovereign loan book which was high in comparison to peers.

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Table 1: PSI losses incurred by the Greek banks

€mn GGBs Face value

State related loans

Total subject to PSI PSI loss on GGBs

PSI loss- state loans

Total PSI loss Loss as % of nominal

NBG 13,748 1,001 14,749 10,985 751 11,736 80%Eurobank 7,001 335 7,336 5,517 264 5,781 79%Alpha 3,898 2,145 6,043 3,087 1,699 4,786 79%Emporiki 351 415 766 270 320 590 77%Piraeus 7,063 280 7,343 5,686 225 5,911 80%ATEbank 5,164 608 5,772 3,873 456 4,329 75%Postbank 4,197 175 4,372 3,306 138 3,444 79%Millennium 185 0 185 137 0 137 74%Geniki 384 7 391 287 5 292 75%Attica 199 0 199 142 0 142 71%Probank 415 0 415 295 0 295 71%New Proton 934 0 934 216 0 216 23%FBB 70 0 70 49 0 49 70%Panellinia 34 0 34 26 0 26 76%Total 43,643 4,966 48,609 33,876 3,857 37,733 78%o/w core banks 31,710 3,761 35,471 25,275 2,939 28,214

Source: Central Bank of Greece

PSI provisions taken by the banks during the course of 2011 were added back.

3 year estimated credit loss provisions (€46.8bn for the system and €31.4bn for the core banks) – incorporating results from Blackrock diagnostic exercise and an increment from Bank of Greece (to reflect for loan growth and 4th year of provisions). These credit provisions were calculated both for a baseline and an adverse scenario. We will discuss this in more detail later in the section.

Dec-11 provision base and 3year of pre-provision profits (as submitted by banks and adjusted by Bank of Greece) were then added to get the estimated level of core tier 1.

Finally, Bank of Greece estimated the target level of core tier capital at the end of each year till 2014, based upon a baseline (Core tier 1 ratio of 9% for 2012 and 10% for 2013 and 2014) and an adverse scenario (CT1 target of 7% during 2012-14). Capital needs for each bank were then determined as the difference between the target and estimated capital levels. For each bank, a scenario that resulted in highest capital needs was chosen. We highlight that capital needs for NBG are based on the baseline scenario, while the other core banks are based on adverse (as capital needs for NBG were higher under baseline scenario).

Table 2: Calculation of capital needs for the Greek banks

2011 Core tier 1

Gross PSI impact

Provisions already taken

3yr credit provisions

Dec-11 loss reserves

3yr pre-prov profits

Target CT1 Dec 2014

Capital needs

NBG 7,287 -11,735 1,646 -8,366 5,390 4,681 8,657 9,756Eurobank 3,515 -5,781 830 -8,226 3,514 2,904 2,595 5,839Alpha 4,526 -4,786 673 -8,493 3,115 2,428 2,033 4,571Emporiki 1,462 -590 71 -6,351 3,969 114 1,151 2,475Piraeus 2,615 -5,911 1,005 -6,281 2,565 1,080 2,408 7,335ATEbank 378 -4,329 836 -3,383 2,344 468 1,234 4,920Postbank 557 -3,444 566 -1,482 1,284 -315 903 3,737Millennium 473 -137 0 -638 213 -79 230 399Geniki 374 -292 70 -1,552 1,309 -40 150 281Attica 366 -142 53 -714 274 15 248 396Probank 281 -295 59 -462 168 147 180 282New Proton 57 -216 48 -482 368 34 115 305FBB 145 -49 0 -285 167 -29 116 168Panellinia 82 -26 3 -118 48 -26 42 78Total 22,119 -37,733 5,861 -46,834 24,727 11,381 20,062 40,542o/w core banks 17,944 -28,214 4,154 -31,367 14,583 11,093 15,693 27,501


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Calculation of 3 year credit provisions – this we believe, is the most important part of the whole recapitalization exercise and would be an area debated/scrutinized most by market participants (whether the banks would remain well capitalized over the next 3 years depends upon how the credit provisions play out). While we believe the assumptions are conservative, we highlight that only 3 year losses were incorporated in this exercise (lifetime losses on loan portfolio were also estimated, but not incorporated). We describe the individual components of the total provisions below:

Table 3: Calculation of 3yr credit provisions, excluding collaterals

Greece Foreign State loans BoG Total€mn Exposur

eProvisions Exposure Provisions Exposure Provisions increment provisions

NBG 41,019 4,421 29,289 2,802 3,138 274 869 8,366Eurobank 37,116 6,026 22,516 1,622 2,181 173 405 8,226Alpha 34,298 6,733 13,107 1,201 1,100 77 482 8,493Piraeus 25,909 3,977 10,106 1,624 2,375 288 392 6,281Emporiki 19,881 5,631 1,513 206 1,416 282 232 6,351ATE bank 14,639 2,482 632 103 2,180 522 276 3,383Total system 203,108 33,055 77,164 7,558 12,731 1,733 4,487 46,834


Greek provisions – were calculated in a similar fashion to Ireland, with Blackrock Solutions estimating 3yr and lifetime loan losses for different loan segments, both for an adverse and baseline scenario (based on loan levels as of June-2011). For the system, 3yr loss rate in the baseline scenario stood at 13.1% (vs. 7.3% in Ireland); while in the adverse scenario it stood at 17.1% (vs. 10.1% in Ireland). Lifetime losses under baseline scenario stood at 16% (vs. 10% in Ireland); 21.4% under adverse (vs. 14.6% in Ireland). The 17% 3yr loss rate under adverse scenario would equate to c.34% NPLs (assuming coverage at 50%). Looking at individual loan segments, highest loss rate have been assumed for small business loans, followed by credit cards and consumer loans. On an individual bank level, Alpha has the highest loss rates, followed by Eurobank. Thus in the event economic progression turns out better than current estimates (inputs to Blackrock exercise); Alpha and Eurobank are likely to have bigger capital buffers.

Table 4: Blackrock outputs for Greek book-higher loss rates than Ireland

Greece Baseline Greece Adverse Ireland Baseline Ireland Adverse€mn, % Balance 3YR Lifetime 3YR Lifetime 3YR Lifetime 3YR LifetimeMortgages 67,928 5.9% 8.6% 9.3% 14.3% 4.1% 7.1% 6.7% 12.0%Consumer 28,863 17.5% 25.9% 22.2% 32.8% 16.1% 19.5% 20.7% 27.1% o/w Credit cards 6,900 18.3% 23.6% o/w auto 2,500 4.9% 6.6% o/w other consumer 19,600 18.7% 23.7%Business 106,318 16.5% 18.0% 20.8% 22.8% o/w small business 24,500 27.7% 32.6% o/w corp & sme 68,818 14.3% 18.2% 6.2% 8.8% 8.3% 11.8% o/w CRE 4,400 9.6% 12.8% 17.7% 20.1% 22.1% 25.5% o/w shipping 8,600 4.9% 9.9%Total 203,108 13.1% 16.0% 17.1% 21.4% 7.3% 10.0% 10.1% 14.6%


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Table 5: Loss rates on individual bank level

Greece Greece- Baseline Greece- Adverse Foreign 3yr provisions€mn, % Jun-11 loans 3Yr lifetime 3Yr lifetime Loans Base Adverse

NBG 41,019 10.8% 13.7% 14.2% 18.5% 29,289 9.6% 12.0%Eurobank 37,116 12.1% 15.7% 16.2% 21.6% 22,516 5.5% 7.2%Alpha 34,298 15.1% 18.3% 19.6% 24.5% 13,107 7.0% 9.2%Piraeus 25,909 11.5% 13.5% 15.3% 18.4% 10,106 13.0% 16.1%Total system 203,108 13.1% 16.0% 17.1% 21.4% 77,164 8.5% 10.7%


Foreign loan provisions – were estimated by Bank of Greece based on the methodology used for the June-11 EU-wide EBA stress tests. Lifetime loss rates were not estimated for this segment. Looking at individual bank levels, highest provisioning rates were estimated for Piraeus, followed by NBG.

Provisions for state exposure – incorporated both Bank of Greece and Blackrock estimates.

Bank of Greece Increment – In addition to provisions for different loan segments (Greek, Foreign, Sovereign), Bank of Greece included an additional adjustment which incorporates i) cumulative expected loss from new loan production in Greece over 2012-14 (assumed at 120bps of new loan production),and ii) additional provisions in 2014 to cover for 4th year of provisions (100bps of end 2014 loan balance).

Annualizing banks’ 9M performance, we conclude that provisioning levels have been below/in line with yearly avg. of estimated total provisions (ex. Bank of Greece increment); while pre-provisioning profit levels are running below expectations (however likely to improve going forward as funding costs improve for the Greek banks post restatement of ECB funding line and shift from ELA).

Table 6: Comparison of actual performance vs. estimates used in the recap exercise

€mn Total provisions

o/w BoG increment

3yr provisions

Yearly runrate

Annualized 9M'12 rate

3yr PPOP Yearly runrate

Annualized 9M'12 rate

NBG 8,366 869 7,497 2,499 2,496 4,681 1,560 903Eurobank 8,226 405 7,821 2,607 1,617 2,904 968 825Alpha 8,493 482 8,011 2,670 1,561 2,428 809 378Piraeus * 6,281 392 5,889 1,963 1,940 1,080 360 684

Source: Central bank of Greece. Company reports. * Includes ATE bank figures from 27-07-2012

Table 7: Greek banks- NPL and coverage levels as of 9M12

Group NPLs Group Coverage Greece NPLs CoverageNBG 18.0% 53.0% 21.9% 51.0%Eurobank 21.3% 42.3% 22.5% o/w consumer 37.6% 72% o/w mortgages 13.4% 20% o/w corporate 21.6% 38%Alpha 20.9% 43.0% 21.8% 40.5% o/w corporate 22.9% 47.0% o/w mortgage 18.1% 26.0% o/w consumer 18.9% 64.0%Piraeus * 18.0% 55.0% 17.1% 56.0%

Source: Company reports. * Includes ATE bank figures from 27-07-2012

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Recap terms

We highlight the key terms associated with the recapitalization process:

Banks should reach minimum 6% core tier 1 (ex preference capital) via common equity (with HFSF subscribing for any ordinary shares remaining unsubscribed).

Remaining capital requirement (to reach Bank of Greece’s 9% target) will be met via convertible bonds (CoCos) issued to the HFSF.

If private shareholder participation in the capital increase reaches at least 10%, then shares issued to the HFSF would carry restrictive voting rights. However if private shareholders fail to contribute 10%, then HFSF shares would carry full voting rights.

In the event private shareholders reach the 10% threshold, they will be granted warrants, allowing them to repurchase HFSF’s share over a period of 5years.

The issuance price of common shares is equal to or lower than lesser of the following prices a) 50% of volume-weighted average price of the share over 50 trading days preceding the date of determination of offer price of the shares and b) the closing price of the share on the trading day preceding the date of determination of the offer price of the shares.

Key terms for warrants

The number of warrants to be received by the private shareholders would be calculated as total number of HFSF shares (taken up in the capital increase) divided by total number of shares taken up by the private investors. Assuming 10% participation, private shareholders would receive 9 warrants for every 1 newly subscribed share.

Exercise price per warrant would be equal to the offer price of new shares subscribed for by HFSF plus accrued interest (annual interest rate of 3% plus a spread of 1% for the first year from issue of warrant, increasing by 1% for subsequent years). Given the above terms and expected recap valuations (please refer to next section), we believe warrants would be out of money following the recapitalization and likely to remain so in the near term (unless Greek recovery accelerates )

Warrants can be exercised upto 54 months from warrants’ issue date, semi annually (first exercise date 6months from issue date). If the warrants are not exercised within this period, they would be cancelled by the HFSF.

After 36 months (and till the final exercise date), HFSF can transfer its shares to third parties, provided it has given 30 calendar days prior notice to the warrant holders, inviting them to acquire the shares/exercise the warrants. The strike price of warrants would be the lower of a) market price (50 day volume weighted average price) and b) exercise price as per the original conditions. Thus unless macro recovery accelerates above expectations, warrants are not likely to be exercised before 3 years.

Key terms for Contingent Convertible Bonds

Bonds can be issued before or after the capital increase. They would be issued at par and would be perpetual without a termination date.

Bonds would carry an interest rate of 7%pa, increasing by 50bps every year. Interest can be paid in cash or in kind (shares; this would apply if payment of cash would reduce Core tier 1 below minimum requirements). In case of payment

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in kind, shares would be issued at volume weighted average price of the share over 50 days preceding the interest payment date.

Following 5 years from issuance date, bonds are mandatorily converted to common shares. The issuance price would be 50% of the offer price of common shares subscribed by the HFSF. If the bonds are issued before the capital increase, then the issuance price would be 50% of 50 day wt avg price prior to issuance of bonds. In case of no capital increase, the issuance price would be 25% of 50 day wt. avg price before issuance of bonds.

If the credit institution decides not to pay interest payment, then conversion occurs at 65% of wt avg price over 50 days prior to interest payment date.

In case of a viability or contingency event, bonds are converted as per terms of para 3. Viability event occurs in the case of a decision to make public sector injection of capital or equivalent support without which the credit institution becomes non-viable in the opinion of Bank of Greece. A contingency event occurs if EBA core tier 1 falls below 7%.

If minimum participation of private sector is not reached, bonds would be converted to common equity (same terms as para 3).

The credit institution can redeem the bonds at any time, provided approval from Bank of Greece is obtained, which would be granted if the following conditions are met i) redeemed bonds are replaced by regulatory capital of equal or better quality, and ii) own funds would exceed minimum core tier 1 following the redemption.

Given the aggressive terms associated with the convertible bonds, we believe banks would refrain from/minimize issuance of contingent convertible bonds.

Implied valuations in the recaps

In this section, we estimate the implied valuations of the Greek banks immediately after the recap. Our methodology and assumptions are outlined below:

We start with Q3'12 reported equity of banks and adjust it for preference capital and intangible assets to arrive at tangible equity (NAV).

We add gains on buy backs (banks participated in GGB buybacks in Q4’12) and negative impact of payment of fees to HFSF (one time charge which would be reflected either in Q4'12 or Q1’13). For NBG we also include the capital increase owing to absorption of Eurobank (c. €270mn).

We also include gains which Alpha and Piraeus would register post acquisition of Emporiki and Geniki respectively (Alpha and Piraeus acquired fully capitalized banks for €1mn). These gains are based on estimation of Q3'12 equity of Emporiki and Geniki. Adding all of the above, we arrive at our adjusted tangible equity, which we have used for the valuation exercise.

We have assumed that banks would not issue CoCos (owing to their aggressive terms) and hence the capital requirements by bank of Greece would be met via common equity. Correspondingly 10% private shareholder participation is based on this entire equity amount (without CoCos).

We have assumed that the convertible bonds issued to SocGen (€170mn) and CASA (€150mn) would be utilized to cover the private participation needs. For Piraeus we have included €570mn of HFSF funds (provided during ATE

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absorption) in the total equity issuance, but not for capital levels used to calculate 10% private participation threshold (as the funds provided by HFSF were not subject to 10% private participation).

We estimate valuations of NBG + Eurobank on a combined basis, given NBG has acquired c.85% of Eurobank shares.

We have not incorporated the impact of Piraeus taking over Greek units of Cypriot banks.

Table 8: Adjustments to Q3'12 reported equity; Alpha has positive NAV

Adjustments€mn Q3 reported

equityo/w pref capital

Equity ex pref capital

Tangible Equity

Gains on buybacks

Gains from acquisitions

Other Adj. Tangible equity Q3

Alpha 726 940 -214 -387 94 2,700 -153 2,254Piraeus -2,520 750 -3,270 -3,668 300 368 -133 -3,134NBG -2,871 1,350 -4,221 -6,411 251 21 -6,138Eurobank -1,048 950 -1,998 -2,444 154 -154 -2,444NBG + Eurobank -2,871 2,300 -4,221 -6,857 405 137 -6,315

Source: Company reports, J. P. Morgan Calculations

Table 9: Implied free float and number of shares issued

€mn Current shares,

mn

Current price

50 day avg

BoG-Capital needs

10% private hurdle

Issuance price

Shares issued,

mn

Totalnumber of shares, mn

Shares held by private,

mn

Shares held by

HFSF,mn

Free float

Alpha 534 0.76 1.11 4,571 457 0.56 8,208 8,742 1,355 7,387 15.5%Piraeus 1,143 0.23 0.26 7,335 734 0.13 59,873 61,016 6,699 54,317 11.0%NBG 956 0.70 1.01 9,756 976Eurobank 553 0.26 0.49 5,839 584NBG + EFG 1,227 0.70 1.01 15,595 1,560 0.51 30,746 31,973 4,301 27,671 13.5%

Source: Bloomberg. J. P. Morgan Calculations. Prices as of COB Friday 22 March 2013

Table 10: Implied valuations of Greek banks post recapitalization- looks demanding

€mn Current mkt cap Adj Tangible Equity Capital raised Equity post issuance Mkt cap post issuance Implied P/NAVAlpha 404 2,254 4,571 6,825 4,975 0.73Piraeus 265 -3,134 7,905 4,771 8,170 1.71NBG 859 -6,138 9,756Eurobank 143 -2,444 5,839NBG + EFG 859 -6,315 15,595 9,280 16,454 1.77

Source: J. P. Morgan calculations. Prices as of COB Friday 22 March 2013

Looking at the above valuations, we think Alpha (with implied PNAV of 0.73x post recap) is in a relatively better position to attract private capital (benefiting from the Emporiki transaction which increased its tangible equity). Also we would highlight that post capital issuance the share prices are likely to fall, to adjust for lower valuations (given market would not price Greek banks at the multiples calculated above) – thus the capital increase is not likely to attract regular investors. However investors with a long term view and willing to take initial losses can build their stakes in Greek banking system over 5 years (via warrants) and realize substantial gains in case Greek recovery materializes. Thus it’s a high risk high reward investment.

We would also highlight that any capital enhancing measures undertaken by banks before the capital increase would help in reducing the implied p/nav multiples as it would increase the tangible equity. Thus if NBG were to proceed with sale of minority stake in Finansbank (as it had announced in 2010) before the capital increase, it would bring down the implied valuations.

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Some positives within the sector

Despite being plagued by an extended recession and restructuring of the sovereign, we highlight a few positives for the banking sector (incorporating feedback from our recent trip):

Buffer on top of the central bank recap needs – the central bank’s recapitalization exercise calculated the capital amount necessary to keep Greek banks’ capital ratios above a required minimum over 2012-14. Thus, any capital strengthening measures undertaken by banks and not incorporated in the recap exercise would provide a capital buffer on top of required capital ratios (which should provide a cushion against higher than expected losses). We highlight the key areas which provide for the capital buffer:

Capital strengthening measures undertaken by the banks – while banks submitted their capital strengthening plans to the central bank, only those measures which had materialized at the time of the capital needs assessment (early 2012) were incorporated into the recap exercise. Thus other measures undertaken/planned by the banks – like liability management, sale of subsidiaries, acquisitions (Alpha acquired Emporiki – positive NAV contribution of c.€2.7bn; Piraeus acquired Geniki- positive contribution of c.€370mn) provides for a capital buffer.

Synergies associated with bank mergers – Greek banking sector is undergoing a consolidation phase. The associated synergies, whenever realized would provide a capital buffer as well

DTAs – while the Greek banks currently incorporate full DTAs into their reported capital ratios, Bank of Greece calculated the recap needs only taking into account net DTAs (at Dec-11) at 10% of 9% RWAs. DTAs above this level were excluded from the recap exercise. If the DTA limit is raised to 20% (expectation of banks we met) then the existing recap amounts would provide a buffer to required capital ratios.

Sector is finally consolidating – consolidation within the Greek banking system has been a topical issue. Though the circumstances in which it took place might not have been favorable, consolidation is finally happening within the sector. NBG has acquired Eurobank; Alpha has taken over Emporiki; Piraeus has taken over good assets of ATE bank, Geniki, Greek subsidiaries of Cypriot banks (latest development) and is in exclusive talks over acquisition of Millennium bank. The top 3 banks (NBG+ Eurobank; Alpha+Emporiki; Piraeus+ATE+Geniki) would now hold c.72% of deposit market (vs. 52% in 2009- NBG, Eurobank and Alpha); c.81% if other transactions of Piraeus bank are incorporated. This compares to c.70% in Czech Republic and c.40% in Turkey. This concentrated sector would be in a better position to navigate through the next phase of restructuring, and extract potential synergies along the way.

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Table 12: Top 3 banks would hold c.81% of deposit market share in Greece

9M'12 2009€mn,% Deposits Mkt share Branches-2011 Deposits Mkt share Branches

NBG 36,656 22% 542 56,847 23% 575Eurobank 19,800 12% 402 37,139 15% 432NBG + Eurobank 56,456 34% 944Alpha 20,529 13% 414 36,162 14% 431Emporiki 11,838 7% 323 15,061 6% 368Alpha + Emporiki 32,367 20% 737Piraeus- ATE 28,867 17% 812 25,894 10% 357Geniki 2,019 1% 104 2,666 1% 139Piraeus + Geniki 30,886 19% 916Laiki 6,000 4% 173 10,732 4% 186Bank of Cyprus 6,511 4% 187 10,911 4% 166Millennium 2,943 2% 119 3,482 1% 163Total Piraeus 46,340 28% 1,395

Source: Company reports.

Table 13: Banking asset size of selected EU countries

€bn Total assets

Total loans

o/w non MFI and govt loans

Total Deposits

o/w non MFI and govt deposits

2012 GDP

Assets as % of GDP

Loans as % of GDP

Deposits as % of GDP

Belgium 1,077 505 287 645 508 377 286% 76% 135%Germany 8,110 4,658 2,611 4,545 3,143 2,659 305% 98% 118%Ireland 1,151 421 250 461 198 162 712% 154% 122%Greece 435 262 227 305 168 201 216% 113% 83%Spain 3,510 2,051 1,628 2,216 1,520 1,059 332% 154% 144%France 8,532 4,375 2,156 3,907 1,931 2,038 419% 106% 95%Italy 4,194 2,469 1,740 2,282 1,466 1,564 268% 111% 94%Cyprus 126 81 58 72 47 18 713% 326% 267%Luxembourg 960 407 130 439 227 44 2198% 298% 521%Netherlands 2,460 1,405 1,083 1,087 912 594 414% 182% 153%Austria 962 582 345 528 320 309 311% 111% 103%Portugal 552 303 251 317 209 166 332% 151% 126%Finland 573 277 193 176 137 191 301% 101% 72%

Source: ECB. IMF

Funding conditions are improving- while margins in Q4 would remain depressed, banks were optimistic about their funding costs/outlook going forward. Underlying factors for this optimism were:

Inflow of deposits since Q2’12, reflecting the improvement in political climate. Greek household + corporate deposits have increased by c.€9bn since Q2’12.

Reliance on central bank funding (as % of total assets) is reducing and stands at c.25% (vs. peak of c.32%). In addition, from Dec-12 Greek banks were again eligible to access normal Eurosystem funding. Thus reliance on ELA would be reduced going forward, which would help the overall margins (cost of ELA c.300bps vs. 75bps for normal ECB financing).

Interbank markets though expensive have opened again for the banks.

A reduction in time deposit costs is also expected post sector consolidation.

Table 14: Greek deposit evolution

€bn 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q1'12 Q2'12 Q3'12 Q4'12 Jan-13Household 102 101 111 129 141 158 185 197 174 145 140 127 131 135 136Corporate 21 22 24 28 31 35 38 36 30 23 20 18 18 20 19HH+ Corp 123 124 135 157 172 194 224 233 203 168 159 145 149 155 155


Table 11: Targeted synergies

€mn Total Cost Rest

NBG-EFG 570-630 60% 40%AL-EM 200 150 50Pir-At-GN 250

Source: Company reports. AL-EM implies Alpha

Emporiki. Pir-At-GN implies Piraeus, ATE and

Geniki

12



Figure 1: Greek banks: Central bank funding as % of total assets

Source: Central Bank of Greece.

Figure 2: Rates on new deposits

Source: Central Bank of Greece. Rates correspond to deposits with agreed maturity upto 1 year

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

2.8%

3.3%

3.8%

4.3%

4.8%

5.3%

Household Corporate

13



However risks remain…

Despite the positives we highlighted above and as reiterated in the valuation section, Greece still remains a high risk investment. Some of the key risk factors are:

Effective nationalization of the banking system if 10% private participation is not reached.

Extended deterioration of the macro-economy, which would result in higher than expected loan losses and further capital needs for the banking sector (bank recap needs were calculated based on a 3 year loss rate). As per latest IMF review, GDP is expected to contract 6% in 2012, 4.2% in 2013 before returning to growth in 2014 (0.6%).

Cypriot business of Greek banks can come under pressure, as the economy faces a tough time ahead. This can result in higher than expected asset quality deterioration, leading to additional capital requirements. In addition, deposit outflows from Cypriot subsidiaries could also accelerate. We do highlight that Cypriot book was part of the overall foreign exposure of banks for which 3yr loss rates were determined. In addition, HFSF has a buffer of c.€5bn to provide for unaccounted capital needs of the banks.

Resurfacing of political instability

Reacceleration of deposit outflows- negative read across from Cyprus.

Table 15: International operations of Greek banks

Loans €mn Deposits €mn Branches NPLs

NBG- Q1'12Turkey 15,404 12,054 522Bulgaria 3,045 2,194 212Romania 1,936 797 135FYROM 800 936 64Serbia 707 578 121Albania 223 217 27Cyprus 890 837 17

Eurobank- Q3’12Romania 3,065 1,701 250Bulgaria 2,765 2,133 194Serbia 1,081 777 109Cyprus 1,461 3,036 7Ukraine 667 296 55Lux 451 1,198 1

Alpha- Q3’12Cyprus 4,581 2,637 31 22.2%Romania 3,150 1,100 150 13.1%Bulgaria 804 322 94 24.0%Serbia 808 517 135 15.7%Albania 377 450 42 19.1%FYROM 71 71 20 31.0%

Piraeus- Q3’12Albania 417 522 56 31.0%Bulgaria 1,485 700 83 18.0%Cyprus 874 1,029 14 17.0%Egypt 607 836 48 21.0%Romania 3,081 821 168 24.0%Serbia 575 259 42 17.0%Ukraine 291 96 38 48.0%

Source: Company Reports

14



Table 16: Greece: Macro projections

% 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020EReal GDP growth -7.1 -6.0 -4.2 0.6 2.9 3.7 3.5 3.3 3 2.6Unemployment rate 17.5 24.4 26.6 25.1 23.3 20.4 17.8 15.5 13.3 11.3Unit labor cost growth -3.4 -8.1 -6.6 -0.7 -0.9 1.2 0.4 0.6 1.1 1.3Current account balance* -9.9 -4.2 -1.2 -0.3 0.4 0.7 0.9 1.1 1.5 1.8Trade Balance* -6 -2.5 -0.3 1.3 2.5 3.3 3.9 4.3 4.8 5.2Primary balance* -2.2 -1.5 0 1.5 3 4.5 4.5 4.3 4.3 4.3Overall balance* -9.4 -6.7 -4.5 -3.4 -2.2 -0.6 -0.6 -0.6 -0.2 0.2Gross Debt* 171 157.5 178.5 174.5 170 162.7 153.4 144 133.9 124

Source: IMF. * As a % of GDP

Figure 3: Greece- evolution of NPLs

Source: IMF

Table 17: Balance sheet evolution of Greek banking sector

€mn 2005 2006 2007 2008 2009 2010 2011 2012Cash 2,176 2,597 2,701 2,712 2,518 2,123 2,359 2,538Interbank loans 43,152 48,209 73,515 96,443 120,395 99,544 73,781 51,425Loans 152,889 172,484 204,473 225,995 214,113 280,557 267,382 241,993 o/w domestic govt 11,638 11,126 12,899 13,358 11,992 18,209 14,153 9,681 o/w domestic non govt 136,716 156,602 183,405 200,046 189,096 255,832 246,841 227,071 o/w others 4,535 4,756 8,168 12,592 13,026 6,516 6,388 5,242Domestic securities 41,203 43,734 42,624 44,941 52,568 45,890 45,781 18,875Other Euro area securities 5,792 6,024 7,839 7,669 7,031 4,916 3,604 36,495Other country securities 7,152 10,733 15,121 28,100 36,379 24,531 22,439 24,272Total Assets 286,044 321,410 391,504 464,747 492,609 514,966 476,913 442,214

Liabilities to Bank of Greece 2,425 4,866 8,795 40,594 49,723 97,794 128,891 121,196Other interbank liabilities 37,516 45,082 69,144 77,822 91,526 66,257 44,550 31,708Domestic deposits 165,499 180,916 204,940 235,878 245,470 222,874 182,790 173,347Other deposits 22,088 30,542 43,766 44,511 34,074 57,369 49,481 45,565Debt securities 479 809 1,086 2,960 2,403 3,425 1,569 3,172Capital and reserves 22,646 24,763 28,859 28,048 39,257 44,353 53,067 53,247 o/w provision for bad loans 5,168 5,129 5,974 6,379 8,019 14,326 20,354 28,134


5.10%

7.8%

10.5%11.5%

12.8%

14.7%16.0%

18.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2008 2009 2010 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12

15



Companies Recommended in This Report (all prices in this report as of market close on 25 March 2013)Erste Bank (ERST.VI/€22.10/Overweight), OTP Bank (OTPB.BU/Ft4,470.00/Overweight), Sberbank (SBER.MM/R98.70/Overweight)

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the documentindividually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Market Maker/ Liquidity Provider: J.P. Morgan Securities plc and/or an affiliate is a market maker and/or liquidity provider in OTP Bank, Erste Bank, Sberbank.

Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Erste Bank, Sberbank within the past 12 months.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: OTP Bank, Erste Bank, Sberbank.

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Erste Bank, Sberbank.

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: OTP Bank, Erste Bank, Sberbank.

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: OTP Bank, Sberbank.

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Erste Bank, Sberbank.

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Erste Bank, Sberbank.

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from OTP Bank, Erste Bank, Sberbank.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail [email protected].

16



Date Rating Share Price (Ft)

Price Target (Ft)

14-Jun-07 OW 9750.00 12193.54

14-Mar-08 OW 6700.00 11500.00

09-Jan-09 N 2839.00 3500.00

05-Jun-09 OW 3360.00 6200.00

08-Mar-10 OW 6010.00 8000.00

08-Oct-10 OW 5400.00 6800.00

28-Sep-11 OW 3259.00 4400.00

09-May-12 OW 3709.00 5400.00

07-Mar-13 OW 4835.00 6200.00

Date Rating Share Price (€)

Price Target (€)

20-Dec-06 OW 58.89 77.00

26-Oct-07 OW 56.34 72.00

03-Oct-08 OW 38.49 60.00

20-Nov-08 OW 13.42 20.00

05-Aug-09 OW 25.29 35.00

11-Jan-10 OW 28.90 42.00

11-Aug-10 OW 29.07 50.00

23-Mar-11 OW 35.68 48.00

20-Sep-11 OW 20.89 32.00

17-Oct-11 N 15.99 23.00

20-Apr-12 OW 15.76 25.00

29-Jan-13 OW 24.93 32.00

0

3,014

6,028

9,042

12,056

15,070

18,084

Price(Ft)

Sep06

Jun07

Mar08

Dec08

Sep09

Jun10

Mar11

Dec11

Sep12

OTP Bank (OTPB.BU, OTP HB) Price Chart

OW Ft12,193.535OW Ft11,500 N Ft3,500OW Ft6,200OW Ft8,000OW Ft6,800 OW Ft4,400OW Ft5,400OW Ft6,200

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage Jun 14, 2007.

0

21

42

63

84

105

Price(€)

Sep06

Jun07

Mar08

Dec08

Sep09

Jun10

Mar11

Dec11

Sep12

Erste Bank (ERST.VI, EBS AV) Price Chart

OW €20 N €23

OW €77 OW €72 OW €60 OW €35OW €42 OW €50 OW €48OW €32 OW €25 OW €32


Initiated coverage Dec 20, 2006.

17



Date Rating Share Price (R)

Price Target (R)

31-Aug-12 OW 93.24 147.31

18-Jan-13 OW 101.14 136.38

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.

Coverage Universe: Formanko, Paul: Akbank (AKBNK.IS), Alior Bank (ALRR.WA), Alpha Bank (ACBr.AT), BRE Bank SA (BREP.WA), Bank Asya (ASYAB.IS), Bank Handlowy (BAHA.WA), Bank Millennium (BIGW.WA), Bank Pekao SA (BAPE.WA), Bank of Cyprus (BOC.CY), Erste Bank (ERST.VI), Eurobank EFG (EFGr.AT), Garanti (GARAN.IS), Getin Holding (GETI.WA), Halkbank (HALKB.IS), Isbank (ISCTR.IS), KBC Group (KBC.BR), Komercni Banka AS (BKOM.PR), National Bank of Greece (NBGr.AT), OTP Bank (OTPB.BU), PKO Bank Polski (PKOB.WA), Piraeus Bank S.A (BOPr.AT), Raiffeisen Bank International (RBIV.VI), Vakifbank (VAKBN.IS), Yapi Kredi (YKBNK.IS)

J.P. Morgan Equity Research Ratings Distribution, as of January 1, 2013

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 44% 44% 12%IB clients* 53% 46% 34%

JPMS Equity Research Coverage 42% 49% 9%IB clients* 71% 62% 51%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

0

27

54

81

108

135

162

189

Price(R)

Aug09

May10

Feb11

Nov11

Aug12

Sberbank (SBER.MM, SBER RX) Price Chart

OW R147.314OW R136.384


Initiated coverage Aug 31, 2012.

18



Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P. Morgan representative, or email [email protected].

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19



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"Other Disclosures" last revised February 7, 2013.

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