Loan Expansion And Snappi Launch Promise Growth But Analyst Revenue Decline And Margin Pressures Pose Risks

Key Takeaways

• Piraeus expects strong loan growth and strategic asset management to drive significant revenue and margin improvements.
  
• Accelerated DTC amortization and new product launches aim to bolster capital strength and diversify revenue sources effectively.
  
• Competitive pressure in mortgages and potential missteps in acquisitions or new launches could challenge Piraeus Financial's revenue growth and profit margins.

Catalysts

Provides banking products and services in Greece and internationally.

• Piraeus Financial Holdings anticipates expanding its performing loan book to €33 billion by year-end, with a significant 10% year-on-year growth, which is expected to positively impact revenue.
  
• The company projects €50 million to €100 million upside to the current guidance of €1.8 billion for net interest income in 2025, attributed to higher loan volumes and monetization of bond IRS, enhancing earnings prospects.
  
• Strong growth in net fee income, with assets under management growing 29% year-on-year to €11 billion, driven by loan expansion and strategic asset management, is anticipated to improve net margins.
  
• Piraeus plans to accelerate DTC amortization, aiming for a DTC/CET1 ratio reduction to 30% by 2027, which could strengthen their capital base and support higher future payouts, impacting earnings per share positively.
  
• The launch of Snappi with an ambition to generate more than €200 million in revenues over the next five years could serve as a catalyst for revenue growth and diversification.

Piraeus Financial Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Piraeus Financial Holdings's revenue will decrease by -2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 40.2% today to 40.7% in 3 years time.
• Analysts expect earnings to reach €1.0 billion (and earnings per share of €0.85) by about January 2028, down from €1.1 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, up from 4.4x today. This future PE is lower than the current PE for the GB Banks industry at 12.4x.
• Analysts expect the number of shares outstanding to decline by 0.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.4%, as per the Simply Wall St company report.

Piraeus Financial Holdings Future Earnings Per Share Growth

Risks

• Piraeus Financial Holdings is experiencing competition in the mortgage market, with a decline in mortgage volumes year-on-year. This could impact future revenue growth, especially given potential stagnation or slow recovery in residential loans.
  
• There is concern about potential compression in net interest margins due to lower Euribor rates and competitive pressures on loan pricing, which could affect future earnings.
  
• The reliance on inorganic actions, such as NPE sales, to reduce the NPE ratio to below 3% might imply an ongoing need for asset quality improvement tactics that could pressure net margins if not executed efficiently.
  
• With considerations for possible acquisitions, especially outside the core markets, there is a risk of misallocation of capital, which may not yield expected synergies or returns, potentially impacting future capital ratios and net income.
  
• The launch of Snappi comes with anticipated high costs in 2025, which may weigh on the company’s operating expenses and, subsequently, its net profit margins if revenue projections from this venture are not met.

Valuation

• The analysts have a consensus price target of €5.53 for Piraeus Financial Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €6.31, and the most bearish reporting a price target of just €4.13.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.5 billion, earnings will come to €1.0 billion, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 10.4%.
• Given the current share price of €3.85, the analyst's price target of €5.53 is 30.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.