Even though most major European banks have limited direct exposures to Greece, they are indirectly affected by what’s happening in Greece. The financial services industry is globally connected, and tightening credit conditions in one region often spreads quickly to the rest of the world.
Although the small size of Greece’s economy means that a default on its debts will have limited direct consequences on the rest of Europe’s economy; fears of contagion to the other indebted countries in Southern Europe is a very real risk. Europe’s leaders will likely do whatever it takes to prevent this from happening, but the lack of an immediate solution could cause further panic in the financial markets.
HSBC‘s (LSE: HSBA) exposure to Greece was $6 billion at the end of 2014. The bank had cut its Greek assets from $7.3 billion since the end of 2013, but its current exposure is the largest of all European banks outside of Greece itself.
It is of some comfort that the $2 billion in loans to Greece’s shipping industry is denominated in US dollars and has been booked in London. The shipping industry, which is more dependent on global economic conditions, is better insulated to developments happening in Greece. This means that HSBC’s exposure is smaller than what its headline figure suggests.
Even if much of its loans in Greece sour, HSBC’s strong capital position would mean that it could comfortable absorb the losses. But, that would still have a huge impact on earnings; which has already been weak, despite a tapering of loan losses at a low level. Its return on equity in 2014 was just 7.3%; and has been below its 10% target in every year since 2007, except once in 2011. So although you may not sell shares in HSBC on Greek worries, you probably shouldn’t buy them either.
Of the British banks, RBS (LSE: RBS) is expected to have the second largest exposure to Greece. At the end of 2014, RBS had about £400 million in assets exposed to Greece, which is much less than HSBC. But, because of collateral and guarantees, its net exposure is only about £120 million.
The bank still has a long way to go in its recovery, but it is moving slowly, but surely in the right direction. Analysts expect earnings will be much improved this year, with forecasts for earnings per share (EPS) of 27.2 pence, which implies a forward P/E of 13.5.
Santander’s (LSE: BNC) exposure to Spain is its key drawback. Spain’s weak economic growth, its large fiscal deficit, reliance on foreign borrowings and the rise of left-wing populist party Podemos means that the country’s situation is very comparable to Greece.
On a positive note, Santander’s strong global retail banking franchise is highly efficient and relatively profitable. Its credit quality in Spain and Latin America is steadily improving; and its capital position is strong, having already raised capital earlier this year. So unless, Spain follows in Greece’s footsteps, Santander will continue to deliver on steady earnings growth.
Retail challenger bank, OneSavings Bank (LSE: OSB) has no direct exposure to Greece, and very limited exposure outside of the UK. Its fast growing loan book and low operating cost structure should mean the bank would prove to be resilient even with the uncertainties surrounding the Greece’s future.
Analysts expect EPS will grow by 29% this year, to 31.5 pence, which implies a very attractive forward P/E ratio of 10.1.
