As the Greek economy starts to pick up again after a prolonged and painful slump, the country's "big four" banks are set for a good year in 2020, analysts say.

Demand for credit is returning, a trend that is set to continue in the coming year, and Greek bank shares are tipped for a run of strong performance.

But lenders in the country still have the matter of €75.4 billion of toxic debts, the product of the crisis years, to contend with.

Fair economic headwinds

The Greek economy is moving into a "sweet spot" and is predicted to grow by around 2.3% in 2020, up from an estimated 1.8% in 2019 and 1.9% in 2018, according to Jakob Suwalski, an analyst at Scope Ratings.

International investors are gradually returning, and public finances are improving, with Greece on track to end 2019 with a primary budget surplus of 3.7%, he said in a Dec. 16 note. Stronger tax collections and "buoyant" tourist spending in 2019 have also helped.

This is a far cry from the economic turmoil of the years following the financial crisis, when Greece lost more than a quarter of its GDP between 2008 and 2016.

As the Greek economy improves, demand for credit is likely to pick up again, according to Jonas Floriani, director in the research team at AXIA Ventures. And there have already been some encouraging signs.

"Considering that 2019 was not necessarily a great year, banks still managed to grant loans," he said in an email.

Eurobank Ergasias SA, for example, grew its loan book to €30.4 billion at the end of the third quarter, compared with €27.5 billion a year previously.

Panagiotis Kladis, equity research analyst at Eurobank Equities, is also optimistic about Greek banks' prospects in 2020: Improving macroeconomic fundamentals and a rebound in the real estate market should be supportive of the main lenders, he said in an email.

Stock market winners

In what was a punishing year for European bank stocks, Greece's "big four" lenders — Eurobank, National Bank of Greece SA, Piraeus Bank SA and Alpha Bank AE — bucked the trend with a sustained run in share price growth.

Piraeus saw the most dramatic growth in share price out of the Greek banks in 2019, rising by more than 250% between the start of the year and Dec. 18, when shares closed at €2.99 each. Shares in Eurobank closed at 87 cents per share Dec 18, compared with 50 cents Jan. 2, while National Bank of Greece shares cost €2.98 on Dec. 18 compared with €1.09 on Jan. 1. Alpha Bank shares closed at €1.90 per share on Dec. 18, up from €1.09 on Jan. 2.

One of the initial reasons analysts pinpointed for the uptick was a handful of international long-only investors suddenly deciding to increase their positions in order to buy into the Greek economic recovery story.

Greek bank prices should continue to perform well in 2020 given the strong fundamentals of the banking sector, but it is "not reasonable" to expect a repeat of 2019's knock-out performance, Kladis said.

Dealing with toxic past

Although Greek banks are benefiting from a rebound in the domestic economy, there is still the matter of nonperforming loans. Bad loans racked up during the crisis years stood at €75.4 billion at the end of June 2019, a reduction of €13.5 billion, or 15% year over year, according to a Dec. 16 note from Scope Ratings.

A new asset protection scheme, dubbed Project Hercules, which is designed to encourage banks to use securitization as a means of getting NPLs off their balance sheets, is likely to help matters, analysts say. Project Hercules was approved by the Greek government earlier in December.

AXIA's Floriani called Hercules a "great tool" for Greek banks, while Kladis expects NPE stock to halve over the course of 2020.

But Nikolaos Antypas, lecturer in finance at Henley Business School, University of Reading, sounded a note of caution.

While the general outlook for Greek lenders is positive for 2020, the banking system has "accumulated years, even decades worth, of inefficiencies," which will not disappear overnight, he said in an email.

The new Greek government is at pains to tackle the NPL issue and revamp the banking system, but it will take time for banks to heal sustainably, he said.