Seeking Alpha
Long/short equity, deep value, special situations, contrarian
Profile| Send Message| ()  

I have had several requests from friends and followers asking me to give my opinion on National Bank of Greece (NBG). The question that has been asked of me is if it's a good idea to buy the stock at current prices for the long term. There are many important parameters to take into consideration, and unfortunately most of it is guesswork.

Is the current funding enough?

The current capital increase will put the banks balance sheet once more in the black. The bank currently has a negative 2 billion euro book value, so the 9.7 billion euro capital increase will raise the bank's net book position to about 7.7 billion euros.

If we look at the balance sheet (3/31/2013), the bank has about 70 billion euros in loans and 60 billion in deposits. so there is still a funding gap. At the same time however things seem to be improving, the bank posted a small profit and deposits have increased. Current provisions against bad loans are about 7.7 billion euros. While this may seem a very big number (and it is), the question is, is it enough?

Let me give you one reason for this. Bank repossessions have been frozen in Greece since 2009 (and are to continue been frozen at least until 2015). As a result, banks are unable to repossess properties and liquidate then in order to get their money back. However, as a result of the economic stress on the economy, many properties are worth a whole lot less than what they were 2-3 years ago. This is not portrayed on the bank's balance sheet, because these loans are carried at face value.

As an example, I have a friend who took out a 40 year mortgage of 250,000 euros about 6 years ago. He has been unable to make payments for the past 2-3 years or so. Today the his balance due on his loan is about 260,000 euros, but the property is not worth more than 100,000 euros in the best case scenario. NBG carries 23.3 billion euros in mortgages, 18 billion euros in Greece.

According to the most recent data, about 300,000 mortgage holders were behind on their payments. The Greek Banking Institute (the official bank lobbying group in Greece), says that current mortgage NPLs are about 15 billion euros. However this is also misleading, because many loans have been refinanced -- rolled over -- for the sole purpose of not registering as NPLs.

It's common knowledge that many corporate loans are also being rolled over as to not register as NPLs. There is not a single bank executive that I have talked to that has not told me that this practice is not mainstream among banks.

Moody's also has reservations. According to a report dated April 18, Moody's confirms the negative outlook on the Greek banking sector and adds:

Moody's says that the deep and prolonged economic contraction will further increase already very high levels of non-performing loans (NPLs), exerting additional pressure on the stressed banking system. Declining domestic purchasing power and liquidity, compounded by the impact of government spending cuts and increasing unemployment, will continue to weaken the repayment capacity of banks' retail and corporate customers. Within this context, Moody's expects that (1) NPLs will likely exceed 30% of gross loans by end-2013 (from 24.6% in December 2012); and (2) the banks will remain loss-making in 2013 and in 2014.

Further downside risks stem from the banks' sizable portfolios of Greek Government securities. Although the banks have reduced these holdings to around EUR18.5 billion in December 2012 from EUR44.9 billion in December 2011, Greek Government securities still comprise approximately 87% of the banking system's pro-forma Tier 1 capital. Greece's government bond rating of C indicates that the probability of a Greek sovereign re-default remains elevated, which could imply further substantial losses for the banks.

I agree 100% with this assessment. Furthermore, the talk of the town these days is that Greece needs additional debt relief. The IMF in a recent report describes the many mistakes done in Greece and adds -- what everyone already knows -- that the country needs additional debt relief. My question is, will the official sector take a hit and leave the private sector untouched? I doubt it. While I have been calling for an OSI even before the recent PSI, in the end I think private holders of Greek debt will take another hit before the official sector comes to the plate. That might mean additional write-downs for Greek banks.

As of April 29, Moody's baseline credit assessment for NBG is caa3. In addition, on June 3, 2013, Moody's also said that it expects continued bank asset quality deterioration for the Greek banking sector, despite Greece's improving economic sentiment.

The macroeconomic landscape

The Hellenic Statistical Authority said the Greek economy shrank by 5.6 % in the first quarter of this year, according to figures published by on Friday. The drop is more than the May 15 initial estimate of 5.3 percent. The IMF forecasts that Greek GDP will fall by 4.2% before output expands in 2014. The OECD however expects no expansion in 2014 and forecasts output will fall by another 1.2%. If the OECD is conformed, Greece will probably be the only economy on record that will have endured seven straight years of economic contraction in times of peace (and probably war).

While someone can look at this and come to the conclusion that the Greek economy has eaten the horse and all that remains is the tail, the reality of the matter is that even if economic output in Greece is stabilized, it does not necessarily mean the economy will expand. However even if the economy stabilizes and we do get some increase in output, this will be a drop in the bucket compared to the carnage done so far. At the margin, it will not make much of a difference.

So far Greece's GDP has fallen about 25%, with unemployment at 27% and with a debt burden that even today can't be serviced. Is it possible for the economy to recover without a drastic reduction in unemployment? The answer is probably no. There are no estimates whatsoever that project unemployment falling to 10% anytime soon. At least I have not seen any. Given that the troika (ECB, IMF, European Commission) have been wrong on just about everything with respects in forecasting the current situation, even if they projected unemployment falling soon, it would not be credible. Please keep in mind that the current situation in Greece is far worst than the Great Depression the U.S. went through in the 1930s'. And if you recall, it took World War II to get the U.S. out of the Depression.

The everyday situation in Greece

About 50% of the total population and private companies owe the government past-due taxes. Many small businesses and individuals have been devastated as a result of the recent tax raid in Greece. To give you a small taste of the madness that characterizes the Greek political establishment, next year, in addition to the normal amount of tax paid, small business owners and companies will also pay in advance next year's tax, to the tune of 90% of the current year's tax. For some reason the government thinks it can use the private sector as a cash flow piggy-bank.

About 58 billion euros in taxes are past-due (30% of GDP). Just this year alone, past-due taxes increased by about 3.1 billion euros. Since about 50% of the total population owes back taxes, this year alone, 50% of the Greek population owes an additional 620 euros more in past-due taxes (not counting the total tax due).

About 40 of 58 billion euros are uncollectable, however the government insists keeping these figures on its balance sheet, because if some politician were to make the case to write these sums off, there would be populist political backlash from the political opposition. In the meantime, the government owes the private sector about 8 billion euros.

NBG might be too rich

Even, after the capital increase at NBG and assuming the stock stays at current levels (around 4.30 euros), it will have a market cap of around 10.5 billion euros. That's a 20-30% premium to book value. Even many U.S. banks like Citigroup (C) that are in much better financial condition, don't have that kind or premium. In fact every major U.S. and European money-center bank has a P/B discount except Well Fargo (WFC).

Concluding thoughts

While recent data has showed that sentiment in Greece has gotten better, the reality is that after so many years of hardship, you get use to the situation and even the slightest improvement will make you feel better, even if your situation does not change much.

As for NBG, I think the current capital increase will prove not to be enough and further capital will be needed in the future. And if I am correct, that will mean more dilution for current shareholders.

The fact that the bank is currently trading at a premium, is also another reason why I don't think the stock is a good long term investment at current levels.

Finally, while the current offering has been fully subscribed to, the fact that the stock is trading at the current offering price (4.3 euro's) and the rights have gone from 4.5 euros to almost absolute zero in seven days, is not indicative that the market is very positive on the stock.

Source: Why You Should Not Buy National Bank Of Greece