The National Bank Of Greece Is Still Not Investment-Grade Material

Aug.20.14 | About: NATL BK (NBGGY)


Contrary to expectations, NBG's stock is nearing its all-time lows once more.

The problem is that we still don't know the NPL bill, and the Greek economy is not doing much better.

As such, and until the Greek economy does better and we have a clear picture of the NPL situation, NBG is not investment-grade material yet.

The common stock of National Bank of Greece (NBG) is approaching its all-time lows once again. The question is, why is this happening, since according to the plan, the bank is now fully financed after its latest recapitalization.

The problem with NBG, and the entire Greek banking sector for that matter, is that we do not know if the bank will need additional capital and how much.

This is a theme I have long talked about. For those following my thoughts on NBG (please consider "Why You Should Not Buy National Bank Of Greece" and "This Might Not Be The Last Round Of Funding For The National Bank Of Greece"), long-time readers know that I have been bearish on this stock, even if the entire investment community has been bullish.

The bullish theme for NBG is subject to the numbers being correct.

One of the bullish themes for NBG is that provisions might be higher than needed, and if the Greek economy recovers, then many of these losses will be recouped. While there is a small chance this might happen, I think the possibilities are very small.

Here are some of the reasons:

The unemployment rate in Greece currently stands at about 27%. Tourism this year was at record levels; however, it did very little to alleviate unemployment. One of the reasons is that a very big chunk of this increase was due to the influx of cruise ships, where tourists stay in Greece for a limited time and don't spend much. Another reason is because more and more, Greece is an all-exclusive destination, whereby the average tourist leaves very little (if anything) to the local economy.

At least 2.5 million Greek citizens (just under 50% of the working population) owe back taxes to the government or money to the banks. And when it comes to paying the bank or the taxman, the obvious choice is the taxman, leaving the bank in second place.

As a result of the above, about half the Greek working population has problems participating in the economy. That's correct, a very big part of the workforce is in a sense "off-line". Meaning, not being able to start a business (even if they have money), or doing ordinary things like opening up a bank account. Reason being, if you owe money to the government, this money will be confiscated. As a result, there are figures that show that Greece is become more and more of a cash economy.

The introduction of a real estate tax in Greece has made things even harder, with many Greeks not being able to pay this tax also.

Most of the mortgages taken out during the period of 2007-2010 are not just under water, but banks will have to take substantial losses on those loans. As an example, I have a friend who (contrary to my advice) bought an apartment in Athens about 7 years ago for about 240,000 euros. He has stopped paying his mortgage for about three years now, and his current debt is about 270,000 euros. His apartment is probably not worth more than 100,000 (if that), and the bank cannot confiscate the property for at least another 3-4 years, because the courts are swamped with similar cases.

It is no secret that many corporate loans in Greece are being rolled over, so as to not be classified as distressed debt. To some extent, the same is being done for loans to individuals. While we do not know the exact figure, many analysts think that the actual NPL situation will worsen if these tactics are exposed and fully accounted for.

Were the recent capital raises a smokescreen?

One thing that has puzzled me for a while now is why the The Hellenic Financial Stability Fund (HFSF) insisted that the Greek banking sector return to the investing public so soon. As a reminder, the S&L scandal of the 1980s in the U.S. took 11 years to unwind.

The HFSF recently decided not to participate in the recent capital increases of the Greek banking sector, allowing itself be diluted dangerously (my opinion). The HFSF has to repay about 50 billion euros in loans it has taken out in order to recapitalize the banks. In theory, it can recoup this money, but not if its ownership in the banking system falls by a lot (as it did recently).

One of the reasons I think it allowed itself to be diluted is because it probably knew that the recent round of funding might not be enough. Since the HFSF still has about 10 billion to put to work if needed, I think it let the market participate in these offerings, probably knowing that this money will not be enough. So if in the future it needs to backstop the sector with additional funds, it will recoup its ownership then.

And that is one of the reasons I think NBG and the entire Greek banking sector keeps going down. In the wake of the pan-European stress tests coming up in several months, if the ECB tells Greek banks they need another 5-10 billion euros, for example, then that will mean another round of substantial dilution, whether inherited rights are permitted or not, or if the HFSF fully backstops the banks itself, diluting everyone to kingdom come.

Bottom line

The bottom line is that NBG and the entire Greek banking spectrum is still not stable enough to be considered investment-grade for the long run. The main reason is simply because no one knows what the final NPL bill will be.

In addition, the Greek economy is not reviving. The Greek government is simply trying to manage the situation as best it can, but without laying the groundwork for reforms that might make it easier to do business in Greece in the future. As such, the market is not taking any chances, and is not investing in the Greek economy, which is a prerequisite for lower unemployment, so people can better manage and pay back their debts.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.