The title says it all. The Greeks, still led by a beleaguered George Papandreou and a reshuffled cabinet, are in for some tough times. The euro has shed some of its multi-year gains versus the U.S. dollar due to the crisis as European leaders look to shovel money at the "Greek problem" until it goes away. Unfortunately, it won't.
While the Greeks have some valuable property that it can sell off to raise cash (although that alone has limits), the EU faces the particular problem of frequent rioting in Greece in the face of austere budget cuts. Greek citizens are still adjusting to the reality that a huge public debt, public sector GDP (that accounts for 40%) and high public sector employment levels are unsustainable.
While EU-member banks, including BNP Paribas (BNP.PA), Societe Generale (GLE.PA, CSGLY.PK), Credit Agricole (ACA.MI), and Unicredit (UCG.MI) will suffer the brunt of the fallout, U.S. banks will suffer from the plague of black Greek debt as well. In total, estimate of U.S. banks have between $18.1 billion and $40 billion in exposure to Greece.
JP Morgan (JPM) While generally well run under the stewardship of Jamie Dimon, JP Morgan has significant exposure to PIIGS debt. According to a research note last year from Matthew Burnell, an analyst with Wells Fargo, JP Morgan has around $36 billion in exposure to the PIIGS.
JPM quickly took advantage of allowable dividend increases by bumping its quarterly mark up to $0.25 from $0.05. This actually isn’t that far off from the pre-recession $0.38 quarterly payout. Add in the 9.3% payout ratio and the future outlook for this financial powerhouse appears to be promising. The 2.45% current yield isn’t that attractive, but then again, the $8 billion common share buyback should be factored into the shareholder value equation. Some might not be keen on the near 50% increase in CEO Jamie Dimon’s compensation during 2010 -- but to be fair, his year-to-year base salary did not change, just his stock option incentives.
JP Morgan is also reportedly currently in talks with the SEC to settle regarding its CDO sales leading up to the financial crisis. With a current stock price of $40.48, JP Morgan is trading at a significant discount to its 52-week high of $48.36 reached on February 16, and below both its 50- and 200-day moving averages.
JPM has $70B in global derivative liabilities through credit default and other swaps on debt. JPM has about $6B in outstanding loans to the Greek government, and total exposure of $15B. With a 70% chance that Greece defaults over the next 5 years, based off of signals from its credit default swaps, JPM shares make take a 5-6% haircut.
Citigroup (C) is walking to the same tune as the other big banks mentioned, having suffered drops in share value of over 20% since its high in late January.
Currently selling at $38.16, C should probably be valued somewhere in the mid-$40 range. With a P/E of 12.35, and earnings per share of 3.06, C definitely has room to grow in value. In terms of management effectiveness, C is below industry averages when it comes to net profit margin and return on assets.
Aside from the Greek debt issues, Citigroup is a worthwhile stock to consider, based on its current valuation and share price below projected book value. It has been recovering since announcing a 10-to-1 reverse stock split in March, a move that pushed away many retail investors. This dropped the value of the stock considerably, and it appears to be close to a bottom.
C has total derivative liabilities of $60B. It claims its Greek exposure is "manageable" and we calculate that-- given total large bank exposure to Greece is about $32B-- C has somewhere between a $2-5B cut of that number. Citi's hedges are also unknown, but these may limit the damage should Greece default and those default swaps require payment.
Bank of America (BAC) Most analysts maintain that Bank of America’s business model is fundamentally sound despite a questionable balance sheet. The company remains bloated, with nearly 5,900 retail banking offices to serve its approximately 57 million consumers and businesses. Management's stateside approach on the retail banking side is summed up in one sentence: BAC maintains dominant positions in regions expecting high growth such as California, Florida and Texas. There is the expectation that these markets will rebound soon.
We disagree. Heightened competition from Toronto-Dominion (TD) pushing south and Wells Fargo (WFC) pushing in all directions will dampen margins within BAC's retail segment and frustrate deposit growth.
BAC said its net exposure is $31M in default protection to the government and around $550M in exposure to the corporate and consumer sectors in Greece. This could shave less than 0.5% off of BAC's fair value in the event of default.
Goldman Sachs (GS): Goldman Sachs is considered the premier investment bank on Wall Street. The bank has been all over the media because of scandals, most recently Goldman's role in the whole Greek fiasco.
Goldman structured complex derivative deals that allowed Greece to hide its debt burden and therefore scurry the EU Maastricht deficit rules. After which, the bank shorted Greek debt for good measure. While the bank does have exposure to Greece, it seems it has flattened its exposure through long and short positions. As Ben Franklin's said "but in the world nothing can be said to be certain except death and taxes [and Goldman Sachs having a sinister role in every global economic crisis]."
GS has $55B in global derivative swap liability, with unknown obligations to Greece. The company is not required to disclose potential claims on assets below 0.75% of assets for any particular country. GS could face considerable headline risk, nonetheless, because GS made a $7.7B off the market swap deal with Greece. We wouldn't be surprised to find out that GS is betting on a default and plans to profit from it.
GS does have other exposure to PIIGS, namely Ireland. GS has $8.3B in exposure to the island nation in crisis.
Morgan Stanley (MS) MS has $32.4 billion of debt in the PIIGS region. This equates to about 70% of the firms Tier 1 capital. Maybe this fact has something to do with the recent negative price momentum. Shares have fallen from around $31 in late February to around $22 at the time of writing.
That being said, MS trades below book value, at 0.73 price-to-book, and should eventually see some increases leading to sustained higher prices. MS only has a P/E of 11.23 along with a 0.58 PEG ratio. Interested investors may want to wait as MS could see how the Greek tragedy plays out before buying shares.
MS has a total of $48B in outstanding derivative swap liability, with unknown obligations to Greece. Like GS, MS is not required to disclose potential claims that fall below 0.75% of assets. With 2% of assets exposed to corporate lending and 3% exposured to CDS in France, MS could take a 4-5% haircut if it is obligated to pay French banks and others with debt outstanding in Greece.
Wells Fargo & Company (WFC): Wells Fargo is one of the big four national banks in the U.S. and offers a broad range of financial products and services for both consumers and businesses. It’s trading at $26.95 a share, only 14% above its low of $23.02, for a P/E ratio of 11.29 which is about industry average. The stock pays a dividend of $0.48 for a healthy 1.76% yield.
Despite Wells Fargo maintaining a strong recovery from the financial crisis, the stock is down from a 52-week high of $34.25, like its banking peers, amid concerns about increased federal regulation and debt exposure. John Stumpf, CEO of Wells Fargo, has stated the banks are concerned that increased capital requirements and other new rules could harm their revenues and lending abilities.
With a poor public perception of big banks’ practices, the momentum right now is against firms like Wells Fargo. However, the government has previously shown its willingness to side with the banks in serving a greater public interest, so it’s definitely possible it will happen again. With the deflated price and solid financials of Wells Fargo, investors should buy into this stock as a promising performer from the finance sector.
Wells Fargo did not report any exposure to Greece. We think WFC's relatively North-America-centric focus will spare it for the most part.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
