National Bank of Greece: Not Worth the Risk

Includes: C, IRE, NBGGY
by: Ian Bezek

I've always been a fan of contrarian thinking and so I read fellow SA Contributor Chris Tomsovic's article pitching the National Bank of Greece (NBG) with great interest. But I am unable to agree with his conclusion that NBG is an undervalued bargain. Instead, it looks like a lottery ticket; a purely speculative gamble.

The argument for NBG as an undervalued investment is quite simple. The company has a strong track record of profitability, it has withstood past crises and that investors are overreacting to ominous headlines. Also, they note, NBG has strong foreign assets in countries such as Turkey that will not suffer from the Greek crisis. Couple this with the 80% selloff in NBG shares since the autumn of 2009 and you have, according to bulls, a compelling value.

But it's not that simple. Despite its low share price ($1.42 as I'm writing this), the company still maintains a large market cap ($6.8 billion). Despite the low share price, NBG still has a large market cap that enables equity dilution should NBG need it. Additionally, there is nothing to stop NBG from doing a reverse-split to get their shares back to a higher sticker price. As we've seen with Citigroup (NYSE:C), that route ended poorly for investors. So, we can discard the idea that the stock is cheap merely because it is trading in penny stock land.

Let's move on to the fundamentals -- how strong is the underlying business? I will grant the optimists some points here; NBG has built some good brands and their operations in countries such as Turkey are worth a nice sum of money. But, it appears that NBG is now attempting to sell some of their strongest assets to raise funds. Once again, there are shades of Citigroup circa 2008 here; if as a bank, you survive by selling the profitable portions of your business, what are you left with?

And it's quite an assumption to even assume that NBG will survive past the current crisis. The company has already written down more than 1 billion euros worth of assets related to Greek government debt and other impaired assets. While I couldn't find a precise figure for NBG's exposure to Greek government debt on their website, it is clear that if they've already written down 1 billion euros, the company is exposed to a great amount of debt. If Greece is really heading for default, NBG is going to end up writing down a whole lot more. NBG's stated book value is only $2.63 a share -- any major markdowns will put a low ceiling on a potential rebound should NBG survive the current crisis.

Furthermore, NBG is exposed to lots of Greek economic risk outside of merely government debt. I encourage all potential investors to look at Note 16 of NBG's most recent financial report. In it, you'll find that the NBG group (the corporate parent of the bank) has all sorts of other subsidiaries in businesses such as real estate, hotels and insurance. If you are a bullish on NBG, you are by extension bullish on a Greek economic recovery. While it is obvious that a bank is levered to its nation's economy, NBG is even more so than usual due to all its other business operations.

Even if the company survives, it is hard to imagine the company being profitable in the near term with the Greek economy facing such hard times for the foreseeable future. And there's good reason to believe the company won't survive. This graphic of NBG's credit ratings is reproduced directly from NBG's most recent financial report. Notice that NBG's credit ratings were already downright lousy as of March 31, 2011. If NBG was already is such trouble then, imagine how bad things must be now.

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While investors in American banks came out with good results buying near the bottom of the financial crisis, the experience with buying distressed banks overseas has been less than positive. I'd remind readers of the performance of the widely-touted Ireland rebound play: the Bank of Ireland (NYSE:IRE).

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I have no doubt that NBG will zig and zag wildly as the news continues to develop out of Greece. Smart speculators and day traders will make money. But investors in NBG are likely to end up getting similar results to those who bought Irish banks during their debt crisis. In the end, if you buy a highly-levered bank in a country whose economy is in freefall and whose government is on the brink of collapse, you are merely gambling rather than investing and you should be prepared to lose the entirety of your invested capital. My advice: Don't buy NBG, don't short NBG, simply stay away.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.