Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

On Thursday, Firch downgraded National Bank Of Greece's (NYSE:NBG) credit from B+ to B-. This downgrade confirms my concerns that the bank is simply too risky to be investable at the present time. Seeking Alpha's market currents reported that:

Fitch downgrades Greece's banks to B- from B+ in the wake of the yesterday's downgrade of the country to CCC. The agency notes the banks' funding is supported by "extraordinary liquidity provided by the ECB," leaving little room for maneuver against further deposit outflows or sovereign shock.

I wrote about National Bank of Greece on June 22, saying:

[I]nvestors 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.

Since then, shares have fallen 10% and now trade for $1.27. The bottom-callers have returned, with SA Contributor Alan Young reiterating his bullish stance and stating that the media has spun Greek news too negatively and scared investors into overreacting, and thus mispricing, NBG shares. He not only restates his view that the bank's common equity is undervalued, but he further suggests purchasing the preferred shares (NBGpA). This is an interesting idea; here's his logic for the suggestion:

The cancellation of the dividends were not a big surprise, but I think the price is attractive again. Sooner or later, the dividend will be reinstated, so holders of the shares who buy at the current price will be earning a 30% return, plus whatever capital gain is realized when the shares are sold or called. The only question is how long one will have to wait.

While I commend his creative thinking, I must disagree entirely with his conclusion. I think it is far from a sure thing that the dividend will ever be reinstated. Read the Fitch news again: NBG's access to capital is heavily dependent on ECB funding, leaving the bank highly vulnerable to a bank run or a sovereign default. For those of you who've been closely watching the news, you'll be inherently skeptical of investing in any institution heavily reliant on the ECB to remain a going concern. The ECB has not exactly done a masterful job of handling affairs during this crisis, and if NBG investors are reduced to betting on the ECB to continue funding NBG in a beneficial way, they are likely to end up disappointed.

Furthermore, one must question where NBG's reinstated dividend would come from. Is NBG going to be using the ECB's money to pay dividends on its preferred shares? How will German voters feel seeing their money used to pay NBG's dividends? Long story short, I think it is a great leap of faith to assume that NBG will be restoring the dividend on its preferred shares anytime soon. In addition, there is no guarantee that a reinstated dividend would be as large as the previous one; any assumptions of current buyers getting a 30% return are wildly optimistic.

Young's analysis subtly slips in the assumption that the National Bank of Greece will survive this crisis. He fails to even mention the possibility of NBG completely failing to continue as a going concern. If the National Bank of Greece ceases to be a functioning entity, its preferred stock will be wiped out, with owners receiving little or no return of capital. Investors in Lehman preferred shares (now trading under ticker LEHJQ.PK at $0.018) who bought them on the assumption that "sooner or later" the dividend would be reinstated have lost everything.

With all signs pointing to the Greek crisis worsening rather than improving, I think it is foolhardy to invest in NBG in any way, be it through its common stock, preferred stock, or bonds. I'll reiterate what I said last month: Don't buy NBG, don't short NBG; just stay away.

Source: National Bank of Greece: Still Too Risky Following Fitch Downgrade