Massive Dilution Coming For National Bank Of Greece Shareholders

| About: NATL BK (NBGGY)
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On December 27, the Bank of Greece directed Greek banks to raise capital. National Bank of Greece (NBG) has been directed to raise 9.756 billion EUR. Given a share price as at January 4 of 1.43 EUR, NBG's market capitalisation is only 1.37 billion EUR, a mere 14.01% of the capital required. It follows that current shareholders will face substantial dilution once the capital raising is complete.

Current financial position

On December 21, NBG released its Q3 results. Some notable figures:

  • 2.45 billion EUR loss for the 9 months ending 30 September, of which "only" 465 million EUR was impairment of Greek government bonds
  • 554 million EUR loss for Q3 2012

NBG's large historical losses are not the focus of this article. Nor are the likely future losses as Greece continues to be stuck in a deep recession. Instead, we draw investors' attention to the company's financial position as at 30 September 2012:


103.10 billion EUR


105.73 billion EUR

Total equity attributable to NBG shareholders

Negative 2.87 billion EUR

Non-controlling interests and preferred securities

241 million EUR

It bears repeating - this bank, with a negative book value of 2.87 billion EUR, is trading with a market capitalisation of 1.37 billion EUR, and has been directed to raise 9.756 billion EUR.

Capital raising terms:

The 9.756 billion EUR capital must be raised by the end of April.

In a separate press release, the Hellenic Financial Stability Fund (HFSF) announced

(1) that they would underwrite the Greek banks' capital raisings and

(2) the terms of the capital raisings.

The link provided above to the HFSF website contains the terms in Greek, however there are numerous summaries of the document in English, such as this one from a Greek research analyst and this one from Bloomberg.

The key terms are:

(1) Greek banks must issue common shares to achieve a core Tier 1 capital ratio of 6%.

(2) They must also issue contingent convertible bonds (CoCos) to increase the Tier 1 capital ratio by 3%, from 6% to 9%.

(3) Common shares will be offered at lower of
(3a) at least a 50% discount of the 50-day moving average [MA] preceding the announcement of a bank's capital raising and

(3b) the last traded price preceding the announcement of a bank's capital raising.

Rights issue and impact on share price

The sale of common shares will most likely take place as the result of a rights issue to current shareholders.

Many European banking stocks are trading at price-to-book ratios below 1.0, and these banks have operations countries much stronger than Greece.

Greek banks deserve a price-to-book multiple lower than other European banks due to the high levels of doubtful debts from Greek customers. After NBG shares go ex-rights, the share price should fall very close to, or even below the issue price of the new shares, to reflect a price-to-book ratio of 1.0 or below.

As mentioned earlier, NBG's capital requirement is 9.756 billion EUR. This amount represents a core Tier 1 capital ratio of 9%. Therefore the common stock capital requirement is 6/9 * 9.756 billion = 6.504 billion EUR.

NBG's 50 day MA is 1.59 EUR. Therefore if the capital raising were to be announced in the near future, NBG shareholders could expect a rights issue price of about 0.80 EUR per share, which is roughly 50% of the 50 day MA.

Given the above assumptions, 6.504 billion EUR capital required is 8.18 billion shares at 0.80 EUR each. This is significant dilution for a company that only has 956.09 million shares outstanding.

Taking the analysis one step further, if NBG raises 6.504 billion EUR in capital, then the book value of the company only rises to 3.634 billion EUR (new capital 6.504 billion + existing (negative 2.87 billion). Given a new share count of 9.14 billion shares (956 million existing + 8.18 billion new shares), this gives a share price of 0.40 EUR (3.634 billion EUR / 9.14 billion shares) at a price-to-book ratio of 1.00.

Eurobank merger

On November 23, NBG shareholders approved a proposed takeover offer of rival Eurobank. Under the offer, Eurobank shareholders will receive 58 NBG shares for every 100 Eurobank shares held.

The merger may close before NBG completes its capital raising, so we've also reviewed the capital requirement for Eurobank, which is even worse than that of NBG.

Eurobank financial position and capital requirement

Eurobank has been directed to raise 5.839 billion EUR. However it also has a book value as at September 30 of negative 404 million EUR. If we assume that the NBG and Eurobank merger is finalized before either bank's capital raising is completed, the position of the combined entity is shown in the table below. Please note that the shares outstanding count for the combined entity is calculated as follows:

552.95 million Eurobank shares * 0.58 = 320.71 million additional NBG shares to be issued.

956.09 million existing NBG shares + 320.71 million new shares = 1,276.80 million shares for the combined entity.

Combined entity



Shares outstanding

1,276.80 million

956.09 million

552.95 million

Recent share price

1.43 EUR

1.43 EUR

0.7000 EUR

Market capitalisation

1,825.82 million EUR

1,367.21 million EUR

387.06 million EUR

Capital required

15,595 million EUR

9,756 million EUR

5,839 million EUR

Market capitalisation as percentage of capital required




As we can see from the table, Eurobank's market capitalisation, when compared to its capital requirement, is far smaller than that NBG. Therefore the completion of the merger (before NBG's capital raising) would result in additional dilution for NBG shareholders.

Catalysts for share price decline

There are many catalysts for NBG's share price to decline in the coming days, weeks and months. These include:

(1a) A delayed reaction to the NBG and Eurobank Q3 loss reports from mid-December that disclosed negative book values for the two banks.

(1b) A delayed reaction to the Bank of Greece report of late December that directs NBG and Eurobank to raise 9.756 billion EUR and 5.839 billion EUR respectively.

(2) NBG going ex-rights, and then declining to or below the rights issue price.

(3) NBG shareholders receiving their newly issued shares from the rights issue will likely sell their shares if the share price is higher than issue price. As described above, a price-to-book of 1.0 would be overly generous for these banks.

Catalysts 1a and 1b could result in a lower NBG share price at any time. Catalysts 2 and 3 are almost certain to occur between now and April 30.

Massive dilution for NBG shareholders is coming between now and April 30, with the capital raising to take place at a 50% discount to the stock's 50 day MA. This will probably continue to put downward pressure on the stock, given a likely capital-raising price below the 52-week low of 0.8980 EUR. A market capitalization of 1.37 billion EUR is extremely rich for a Greek bank with a book value of negative 2.87 billion EUR and an impending capital-raising of 9.756 billion EUR.

Disclaimer: The above commentary is provided for informational purposes only. This article does not take into account your personal circumstances, and as such, you should consider whether its content is relevant to your situation. Before buying or selling any security you should conduct your own research and analysis, and seek advice from an independent financial adviser.

Disclosure: I am short NBG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.