Are Greek Banks A Bargain Now?

by: Jan Willem Barnhoorn


Greece is now one of the most concentrated banking markets in the world.

The foreclosure laws have been changed in favor of the banks.

The remaining banks are conservatively capitalized and reserved.

Greek banks are obscure, ugly and out of favor. After endless recapitalizations, staggering non-performing loan portfolios and a struggling Greek economy the remaining banks still have major challenges. Bank shareholders found themselves being diluted towards infinity and their stocks priced close to zero. What do the facts tell us now and is the time right to invest in Greek banks?

Back in 2009, the Greek banking landscape was highly fragmented with around 15 active banks competing in the country. None of them had a market share above 20%. However, that picture changed completely after the banks were forced to merge and restructure in the period between 2009 and 2016. Now Greece is one of the most concentrated banking markets in the world, with the 4 surviving banks holding >90% market share.

The good news: Concentrated banking markets such as Greece are highly profitable and can easily generate a ROE north of 12% in 'normal situations'.

The bad news: The Greek economy is still far from a 'normal situation' and some problems of the banks still haven't been solved. The banks have been re-capitalized to very conservative levels, but their non-performing loans (NPLs) portfolios are still a big problem.

As of 2009, NPLs in Greece started to grow exponentially until today's 35% of total gross loans.

During the crisis, the Greek government passed a law (Katseli law) which prohibited foreclosures of primary homes. This made it very difficult for banks to act proactively on their NPL portfolios(e.g. by forcing loan recoveries via auctions). Additionally, 'strategic defaulters' emerged. These are people that are perfectly able to pay their loans, but simple stopped paying because they are protected by law anyway. Informal surveys show that 'strategic defaults' represent around 15% of the NPL cases.

The good news: As of Jan 1st 2016, the foreclosure law has been changed and now only the poorer families (approx. 25%) will be protected under the law. This means (1) strategic defaults are very likely to go down and (2) banks will be able to recover loans more easily in case restructuring is not working out.

Let's have a look at the strict CET1 ratios (fully loaded and excl. coco's and prefs):

The Greek banks are currently among the best capitalized banks in the Eurozone and easily beat the ECB requirements (especially counting back the coco's and prefs).

Moreover, the cash coverage (NPL coverage ratio) for the 4 banks is on average 68%. This means that Greek banks have already built up a cash reserve equal to around 68% of the NPL portfolio value:

On top of that, most loans are covered by collateral. The average collateral value for the banks was around 59%, bringing the total coverage to 127%.

Total coverage = Collateral value(59%) + Cash coverage(68%) = 127%

Taking into account that not all collateral will be recoverable (remember that Katseli law?) and that collateral value will be lower a bit due to slightly lower real estate prices, the total coverage is still fairly conservative.

Conclusion: A concentrated banking sector with the foreclosure laws being adjusted in its favor should provide a positive framework going forward. Whether NPL ratios will start to decline is still to be seen (in Cyprus they did). The 4 remaining banks are conservatively capitalized and reserved, making it very unlikely investors run the risk of being diluted towards infinity (again). Of course Greek Banks have a lot of other risks to consider, but this one doesn't seem to be one of them.

The other risks will be the topic for the next article…

Disclosure: I am/we are long EGFEF.

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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.