Since my last article on August 23rd on why Greek (GREK) banks are not investable, and why you should stay away, the sector has corrected as much as 50% (please consider: Greece: Forget About The Positive Headline News, Nothing Has Changed).
National Bank of Greece (OTCPK:NBGIF) was around 2.40 euros, and today around 1.54.
So what happened since then?
For starters, there was an article in Bloomberg a while ago that said the ECB told Piraeus Bank to raise about 500M euros of capital via a tier 2 bond sale, as agreed with the ECB’s Single Supervisory Mechanism.
Initially this news did not cause a lot of harm to bank stocks. Then about a week ago on October 3rd, all hell broke loose on the Athens Stock Exchange, with almost the entire banking space down as much as 30%.
So I made several calls to understand what was going on, and I was told that when the bank explored the coupon for such a bond offering, the market wanted 12%.
I am assuming the market then thought that a bond offering was out of the question, and the bank might instead raise equity capital. However when the current market cap of the bank is only about 500M euros, and at the same time it needs 500M euros, I don't have to tell you how dilutive this might be to current shareholders.
And obviously Piraeus Bank is probably not the only bank that needs additional capital, so the entire space since then has fallen as much as 50%.
However there is also another issue besides dilution. Long time readers know that if I had my say on how to fix Greek banks, current shareholders would go to zero (as in common shares cease to exist). But for some reason ever since the start of this crisis, people who have made the decisions do not seem to understand on how to go about fixing the problem.
The latest scheme to fix the banks involves setting up some kind of an Asset Protection Scheme. According to the plan, about 20B euros in bad loans are to be transferred to the scheme in order for banks to reduce their NPLs. But how is it possible for banks to get rid of their bad debt at no cost? The answer is, it is not.
Let me give you some insight pertaining to the people making decisions in Greece. When Greek politicians want advice pertaining ti financial issues they ask bankers. And because Greece is like a small village, all top executives in the banking space know each other. They are either drinking buddies, relatives, intermarried, in the same political party, or simply worked together. As a result they try not to step on each others toes.
So when politicians ask for advice from bankers, their advise is almost always crafted in a such a way so to preserve the value of their common shares (or try to that is).
Also worth noting is that all Greek central bankers are ex-banking executives. As a result, every Greek central banker knows every top banking executive by first name. How can you appoint someone to the central bank when they are drinking buddies with the people they are supposed to be supervising? The answer is you should not.
So for the past 8 years or so every solution put on the table to try to fix the banking system, was centered around the notion of how not to dilute shareholders (this irrespective if banks shares have all gone to zero several times over already). As a result nothing ever gets done, because politicians don't know any better, and the advice they get from bankers is never the correct remedy.
The latest idea to simply make 20B euros in bad loans disappear is another one of those ideas. And as far as I am concerned, it does not make sense and the current problems of Greek banks will not be fixed.
Because fixing the banks requires (among other things) eliminating current shareholders from the picture.
As I have said for a very long time now, Greek banks are still not investable. There are ways of fixing the banking system, but shareholders need to be sacrificed.
Also please disregard the headline news that Greece is turning around. It is not. This because, it is impossible for any country to turn around without a sound functioning banking system with incremental loan growth.
And because the latest round of theories on how to fix the Greek banking system make no sense to me (one more time), I do not see anything changing with the banking system yet. And as such, I continue to this Greek banks are not investable.
Also, longer term, I continue to think that the entire Greek banking complex will go to zero (once more), because eventually all banks in Greece need to be nationalized for several years before the system is fixed.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
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