|Shares Out. (in M):||1,544||P/E||0||0|
|Market Cap (in $M):||3,258||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
What if I told you, you could buy a bank at 0.37 tangible book with 17.2% fully loaded CET1, leverage ratio of 13.5% and price to pre-provision income of 2.7? Sounds great, right? You would be less excited if I told you it is a Greek bank. But things are changing.
Investing in distressed Greek banks is not new. Many well-known investors like current Secretary of Commerce Wilbur Ross or John Paulson or David Einhorn invested in various Greek banks 2-3 years ago. They got burned really badly! Their investing thesis had only one flaw - they were too early. They have underestimated severity of Greek economic woes and political instability which resulted in and caused further economic problems. Now, 3 years later, Greek banks have sufficient capital, CET1 is at the highest rate in recent history, deposits have started to grow, NPLs to fall; Greece has done additional restructuring and is finally poised to a secular growth.
Investing in distressed securities, especially banks is always a risky business so allocation size should be set accordingly.
It is impossible to consider investing in Greek banks without some insight into the macro environment.
With 27 percent drop and 10 years long depression Greek economy probably set some kind of a record. You won’t find many peacetime drops of this magnitude, for sure. As NYT headline said “Seen from Greece, Great depression looks good”. Greek unemployment reached 28%, with youth unemployment hitting 60 percent. With its own currency, rebalancing would have gone much smoother and less painful but that water is under the bridge now. Sunk costs are too big at this point. 2010 or even 2013 was the time to leave euro but now, after all the suffering, it doesn’t have much sense any more. The Greeks have managed to rebalance their economy in a big way. The average and minimal salaries are about a quarter below their pre-crisis levels while enormous current account deficits (15% in 2007 and 2008) have all but disappeared. The Greeks are finally living within their means.
Real estate prices are recovering form their 40% drop since 2009, while the unemployment rate has dropped to 21.7%. With the total contribution to GDP close to 20%, tourism is extremely important to for the prosperity of Greece. All evidence suggest that this is going to be a record tourist season so unemployment rate is expected to continue to decrease.
Increased competitiveness of Greek workforce toward Germany didn’t lead to higher exports so far. That shouldn’t come as a surprise. There is always a time lag. In the first phase it’s the imports that fall and subsequently, after some investing, exports pick up. Only recently, after nearly a decade of negative growth, Greek fixed capital formation turned positive. The only issue that still prevails is a large government debt, close to 180% of GDP. Even on that front the Greeks have made a tremendous progress. In 2016 they managed to produce fat primary surplus of 3.9%( IMF: 4.2%), far above targets set by the creditors. It remains to be seen whether this will be enough to avoid new austerity measures. But imposing new austerity measures shall certainly not result in as disastrous outcome as it did before. More balanced and competitive, economy should be more resilient to similar shocks.
Greek banking sector
This is mostly a macro story and improved macro environment is going to lift all banking boats. I have chosen Alpha Bank since it has somewhat protected downside with the highest level of regulatory required capital and the high level of total coverage, yet it is still quite cheap on P/TBV basis. In the most optimistic scenario for the Greek economy, Piraeus shares should probably perform the best but if things don’t go as planned it would be the weakest link among Greek banks. Alpha Bank is one of the 4 Greek banks that control roughly 95% of the total banking market. The concentration of Greek banking industry is a direct result of financial and economic crisis which hit that country badly. Prior to the crisis 4 largest banks: Alpha, Piraeus, National Bank of Greece and Eurobank Ergasias held about 65% of the Greek market but after the wave of consolidation, Greece banking sector has become the most concentrated in the Eurozone. Greek banking industry is a textbook example of oligopoly (which comes from Ancient Greek ὀλίγος and πωλεῖν).Needless to say, such a large concentration implies better NIMs, ROAs and ROEs, other things being equal.
Furthermore, Greek banking industry has become very efficient. Numerous branches have been closed and a large number of employees has been laid off. In 2008, there were 4098 branches of domestic institutions with 66 thousand employees which fell to 2332 branches and 43 thousand banking employees in 2016. Reduced operating expenses over the past few years has made Greek banking one of the most efficient in the EU on the cost/income basis as the picture below shows.
NPEs represent the most significant challenge for Greek banking system and a big drag to Greek economy. Greek banks entered the crisis with total outstanding number of NPEs of €14.5 billion which has ballooned to €108 billion or 45% of total exposure. To settle this burdening issue there are currently a number of initiatives which are aiming to remove impediments for NPEs resolution. Greek authorities have recently passed several important legislations related to this matter. For instance, as a result of activist groups that are on a daily basis opposing foreclosures and interrupting proceedings as well as abusing notaries, only few hundred auctions have gone ahead out of thousands planned last year. To avoid further obstruction from anti-eviction groups in courthouses, the property auctions are going to be carried out on line from September this year. Also, out of court settlement of business debt has been approved by the parliament. Those legal changes should speed things up considerably.
In cooperation with the Bank of Greece and SSM, operational targets have been set to reduce NPLs and NPEs in a three years period. They plan to reduce the NPLs approximately by half until the December of 2019.
Alpha Bank holds about 22% of all Greek deposits and a quarter of all the loans. It is the fourth largest bank in terms of assets and deposits in Greece. Alpha is the bank with the largest tangible book value, it is best capitalized under Basel 3 rules, has the highest pre-provision income and the second highest level of private ownership. There are 1.5 billion shares of which 11% are owned by special purpose vehicle created to stabilize Greek banking sector, HFSF. They issued warrants with the rights to purchase shares from HFSF but being deep out of the money (strike price is going to be € 27.72 on the next exercise in December) they are worthless now. Alpha doesn’t have preferred shares or convertible bonds at this point.
Alpha has 692 branches of which 505 are in Greece and the rest in Cyprus, Romania and Albania. They were also present in other neighboring countries but sold the subsidiaries off with Serbian subsidiary being the latest disinvestment earlier this year. While they were pulling off from South Eastern European market, they increased their presence in Greece by acquiring Emporiki Bank S.A. from Credit Agricole followed by acquisition of Citibank’s Greek Retail Operations. The bank significantly improved its operating efficiency over the past few years. Since 2013, the workforce has been decreased by 5 thousand and number of branches by approx. 400, representing a decrease of 25% each. Combined with freezed or cut wages, cost to income has dropped nearly 20 pps to 46% making Alpha Bank best in class in operating efficiency. As of Q1 this year Alpha has €64 billion in assets of which €44 billion are in net loans. 43% of loans are medium and large business loans, 34% are mortgages, 11% are SBL and the rest are consumer and credit card loans. The largest part of loan portfolio, wholesale is split between industry (23%), trade (21%), construction (16%), and real estate (8%), tourism (8%), shipping (6%) and others.
Despite being the smallest among the 4 systemic banks it has been the leader in the revenue generation and profits before provisions for loan losses. TTM PPI is €1.2 billion, head and shoulders above the peers. It is a result of high net interest margin (3%) and the lowest cost to income ratio.
As with the case of other Greek banks, Alpha has a considerable non-performing exposure. Current NPE is €32 billion and more than half is in the business segment. NPLs stood at €23 billion at the end of Q1. The most problematic loans are SBL and consumer loans where NPL ratios are 76.2% and 42.1%, respectively, far above the average NPL ratio of 38.1%. A good thing is that from the current levels they can go only down which has already started to happen. Alpha SSM targets are in line with system targets announced by the Bank of Greece. Respective targets for Alpha are 36% reduction of NPEs and 48% of NPLs until the end of 2019. These targets are based on 1.5% GDP growth in 2017 and 2% growth in 2018. The management did not provide the precise trajectory of NPL/NPE reduction but on the last quarter’s conference call Alpha Bank Deputy CEO Artemis C. Theodoridis has said “I can tell you that the plan that we have submitted and agreed is lighter on the first couple of quarters and heavier towards the last couple of quarters of the year. And also, a lot heavier towards 2018 and 2019.” He also stressed that for significant improvement legal changes should have to take place but so far they didn’t. He was referring to electronic auctions that have become a law of the land and they expect tangible improvements in the 4th quarter this year when electronic auctions become a common practice.
2017 should represent an inflection point in terms of NPEs. Q1 was the first quarter when NPE formation turned negative. NPLs have already declined in 2016 but now they are declining at twice that rate.
The NPLs and NPE are very high but total coverage ratio, which includes provisions and collateral, stands at 124% for NPLs and 105% for NPEs (which is the reason I prefer Alpha over Piraeus). Given the high LLP level (15.9 billion euros) there is a good chance that in the next few years a part of reserves is going to be released and added to the tangible book value.
Even before the crisis loans to deposit ratio was very high. During the never ending depression it got even higher due to: a) collapse of disposable income and huge unemployment due to which Greeks had to eat up their savings and b) financial panics. The deposits have been falling at the rapid rate in two periods across the board: a) from 2009-2012 and b) 2015. Alpha’s deposits reached the bottom in 1Q 2016 at 31 billion, a fall of nearly 30% in a bit more than a year. But things are changing for the better as of late. They have been on a steady rise since 1Q 2016. Higher level of deposits should improve margins given the fact that the funding gap has been bridged with more expensive Eurosystem funding sources. The deposits should continue to grow with the help of improved macro conditions and decreased risk of a new default. There was a slight decrease earlier this year due to delays in the 2nd review but after successful completion of the review, deposits continue to rise.
With FLB3 CET1 of 17.2% Alpha Bank is the best capitalized bank in Greece. Also, it has by far the smallest percentage of DTA among the Greek banks.
What could go wrong?
The typical explanation for such a low price is uncertainty related to the bailout program. I find it strange that 3 years ago people were willing to invest at more than a double of the current P/TBV multiple. So many investors have been burned over the last decade during which the market became overly cautious when it comes to Greek banking shares. But depressions don’t last forever. Also,3 extra years have considerably improved chances for exiting depression and starting long run growth.
The biggest risk is a new default and the repetition of 2015. Many US investors have invested in the Greek banks in 2014 and 2015 under the impression that the worst for Greece is over but the political unrest, new left-wing government, bailout referendum, default, risk of leaving the Eurozone, the bank runs and the capital shortfall led to huge losses for them. I believe that market fears about repetition of 2015 are exaggerated. Currently, banks are sufficiently capitalized and frankly how much more austerity measures Greece could take or creditors could demand? Many reforms had already been taken; fiscally it is one of the most frugal countries in the world right now. The largest reform than will be carried out going forward are going to be pension cuts. Pensions are expected to fall on average of 12%.When ongoing bailout program ends in summer 2018 there is a possibility of fourth bailout but I think there is only a small chance that jitters from it will be nearly as bad as in 2015. Firstly, Syriza which won election on anti-austerity policies embraced austerity measures almost identical to those adopted by previous governments. The anti-systemic rebels are now part of the system and there is no new force in sight that can cause mayhem of the previous magnitude. So whatever happens at the end of current bailout program should go smoother than the last time. Besides, completion of the 2nd review and Greece recent issue of 5 year bonds are certainly a signs of stabilization.
Second risk is related to the banking industry specifically. If in the forthcoming quarters banks don’t show improvement in reducing NPLs, it could trigger regulator’s reaction for a new wave of recapitalization since high level of NPLs undermine capacity of banks to lend and that way represent an obstacle in effort for economic recovery. So far, there have been Greek banks that have done a better job reducing NPLs than Alpha. Most notably National Bank of Greece which is the bank with best metrics but it is also more expensive. But it is still too early in the game. The management of the Alpha bank is confident it will meet its targets.
Alpha bank operates in one of the least competitive environments for banks in the world. When the dust finally settles, 15% ROE should be the standard for the Greek banking industry and Alpha has proven itself as the leader of the group so far in terms of profitability. I expect this to happen over the next five years. Right now, large US banks are trading at 1.4 to 1.8 to tangible book. There is no reason not to see Greek banks at those multiples in a few years. During that period cost of risk should considerably fall, making Alpha more profitable which should, in turn, further increase its tangible book. Even €5.7 in TBV per share vs. current price of 2 euros looks attractive. Add some released reserves and 5 years of cumulative core earnings and it will look even better. And that doesn’t even count in the premium to the book value.
Alpha Bank has all characteristics of a great business: high industry concentration, high barriers to entry, low and declining operating costs and increasingly favourable legislative framework. It is only political instability that casts a shadow over Greek banking industry, worrying shareholders as well as savers. But all the back and forth play between Greek government and Eurogroup ( i.e. Germany) is in my opinion just a posturing, at this point. No one can afford a new default now, and least of all the Greek government. They are ready to sign almost ANYTHING now and Euro ministers are ready to except signed reforms that will take place in a few years.
After 7 lean years Greece is at the dawn of economic recovery of which the banking industry is going to be the greatest beneficiary.
Record breaking tourist season, falling unemployment rates, positive GDP results
Successful completion of the third bailout program
Inclusion of Greek bonds in ECB buying program
|Entry||09/06/2017 01:10 AM|
Veki282--I'd like to start by congratulating you on one of the most interesting and contrarian ideas I've come across in ages. If I mentioned this at an idea dinner, I'd be laughed out of the room, which probably means it's worth spending some real time on.
Q2 numbers pre-provision numbers seemed decent and a gradual continuation of prior trends.
How do you get comfortable with the NPL and NPE levels here? I've read a lot of opinions from various people who are following the greek financial system and many of them seem to think that NPEs are much higher than stated numbers, with estimates often in the 60-75% range vs the big 4 Greek banks who cluster in the 50s. Then again, these are mostly just opinions.
Why do you think that they're still needing to provision against new NPLs at such a dramatic level if the Greek economy is starting to turn the corner. You'd think that provision expense and new NPE's would decline, but there were 900m of new NPEs in Q2 alone which is an increase from the 700m level in Q1. I know that they talk about former NPEs that re-default but at the same time, this would sort of argue towards my first question about the overall number of NPEs being higher.
Do you have any good information on the recent changes in the bank foreclosure and auction rules and how those changes are actually being implemented. From what I can find, there haven't been many (any) online auctions yet.
I have read a lot about "strategic defaults" where the borrower can pay, but chooses not to as there hasn't been much in the way of foreclosures. Do you have any data as to what % of NPEs are "strategic defaults"? If this is any sizable %, you may see a lot of NPEs cure as foreclosures speed up with the new laws.
Thanks in advance
|Subject||Re: Re: Fascinating|
|Entry||10/13/2017 12:05 AM|
Veki282- Thanks for your response. I've actually put a lot of work into the banks and will be in Greece next week (15-20) meeting with the mgmt's of Alpha, Piraeus and Eurobank along with lots of local economists/stock brokers/real estate agents and basically anyone who'll take a meeting with me. Did you ever go to Greece? Anyone to meet with? I intend to report back on what I find.
Conceptually, how do you think of the Deferred Tax Assets at these banks? As a % of CET1, Alpha's DTA is smallest, but still quite large. While it counts as CET1 capital by ECB rules, are you worried that the regulators may decide to ignore it at some point when doing their stress test? Stripping the DTA, you get to high single digit CET1 ratios at the various banks, which may necessitate more capital raises. Of course, this DTA counts as capital, but this wouldn't be the first (or last) time that the various regulators have made exceptions for Greece as it seems to always be "special."
Is there a reason that you have not chosen Piraeus outside of the slightly weaker capital base/provisioning? Seems like NPE/NPLs are declining faster than the others and has a much higher % of SME and corporate loans, as opposed to consumer and mortgage loans which are likely harder to collect on due to govt interference and socialist legal structures in Greece. Having done business for the last 7 years in a corrupt, dysfunctional, bankrupt country (Mongolia or the Greece of Asia), I have seen many in the business community who really wanted to keep their loans current, but couldn't as they weren't paid by the government for work that they'd done, or someone a step or 2 down the supply chain of their own business payments chain hasn't paid. For instance, at our own business, almost all of our bad debts from rental tenants have been from guys who wanted to pay, but had some customer who didn't pay them (always leading from govt as the initial bad payor). I bring this up, b/c 2-3 years after our auditors made us charge off these bad debts, we're still getting payments from guys who we haven't heard from in years, but who want to make it right and salvage their reputations. The money trickles in over time at 5-25% of the charged off debt in a surprise payment, followed by silence for months and another payment. My friends in the Mongolian banking industry tell me similar stories. It makes me think that Piraeus is more of a working capital issue related the Greek govt's EUR 5-7b of unpaid bills as opposed to true defaultors, and that as Greece gets current, more of these loans will come current again as there are only 4 systemic banks and these guys won't re-lend to SMEs that defaulted once. I think that is also why Piraeus has a very high % of re-defaults as someone gets current, only to not get paid by a customer and re-default. So as liquidity improves and teh Greek govt gets current, things should gradually improve with the NPEs, but at a much faster rate than consumer and mortgage. Or am I trying to translate an experience in Mongolia into something that may not be happening in Greece?
|Subject||Re: Re: Re: Fascinating|
|Entry||10/18/2017 02:56 PM|
Hkup881 – I am looking forward to your report. I didn't go to Greece, only talked to management over the phone. Since you are there I would certainly suggest to include the management of NGB since NGB is a clear outlier in terms of NPEs. They had the lowest NPEs to begin with and they made the greatest progress so far. Also, maybe to include some notaries just to see what their expectations regarding online auctions are, some SME owners etc..
The DTA is one of the reasons I prefer Alpha over Piraeus even thought I believe the possibility of stripping the DTA from bank's capital is quite low at this point. The question was raised before, in 2014 and 2015 and nothing happened. DTA was also counted as CET1 capital in the latest, 2016 stress test, which didn't include Greek banks. So, in my opinion, the possibility to change it now and make an exception for Greece is not very likely. But just in case, I chose the bank with the smallest DTA as % of CET1.
I didn't like Piraues's total coverage levels. Considerably lower than Alpha's. That was a big turn off for me. As I wrote in the write-up, I consider Alpha a more conservative investment than Piraeus. In an ideal scenario, Piraeus should probably perform better, but if things don't go as planned, macro or industry wise, I believe it has the highest risk.
|Subject||Re: Re: Re: Re: Fascinating|
|Entry||11/22/2017 09:32 AM|
Veki282- I never ended up meeting with NGB. I took about 30 other meetings though.
-Greece bottomed but it will be a long slow muddle forward due to high taxes, lack of lending, bad demographics, brain drain, etc. Best case is 1-2% GDP growth going forward. There's a cultural inability to get all Greeks pushing forward and it will hold back business and hurt everyone. Note how silly strikes and whatnot can hold up something as critical as online auctions...
-New Democracy will sweep the polls and everyone is waiting for that to happen before they do anything that involves spending growth capital. We met with the #2 guy at New Democracy and came away VERY impressed with New Democracy's plans for privatizations and liberalization of the economy. The question is if he speaks for the whole party, or just some members?
-Greek banks are through the worst of things and the overall trend is higher (lower NPE/NPL, reduced ELA that likely goes to zero systemwide by summer 2018, more liquidity, etc.), but the upcoming stress test will be difficult for many of them and it is expected that at least one (Piraeus) is forced to raise capital and a few of the others may choose to pre-emptively raise capital. Everyone thinks Alpha is in the best position, but that may not mean anything as the stress test will be a political thing coming out of Germany, as opposed to something rational based on numbers. Basically, not a single broker or fund manager in Greece was long and they all expect to buy the last and final capital raise in 2018, and even if a raise is not needed, they expect shares to leak lower in fear of that capital raise. Does that make it contrarian to be long here?
-IFRS 9 will have serious impacts for Greek banks (all banks in Europe really) and will make the current CET1 ratios look worse than currently noted (which will make a capital raise more likely)
-Most investors don't take into account what will happen to PPI as the banks shrink their balance sheets. We've seen roughly constant NII as spreads widen, but that will start to hit PPI soon
-Banks are still pretty bloated on costs and they all think there's 500 bps of COI to come out. For instance, you cannot walk a block in Athens without running into EACH of the 4 banks. This is a legacy of the banks being "make work programs" to appease various governments along with the consolidation in the sector. NBG is worst in this regard as it was a govt company at one point. Everyone seemed to think that the number of branches drops in half again in the next 5 years, leading to huge savings.
-Property prices bottomed in Q1 or Q2 for 2017, though there won't be any uptick in prices except in real tourist zones until the distressed assets are sold. It seems that there aren't many cashed-up bidders and everyone is scared of a new leg lower in property prices when the selling starts--which will likely impact asset value marks on the banks once again.
In terms of banks, I came away most impressed with Piraeus. They seem like they have a great handle on their NPE book and are being most pro-active to solve issues. Alpha and Eurobank had more of a "trust me" attitude to things, but no real plans on how to restructure/dispose of assets. Piraeus gives the best data on this, but if you look at NPEs, due to IFRS treatment and the 2 year cure period from when a restructured loan goes back into the performing bucket, many of their NPEs are actually cured NPLs that have yet to re-default, meaning that their NPE exposure should start to dramatically decrease in 12-18 months (which may be too late for the stress test but I felt pretty good that they're actually in the best position of the banks in terms of where things are when the dust clears in 24 months) whereas Alpha and Eurobank have been much slower to restructure NPLs and so they will take an extra year to start seeing the roll-off. The banks have thus far been lowering NPE by asset sales--as that runs its course, I expect Piraeus to outperform going forward as they've taken the pain early. Additionally, Piraeus has lots of SME/Corporate loans that are for enterprises that are EBITDA positive, but have working capital issues, often due to late payments from their own customers. So they will be performing fine for 6 months, then miss a payment by 1 day, and have to re-start the 24 month cure period for IFRS. Whereas, the other banks have much more residential mortgage (hard to sell due to restrictions on lower income owners) and consumer debt (worth 3-5c on face).
Outside of banks, we were looking for other companies with leverage to a recovery. We didn't find any, but were VERY impressed with Grivalia (GRIV GA). I don't think it has the sort of upside that I'm looking for in taking the risk of investing in Greece, but I don't see why GRIV isn't a double in a few years and you get paid 5% to wait. I feel like it's materially undervalued and they will be leveraging the balance sheet somewhat going forward to buy distressed asset sales (likely best positioned to buy and manage those auction assets--which could really increase NAV/shr).
I posted some other thoughts on my blog. Happy to answer any questions that anyone may have. I ended up spending 2+ weeks in Greece, with the last few days mostly on the tourist side in Crete and Mykonos.
In summary, I have tiny positions in Piraeus and Alpha. After we know of the stress test results, I expect to add substantially to the positions--either at a huge discount to today's prices or at a small premium today's price if there is no need to raise more capital. I really don't think there's a reason to be long until the stress test results are out as the shares likely leak lower until then.
|Entry||05/06/2018 10:41 AM|
"Greece’s four biggest banks would take a €15.5bn hit to their average capital in a future economic downturn, according to the results of the European Central Bank’s latest stress test of the country’s main lenders.
Senior Greek officials said the outcome of the exercise meant there was “no immediate need for a capital increase by any bank”. However, one official said that while the banks were out of immediate danger they still needed to clean up their balance sheets and several were likely to raise capital soon — notably Piraeus Bank, which emerged as a laggard in the tests.
The ECB modelled the impact of a baseline scenario, in which the Greek economy grows 2.4 to 2.5 per cent annually over the next three years, and an adverse scenario, in which the economy contracts 1.3 per cent this year, 2.1 per cent next year, before returning to slight growth in 2020. The test was much less severe than the scenario modelled by the ECB in its 2015 stress test of the Greek banking system, which assumed the economy shrank as much as 3.9 per cent in a single year. But this year’s test assumed a 16 per cent fall in Greek house prices, which bankers said was harsher than previous tests. Under the rules of the ECB’s 2015 stress tests, which required banks to maintain a common equity tier one ratio — a key benchmark of banking strength — of at least 8 per cent in the adverse scenario, three of the four banks would have failed the latest exercise: Piraeus, National Bank of Greece and Eurobank. Yet they all would have passed on the basis of the 5.5 per cent unofficial threshold used by supervisors in more recent stress tests. Alpha Bank performed the best in the latest test as its CET1 ratio declined from 18.25 per cent at the end of 2017 to 9.69 per cent at the end of 2020 in the adverse scenario. Demetrios Mantzounis, Alpha Bank’s chief executive, said the result “demonstrates the strength of our capital base”. Piraeus Bank was the worst performer, as its CET1 ratio declined from 14.85 per cent to 5.89 per cent in the adverse scenario. Christos Megalou, chief executive of Piraeus, said the results “confirm that the market environment in Greece is tangibly improving,” adding that he was committed “to further strengthen Piraeus’ financial position”. Piraeus is expected to give more detail on its “capital strengthening plan” — including potential subordinated debt issuance and asset sales — when it reports quarterly results on Thursday."