Contrarian Value Ideas

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>>> Greek Banks: Which One Do You Pick?



Apr. 11, 2016

About: Alpha Bank S.A. ADR (ALBKY), BPIRY, EGFED, NBGIF

Jan Willem Barnhoorn



http://seekingalpha.com/article/3964388-greek-banks-one-pick



Summary


•National Bank of Greece is the best capitalized and reserved Greek bank, holds 30% of the deposits, and has gained 2% deposit market share. However, its C/I ratio is worst-in-class.

•Eurobank has the least exposure to Greece, with 29% of its operating income abroad. This is very likely to increase in the coming years.

•Alpha Bank and Piraeus Bank have the best C/I ratios.

•Piraeus bank is the cheapest bank trading at 0.19x TBV, but is also least capitalized and reserved.

•My pick is Eurobank (find out why).


In our former articles (here and here), we showed that Greek banks are conservatively capitalized and reserved, and that the main risk is the exposure to Greek politics. We also showed that you have to have a feel for the bankers to minimize operational risks and feel assured that management is conservative with its accounting assumptions.

Let's compare the 4 remaining Greek banks and assess them on the following criteria:
•Best capitalized and reserved
•Least Greek exposure
•Best cost advantage
•Cheapest compared to Tangible Book Value
•Feel for the bankers

Best capitalized and reserved

National Bank of Greece (OTCPK:NBGIF) has the best CET1 Ratio (FLB3), the lowest non-performing loan ratio and the highest coverage ratio. Piraeus Bank (OTCPK:BPIRY) is the least capitalized and reserved bank in Greece. However, its figures are still very conservative in a European context. If you plan to minimize your risk for dilution, National Bank of Greece will be your winner (provided management made correct assumptions, but that holds for all banks).



Least Greek exposure

As concluded in my last article, the main risk for your Greek bank investment is exposure to Greek politics. If you plan to own a Greek bank with the least exposure to its home market, Eurobank (OTCPK:EGFED) will be your pick as 29% of its operating income comes from abroad. This is very likely to grow in the coming years due to acquisitions and organic growth. In comparison, the other banks are downsizing their international operations.




Best cost advantage

Banks with the lowest cost of funding (deposits) and efficient operations (C/I ratio) will have a cost advantage compared to their peers. National Bank of Greece and Piraeus Bank both hold 30% of the deposits in Greece. While National Bank of Greece gained market share, Alpha Bank (OTCPK:ALBKY) and Piraeus have the best cost-income ratios. Therefore, choosing the best-in-class in this criterion is blurry, but I am inclined to go with Piraeus Bank. Why? In a 'pricing war' for gaining market share, Piraeus can afford to go deeper due to its operating cost advantage.



Cheapest compared to Tangible Book Value

It will not come as a surprise that Greek banks are very undervalued. They all trade at a fraction of Tangible Book Value (TBV), with Piraeus Bank being the most mispriced.



Feel for the bankers

As explained in my last article, it is very important to have a good feel of the bankers running the banks. Unfortunately, I do not know any of them. What I do know is that Prem Watsa and Wilbur Ross have big positions in Eurobank and are represented on the board. Both are value investors I admire deeply and, therefore, I have the most feel with the bankers of Eurobank.


My Pick

My pick will be Eurobank. It's not necessarily the best bank, but due to its capitalization, board members, and growing international operations, I feel this bank has the least chance of a permanent capital loss

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