Contrarian Value Ideas

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>>> National Bank Of Greece: When Is It Time To Buy?



12-15-15


About: NATL BK (NBGGY)

The Unhooded Falcon



http://seekingalpha.com/article/3756546-national-bank-greece-time-buy



Summary


•National Bank of Greece shares continue to plunge following a recapitalization, reverse split, and delisting.

•Book value measurements are difficult to rely on, given the recapitalization price and the state of the Greek economy.

•Speculative investors may want to take a stake if shares continue to slide.

•Less speculative investors should wait for signs of a turnaround in the Greek economy.


With shares down over 98% year-to-date, the National Bank of Greece (OTCPK:NBGGY) is proving to be one of the worst investments of 2015. But since investors need to look through the windshield rather than just the rearview mirror it's worth examining whether NBG shares are nearing a point to buy.



The plunge

I won't go too deep into the details regarding National Bank of Greece's 2015 plunge because it has been extensively covered in articles by both myself and other authors.

To summarize, capital controls put in place over the summer combined with a weak Greek economy put major capital holes in the balance sheets of Greek banks. In NBG's case the bank required about 4.5 billion euros in capital.

During the recapitalization 1.8 billion euros came from private investors and the remainder came from state aid. But to raise private capital NBG had to dilute its old shareholders to a less than 5% stake in the bank. Alongside this, NBG ran a 1-for-15 reverse stock split and saw its ADR delisted from the NYSE.

In previous articles I argued that National Bank of Greece Series A Preferred Stock (NBG-A) would outperform the common. But now that the preferred has been halted and will be converted to common shares I need to examine when it's worth buying NBG common shares.

Book value

Typically banks are valued on a book value or tangible book value metric but such a measurement is difficult to rely on for National Bank of Greece.

For a rough estimate we can use NBG's Q3 financials and add in the capital raised from the common share offering. This would mean equity of about 8.4 billion euros. Dividing that by the roughly 5.2 billion post-split shares equates to a book value of roughly 1.61 euros per share. Keep in mind this is a rough estimate that could be affected by the terms of NBG's state aid, currently expect to come in the form of 75% CoCos and 25% common shares.

But before investors go rushing out to buy NBG shares at roughly 0.2x book value there are some caveats to know. First, NBG's book value itself is questionable given the high level of non-performing loans and the poor state of the Greek economy. After all, if institutional investors believed NBG's book value why would the capital raise take place at 0.2x book value?

Investors also need to consider that even a healthier NBG may have a difficult time trading at book value. Many major banks in the United Kingdom, France, and Germany trade at a sharp discount to book value so it would make little sense for a Greek bank to achieve a 1.0x book valuation.

Additionally, 5.1 billion euros of NBG's equity is made up of a deferred tax asset. While reduced taxes are a positive for investors, the DTA cannot be monetized until NBG earns the profits to use it. Until then, the DTA continues to exist but cannot generate returns and boost return on equity like most other types of bank assets.

When to buy

Whether and when to buy National Bank of Greece shares is highly dependent on an investor's risk tolerance. With the state of the Greek economy, NBG is obviously not a good pick for conservative investors; however, speculative investors have three main options for NBG shares.

The first option is to buy shares are current levels which allows an investor to buy below the offering price and at a sharp discount to book value. If you are a long-term speculative investor this option may be worth considering.

The second option is to wait until the share price begins to stabilize to avoid trying to catch a falling knife. NBG has been down every day for the past five days with some days carrying double digit percentage losses. This is likely due to a combination of fear-based selling and selling from investors that bought into the offering. While this option does risk missing out on a reversal to the upside it prevents investors from riding the stock lower in the near-term. For more speculative investors, this is my preferred route if choosing to buy NBG shares.


The third option means a likely far longer wait. Since NBG has continued to need new rounds of recapitalization as the Greek economy has remained depressed some investors may want to wait for some positive news regarding an economic turnaround. Of course this could mean a higher purchase price as positive economic news would likely move shares higher. But this would avoid the risks of falling victim to additional rounds of recaptialization if the economy continues to sputter. Personally, this is my preferred option for buying NBG shares.

Takeaway

NBG shares have plunged in 2015 and now trade at a very low price to book valuation; however, the book value is unreliable and is largely made up of a DTA.

While shares have moved below the offering price and are no longer excessively overvalued as they were a earlier this month, I still prefer to wait for the share price to stabilize and for some signs of fundamental economic improvement in Greece. By holding off on buying I accept I may be giving up some potential upside but I believe this is worthwhile to avoid catching a falling knife and the potential for a continued slow economy to force additional capital raises.

In my opinion, NBG does represent an interesting investment opportunity and I will definitely be keeping an eye on the bank with particular attention to the Q4 report and the fundamental Greek economy.

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