EGFEY - Eurobank

[TwoCitiesCapital]

Seems Kyle Bass is bullish about Greece and is long its banks.

 

https://www.bloomberg.com/news/articles/2017-10-06/bass-bets-greek-elections-called-within-a-year-spurring-rally

 

https://www.bloomberg.com/view/articles/2017-09-19/the-imf-needs-to-stop-torturing-greece

 

Eurobank is down another 20% since this - seems like it's getting attractive again @ 20% of book - especially when considering pre-provision income....

 

But then again, every entry point has simply been a head-fake so far.

[Guest Cameron]

35.2% of the total loan book is still NPL's and NPE's are still in the 40% range, the texas ratio is still way to high.

 

They also have $6 billion in equity with $4.9 billion in deferred tax assets. Their RWA leverage ratio is still high.

 

However there are definitely opportunities in the financial sector, EUPIC is one of my holdings, there are a bunch of areas outside the financial sector. Investing in Greek banks is still playing with fire and the risk reward makes no sense, the likelihood you leave with only a small portion of your capital is still high. So I'm not to sure why he feels now is a good time to invest in Greek banks. 

 

Just my 2 cents into Greek investing.

[TwoCitiesCapital]

35.2% of the total loan book is still NPL's and NPE's are still in the 40% range, the texas ratio is still way to high.

 

Yes, but formation was negative over the last quarter which is a nice place to be if the trend continues. And, as Bass points out, if loan growth started again, this ratio would drop dramatically as the denominator would expand with good loans. The ratio would be attacked at both the numerator and denominator and drop quickly IF this is the turn-around for the Greek economy.

 

Agreed on RWAs, but also doesn't quite matter if the wind is blowing at your back instead of in your face. Every year, a portion of the DTAs would be converted to cash which would be tangible equity.

 

If you truly believe a recovery is around the corner, it makes sense to be bullish on the banks. It's only if you're wrong that things like the NPEs and tangibility of the RWAs matters.

 

I'm considering nibbling here even though I was burned before. Will wait for another 2-3 quarters of confirming trends before I take a larger bite for the reasons you have pointed out.

[Guest Cameron]

35.2% of the total loan book is still NPL's and NPE's are still in the 40% range, the texas ratio is still way to high.

 

Yes, but formation was negative over the last quarter which is a nice place to be if the trend continues. And, as Bass points out, if loan growth started again, this ratio would drop dramatically as the denominator would expand with good loans. The ratio would be attacked at both the numerator and denominator and drop quickly IF this is the turn-around for the Greek economy.

 

Agreed on RWAs, but also doesn't quite matter if the wind is blowing at your back instead of in your face. Every year, a portion of the DTAs would be converted to cash which would be tangible equity.

 

If you truly believe a recovery is around the corner, it makes sense to be bullish on the banks. It's only if you're wrong that things like the NPEs and tangibility of the RWAs matters.

 

I'm considering nibbling here even though I was burned before. Will wait for another 2-3 quarters of confirming trends before I take a larger bite for the reasons you have pointed out.

 

Thats the problem for me at least I can find cheap companies in Greece but I don't know if that necessarily makes me bullish on Greece from a macro framework. Here is what I'm trying to say, why try to time the Greek recovery through banks that are worth nothing in the event that things don't improve in the near future because they will have to recapitalize the banks soon if they don't which is what it sounds like Bass is trying to do or pick up the scraps that are trading at sub 5 P/E ratios and crazy discounts to book value even after asset write downs that took place 7 years ago that have proven themselves throughout the crisis.

 

I agree with waiting, the reason being is that lets say the outcome is between the good and best case scenario, I still think shares will be cheap because of the stigma of it being a Greek Bank. It will be interesting to watch.

 

[Guest Cameron]

I forgot, about the DTA's, they are an accounting asset and its not an asset that returns capital. In the event that the economy does recover and they can use those DTA's it will have suppression effect on ROE, Citigroup had and still has this problem.

 

But that assumes that the economy does recover, if they can't use them they are worthless.

[TwoCitiesCapital]

35.2% of the total loan book is still NPL's and NPE's are still in the 40% range, the texas ratio is still way to high.

 

Yes, but formation was negative over the last quarter which is a nice place to be if the trend continues. And, as Bass points out, if loan growth started again, this ratio would drop dramatically as the denominator would expand with good loans. The ratio would be attacked at both the numerator and denominator and drop quickly IF this is the turn-around for the Greek economy.

 

Agreed on RWAs, but also doesn't quite matter if the wind is blowing at your back instead of in your face. Every year, a portion of the DTAs would be converted to cash which would be tangible equity.

 

If you truly believe a recovery is around the corner, it makes sense to be bullish on the banks. It's only if you're wrong that things like the NPEs and tangibility of the RWAs matters.

 

I'm considering nibbling here even though I was burned before. Will wait for another 2-3 quarters of confirming trends before I take a larger bite for the reasons you have pointed out.

 

Thats the problem for me at least I can find cheap companies in Greece but I don't know if that necessarily makes me bullish on Greece from a macro framework. Here is what I'm trying to say, why try to time the Greek recovery through banks that are worth nothing in the event that things don't improve in the near future because they will have to recapitalize the banks soon if they don't which is what it sounds like Bass is trying to do or pick up the scraps that are trading at sub 5 P/E ratios and crazy discounts to book value even after asset write downs that took place 7 years ago that have proven themselves throughout the crisis.

 

I agree with waiting, the reason being is that lets say the outcome is between the good and best case scenario, I still think shares will be cheap because of the stigma of it being a Greek Bank. It will be interesting to watch.

 

And one year later, the share price is right back where it was. Full circle!

 

Interesting to watch indeed. Glad I only nibbled.

[petec]

Eurobank and Grivalia have just announced that they will merge. Fairfax will own 33% of the newco.

 

The merger creates a much better capitalised banking group - in effect it is an equity issue by Eurobank in return for a cheap asset. It's accretive (for what that's worth) to earnings and capital ratios but dilutive to Eurobank's bvps.

 

The merger also gives Grivalia's excellent management team operating control over the big Eurobank real estate portfolio.

 

Eurobank has also announced plans to speed up bad loan reductions by securitising them and spinning the securities out to shareholders. This cleans the bank's balance sheet but allows shareholders to participate in any upside.

 

Fairfax controls Grivalia and has seats on both boards so this isn't happening without their approval.

 

Links:

 

https://www.eurobank.gr/-/media/eurobank/omilos/grafeio-tupou/etairikes-anakoinoseis/2018/etairiki-anakoinosi-26-11-18/etairiki-anakoinosi-26-11-18-eng.pdf?la=en

 

https://www.eurobank.gr/-/media/eurobank/omilos/grafeio-tupou/etairikes-anakoinoseis/2018/etairiki-anakoinosi-26-11-18/investor-presentation.pdf?la=en

[petec]

If this used to be on your radar and dropped off, it might be worth kicking the tyres again. The economy is growing, real estate prices are rising, deposits are flowing in, and in 2019 the company will sell or spin a large proportion of its non-performers such that in 2020 they will start provisioning at normalised levels, profits will jump, the DTA will start turning to cash, and capital will accrete.

[lathinker]

petec,

 

thanks for bringing this up. I think this is a very interesting situation given what I perceive to be a highly creative "stealth recapitalization" of a decent bank with an NPL problem through a lowly levered REIT. If the merger goes through, they have a decent shot of cleaning up their NPL in a manageable period of time.

The spin-off of certain tranches of the NPL securitisation to shareholders feels even more interesting and will combine characteristics of a Greenblatt spinoff situation (people getting securities they have nouse for) with the arguably least popular asset class one might imagine (NPLs in the economically least successful country of the last decade). So definitely worth to stay tuned here.

 

I own a tiny position

[TwoCitiesCapital]

petec,

 

thanks for bringing this up. I think this is a very interesting situation given what I perceive to be a highly creative "stealth recapitalization" of a decent bank with an NPL problem through a lowly levered REIT. If the merger goes through, they have a decent shot of cleaning up their NPL in a manageable period of time.

The spin-off of certain tranches of the NPL securitisation to shareholders feels even more interesting and will combine characteristics of a Greenblatt spinoff situation (people getting securities they have nouse for) with the arguably least popular asset class one might imagine (NPLs in the economically least successful country of the last decade). So definitely worth to stay tuned here.

 

I own a tiny position

 

I don't think it's a direct spin-off to shareholders. The way I understand it, the bank is restructuring I to a holding co and a bank. The bank will spin-off certain non performing loans to the Hold Co so shareholders still have exposure to upside even if the bank no longer has exposure. You won't be receiving any additional securities from this.

[lathinker]

petec,

 

thanks for bringing this up. I think this is a very interesting situation given what I perceive to be a highly creative "stealth recapitalization" of a decent bank with an NPL problem through a lowly levered REIT. If the merger goes through, they have a decent shot of cleaning up their NPL in a manageable period of time.

The spin-off of certain tranches of the NPL securitisation to shareholders feels even more interesting and will combine characteristics of a Greenblatt spinoff situation (people getting securities they have nouse for) with the arguably least popular asset class one might imagine (NPLs in the economically least successful country of the last decade). So definitely worth to stay tuned here.

 

I own a tiny position

 

I don't think it's a direct spin-off to shareholders. The way I understand it, the bank is restructuring I to a holding co and a bank. The bank will spin-off certain non performing loans to the Hold Co so shareholders still have exposure to upside even if the bank no longer has exposure. You won't be receiving any additional securities from this.

 

Thanks for pointing out. I had a different understanding and checked in the presentations.

- Page 17 of the November 2018 presentation states "Listing and distribution of B1 Mezzanine and Junior Notes to Eurobank's shareholders.

- In the 2019 presentation they say "Potential listing and distribution of B1 Mezzanine and Junior notes to Eurobank’s shareholders"

 

So, after all, it may not be clear yet. Why do you understand there will be not listing/distribution?

[TwoCitiesCapital]

petec,

 

thanks for bringing this up. I think this is a very interesting situation given what I perceive to be a highly creative "stealth recapitalization" of a decent bank with an NPL problem through a lowly levered REIT. If the merger goes through, they have a decent shot of cleaning up their NPL in a manageable period of time.

The spin-off of certain tranches of the NPL securitisation to shareholders feels even more interesting and will combine characteristics of a Greenblatt spinoff situation (people getting securities they have nouse for) with the arguably least popular asset class one might imagine (NPLs in the economically least successful country of the last decade). So definitely worth to stay tuned here.

 

I own a tiny position

 

I don't think it's a direct spin-off to shareholders. The way I understand it, the bank is restructuring I to a holding co and a bank. The bank will spin-off certain non performing loans to the Hold Co so shareholders still have exposure to upside even if the bank no longer has exposure. You won't be receiving any additional securities from this.

 

Thanks for pointing out. I had a different understanding and checked in the presentations.

- Page 17 of the November 2018 presentation states "Listing and distribution of B1 Mezzanine and Junior Notes to Eurobank's shareholders.

- In the 2019 presentation they say "Potential listing and distribution of B1 Mezzanine and Junior notes to Eurobank’s shareholders"

 

So, after all, it may not be clear yet. Why do you understand there will be not listing/distribution?

 

There was a chart of the reorganized entity and the spin-off of the assets in the earnings presentation that gave me that impression. P.45-48

 

https://seekingalpha.com/article/4247025-eurobank-ergasias-sa-adr-2018-q4-results-earnings-call-slides

 

EDIT: though after second review, it looks like I was recalling phase 2 on p.47. Phase 3 on page 48 does look like a spin directly to shareholders from the Hold Co so...looks like I might be wrong.

[petec]

Anyone following this? While it's not as cheap as it was, I feel a huge amount of risk has been removed by the reorganisation and the election of a pro-market government, and I wonder if the risk/reward isn't as good as it has been in years.

[TwoCitiesCapital]

Anyone following this? While it's not as cheap as it was, I feel a huge amount of risk has been removed by the reorganisation and the election of a pro-market government, and I wonder if the risk/reward isn't as good as it has been in years.

 

I still own. Waiting for the spin-off of the negative credits before I expect though will start performing. Have added in the recent past, but still keeping it small after having been burned in the last recap

[TwoCitiesCapital]

Anyone know how the spin-off of Cairo will be treated for ADRs?

 

The bulk of my position is in shares directly on the Athens exchange on IB, but I did add recently in my account @ Schwab and am curious if the spin-off will be sold and distributed to ADR holders as cash or if I'm going to get stuck with a security I can't trade at Schwab?

[petec]

What platform did you use to buy it in Athens?

[TwoCitiesCapital]

What platform did you use to buy it in Athens?

 

Interactive Brokers

[petec]

What platform did you use to buy it in Athens?

 

Interactive Brokers

 

Thanks. My IB won't let me buy either line. V annoying.

 

Some key Q1 call comments:

1) Core PPI won't be affected much, with cost cuts nearly offsetting revenue declines (vs prior guidance).

2) Provisions likely to go from 90bps to 160bps which is manageable (but it is early days).

3) only c.20% of mortgage and corporate clients have taken the offered payment moratoria, and 50% of small businesses. This is lower than they expected, possibly because "these people have been tested under very severe conditions over the last four, five, six years. They remain performing. They have a payment culture that is quite strong."

4) the Cairo NPL reduction transaction has passed all hurdles. The sale of the FPS closes in the next few days and the spinout of the SPV shares will happen in August or Sept. Losses related to this deal will be booked in 2q but it sets them on a much better footing.

[TwoCitiesCapital]

What platform did you use to buy it in Athens?

 

Interactive Brokers

 

Thanks. My IB won't let me buy either line. V annoying.

 

Some key Q1 call comments:

1) Core PPI won't be affected much, with cost cuts nearly offsetting revenue declines (vs prior guidance).

2) Provisions likely to go from 90bps to 160bps which is manageable (but it is early days).

3) only c.20% of mortgage and corporate clients have taken the offered payment moratoria, and 50% of small businesses. This is lower than they expected, possibly because "these people have been tested under very severe conditions over the last four, five, six years. They remain performing. They have a payment culture that is quite strong."

4) the Cairo NPL reduction transaction has passed all hurdles. The sale of the FPS closes in the next few days and the spinout of the SPV shares will happen in August or Sept. Losses related to this deal will be booked in 2q but it sets them on a much better footing.

 

TBH, I haven't tried buying/selling it on IB recently. Those are shares that I purchased late mid-to-late 2019 so dunno if IB is still allowing trading in the name or not.

[TwoCitiesCapital]

Two questions:

 

1) has anyone had any success in buying the Cairo Mezzanine issue through any brokers at this point? I have it in my IB account, but have not tried purchasing or selling. Just note that the price has been 0.03 since it was distributed where I'm seeing fluctuations between 0.09 and 0.15 on other sites.

 

2) Does anyone have any resources on finding info on the underlying debt, performing ratios, and yield underneath Cairo Mezzanine?

 

The best information I've been able to find was linked on a random stock quote site but is hosted on their main page where I've been unable to find anything useful navigating their menus.

 

http://www.cairomezz.com.cy/wp-content/uploads/2020/12/2020.12.15_CairoMezz_Covid_Impact_EN.pdf

 

Suggests that fair value of the portfolio as of September was EUR 57,368,958. If they have the 309,096,827 shares outstanding as originally announced, that suggests a fair value of 0.185/share relative to a trading range closer to 0.11.

 

Seeming double discount here since the loans have already been written down by 97% to reflect non-performing nature and you get an additional 40% discount from there for public market price.

 

Just trying to understand how good of a deal that actually is by understanding the underlying loans, yield, and historical performance trend of how many are improving

[petec]

There are two recent posts discussing this on the Fairfax stock positions thread which I’m sure you’ve seen. Beyond that I don’t know of any good data, or even results reporting. The best I can suggest is following Eurobank trends and extrapolating with caution.