EGFEY - Eurobank

[TwoCitiesCapital]

http://www.bloomberg.com/news//2014-10-26/eurobank-national-bank-plans-may-cut-capital-gap-to-zero.html

 

very important that there is no big capital gap at Eurobank. now they can make their way going foreward. streamline the Company. great!!

 

How does the board think about this now? Seems like getting in at a 75+% discount (in USD terms) from where Prem/Wilbur et al. did isn't a bad price. So what's the story with the situation? New elections for a new government that wasn't as extreme as most believed doesn't seem worth of a 75% discount - especially given the recently agreed to extension to cover the finances. Is there company specific risk that has occurred or a real threat developing from deposit flight?

 

I'm planning on looking into this more in depth sometime soon but wanted to know if there were any obvious land mines that would make we simply put it into the too hard pile.

[constructive]

Is there company specific risk that has occurred or a real threat developing from deposit flight?

 

Every Greek bank has probably suffered significant capital flight in the last month and continues to be at high risk of deposit loss going forward.

 

http://www.cnbc.com/id/102439432#.

 

"Sources in the Greek banking sector have told Greek newspapers that as much as 25 billion euros (US $28.4 billion) have left Greek banks since the end of December."

[TwoCitiesCapital]

Is there company specific risk that has occurred or a real threat developing from deposit flight?

 

Every Greek bank has probably suffered significant capital flight in the last month and continues to be at high risk of deposit loss going forward.

 

http://www.cnbc.com/id/102439432#.

 

"Sources in the Greek banking sector have told Greek newspapers that as much as 25 billion euros (US $28.4 billion) have left Greek banks since the end of December."

 

I see - given that Eurobank was 18% of deposits we could probably scale proportionally to determine that they've lost as much as EUR 4.5B in deposits. This is all driven by political risks and concerns about the new government though, right? People are just scared of the changes that new government might make and GREXIT is a possibility that is back on the table? Just trying to understand recent market movements in the context of what is actually occurring - Prem seems to stand behind the investment even after speaking with the government and I haven't seen any word that W. Ross is out. Both of them have experience with this sort of thing and haven't jumped ship - makes me wonder if now is the time to take advantage of being a small investor and act.

[rb]

One potential landmine.... if Greece exits eurozone alll the Greek banks are bankrupt. 

[peter1234]

Looks like a binary outcome is probable: Heads you win, tail you lose.

With lots of drama in between.

???

[rb]

Looks like a binary outcome is probable: Heads you win, tail you lose.

With lots of drama in between.

???

Basically yes... with shades of gray. Tail you definitely loose. Heads we see how your thesis plays out. But at the very least you're flipping a coin. Not a lot of margin of safety behind it.

[TwoCitiesCapital]

One potential landmine.... if Greece exits eurozone alll the Greek banks are bankrupt.

 

Could we dig into this a little more - why would that be the case? I'm having a hard time understanding this argument, but I've also never studied banks in currency regime changes.

[Sunrider]

Two scenarios on Grexit:

 

1. People pull out so much in deposit money before it happens that the banks are bankrupt (basically a bank run). That funding currently is replenished by ECB facilities. Without these, the banks would not be able to honour the requests for withdrawal. So, basically, you have a situation where at least from a liquidity perspective the banks would be insolvent (true sense of the word). Whether the asset value then covers more than the liabilities is anyones guess once the dust has settled (remember that there will be tremendous economic turmoil during that time ... and the question only arises to the extent that there will be an orderly process of liquidation in which first everything is frozen and then unwound).

 

2. The government decides to go all in and leave now. The impose currency controls today. Tonight they re-introduce a new Drachma and re-denominate all domestic debt, currency, accounts, etc. in that new currency. The banks are not technically insolvent at that point. Tomorrow two things happen -

(1) the Greek government tells the rest of Europe that it still wants to repay its debts but since the new Drachma will immediately plunge in value against the "hard" Euro, that's wishful thinking and everyone knows it. They basically default in quick order since they don't have Euros nor can the exchange enough new Drachmas for Euros on the market to pay up.

(2) the ECB demands repayment on its facilities to the banks. The have the same problem - they got Drachmas, not Euros, and so they are no not able to pay, i.e. insolvent.

 

If all of these politicians just play a bit more smartly .... good article in the Economist this week how the Greeks' approach to these negotiations blew a big chance.

 

C.

One potential landmine.... if Greece exits eurozone alll the Greek banks are bankrupt.

 

Could we dig into this a little more - why would that be the case? I'm having a hard time understanding this argument, but I've also never studied banks in currency regime changes.

[rb]

One potential landmine.... if Greece exits eurozone alll the Greek banks are bankrupt.

 

Could we dig into this a little more - why would that be the case? I'm having a hard time understanding this argument, but I've also never studied banks in currency regime changes.

The short answer is this. If the bank runs don't bankrupt the banks before the Euro exit. Post exit basically the banks have assets in Drachmas and liabilities in Euros. Drachma drops and wipes out the banks capital. The end.

[TwoCitiesCapital]

Two scenarios on Grexit:

 

1. People pull out so much in deposit money before it happens that the banks are bankrupt (basically a bank run). That funding currently is replenished by ECB facilities. Without these, the banks would not be able to honour the requests for withdrawal. So, basically, you have a situation where at least from a liquidity perspective the banks would be insolvent (true sense of the word). Whether the asset value then covers more than the liabilities is anyones guess once the dust has settled (remember that there will be tremendous economic turmoil during that time ... and the question only arises to the extent that there will be an orderly process of liquidation in which first everything is frozen and then unwound).

 

2. The government decides to go all in and leave now. The impose currency controls today. Tonight they re-introduce a new Drachma and re-denominate all domestic debt, currency, accounts, etc. in that new currency. The banks are not technically insolvent at that point. Tomorrow two things happen -

(1) the Greek government tells the rest of Europe that it still wants to repay its debts but since the new Drachma will immediately plunge in value against the "hard" Euro, that's wishful thinking and everyone knows it. They basically default in quick order since they don't have Euros nor can the exchange enough new Drachmas for Euros on the market to pay up.

(2) the ECB demands repayment on its facilities to the banks. The have the same problem - they got Drachmas, not Euros, and so they are no not able to pay, i.e. insolvent.

 

If all of these politicians just play a bit more smartly .... good article in the Economist this week how the Greeks' approach to these negotiations blew a big chance.

 

C.

One potential landmine.... if Greece exits eurozone alll the Greek banks are bankrupt.

 

Could we dig into this a little more - why would that be the case? I'm having a hard time understanding this argument, but I've also never studied banks in currency regime changes.

 

I guess this is what I was thinking. I assumed if it would happen that it would be #2. So all loans and deposits would be converted to a lower valued currency. The Greek government would default on its debt Euro which affects yields and the currency value. I wasn't considering the liquidity facilities provided to the Greek banks by the ECB. That's what I was missing.

 

I'm not sure if a Grexit is more than remote likelihood though. Most people in Greece don't want this and neither does Europe simply because of the precedent it sets for the other countries on the periphery that might want out as well. Sure it's not a big deal when Greece leaves...but what about Italy or Ireland?  Ultimately, both sides have good reason for Greece to remain and it's simply negotiating the terms.

 

Thanks for the all of the insight here guys. I'm going to look into the numbers a bit more.

[rb]

I'm not sure if a Grexit is more than remote likelihood though. Most people in Greece don't want this and neither does Europe simply because of the precedent it sets for the other countries on the periphery that might want out as well. Sure it's not a big deal when Greece leaves...but what about Italy or Ireland?  Ultimately, both sides have good reason for Greece to remain and it's simply negotiating the terms.

 

I think it's more than just a remote possibility. While there is still support in Greece for the Euro, that support is fading. At the latest rounds of talks Germany acted like the could care less if Greece leaves - this may just be political posturing though so maybe don't read too much into it. But if Greece stays in the Euro is austerity as far as they eye can see.

 

Greeks are now a people with nothing left to loose which makes them dangerous. Faced with a choice between letting the banks fail and another 20 years or austerity and unemployment, they may just choose to let the banks fail.

[tombgrt]

Wow some people here should read a little less news. Does anyone believe there is a higher than 10-20%  chance at this point that Greece leaves the eurozone or returns to the drachma?

 

Given that they already had a bank run that they managed and the fact Greece is just a small part of the eu (easier to buffer), I wouldn't worry much about that either.

 

Greeks nothing to lose? I'm betting that they have at least some knowledge of economics and history so that emotions don't get the best of them. On the side of Germany etc, that was imo mainly posturing yes. A mexican stand off.. Both sides played it hard so they each got something to work with the coming months.

 

I would look at the business numbers and see what those tell me and stop worrying about known risks that are highly visible and anticipated and more than likely priced in already....

[rb]

Wow some people here should read a little less news. Does anyone believe there is a higher than 10-20%  chance at this point that Greece leaves the eurozone or returns to the drachma?

 

Given that they already had a bank run that they managed and the fact Greece is just a small part of the eu (easier to buffer), I wouldn't worry much about that either.

 

Greeks nothing to lose? I'm betting that they have at least some knowledge of economics and history so that emotions don't get the best of them. On the side of Germany etc, that was imo mainly posturing yes. A mexican stand off.. Both sides played it hard so they each got something to work with the coming months.

 

I would look at the business numbers and see what those tell me and stop worrying about known risks that are highly visible and anticipated and more than likely priced in already....

I don't know how to handicap the odds of a Greek exit and I don't think anyone can. All I'm saying is that it is more than just a remote possibility.

 

As for the Greek people of course they have nothing to loose. A vast number of their population  have no money, no job, no prospects. Do you think that they're just going to ignore that?

 

Btw, economics and history point to the fact that they'd be better off if they exit.

[TwoCitiesCapital]

Wow some people here should read a little less news. Does anyone believe there is a higher than 10-20%  chance at this point that Greece leaves the eurozone or returns to the drachma?

 

Given that they already had a bank run that they managed and the fact Greece is just a small part of the eu (easier to buffer), I wouldn't worry much about that either.

 

Greeks nothing to lose? I'm betting that they have at least some knowledge of economics and history so that emotions don't get the best of them. On the side of Germany etc, that was imo mainly posturing yes. A mexican stand off.. Both sides played it hard so they each got something to work with the coming months.

 

I would look at the business numbers and see what those tell me and stop worrying about known risks that are highly visible and anticipated and more than likely priced in already....

I don't know how to handicap the odds of a Greek exit and I don't think anyone can. All I'm saying is that it is more than just a remote possibility.

 

As for the Greek people of course they have nothing to loose. A vast number of their population  have no money, no job, no prospects. Do you think that they're just going to ignore that?

 

Btw, economics and history point to the fact that they'd be better off if they exit.

 

That "vast" number is still far less than half. The remaining 70-75% have quite a bit to lose and have said that they don't fancy the idea of exiting. Bankrupting all of the financial institutions in the country would do nothing for their "recovery" though the weaker currency would help them be more competitive which could assist their recovery in the LONG run. That doesn't speak to the short run where asset prices collapse, companies/individuals are bankrupted, and that 25% unemployed becomes significantly more as economic activity in the country halts.

 

Even if we assume the weaker currency would help them in the long run, when was the last time you knew a politician to make a decision for the long run? I don't see it in the U.S. I don't see it in Europe. I don't see it in most places. Most politicians certainly don't care about the long-run consequences and their constituents don't hold them responsible for it because they themselves don't think about the long run. Decisions are made based on short-to-medium term gain in pretty much every country I've ever paid attention to.

 

Lastly, staying in the Euro doesn't guarantee massive pain for the Greek people. It guarantees that some fiscal autonomy will have to be ceded (like should happen with all Euro members) and that Greece will have to become more competitive on a global basis, but that's about all it guarantees. Realistically, if it makes sense for Greece to exit, it would make sense for most of the nations on the periphery and in Southern Europe to exit. I can't claim that it makes sense to have a common currency area - I think things would have ultimately been better if it was simply an economic union without a single currency but that's in the past and we have to deal with what we've built. It's probably too painful to go back so this Euro-monster will limp forward.

 

I'm not saying there's no chance they leave - I'm saying this has been the broken record that has been playing since 2011 and it hasn't even come close to happening yet. There's a reason for that - neither side stands to benefit from it in the short-to-medium term so I think the risk is being overhyped.

 

 

[rb]

Zach,

 

I think we got a bit sidetracked here. I don't want to get into a point by point macro analysis of Greece cause I don't think the time required to pull all the data is worth it and the Eurostat website sucks.

 

You asked whether there are some potential land mines and I pointed to one. Also in my opinion the chance of that mine going off is not insignificant. Of course no one can know what the true likelihood is. One can only speculate.

 

But here you have a situation where factors outside of a company's control can cause catastrophic failure. That is enough to make me stay away. Plenty of other fish out there. However, if you think that the risk is worth it, then go ahead.

 

rb

[NeverLoseMoney]

Wow some people here should read a little less news. [...]

+1

The main thing I've learned from the Greek situation is that news is poisonous to the investor's mind. At the same time you do need some information. My solution, as I said in a post elsewhere, is to only listen to people with skin in the game (like Wilbur Ross and Prem Watsa) and people who actually live in Greece.

 

With that in mind: Wilbur Ross seemed to very much like the idea of investing more in Eurobank last week (watch from 03:15): http://www.bloomberg.com/news/videos/2015-02-18/europe-is-very-attractive-for-investment-ross-says

The interviewer and Bloomberg translated his statement as "Europe is very attractive", but to me it seemed quite clear he was talking about Eurobank specifically here.

 

I don't know Ross very well, but I admire the way he separates his political views and his investment perspective. He strikes me as a conservative / Republican type and I'm going to take a wild guess that he is probably not a big fan of the Syriza party in Greece or Greek politics in general. Still that does not stop him from investing there when the price is right. And Prem Watsa: betting on deflation in Europe, but at the same time investing in Greece. You have to keep an open mind as an investor and evaluate opportunities as they come. This is very hard to do if you listen too much to the media or if you cant separate your personal political views from your investing.

[TwoCitiesCapital]

Wow some people here should read a little less news. [...]

+1

The main thing I've learned from the Greek situation is that news is poisonous to the investor's mind. At the same time you do need some information. My solution, as I said in a post elsewhere, is to only listen to people with skin in the game (like Wilbur Ross and Prem Watsa) and people who actually live in Greece.

 

With that in mind: Wilbur Ross seemed to very much like the idea of investing more in Eurobank last week (watch from 03:15): http://www.bloomberg.com/news/videos/2015-02-18/europe-is-very-attractive-for-investment-ross-says

The interviewer and Bloomberg translated his statement as "Europe is very attractive", but to me it seemed quite clear he was talking about Eurobank specifically here.

 

I don't know Ross very well, but I admire the way he separates his political views and his investment perspective. He strikes me as a conservative / Republican type and I'm going to take a wild guess that he is probably not a big fan of the Syriza party in Greece or Greek politics in general. Still that does not stop him from investing there when the price is right. And Prem Watsa: betting on deflation in Europe, but at the same time investing in Greece. You have to keep an open mind as an investor and evaluate opportunities as they come. This is very hard to do if you listen too much to the media or if you cant separate your personal political views from your investing.

 

Thanks so much for sharing that video. I've spent the last two days looking for video clips and write ups about Ross' view on Eurobank and wasn't able to find much. I certainly didn't see this clip. I've been wondering why he hasn't been buying more and this pretty much sums it up - he can't until they release the annual report. That's extremely comforting - I was concerned on his silence, his lack of buying, and the fact that this bet was only 1/10th the size of his investment in Bank of Ireland. I guess we can't extrapolate that he will purchase upon the release, but it certainly explains his lack of activity given the current pricing.

 

I generally do my own research and don't buy things just because gurus do, but I do occasionally look into ideas that I wouldn't have previously considered if the price declines significantly after a guru purchase and they still hold. That's what prompted my current interest into Eurobank - a 75% decline after Prem/Ross' investment was a huge invitation for me to take a look but I was concerned that Ross wasn't adding.

 

 

[constructive]

My solution, as I said in a post elsewhere, is to only listen to people with skin in the game (like Wilbur Ross and Prem Watsa) and people who actually live in Greece.

 

I don't think it's a good idea to only assign credibility to people who agree with you. People who have reviewed Greek banks and have decided to short them, or pass on them, have also made serious investing decisions.

[NeverLoseMoney]

My solution, as I said in a post elsewhere, is to only listen to people with skin in the game (like Wilbur Ross and Prem Watsa) and people who actually live in Greece.

 

I don't think it's a good idea to only assign credibility to people who agree with you. People who have reviewed Greek banks and have decided to short them, or pass on them, have also made serious investing decisions.

Short sellers have skin in the game as well, so yes, I am interested in what they have to say. People who take a pass don't really show any strong conviction one way or the other. If you don't put your money where your mouth is it is just noise.

[TwoCitiesCapital]

For those if you interested in getting a better perspective on Yanis Varoufakis, here is a link to several articles penned by him.

 

http://www.thepressproject.net/list.php?author=Yanis Varoufakis

 

Specifically, there is this one where he describes the bailout of Eurobank and the subsequent resale to private investors. The article is extremely negative (and justifiably so, it would seem); however, the anger seems to be aimed at the politicians involved and less towards the private investors which is good.

http://www.thepressproject.net/article/61225/EUROBANK-Another-scandal-re-packaged-as-part-of-the-Greek-Success-Story

[TwoCitiesCapital]

Anyone able to understand what was voted on at the General Meeting in November? I've read through this a few times but still can't make heads nor tails of the special reserve that is being created with rights to buy common shares on behalf of the Greek State that is somehow related to DTAs and DTCs.....

 

http://www.eurobank.gr/Uploads/pdf/SHAREHOLDER_BINDER_EGM_07112014_ENG_(FINAL).pdf

[lathinker]

Anyone able to understand what was voted on at the General Meeting in November? I've read through this a few times but still can't make heads nor tails of the special reserve that is being created with rights to buy common shares on behalf of the Greek State that is somehow related to DTAs and DTCs.....

 

http://www.eurobank.gr/Uploads/pdf/SHAREHOLDER_BINDER_EGM_07112014_ENG_(FINAL).pdf

 

Not sure if I get all the details right, but can give some context:

 

Under the Basel III framework, DTAs are deducted when it comes to assessing a banks capital. DTAs mean that a bank may not have to pay corporate tax in the future, mostly because a bank lost money, so potential tax liabilities can be netted. The argument for deducting DTAs for capital calculation purposes is that DTAs represent somewaht uncertain assets as it is unclear if and when their benefits can be reaped - this requires profits. The treatment for Basel III is similar for other intangible assets, notably Goodwill.

 

Greek banks with huge past losses have normally accummulated sizeable DTAs. As the world is moving towards Basel III and the banks had to undergo the ECB stress, banks looked for ways to turn their DTAs into non-deductible assets and that is what this filing is about.

 

The purpose is to turn DTAs into tax credits (DTCs) which are directly enforceable against the Greek state. As opposed to DTAs, DTCs can also be used if a bank makes a loss in which case the Greek government makes a payment to the bank. The condition of the Greek state for making the payment is that it receives conversion rights which can be converted into common shares. Unfortunately the precise economics of the conversion rights are not outlined.

 

Note that the topic is crucial for Eurobank as it makes a difference in their Basel III capital ratio from 6% to 12%. This capital boost is paid for by a potential dilution. Also, you may argue that claims against the Greek Government should not be capital. However, DTA/DTC laws have been passed across Southern Europe in order to address the capital shortage.

 

LT

 

In case you want to read further:

http://www.wsj.com/articles/ecb-should-stop-southern-european-games-with-bank-capital-heard-on-the-street-1413198242

http://www.reuters.com/article/2014/10/09/us-greece-banks-eba-idUSKCN0HY0SE20141009

[peter1234]

Thank you for your explanations. Learned something new today.

;)

[TwoCitiesCapital]

Anyone able to understand what was voted on at the General Meeting in November? I've read through this a few times but still can't make heads nor tails of the special reserve that is being created with rights to buy common shares on behalf of the Greek State that is somehow related to DTAs and DTCs.....

 

http://www.eurobank.gr/Uploads/pdf/SHAREHOLDER_BINDER_EGM_07112014_ENG_(FINAL).pdf

 

Not sure if I get all the details right, but can give some context:

 

Under the Basel III framework, DTAs are deducted when it comes to assessing a banks capital. DTAs mean that a bank may not have to pay corporate tax in the future, mostly because a bank lost money, so potential tax liabilities can be netted. The argument for deducting DTAs for capital calculation purposes is that DTAs represent somewaht uncertain assets as it is unclear if and when their benefits can be reaped - this requires profits. The treatment for Basel III is similar for other intangible assets, notably Goodwill.

 

Greek banks with huge past losses have normally accummulated sizeable DTAs. As the world is moving towards Basel III and the banks had to undergo the ECB stress, banks looked for ways to turn their DTAs into non-deductible assets and that is what this filing is about.

 

The purpose is to turn DTAs into tax credits (DTCs) which are directly enforceable against the Greek state. As opposed to DTAs, DTCs can also be used if a bank makes a loss in which case the Greek government makes a payment to the bank. The condition of the Greek state for making the payment is that it receives conversion rights which can be converted into common shares. Unfortunately the precise economics of the conversion rights are not outlined.

 

Note that the topic is crucial for Eurobank as it makes a difference in their Basel III capital ratio from 6% to 12%. This capital boost is paid for by a potential dilution. Also, you may argue that claims against the Greek Government should not be capital. However, DTA/DTC laws have been passed across Southern Europe in order to address the capital shortage.

 

LT

 

In case you want to read further:

http://www.wsj.com/articles/ecb-should-stop-southern-european-games-with-bank-capital-heard-on-the-street-1413198242

http://www.reuters.com/article/2014/10/09/us-greece-banks-eba-idUSKCN0HY0SE20141009

 

That makes a lot more sense. I had kind of pieced together the DTA and DTC portion but had no idea what the warrants were for. Thanks a lot for your input.

[TwoCitiesCapital]

There's no such thing as a floor for this stock is there? Sheesh!