EGFEY - Eurobank

[muscleman]

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

 

What's your cost basis on this? I've been watching since 2 years ago but always thought the price does not justify the risk. Who would pay 60% of common tangible equity for a bank with a texas ratio of 110?

 

It might be interesting to me now. :)

[TwoCitiesCapital]

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

 

What's your cost basis on this? I've been watching since 2 years ago but always thought the price does not justify the risk. Who would pay 60% of common tangible equity for a bank with a texas ratio of 110?

 

It might be interesting to me now. :)

 

I haven't worked out exactly what it is per share as I've had multiple purchases. I started at $0.09 and continued buying all the way down to $0.06 so it's probably somewhere around $0.07-0.075. Looking to add a small bit more if it goes below $0.05 but at that point I think I'll be done and will play the wait and see game with how things turn out.

 

Full year 2014 results for those who missed it last Wednesday.

http://www.eurobank.gr/Uploads/pdf/deltiotipou_apotelesmata_2014en.pdf

[muscleman]

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

 

What's your cost basis on this? I've been watching since 2 years ago but always thought the price does not justify the risk. Who would pay 60% of common tangible equity for a bank with a texas ratio of 110?

 

It might be interesting to me now. :)

 

I haven't worked out exactly what it is per share as I've had multiple purchases. I started at $0.09 and continued buying all the way down to $0.06 so it's probably somewhere around $0.07-0.075. Looking to add a small bit more if it goes below $0.05 but at that point I think I'll be done and will play the wait and see game with how things turn out.

 

Full year 2014 results for those who missed it last Wednesday.

http://www.eurobank.gr/Uploads/pdf/deltiotipou_apotelesmata_2014en.pdf

 

So they are projecting 2015 returning to profitability.

1. I am very impressed with their growth of pre-provision income.

2. I am still not sure why they posted Credit Loss Provisions of 742M in Q4. Normally, if they think the credit provision is insufficient, they will post a huge provision at once and "return to profitability" in one quarter. But here they are slowly increasing the posting of credit loss provisions quarter after quarter, which seems like a slow recognition that the previous prevision are insufficient? I wish I could project when this could end.

3. With 9.7bn allowance for loan losses and nearly 18 bn of bad loans, you have to be pretty accurate in your estimates for the actual loan loss recovery. The equity is only 6.3 bn. Let's say you actually found out that you need 12 bn allowance, then the equity is reduced to 4.3 bn right away and that would cause regulators to kick in and force another capital increase. However with 200 m per quarter pre-provision income, time is their friend, so if they actually need 12 bn allowance and they just slowly increase the provision for loan losses each quarter, they should be fine.

 

Therefore I am thinking that the actual allowance needed is far more than 9.7 bn and they could not afford to have a one time big provision to put the problems behind. Therefore we could see more quarters reporting losses.

 

However this does not mean the stock price would keep dropping. I have no ability to predict that, but I am watching aside. :)

[cameronfen]

It could be that Eurobank is very conservative in it's recognition of problem loans.  The Allowance for Loan Losses (ALL) to total loans ratio is almost 20%.  To put that in perspective, BAC the worst US bank in the depths of the financial crisis had a ratio of 3-4.5% in 2007-2009.  I think (but don't know for sure, I didn't feel like wading through 5 years of press releases) that even BAC's ALL ended up being too conservative and they released some of it.  So unless you think the Greek crisis is like 4-6 times worse than the financial crisis, the company's loan losses book should be ok.  Furthermore, at Eurobank net charge offs to loan impairment charges is something like 1 to 3 with loan impairment charges being the larger number.  BAC over the past 7 years has never had a ratio higher than 1.5.  This is probably why Watsa and Ross are interested in the company at .8 of book.  It doesn't look all that attractive if you only look at book, but if you look at how conservative the loan loss book is, there is a lot of room for those losses to be released. 

[A_Hamilton]

It could be that Eurobank is very conservative in it's recognition of problem loans.  The Allowance for Loan Losses (ALL) to total loans ratio is almost 20%.  To put that in perspective, BAC the worst US bank in the depths of the financial crisis had a ratio of 3-4.5% in 2007-2009.  I think (but don't know for sure, I didn't feel like wading through 5 years of press releases) that even BAC's ALL ended up being too conservative and they released some of it.  So unless you think the Greek crisis is like 4-6 times worse than the financial crisis, the company's loan losses book should be ok.  Furthermore, at Eurobank net charge offs to loan impairment charges is something like 1 to 3 with loan impairment charges being the larger number.  BAC over the past 7 years has never had a ratio higher than 1.5.  This is probably why Watsa and Ross are interested in the company at .8 of book.  It doesn't look all that attractive if you only look at book, but if you look at how conservative the loan loss book is, there is a lot of room for those losses to be released.

 

Greek GDP is down 25% since the onset of the financial crisis, in the U.S. GDP declined by ~5% at the depths of the crisis. It is 4-6x worse. Eurobank is basically a good bank/bad bank structure you hope there is a closed end fund trading at a discount in conservative marks on NPA's, and then a hope that they can write new loans with conservative underwriting and wide spreads...of course instability of deposits can blow a hole through all of this.

[TwoCitiesCapital]

It could be that Eurobank is very conservative in it's recognition of problem loans.  The Allowance for Loan Losses (ALL) to total loans ratio is almost 20%.  To put that in perspective, BAC the worst US bank in the depths of the financial crisis had a ratio of 3-4.5% in 2007-2009.  I think (but don't know for sure, I didn't feel like wading through 5 years of press releases) that even BAC's ALL ended up being too conservative and they released some of it.  So unless you think the Greek crisis is like 4-6 times worse than the financial crisis, the company's loan losses book should be ok.  Furthermore, at Eurobank net charge offs to loan impairment charges is something like 1 to 3 with loan impairment charges being the larger number.  BAC over the past 7 years has never had a ratio higher than 1.5.  This is probably why Watsa and Ross are interested in the company at .8 of book.  It doesn't look all that attractive if you only look at book, but if you look at how conservative the loan loss book is, there is a lot of room for those losses to be released.

 

I would definitely say what Greece is going through is worse, but hard to say how much worse.

 

That being said, it also has an insurance division which brings in sizable income/revenue. I think this is part of the reason they looked at too. Wilbur Ross mentioned on multiple occasions that part of the reason he had been interested in Bank of Ireland is because of their massive non-bank businesses that were extremely valuable that had been the proverbial "baby in the bathwater." A Grexit would be a bad outcome that would shatter the investment thesis for either, but beyond the Grexit you have a very valuable insurance operation and their ownership stake in Eurobank/Grivalia properties (valued somewhere around $250M).

 

 

[cameronfen]

It could be that Eurobank is very conservative in it's recognition of problem loans.  The Allowance for Loan Losses (ALL) to total loans ratio is almost 20%.  To put that in perspective, BAC the worst US bank in the depths of the financial crisis had a ratio of 3-4.5% in 2007-2009.  I think (but don't know for sure, I didn't feel like wading through 5 years of press releases) that even BAC's ALL ended up being too conservative and they released some of it.  So unless you think the Greek crisis is like 4-6 times worse than the financial crisis, the company's loan losses book should be ok.  Furthermore, at Eurobank net charge offs to loan impairment charges is something like 1 to 3 with loan impairment charges being the larger number.  BAC over the past 7 years has never had a ratio higher than 1.5.  This is probably why Watsa and Ross are interested in the company at .8 of book.  It doesn't look all that attractive if you only look at book, but if you look at how conservative the loan loss book is, there is a lot of room for those losses to be released.

 

I would definitely say what Greece is going through is worse, but hard to say how much worse.

 

That being said, it also has an insurance division which brings in sizable income/revenue. I think this is part of the reason they looked at too. Wilbur Ross mentioned on multiple occasions that part of the reason he had been interested in Bank of Ireland is because of their massive non-bank businesses that were extremely valuable that had been the proverbial "baby in the bathwater." A Grexit would be a bad outcome that would shatter the investment thesis for either, but beyond the Grexit you have a very valuable insurance operation and their ownership stake in Eurobank/Grivalia properties (valued somewhere around $250M).

 

 

 

and

 

It could be that Eurobank is very conservative in it's recognition of problem loans.  The Allowance for Loan Losses (ALL) to total loans ratio is almost 20%.  To put that in perspective, BAC the worst US bank in the depths of the financial crisis had a ratio of 3-4.5% in 2007-2009.  I think (but don't know for sure, I didn't feel like wading through 5 years of press releases) that even BAC's ALL ended up being too conservative and they released some of it.  So unless you think the Greek crisis is like 4-6 times worse than the financial crisis, the company's loan losses book should be ok.  Furthermore, at Eurobank net charge offs to loan impairment charges is something like 1 to 3 with loan impairment charges being the larger number.  BAC over the past 7 years has never had a ratio higher than 1.5.  This is probably why Watsa and Ross are interested in the company at .8 of book.  It doesn't look all that attractive if you only look at book, but if you look at how conservative the loan loss book is, there is a lot of room for those losses to be released.

 

Greek GDP is down 25% since the onset of the financial crisis, in the U.S. GDP declined by ~5% at the depths of the crisis. It is 4-6x worse. Eurobank is basically a good bank/bad bank structure you hope there is a closed end fund trading at a discount in conservative marks on NPA's, and then a hope that they can write new loans with conservative underwriting and wide spreads...of course instability of deposits can blow a hole through all of this.

 

I agree with all the points from above.  I didn't even think about looking at GDP which would be the smart thing to do with regards to the crisis.  Since this has been a crisis in slow motion since 2007 though a lot of the loans have already gone through the system.  Either way though the magnitude of the situation is significantly worse, I agree.  I think though, from my observations, and this might be my own biases at work, but whenever both sides are incentivized to avoid a scenario, ie the Grexit, even if there is some postering and chicken playing going around, usually saner heads prevail.  Think about the debt ceiling crisis or the cuban missile crisis. I can't think of any other situations but I also can't think of one situation where both sides wanted to avoid a terrible situation and they postured too much and neither side caved in and the calamity occured.  Can anyone else? 

[TwoCitiesCapital]

It could be that Eurobank is very conservative in it's recognition of problem loans.  The Allowance for Loan Losses (ALL) to total loans ratio is almost 20%.  To put that in perspective, BAC the worst US bank in the depths of the financial crisis had a ratio of 3-4.5% in 2007-2009.  I think (but don't know for sure, I didn't feel like wading through 5 years of press releases) that even BAC's ALL ended up being too conservative and they released some of it.  So unless you think the Greek crisis is like 4-6 times worse than the financial crisis, the company's loan losses book should be ok.  Furthermore, at Eurobank net charge offs to loan impairment charges is something like 1 to 3 with loan impairment charges being the larger number.  BAC over the past 7 years has never had a ratio higher than 1.5.  This is probably why Watsa and Ross are interested in the company at .8 of book.  It doesn't look all that attractive if you only look at book, but if you look at how conservative the loan loss book is, there is a lot of room for those losses to be released.

 

I would definitely say what Greece is going through is worse, but hard to say how much worse.

 

That being said, it also has an insurance division which brings in sizable income/revenue. I think this is part of the reason they looked at too. Wilbur Ross mentioned on multiple occasions that part of the reason he had been interested in Bank of Ireland is because of their massive non-bank businesses that were extremely valuable that had been the proverbial "baby in the bathwater." A Grexit would be a bad outcome that would shatter the investment thesis for either, but beyond the Grexit you have a very valuable insurance operation and their ownership stake in Eurobank/Grivalia properties (valued somewhere around $250M).

 

 

 

and

 

It could be that Eurobank is very conservative in it's recognition of problem loans.  The Allowance for Loan Losses (ALL) to total loans ratio is almost 20%.  To put that in perspective, BAC the worst US bank in the depths of the financial crisis had a ratio of 3-4.5% in 2007-2009.  I think (but don't know for sure, I didn't feel like wading through 5 years of press releases) that even BAC's ALL ended up being too conservative and they released some of it.  So unless you think the Greek crisis is like 4-6 times worse than the financial crisis, the company's loan losses book should be ok.  Furthermore, at Eurobank net charge offs to loan impairment charges is something like 1 to 3 with loan impairment charges being the larger number.  BAC over the past 7 years has never had a ratio higher than 1.5.  This is probably why Watsa and Ross are interested in the company at .8 of book.  It doesn't look all that attractive if you only look at book, but if you look at how conservative the loan loss book is, there is a lot of room for those losses to be released.

 

Greek GDP is down 25% since the onset of the financial crisis, in the U.S. GDP declined by ~5% at the depths of the crisis. It is 4-6x worse. Eurobank is basically a good bank/bad bank structure you hope there is a closed end fund trading at a discount in conservative marks on NPA's, and then a hope that they can write new loans with conservative underwriting and wide spreads...of course instability of deposits can blow a hole through all of this.

 

I agree with all the points from above.  I didn't even think about looking at GDP which would be the smart thing to do with regards to the crisis.  Since this has been a crisis in slow motion since 2007 though a lot of the loans have already gone through the system.  Either way though the magnitude of the situation is significantly worse, I agree.  I think though, from my observations, and this might be my own biases at work, but whenever both sides are incentivized to avoid a scenario, ie the Grexit, even if there is some postering and chicken playing going around, usually saner heads prevail.  Think about the debt ceiling crisis or the cuban missile crisis. I can't think of any other situations but I also can't think of one situation where both sides wanted to avoid a terrible situation and they postured too much and neither side caved in and the calamity occured.  Can anyone else?

 

If you're familiar with Game Theory, this is called a Nash equilibrium. It takes a slightly different approach to free markets than did Adam Smith and suggests that there are situations where individuals pursuing their self interest opt for non-optimal solutions because of the uncertainty of how their counterpart may react. See the Prisoner's dilemma for an example. http://en.wikipedia.org/wiki/Prisoner%27s_dilemma

 

I don't think that's what we have here though. I still think that all parties involved have a very large incentive to push for a compromise regardless of what the other party decides to do given the consequences to Greece and the future implications for the Euro area if a Grexit occurred.

 

 

 

 

[muscleman]

It could be that Eurobank is very conservative in it's recognition of problem loans.  The Allowance for Loan Losses (ALL) to total loans ratio is almost 20%.  To put that in perspective, BAC the worst US bank in the depths of the financial crisis had a ratio of 3-4.5% in 2007-2009.  I think (but don't know for sure, I didn't feel like wading through 5 years of press releases) that even BAC's ALL ended up being too conservative and they released some of it.  So unless you think the Greek crisis is like 4-6 times worse than the financial crisis, the company's loan losses book should be ok.  Furthermore, at Eurobank net charge offs to loan impairment charges is something like 1 to 3 with loan impairment charges being the larger number.  BAC over the past 7 years has never had a ratio higher than 1.5.  This is probably why Watsa and Ross are interested in the company at .8 of book.  It doesn't look all that attractive if you only look at book, but if you look at how conservative the loan loss book is, there is a lot of room for those losses to be released.

 

ALLL to total loan ratio is NOT a good way to measure the conservativeness. Suppose you have 20% ALLL but 100% of your loans are bad loans, does that sound conservative?

Texas ratio is better. At a minimum you should use ALLL to bad loans ratio.

 

[cameronfen]

It could be that Eurobank is very conservative in it's recognition of problem loans.  The Allowance for Loan Losses (ALL) to total loans ratio is almost 20%.  To put that in perspective, BAC the worst US bank in the depths of the financial crisis had a ratio of 3-4.5% in 2007-2009.  I think (but don't know for sure, I didn't feel like wading through 5 years of press releases) that even BAC's ALL ended up being too conservative and they released some of it.  So unless you think the Greek crisis is like 4-6 times worse than the financial crisis, the company's loan losses book should be ok.  Furthermore, at Eurobank net charge offs to loan impairment charges is something like 1 to 3 with loan impairment charges being the larger number.  BAC over the past 7 years has never had a ratio higher than 1.5.  This is probably why Watsa and Ross are interested in the company at .8 of book.  It doesn't look all that attractive if you only look at book, but if you look at how conservative the loan loss book is, there is a lot of room for those losses to be released.

 

ALLL to total loan ratio is NOT a good way to measure the conservativeness. Suppose you have 20% ALLL but 100% of your loans are bad loans, does that sound conservative?

Texas ratio is better. At a minimum you should use ALLL to bad loans ratio.

 

 

So actually I agree with you, but I'm not actually trying to measure how risky the bank is, for that ALL to bad loans is a good ratio better than the one I'm using, but I'm trying to get a better idea of how conservative the company's NPA process is, which sort of gets at how risky the bank is on a second order.  Now if I remember correctly, NPA for eurobank is twice as large as ALL.  So NPA is 40% of total loans.  What I'm trying to say is that that is a incredibly high number.  Do you think on a dollar weighted basis, 4 of every 10 loans will fail.  Compare that to BAC where NPA to total loans was 4.5% even in the midst of the financial crisis.  That is an extremely high number and sounds to me like the bank is being quite conservative in writing a loan down as an NPA.  The argument that GDP has fallen 25% is a legitimate counterpoint though.  At least in my mind.  Perhaps I should of used NPA to total loans, though.  It illustrates the point better.   

[tombgrt]

Important to note is that Watsa and others made the investment in early 2014 when GDP growth expectancy for 2015 and beyond was 3%+/year. That would have quickly reversed the trend of the last few years. I doubt that they are equally comfortable in their bets now.

[TwoCitiesCapital]

Important to note is that Watsa and others made the investment in early 2014 when GDP growth expectancy for 2015 and beyond was 3%+/year. That would have quickly reversed the trend of the last few years. I doubt that they are equally comfortable in their bets now.

 

I don't think Watsa and Ross gave any consideration to what the expected GDP growth for the next year would be. They generally tend to invest with a much longer time horizon, and a much wider latitude for error than missing GDP expectations for a single year would suggest. Ross even recently said that the price was extremely attractive but he wasn't going to consider adding until the  FY2014 results were filed. That was last Wednesday. Watsa has been betting on deflation in the Euro area so I think he'd probably have argued that 3% was far too optimistic to begin with and is certainly not concerned that the inflated target for a single year wasmissed.

 

Let's be realistic here - nothing much has changed in Greece over the last 6 months except the new government in charge. This new government is posturing and stirring the pot to try get a more favorable outcome than those currently demanded by the Troika and the Troika wants more viable alternatives than what has currently been given. Neither side wants a Grexit, neither side is discussing a Grexit, and yet, because of the sensationalization that has occurred, the stock has dropped 80% on fears of a Grexit and the resulting impact that would have on banks.

 

I can't say that a Grexit won't occur, but I can say that I think the odds are small with neither party in favor of it. You have the opportunity to buy a profitable insurance company, 20% ownership in a profitable real estate company, and direct ownership in what will likely end up being an extremely profitable bank in Greece for a price that is less than 25% of what is arguable a conservative measure of what equity is. This seems like a steal to me - not a riskless investment, but a steal nonetheless.

 

[morningstar]

It could be that Eurobank is very conservative in it's recognition of problem loans.  The Allowance for Loan Losses (ALL) to total loans ratio is almost 20%.  To put that in perspective, BAC the worst US bank in the depths of the financial crisis had a ratio of 3-4.5% in 2007-2009.  I think (but don't know for sure, I didn't feel like wading through 5 years of press releases) that even BAC's ALL ended up being too conservative and they released some of it.  So unless you think the Greek crisis is like 4-6 times worse than the financial crisis, the company's loan losses book should be ok.  Furthermore, at Eurobank net charge offs to loan impairment charges is something like 1 to 3 with loan impairment charges being the larger number.  BAC over the past 7 years has never had a ratio higher than 1.5.  This is probably why Watsa and Ross are interested in the company at .8 of book.  It doesn't look all that attractive if you only look at book, but if you look at how conservative the loan loss book is, there is a lot of room for those losses to be released.

 

ALLL to total loan ratio is NOT a good way to measure the conservativeness. Suppose you have 20% ALLL but 100% of your loans are bad loans, does that sound conservative?

Texas ratio is better. At a minimum you should use ALLL to bad loans ratio.

 

 

So actually I agree with you, but I'm not actually trying to measure how risky the bank is, for that ALL to bad loans is a good ratio better than the one I'm using, but I'm trying to get a better idea of how conservative the company's NPA process is, which sort of gets at how risky the bank is on a second order.  Now if I remember correctly, NPA for eurobank is twice as large as ALL.  So NPA is 40% of total loans.  What I'm trying to say is that that is a incredibly high number.  Do you think on a dollar weighted basis, 4 of every 10 loans will fail.  Compare that to BAC where NPA to total loans was 4.5% even in the midst of the financial crisis.  That is an extremely high number and sounds to me like the bank is being quite conservative in writing a loan down as an NPA.  The argument that GDP has fallen 25% is a legitimate counterpoint though.  At least in my mind.  Perhaps I should of used NPA to total loans, though.  It illustrates the point better. 

 

About 1/3 of the portfolio is 90 days past due. The high NPA number doesn't reflect any form of conservatism, but rather the terrible state of the portfolio. The level of conservatism can be better seen in how rapidly the bank realizes losses on loans that stop performing. I don't think Eurobank is showing very impressively in that regard at around 50% coverage. Though NPA formation seems to be slowing (absent Grexit) there are many quarters ahead of provisions running higher than new NPA formation as the bank realizes its losses.

 

Ultimately portfolio quality might not be very relevant to the performance of this stock though, as the equity seems to be pricing-to-survival now w/ 2018 notes yielding 20+%. If we get to 2018 and the equity hasn't suffered massive dilution or a wipeout, it's bound to be trading much higher.

[muscleman]

I did some comparisons between Piraeus bank, Alpha bank and Eurobank. Please let me know if I made any mistakes.

1. The market cap:

Piraeus bank:

http://www.piraeusbankgroup.com/en/investors/share/shareholder-structure

The Hellenic Financial Stability Fund held 67% of the outstanding common shares (6,101,979,715 of a nominal value €0.30 each)  This means total common shares are about 9.5 bn.

Every HFSF Warrant incorporates the holder's right to purchase 4.47577327722 shares owned by the Hellenic Financial Stability Fund ('HFSF').The issued warrants that are currently traded are 843,637,022.

This means there are additional 3 bn shares if the warrants are exercised. What's the strike price? I can't find it.

Current stock price is 0.355, so market cap is 3.37 bn. However on this link it says it is 2.1 bn. Why?

http://www.piraeusbankgroup.com/en/investors/share/share-interactive-chart

 

 

Alpha bank:

http://www.alpha.gr/page/default.asp?la=2&id=548

Alpha Bank shareholders excluding the HFSF hold 4,310,200,279 voting shares of the Bank. On top of the above, the HFSF holds 8,458,859,579 common, registered, voting, dematerialized shares, which correspond to 66.24% of the total number of voting shares of the Bank. The exercise of voting rights of HFSF shares is subject to restrictions according to Article 7a of L.3864/2010.

In addition, shareholders hold 1,141,747,967 Warrants, each incorporating the right of its holder to purchase 7.408683070 New Shares owned by the HFSF

 

So the warrants look to be different from what I understand as warrants in the US. When exercised, no new warrants are issued. They just buy from HFSF. Therefore the total share count or the bank's book value won't change.

Therefore we can ignore the effects of warrant exercise here, and the total market cap should be 13 bn shares x 0.4 = 5.2 bn

 

 

 

Eurobank:

http://www.eurobank.gr/online/home/generic.aspx?id=23&mid=353&lang=en

Weird that there is no mention of HFSF here. Total Outstanding Number of Common Shares 14,707,876,542. Stock price is 0.085 per share as of today. Total market cap is 1.25 bn euro.

 

 

The common tangible equity are 7.6, 8 and 4.4 bn each for the above banks. Eurobank trades at the deepest discount right now.

 

 

All three banks have about the same texas ratio. 110.

 

Did I make any mistake here? I thought market would be efficient and they should trade at similar discounts to book, but they are quite different.

 

[muscleman]

Here are some interesting articles about David Einhorn's thoughts on Piraeus bank.

It sounds like when the stock price was 1.5 Euro, he said the p/b ratio was 0.75, so that means I was probably wrong when I calculated the p/b ratio in the above post. Please let me know where I am wrong.

 

http://www.valuewalk.com/2014/11/david-einhorn-piraeus-bank-warrants/

http://viennacapitalist.com/2014/11/12/david-einhorn-on-piraeus-bank-now-i-know-what-he-thinks-part-ii/

 

 

[cameronfen]

It could be that Eurobank is very conservative in it's recognition of problem loans.  The Allowance for Loan Losses (ALL) to total loans ratio is almost 20%.  To put that in perspective, BAC the worst US bank in the depths of the financial crisis had a ratio of 3-4.5% in 2007-2009.  I think (but don't know for sure, I didn't feel like wading through 5 years of press releases) that even BAC's ALL ended up being too conservative and they released some of it.  So unless you think the Greek crisis is like 4-6 times worse than the financial crisis, the company's loan losses book should be ok.  Furthermore, at Eurobank net charge offs to loan impairment charges is something like 1 to 3 with loan impairment charges being the larger number.  BAC over the past 7 years has never had a ratio higher than 1.5.  This is probably why Watsa and Ross are interested in the company at .8 of book.  It doesn't look all that attractive if you only look at book, but if you look at how conservative the loan loss book is, there is a lot of room for those losses to be released.

 

ALLL to total loan ratio is NOT a good way to measure the conservativeness. Suppose you have 20% ALLL but 100% of your loans are bad loans, does that sound conservative?

Texas ratio is better. At a minimum you should use ALLL to bad loans ratio.

 

 

So actually I agree with you, but I'm not actually trying to measure how risky the bank is, for that ALL to bad loans is a good ratio better than the one I'm using, but I'm trying to get a better idea of how conservative the company's NPA process is, which sort of gets at how risky the bank is on a second order.  Now if I remember correctly, NPA for eurobank is twice as large as ALL.  So NPA is 40% of total loans.  What I'm trying to say is that that is a incredibly high number.  Do you think on a dollar weighted basis, 4 of every 10 loans will fail.  Compare that to BAC where NPA to total loans was 4.5% even in the midst of the financial crisis.  That is an extremely high number and sounds to me like the bank is being quite conservative in writing a loan down as an NPA.  The argument that GDP has fallen 25% is a legitimate counterpoint though.  At least in my mind.  Perhaps I should of used NPA to total loans, though.  It illustrates the point better. 

 

About 1/3 of the portfolio is 90 days past due. The high NPA number doesn't reflect any form of conservatism, but rather the terrible state of the portfolio. The level of conservatism can be better seen in how rapidly the bank realizes losses on loans that stop performing. I don't think Eurobank is showing very impressively in that regard at around 50% coverage. Though NPA formation seems to be slowing (absent Grexit) there are many quarters ahead of provisions running higher than new NPA formation as the bank realizes its losses.

 

Ultimately portfolio quality might not be very relevant to the performance of this stock though, as the equity seems to be pricing-to-survival now w/ 2018 notes yielding 20+%. If we get to 2018 and the equity hasn't suffered massive dilution or a wipeout, it's bound to be trading much higher.

 

I have to admit I didn't check the delinquencies and the distribution of the NPA.  I just looked at Eurobank quite quickly and the high NPA to loan ratio was what jumped at me.  I just wanted to illustrate what jumped out at me so people could chew it over, and chew at it everyone did.  I took a look at NPAs and based on how much collateral they have I think now they probably will have to raise more capital in the future (although there lack of loan charge offs is the one data point that contradicts this, but assuming and looking at NPA data and all the loans 365 days past due it looks like management is overly hesitant to charge off loans perhaps because this would make the company look really bad).  Anyway, I looked at the NPAs.  Based on the amount of impaired debt, I created an estimated amount that Eurobank would owe above and beyond their ALL.  I also took into account some of their impaired debt would be collateralized and so I subtracted an estimated collateralized amount from total impairments (I assumed that impaired debt would be less collateralized than the average debt by an subtractive factor of .3 in the base rate but I included a sensitivity table).  I then tallied up what remained , which assumes that collection on any debt not collateralized is 0 (What is a good base rate for collecting on unsecured debt?  This is probably too conservative but I do not know.  You should be able to collect something on the Corporate and SME unsecured debt which is about 50% of additional impaired loans that are necessary to collect).  The results of this analysis suggests that the company has somewhere around 3.7 billion euros that need to be made up through a combination of loans becoming performing repayment and unsecured liens that collect something in the process of bankruptcy.  Based on 2013s impairment reversals and repayment it would take about 6 years for this whole to be reversed, which is probably suggests that much of this 3.7 billion euros will have to be written down.  I don't really know anything about bankruptcy and how much unsecured creditors typically recover, but does anyone else?  Loans are typically more senior than bonds right, but in Europe companies have a lot less bonds. 

 

Here is my excel let me know if you can follow.  I would be interested if people that know more about bankruptcy could add unto it. 

Eurobank_Potential_For_Impairment.xlsx

[muscleman]

I did some comparisons between Piraeus bank, Alpha bank and Eurobank. Please let me know if I made any mistakes.

1. The market cap:

Piraeus bank:

http://www.piraeusbankgroup.com/en/investors/share/shareholder-structure

The Hellenic Financial Stability Fund held 67% of the outstanding common shares (6,101,979,715 of a nominal value €0.30 each)  This means total common shares are about 9.5 bn.

Every HFSF Warrant incorporates the holder's right to purchase 4.47577327722 shares owned by the Hellenic Financial Stability Fund ('HFSF').The issued warrants that are currently traded are 843,637,022.

This means there are additional 3 bn shares if the warrants are exercised. What's the strike price? I can't find it.

Current stock price is 0.355, so market cap is 3.37 bn. However on this link it says it is 2.1 bn. Why?

http://www.piraeusbankgroup.com/en/investors/share/share-interactive-chart

 

 

Alpha bank:

http://www.alpha.gr/page/default.asp?la=2&id=548

Alpha Bank shareholders excluding the HFSF hold 4,310,200,279 voting shares of the Bank. On top of the above, the HFSF holds 8,458,859,579 common, registered, voting, dematerialized shares, which correspond to 66.24% of the total number of voting shares of the Bank. The exercise of voting rights of HFSF shares is subject to restrictions according to Article 7a of L.3864/2010.

In addition, shareholders hold 1,141,747,967 Warrants, each incorporating the right of its holder to purchase 7.408683070 New Shares owned by the HFSF

 

So the warrants look to be different from what I understand as warrants in the US. When exercised, no new warrants are issued. They just buy from HFSF. Therefore the total share count or the bank's book value won't change.

Therefore we can ignore the effects of warrant exercise here, and the total market cap should be 13 bn shares x 0.4 = 5.2 bn

 

 

 

Eurobank:

http://www.eurobank.gr/online/home/generic.aspx?id=23&mid=353&lang=en

Weird that there is no mention of HFSF here. Total Outstanding Number of Common Shares 14,707,876,542. Stock price is 0.085 per share as of today. Total market cap is 1.25 bn euro.

 

 

The common tangible equity are 7.6, 8 and 4.4 bn each for the above banks. Eurobank trades at the deepest discount right now.

 

 

All three banks have about the same texas ratio. 110.

 

Did I make any mistake here? I thought market would be efficient and they should trade at similar discounts to book, but they are quite different.

 

Can someone kindly answer my question about the book value of piraeus, Alpha and Eurobanks please?

[TwoCitiesCapital]

It could be that Eurobank is very conservative in it's recognition of problem loans.  The Allowance for Loan Losses (ALL) to total loans ratio is almost 20%.  To put that in perspective, BAC the worst US bank in the depths of the financial crisis had a ratio of 3-4.5% in 2007-2009.  I think (but don't know for sure, I didn't feel like wading through 5 years of press releases) that even BAC's ALL ended up being too conservative and they released some of it.  So unless you think the Greek crisis is like 4-6 times worse than the financial crisis, the company's loan losses book should be ok.  Furthermore, at Eurobank net charge offs to loan impairment charges is something like 1 to 3 with loan impairment charges being the larger number.  BAC over the past 7 years has never had a ratio higher than 1.5.  This is probably why Watsa and Ross are interested in the company at .8 of book.  It doesn't look all that attractive if you only look at book, but if you look at how conservative the loan loss book is, there is a lot of room for those losses to be released.

 

ALLL to total loan ratio is NOT a good way to measure the conservativeness. Suppose you have 20% ALLL but 100% of your loans are bad loans, does that sound conservative?

Texas ratio is better. At a minimum you should use ALLL to bad loans ratio.

 

 

So actually I agree with you, but I'm not actually trying to measure how risky the bank is, for that ALL to bad loans is a good ratio better than the one I'm using, but I'm trying to get a better idea of how conservative the company's NPA process is, which sort of gets at how risky the bank is on a second order.  Now if I remember correctly, NPA for eurobank is twice as large as ALL.  So NPA is 40% of total loans.  What I'm trying to say is that that is a incredibly high number.  Do you think on a dollar weighted basis, 4 of every 10 loans will fail.  Compare that to BAC where NPA to total loans was 4.5% even in the midst of the financial crisis.  That is an extremely high number and sounds to me like the bank is being quite conservative in writing a loan down as an NPA.  The argument that GDP has fallen 25% is a legitimate counterpoint though.  At least in my mind.  Perhaps I should of used NPA to total loans, though.  It illustrates the point better. 

 

About 1/3 of the portfolio is 90 days past due. The high NPA number doesn't reflect any form of conservatism, but rather the terrible state of the portfolio. The level of conservatism can be better seen in how rapidly the bank realizes losses on loans that stop performing. I don't think Eurobank is showing very impressively in that regard at around 50% coverage. Though NPA formation seems to be slowing (absent Grexit) there are many quarters ahead of provisions running higher than new NPA formation as the bank realizes its losses.

 

Ultimately portfolio quality might not be very relevant to the performance of this stock though, as the equity seems to be pricing-to-survival now w/ 2018 notes yielding 20+%. If we get to 2018 and the equity hasn't suffered massive dilution or a wipeout, it's bound to be trading much higher.

 

I went home, re-read through Q3 and Q4 reports, and did some number crunching and chewed on it a bit. The company has a loan portfolio of around 51B. Of this loan portfolio, 17.3B are non-performing assets that are 90 days past due. That being said, there has also been a moratorium on foreclosures that was passed in 2013 - it was supposed to end at the end of 2014; however, the new government has publicly announced that they intend to continue with the policy so banks probably aren't  foreclosing on individuals in the interim to avoid political ire and because they were also pushing for the extension. 

 

I'm sure that there are a large number of individuals who have no ability to pay and that this law is protecting them from being homeless. I'm also sure that there are a large number of individuals who jumped on the chance to not pay a mortgage and have absolutely no consequence for doing so. The banks favor extending the moratorium because if it immediately ended, they'd have to write off the loans from those unable to pay and sell a bunch of collateral (houses) to get their cash back. This would probably force the prices of houses even lower forcing the banks to write down the collateral value against their good loans as well and risk ending up with a billions in a capital shortfall again. The banks would rather take this slowly, extend the moratorium, and work on getting individual cases of borrowers who have the ability to pay to begin paying again.

 

We can see this in Piraeus bank - they offered a number of their non-performing borrowers 30-50% haircuts on their debt if they started paying again and half of them became performing loans again! I would guess that about half of that 17.3B at Eurobank also have the ability to perform but have no incentive because they're not going to lose their house if they don't pay. If we assume this is correct, and we assume that Eurobank offers similar terms (averaging it out at 40% haircut which is pretty extreme for collateralized loans), then Eurobank could write off 3.5B against their 9.7B in reserves and immediately start collecting on some of these loans.

 

The math is as follows:

(17.3 * 0.5) = 8.56B <- this is the amount of loans that could potential be performing if Piraeus' experience is representative of Eurobank as well.

8.65*0.4 = 3.46B <- this is the amount that Eurobank would write off against 9.7B in reserves

8.65 - 3.46 = 5.19B <- the amount that Eurobank would immediately start collecting on again.

5.19 * 0.04 = .2076 <- 207.6M in additional income straight to the bottom line. The 4% is my estimate of what loans are currently paying based on the current NIM relative to current loan book, portfolio, and Piraeus' presentation on deposit rates in Greece. Interest expense doesn't need to be deducted from this 4% because the interest on the deposits paid is already included in currently reported figures. This would be additional income with no additional expense beyond the initial write off.

 

What you have left is a firm that is currently bringing in about 1.75B per year in NII (or about 2B in gross pre-provision income including insurance and income from investments) and reserves would be 6.25B against NPAs of 8.56B (a coverage ratio of 73%) which is still assuming extremely high charge-offs of the remaining non-performing assets. Considering operating expenses and you'd have a bank pulling in about $1B a year pre-provisions. If those earnings are retained, or are written off as loan loss provisions, you have a company that is recapping itself at 700M-1B per year depending on what rate charge offs would continue after the write off.

 

Obviously the 3.5B write off would affect capital ratios. After all, the company had Tier 1 equity of 5.9B which is 15% of Risk Weighted Assets. A write off of 3.5B would reduce both the numerator (5.9) and the denominator (total RWA) though it's hard for me to guess the affects on the final ratio without knowing the profile of those mortgages and how they are weighted in the RWA calculation. It seems possible that this write off could occur and the bank could still be around 7-8% or so on a Tier 1 ratio while recapping itself and adding an additional 3% points to that 7-8% every year. It would only take 2 years for them to get back to a 15% ratio (due to the lower RWA) with a better loan profile, reserving, and NPA ratios.

 

My real concern is their inability to use more than 20% of their tax assets as capital without taking on dilution. They have a significant piece of their capital in DTA (3+B) and these will likely need to be replaced by a better source of capital in the future as it is my understanding the allowance to use them is slowly being phased out. The scenario laid out above doesn't take into account needing to replace these assets with better forms of capital - any positive earnings would simply have an offsetting affect as the cash growth on the balance sheet would offset the decrease in DTAs. We may still have a 3B capital shortfall if my understanding is correct and nothing is done to take care of these.

 

It seems that this could be solved without major dilution at that point though. The issuance of preferred shares and debt could fill the majority of the whole. 3B in total issuance would result in interest/dividend charges that would be extremely reasonable relative to the 2B in pre-provision income.

 

Can anyone who is knowledgeable about banking comment on any of the above? There's a lot here that I'm uncertain about, especially the affect of the write off on Tier 1 ratio and capital phase out of the DTAs, so any input would be much appreciated.

[muscleman]

Hmm... That's probably why Piraeus bank had a 1.7 bn provision in 2014Q3 and claimed that they have a "clean slate" again.

I looked at all 3 major banks and their new 90dpd formation have steadily decreased. Piraeus bank's formation has dropped to 0 in 2014Q4 probably because they now have a "clean slate". But they still reported an loan loss impairment charge of over 400 million. Why is that? Is that based on historical default rates?

 

In terms of your math, I think you are talking about mortgages specifically?

http://www.eurobank.gr/Uploads/pdf/4Q2014%20Results%20Presentation.pdf

 

See page 19. There is 4.1 bn mortgages nonperforming. Maybe your math should be based on that instead of the total NPLs?

I am also concerned about the 0-89dpd disclosure on this page. It has not been disclosed in previous quarters. This figure is 2.1 bn, and it will become the next quarter's new 90 dpd formation. Why do they only have new 90 dpd formation of about 280 m per quarter? Either most of the 0-89 dpd magically starts performing again, or they charged them off before they become 90 dpd, which may explain why the loan impairment costs is so high?

[TwoCitiesCapital]

Hmm... That's probably why Piraeus bank had a 1.7 bn provision in 2014Q3 and claimed that they have a "clean slate" again.

I looked at all 3 major banks and their new 90dpd formation have steadily decreased. Piraeus bank's formation has dropped to 0 in 2014Q4 probably because they now have a "clean slate". But they still reported an loan loss impairment charge of over 400 million. Why is that? Is that based on historical default rates?

 

In terms of your math, I think you are talking about mortgages specifically?

http://www.eurobank.gr/Uploads/pdf/4Q2014%20Results%20Presentation.pdf

 

See page 19. There is 4.1 bn mortgages nonperforming. Maybe your math should be based on that instead of the total NPLs?

I am also concerned about the 0-89dpd disclosure on this page. It has not been disclosed in previous quarters. This figure is 2.1 bn, and it will become the next quarter's new 90 dpd formation. Why do they only have new 90 dpd formation of about 280 m per quarter? Either most of the 0-89 dpd magically starts performing again, or they charged them off before they become 90 dpd, which may explain why the loan impairment costs is so high?

 

When a someone misses a payment the loan goes into the 0-89 dpd bucket. The moment they make a payment, they come out of that bucket again, even if they aren't fully caught up on payments. What this means is that they have 2B of people who have missed at least 1 payment in the last quarter, but as long as they make 1 payment in the next quarter they'll never make it to the 90dpd bucket. This will certainly be a metric to watch first as its likely that these figures will shrink in a recovery long before the 90dpd will.

 

As to your point about mortgages, I think restructurings like this would have the biggest impact on mortgages due to the moratorium, but I certainly think loan modification and reduction to begin timely payments again could also be used for other types of loans. I simply think the rate of success will be less. I'm not entirely certain if Piraeus only offered this deal to homeowners or if it was to a broader group to really know how to apply it.

[constructive]

Let's be realistic here - nothing much has changed in Greece over the last 6 months except the new government in charge.

 

Which was accompanied by massive capital flight from Greek banks (>$28B), a spike in Greek corporate borrowing rates, and economic slowdown.

 

The damage done to the Greek economy over the last 6 months was quite unnecessary, since the government's hard negotiating line evaporated once they saw the market's reaction and they caved to most of ECB's requirements.

[tombgrt]

Let's be realistic here - nothing much has changed in Greece over the last 6 months except the new government in charge.

 

Which was accompanied by massive capital flight from Greek banks (>$28B), a spike in Greek corporate borrowing rates, and economic slowdown.

 

The damage done to the Greek economy over the last 6 months was quite unnecessary, since the government's hard negotiating line evaporated once they saw the market's reaction and they caved to most of ECB's requirements.

 

Exactly. They obviously don't just look at the next year or two, but you can bet that they made the investment because they think they worst lies in the past for Greece. Them having a long term view doesn't mean they don't look at the present.

They aren't buying into it assuming the economy might flatline another 5 years just to maybe come out on top in 15-20 years. In that case wouldn't there be safer bets than banks (after all being levered plays on the economy)?

[TwoCitiesCapital]

http://www.zerohedge.com/news/2015-04-06/valuing-greek-banks-sum-parts-approach

 

Haven't had time to really think through this and digest it myself, but it's an argument for Eurobank being richly valued at present levels.

[muscleman]

http://www.zerohedge.com/news/2015-04-06/valuing-greek-banks-sum-parts-approach

 

Haven't had time to really think through this and digest it myself, but it's an argument for Eurobank being richly valued at present levels.

 

Where did it say it's richly valued right now? I don't see that.

I can't understand most of the discussions here though. He mentioned Eurobank's largest RMBS issue trading at 78 cents and the bank can buy back it to book a profit. Then what? How does this affect valuation?

[Eye4Valu]

That dude's article is total BS. I remember a similar piece that came out about MBIA and its Zohar exposure. Was complete nonsense.