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This month marks the 10th anniversary of Greek banks being cheap, so I thought we should celebrate by taking a fresh look at one.  Greek bank stocks have been a financial market arcade crane game, and it feels like no one is paying attention anymore.  Probably almost anyone who would be interested in distressed bank stocks has probably been burned already.  But some interesting new developments are taking place.  Could things finally be different?  I don’t know I just work here.  Come with me on an adventure you’ll probably regret.

It’s hard to overstate what a catastrophe the Greek banking crisis was.  It more closely resembled the Great Depression than the US financial crisis.  Unemployment peaked at 28% and still sits at 16%.  Nonperforming loans peaked at 49% of total loans.  This compares to a 5.6% peak NPL ratio in the US during the GFC. 

Source: https://www.bankofgreece.gr/en/statistics/evolution-of-loans-and-non-performing-loans

The relentless rise in NPLs is what made Greek bank stocks a value trap for 10 years.  Since 2007, Eurobank issued €7.5 billion of equity and earned €13 billion of pre-provision income but incurred €19 billion of bad debt provisions, thus Eurobank ended 2020 at almost exactly the same capital position as on 12/31/07. 

Fast forward to March 2019.  The Syriza government made modifications to foreclosure laws which made it easier for banks to repossess properties in default.  Prior to this very few foreclosures took place.  Borrowers were able to delay the process in court often for several years.  Even if the borrower knew they would lose in court, they could drop their case after a few years, resume payments, then default again and start the process over again.  While well intentioned, the foreclosure restrictions incentivized borrowers to default on their loans even if they had the ability to pay, because they knew repossession was difficult.  July 2019, the center-right New Democracy party took control of parliament from Syriza, the far left party which held control of parliament from January 2015 to July 2019.  Then the pandemic hit and temporary foreclosure moratoria were granted, delaying the progress on clearing NPLs that had begun in 2019.  In July 2021 the remaining pandemic foreclosure moratoria expired.

Some of the Greek banks are doing a more competent job at bad debt resolution than others.  Eurobank in particular has availed themselves of programs to sell their NPLs to servicers to speed up the process.  Eurobank has completed five NPL securitization and sale transactions which have moved €11 billion of NPLs off-balance sheet.  A sixth securitization is in process which will move €3.2 billion of the remaining €5.7 billion of NPLs off-balance sheet with only a 10 bps cost to equity.  Post this transaction Eurobank will end the year with a 6-7% NPL ratio.  Spectacular progress from a high of 45%.  This progress has happened rapidly and during the chaos of the pandemic, and combined with investor apathy I suspect it has gone largely unnoticed.  The stock no longer responds to excellent earnings reports. 

On the margin, organic NPL formation has actually been negative for some time, so unlike in prior years Eurobank isn’t plugging a leaking bucket anymore.  Once the NPLs are cleared, they’ll be cleared for at least until the next financial crisis in +/- 10 years.  Until then, we have an economy which is possibly spring loaded for a violent recovery.  Tourism, which has the capacity to be 25% of GDP, was down 60% in 2020.  If tourism recovers by €25 billion in 2022, it could provide a 15% tailwind to GDP when it recovers, which will more than offset the 4% of GDP fiscal stimulus.

So once this train wreck is cleaned up, we have a bank that trades for .6x tangible book value.  It’s not the cheapest the stock has ever been, but it’s the closest it’s ever been to resolving its balance sheet problems. I don't want the whole fish, I just want the fillet.  It’s earning €1 billion of core pre-provision pre-tax income.  In a recovery year I don’t think it’s crazy to assume 1% provisions per year (€380 million).  So Eurobank could earn €.13/share in a year or so.  So today it trades for 6.5x one year out EPS.  It seems possible that the stock could double in a year or so.  And I think there is good downside protection from the low price/TBV and the trajectory of NPLs, and a likely recovery in tourism.

I’ve thrown out a lot of numbers but the bottom line is this.  There’s a rotation into value going on.  There’s nothing more value than Greek banks.  Greek banks were value before value was cool.

Catalyst

-NPL resolution

-Tourism recovery in 2022