National Bank of Greece (NBG) Memo Name: James Zhang Phone #: (757) 788-9962 College/School: CLAS Year: Class of 2017

National Bank of Greece (NBG) Memo

Phone #: (757) 788-9962 College/School: CLAS

Name: James Zhang

Company Description
Year: Class of 2017

[NYSE; NGB] is a Greek bank and financial services company that primarily operates in commercial banking, but also has business in retail banking, investment banking, asset management, and insurance. The National Bank of Greece SA previously wrote off huge losses on its balance sheet during the Eurozone debt crisis, it has been on a steady path to recovery since the second half of 2013, and has been expanding its business in various sectors throughout Europe. Specifically, the rise in Greek lending and home loans, diversification by way of improved operations in Turkey and emerging markets, and the general recovery of the Greek economy will propel NGB to huge growth in the long term. Most notably, recent actions by Mario Draghi and the European Central Bank will create a healthy, stable environment for the National Bank of Greece to achieve its upside potential over time.

Thesis / Key Points



Rise in lending and specific developments in the banking sector in Greece will play to NBG’s advantage



As Greece’s largest lender, NBG has acted swiftly in the past year to boost its position financially by increasing loans and

retailing banking, as well as increasing capitalization from outside investors and generating domestic confidence.

o

Its nonperforming loans (NLP) have receded drastically and will contribute to its profitability when compared with its 3 closest rivals, Piraeus Bank, Alpha Bank, and EuroBank, who have all booked operating losses in this field. In addition, NGB now controls a quarter of commercial banking in Greece and 25% of total consumer deposits, and has also proceeded to raise around €2.5 billion in capital to reduce the Greece government’s holding stake in the bank. Thus, not only did NBG gain a pro forma Basel III Common Equity Tier 1 ratio (the required equity stake ratio as dictated by Basel III to gauge banks’ capital strength) of 11.7%, it is in a much more flexible position to redeem the preferred shares that the government held. Comparably, the Basel III CET1 ratio was 11% for Piraeus and 9.8% for Eurobank.



NBG’s loan book improvement and strengthened capital ratios alleviate funding pressures

o

The bank’s loan provisions declined by 15% to €362 million while bad loans were reduced in tandem by 32% to €312 million; both statistics will decrease even more as the economy recovers. Likewise, consumer deposits are on an uptrend, and the loan/deposit ratio is up to 93%, signifying that NBG is now in a prime position to increase lending even more. Greek consumers understand that prices were at their lowest and will not decrease any further, so domestic demand will continue to go up and thus receive more loans from banks. Consequently, NBG has more financial freedom and has lessened its dependence on the Eurosystem funding, which is down 29% so far this year. Economists expect that mortgage lending will double in Greece in 2015, and as the nonperforming loans (NLPs) are stabilizing, NBG will be able to hand out more loans, to around €600 million total in 2015.

o

A domestic law in Greece that disallow banks to foreclose property is widely expected to be repealed. Currently, foreclosures in Greece is almost zero. As such, banks will soon be able to seize property of those who are in a position to pay their mortgages but choose not to.



Increased operations in Turkey



NGB has a 94.9% share in one of Turkey’s most prominent banks, Finansbank, which is a “cash cow” for its parent bank and will play a major role in NBG’s operations going forward

o

Although Finnansbank takes in only 4% of NBG’s total deposits, in 2014’s 1^stQuarter, it contributed €63 million to

NBG’s €181 million in net income, approximately 1/3 of the total. More recently, it generated more than €109 million to NBG’s total 3^rdQuarter earnings, which is an increase of 37% from last year. None of NBG’s close competitors have a similar investment in a foreign bank, and Finnansbank was notable in helping NBG emerge through the Greek debt crisis in a better relative position. Finnansbank is also extremely profitable, and its 2^ndQuarter profit increased to €85 million, by almost a third while adding 40% to NBG’s revenue stream. By diversifying its operations and hedging against Europe with its investment in an emerging market, NBG is poised to reap even stronger cash benefits from Finnansbank in the future.



Economic recovery of Greece



As the bank has spent much of the past few years trimming down its balance sheet and ridding itself of toxic loans, the

National Bank of Greece is now ready to start expanding again as the Greek economy pulls out of its recession and

economic reforms paves the way for future growth. While the economy performs better, households save more disposable income into the bank, which consequently feeds into deposits and thus the bank is able to make more loans and boost business.



Recent economic developments suggest that the country is finally poised for sustained progress

o

The government of Greece has been extremely successful in terms of cutting its spending, and thus its deficit over time, and has already regained some confidence in investors. A positive primary balance, when revenues mostly in terms of taxes exceed spending, was recently achieved an entire year ahead of its designated schedule. Interestingly, Greece is officially trading as an “emerging market,” but is backed by a strong currency in the euro. This should accelerate its recovery process further, as would the slowing down in austerity, coupled with increasing net exports and accelerating consumption and investment from common households.



As tourism approximately comprises 19% of Greece’s aggregate GDP, the huge increase in travelers is bound to contribute

to the nation’s growth.

o

Total tourism adds up to 19 million arrivals, not including 2.2 million from cruising, which is almost 2x the domestic Greek population, and revenues in the two quarters of 2014 have swelled by around 27%, especially from tourists originating in the US and prosperous European countries such as Britain, France, Italy, and Germany. Airline bookings have increased by a quarter, and air traffic on popular islands have especially escalated.Even more encouragingly, tourists have focused more on less popular destinations. As a result, small villages and more isolated locations have earned a steady revenue stream, further igniting local economies.



Recent actions of Mario Draghi and the European Central Bank



In mid-November, the European Central Bank (ECB) decided to increase available loans to Greek banks, and thus give more

liquidity to Greece’s main lenders and spur NBG’s already-rising lending system

o

This act by the ECB will signify that European banks can better insure against toxic loans in the future and reduce its risk profile. As the central bank will seek to secure and cover cheap loans in Europe, NBG is able to exchange some of their assets for collateral, while increasing their overall loan activity. Subsequently, due to the improved economic climate, this will lead to NBG being less reliant on the central bank for borrowing



Chief of the ECB, Mario Draghi, announced recently that the central bank will look to counter deflation, and hinted that it is

likely the ECB will resort to full-scale quantitative easing(QE) in order to spur inflation.

o

Draghi; “The Governing Council has decided to intensify preparatory work related to outright purchases in the ABS market to enhance the functioning of the monetary policy transmission mechanism.” The ECB is planning to buy large amounts of asset-backed securities with underlying loans made to small and medium businesses in Europe. This concept is crucial; as the ECB purchases large-scale assets in the form of pools of loans, banks such as NBG will automatically lend out more loans to consumers. As the ECB is guaranteeing such loans from default, more lending on the part of banks will directly benefit small and medium-sized businesses. Such a mechanism will ensure that business activities trickle back up and lead to more deposits in NBG, which will lead to an even larger increase in its operations. The QE would also avoid the buying of government bonds since dispensing huge amounts of cash in the dangerously low yields of Eurozone bonds would not achieve much.



Mario Draghi is also resurrecting the Long-Term Refinancing Operation (LTRO), a funding program during the Eurozone debt

crisis for banks. The targeted LTRO will push liquidity towards non-real-estate private sector, notably small and medium-

sized businesses

o

As larger companies have more readily access to bond markets internationally, smaller European businesses were desperately short of credit and bank loans for the past few years, and LTRO will ensure more capital to such previously disadvantaged companies. LTRO will prevent banks from drastically increasing their reserve ratios and monopolizing capital rather than making loans in difficult economic conditions. However, LTRO will help stimulate NBG’s businesses by channeling capital through the economy in a similar fashion through loaning to companies less in size. Likewise, as NBG makes more loans to small and medium-sized businesses that depend on bank lending, deposits will increase and lead to more loans. NBG has trimmed its balance sheet the past few years, but due to LTRO, the bank is now ready to restructure increased operations and raise capital ratios, which is compatible with increased loan activity.

Misperception

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Misperception 1; The Greek economy is not growing, and is a rather poor state.

Correction; Positive macro trends are encouraging and likely to be sustained over time



o

Primary surplus is projected to reach 3% of GDP next year, and public debt is also expected to decrease to around 168% of GDP, from 176% this year.

o

Experts project the Greek economy, ironically the fastest growing economy in the Euro-zone currently, to expand by 2.9% in the next year. In addition, the economy is forecasted to achieve a 3.8% growth in GDP for the year 2016, encouraging boosts given its 6-year recession.



Misperception 2; All Greek banks are in similar positions to rebound in future lending.



Correction; NBG is in reality the top pick to recover ahead of its rivals, primarily due to the decrease in its NPL

oo

NBG has considerably cut its ratio of non-performing loans (NPL) after the crisis. While Piraeus, Eurobank, and Alpha Bank currently hole NPL ratios of 37.9, 30.9, and 33.3, respectively, NBG has a NPL ratio of only 28.4. Additionally, Finansbank’s NPL ratio of 6% puts its parent bank in the pole position to increase its future loan activity. NBG also has the lowest loan loss reserves (LLR) among its close competitors. LLRs are measures that help account for loan losses, usually due to nonpayments or defaults, and are related to NPL ratios through cumulative loan provisions. Although all 4 major Greek banks have been experiencing falling LLRs recently as the nation recovers, NBG’s 12.9% is clearly the lowest when compared to Piraeus (19.2%), Eurobank (15.5%), and Alpha Bank (18.6%). Thus, it will be interesting to see how much better NBG performs in loan activity within the next 4 quarters, relatively speaking.



Misperception 3; Recent rounds of stress tests on European banks conducted by the ECB shows that NBG is still short of capital.



Correction; The stress tests did not factor in the effects of NBG’s restructuring plans made at the end of 2013, and the bank is actually in a much better condition than previously anticipated.

o

The stress tests essentially simulate how European banks would fare in cases of emergency, and whether certain banks would be troubled due to capital deficiencies or require bailouts. 13 of the 250 European banks that the ECB surveyed

failed the tests, while only 25 were deemed to be short of sufficient capital. Some analysts take this as a sign that NBG is still somewhat distressed. However, many did not consider the profitability of Finansbank, essentially a cash cow for NBG was part of their recent major restructuring plan, which banks like Piraeus and Eurobank lack. Moreover, although reserve ratios may lower to facilitate more lending and as the economy recovers, there will inevitably be a much larger amount of deposits in NBG, and the consumer savings will only increase with each year. Thus, when taking into account recent phenomena not originally modeled in the stress tests, NBG is in an enviable and should grow above its peer banks.

VAR- View the exhibits How It Plays Out



Greece’s potential for a faster economic recovery is inherently being undervalued, which translates into less expected lending and overall banking activities across the country.



Finansbank will continue to contribute handsome profits for NBG The European Central Bank paved the way for a restructured NBG to take advantage of political decisions and further grow its businesses.



As Greece’s economic recovery accelerates, loan activity will increase even more to expand NBG’s businesses, and the consistent stream of cash from Finansbank and recent ECB measures will all combine to give NBG a strategic advantage that should translate in an upside in its stock price in the next 4-6 quarters.

Risks / What Signs Would Indicate We Are Wrong?



The political stability of Greece is crucial in ensuring the stable economic recovery lasts. Currently, the coalition government with Antonis Samaras at the head is relatively safe, and may not see any potentially dangerous opposition. However, if the leftwing Syriza party seizes control, this could be destabilizing, as the Syriza party opposes the action of Greece’s lenders, notably Germany. Thus, foreign investment may decline and slow economic recovery



If European monetary policy appears to become more segregated and various countries become more inclined to implement its own decisions, this could signal an eventual breakup of the Eurozone. Although this is highly unlikely as of now, Greece would be better off with the backing of a combined European currency.



If the Greek mortgage market does not expand the next year, this may actually clog up lending and dry up liquidity, as well. Greece’s economy needs to grow with each year, and in addition, quarterly progress will be pivotal. As the country pulls out of recession, the new budget needs to be adhered to, and significant deviations from the new budget devised in 2012, should such occurrences happen, may be a worrying trend.

Signposts / Follow-Up

Important Company Financial Data



Observe further what the European Central Bank decides Price (Nov 30, 2014): to do in the near future with regards to QE P/E (ttm):
$2.33 3.10



If the ECB starts to combine fiscal policies of individual EPS (ttm): countries in the Eurozone, this could be a sign that the P/E (forward) ECB is further integrating the economies in the region and 52-Week Range:
0.75 0.8 $2.04 - $6.37 8.2 Billion 4.3 million

could actually boost the Euro currency

Market Cap:



The Greek economy should accelerate in growth, and GDP Average Volume should ideally increase around 1.5-3% the next few quarters

Conclusion

Monitor that fiscal and monetary policies aren’t tightening too rapidly, if at all. Check to make sure that the ECB’s QE help and prices in Greece do not keep falling.
NBG is in a position to expand its businesses, especially in lending. As a relatively cheap stock, NBG and its many growth qualities are overlooked and misperceived by many. The combination of ECB actions and Greek economic recovery will help propel NBG’s stock to rise in the next few quarters. As the US Federal Reserve raises interest rates in 2015, NBG can be a stock to diversify and also hedge the MII portfolio.

VAR Exhibit

Analysts

Main points

Matthew Attwood, Financial News
Greek banks are becoming “more viable institutions” that will be “more attractive to the market.” However, even though one of NBG’s main competitors, Piraeus, has also increased lending significantly, Piraeus’ “bad loan book would have most people reaching for the smelling salt” When Greece’s first bank bond sale since 2009 occurred earlier in May 2014, a corporate bond professional stated “I don't think they could have brought this deal a year ago, but now the situation in the periphery has greatly improved. We’re seeing huge order books for highyield deals.”
Volker Marnet-Islinger, Deka Investment

Greek bonds have earned 18 percent this year, the most among 15 euro-area debt markets.

“NBG controls 25% of retail banking in Greece and 25% of deposits.”

Anthimos K.

Thomopoulos, Piraeus Bank Board of Directors

“But NBG has other strengths as well. Finansbank (FINBN.Turkey), which is 99%-owned by NBG, is a major contributor. It is a second-tier bank in Turkey, accounting for 4% of deposits, but it is a cash cow for its Greek parent. NBG earned net income of €181 million in the first quarter of 2014, and Finansbank accounted for €63 million, or more than one-third of the total. This represents a creditable achievement with emerging markets out of favor and against a backdrop of political uncertainty and higher interest rates in Turkey.”

“Deposits are rising and its loan-to-deposit ratio is 93%, reducing its reliance on Eurosystem funding. NBG looks to be in a strong position.”

Jason Karaian

“On a seasonally adjusted basis, Greece’s GDP rose 0.7% quarter-on-quarter. According to figures from the Hellenic Statistical Authority, or Elstat, gross domestic product in the third quarter rose 1.7% from a year earlier, thanks in large measure to a record summer tourism season. Economists had forecast between 1% and 1.4% growth compared with a year ago. This confirms that a promised recovery is now under way.”

Jonathan Buck, Barron’s Financial

“It wrote down billions of euros on Greek government bonds after the country's emergency bailout by multinational lenders, and it was recapitalized last year.”

“NBG raised enough money from private investors to avoid complete nationalization, but a shortfall was plugged last month when it raised 2.5 billion euros ($3.38 billion) through the sale of new ordinary shares. The sale was carried out at a 15% discount to the market price, and reduced the government stake from 84% to 57%. Following the equity issue, NBG's pro forma Basel III Common Equity Tier 1 ratio as of Dec. 31 would have been 11.7%, a very respectable level and on a par with some of Europe's biggest banks.”

“The cash also gives the bank the flexibility to redeem preference shares held by the government.”

Manos Giakoumis, MacroPolis Research Analyst

“Setting asset quality aside, we would expect deleveraging to continue for a couple of quarters and positive credit growth to resume as of Q4 2014 or Q1 2015. Deposit re-pricing, particularly regarding lower time deposit rates, will be the key driver for a rebound in the NII within the year.” “On the cost front, synergies stemming from the recent acquisitions will continue to drive expenses down. The implementation of voluntary retirement schemes will also result in further cost containment, which is expected to continue showing a double-digit drop in the coming quarters.”

Although these positive trends are expected to further improve the pre-provision income throughout the year, the level of loan impairments is still high (albeit exhibiting a double-digit decline) and will continue to erode profitability this year. Current consensus estimates point to a loss-making year for all banks except National, while a recovery of bottom-line profitability is expected as of 2015.

Charles Sizemore, PersonalFinance
“Draghi’s plan is to make up to €400 billion available via targeted LTRO starting in September. We’re talking about €400 billion being injected into real-economy businesses, not government or mortgage bonds. Banks would be able to borrow from the ECB for four years at an annual rate of just 0.25%. The only problem I see here is one of image. Banks would be foolish not to take advantage of targeted LTRO; it’s virtually free money that can be used to make profitable loans.”

“The ECB has been quiet as to the size of its coming quantitative easing program, but it’s not unreasonable to think that, between targeted LTRO and the new QE, the ECB will be throwing upwards of a trillion euros into the lending market for small and medium-sized businesses.”

“I expect European stocks — which, as I said, are significantly cheaper than American stocks — to enjoy a monster rally over the next one to three years. But within the universe of European stocks, I consider the banking sector to be the most attractive and the most directly leveraged to the ECB’s plans.”

Page of Exhibit(s)
Exhibit 1; Finansbank has seen accelerated growth in both revenue and earnings contribution towards NBG
Exhibit 2; The percentage of NBG’snet income that Finansbank inputs is indicative of how important the Turkish bank is to NBG’s overall operations, and is a strategic advantage in terms of cash flow that NBG’s competitors lack.

Exhibit 3; A higher Basel III Common Equity Tier 1 Ratio indicates that National Bank of Greece is in a stronger capital position and will be able to increase their lending activities on a larger scale.

Exhibit 4; (Source; Macropolis) NBG is in the best position, relative to its closest competitors, in terms of bad loans held, and its low NPL ratio should quicken its recovery in domestic lending.