National Bank Of Greece: Liquidity, Not Capital, Is The Main Concern
- Most companies go bankrupt not because of operational losses, but because they run out of liquidity.
- With deposits leaving the banking system from the begging of the year, Greek banks have had to resort to ELA funding from the Bank of Greece.
- However, if the confrontation between the Greek government and the EU is not resolved, the ECB might cut off liquidity to Greek banks, with might leave them worthless.
For the longest time I can remember, I have been bearish on National Bank of Greece (NYSE:NBG ). On my last NBG article (please consider: National Bank Of Greece: Be Careful Not To Get Vaporized Again ), I warned that investors are most likely to get obliviated once more if they treat NBG as a long term investment.
The main reason for NBG's weakness has to do with a reason I have told you before. That is, the bank probably needs more capital and at these levels, any additional capital increase will dilute current shareholders to oblivion once again.
NBG data by YCharts
While not exactly clear on the above chart, in July of 2009 NBG had about 57 million shares outstanding. Today the company has 3.53 billion shares outstanding, or an increase of about 62 times in the total number of shares outstanding. If that is not being blown to dilution oblivion, I don't know what is.
It is not exactly clear how much more capital NBG might need. Officially, and if you want to believe the ECB, Greek banks are just fine. However more than 30 billion euros of bad loans are still not accounted for. And in my book, NBG and the entire banking complex including Alpha Bank A.E. (OTCPK:ALBKY ), EFG Eurobank (OTCPK:EGFEY ), and Bank of Piraeus (OTC:BPIRF ) will probably end up needing more capital. And any way one looks at it, it will probably mean more dilution down the road.
However, capital adequacy issues aside, most financial institutions do not go under because of capital or operational losses, but because of liquidity issues. Meaning, for some reason the market loses faith and a bank run occurs.
As is well known, Greek banks have had to resort to the Bank of Greece for emergency liquidity under the ELA mechanism. Because even if we are not seeing it, there has been a bank run on all Greek banks for some time now. About 25 billion euros YTD have left the Greek banking system and counting.
According to JP Morgan via Reuters. deposit outflows from Greek banks were around 3 billion euros ahead of last Friday's last-minute aid extension agreement with Greece's creditors. That's a 50% increase in the pace of outflows from the previous week.
And why is this so important? Because if this pace continues, Greek banks (NBG included) will probably run out of collateral for new loans in about 8 weeks from now, instead of 14 weeks as previously estimated by JP Morgan.
JP Morgan estimates that a maximum of 108 billion euros of financing is available to Greek banks by the ECB and the Bank of Greece. Up to now JP Morgan estimates that 85 billion euros have already been used, leaving them with 23 billion euros if needed.
The question is, what might make depositors continue to lose faith in the Greek banking system, thus continuing the bank run
and making these banks completely worthless? The answer is simple, Greece currently has a left wing government (the first left wing government to be voted in since WWII in Europe) and they are doing everything possible to make a very difficult situation even worse.
For example the new government refuses (or says so anyway) to accept any new money from the EU to repay older loans, but at the same time the government is running out of money.
Unless banks are able to draw more money via ELA to buy more Greek government short term notes, chances are the Greek government will not be able to pay state employees and retirement benefits soon. And guess what will happen if we reach that point?
My guess is that everyone will stop paying the government and the government will stop paying everyone also. People will rush to get money at the ATM machine, but there will be no money available. Capital controls will probably be introduced and elections will probably happen again, and the entire economy will be at a stand-still. And if this happens, it's anyone's guess what else might happen and how detrimental it will be to the Greek economy, and yes, to the banking system also.
While we are not there yet, and I hope I do not see the day, owners of NBG shares have to face the possibility that the above scenario might happen. In which case, I think that there will zero value left for shareholders.
So far the ECB has provided Greece with funding equivalent to 68% of Greek GDP (as per Maria Draghi's statement on March 5th). In addition, the ECB president said that the ECB is a rule based organization, that can accept bank collateral as long as the bank itself is solvent. And while he also stated that Greek banks are solvent, bad communications from the Greek government that might increase volatility, will destroy collateral said Mario Draghi. And the rhetoric from the Greek government does exactly that on a daily basis (my opinion).
The bottom line is that I continue to think that Greek banks and NBG hold little or no value for investors. Not just because the NPL issue in Greece is still yet not resolved, but also because of the toxic political liquidity that is ongoing. In addition, the fact that the entire banking system can at anytime be cut off from the ECB system, is just too much of a risk for me to want to be a shareholder of NBG.
Because like I said, most companies don't go out of business because of operational losses, but because they run out of liquidity. And in the case of NBG and the entire Greek banking complex, this might just happen if the current government continues on its present course.
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