Wednesday, June 8, 2011

NBG: For the faint of heart?

Is National Bank of Greece (NBG) the perfect stock? Does NBG trade for ridiculously cheap multiples, have a history of growth and more importantly, potential for exponential growth? Yes. 

If you're still reading I can assume now you probably have a little hair on your chest, are probably a little adventurous and don't mind losing significant sleep at night. 

Before I make any recommendations, lets look at some of the pros and cons with this pick:

Pros: (Q1 2011)
- P/E of 12
- NBG is the largest commercial bank in Greece. Founded in 1841, the bank has been able to withstand WWI, the Nazis in WWII and the Greek Civil War. The ECB tying the hands of Greek macro-economic  policy cannot be worse than the Nazis, right?
- Finansbank, NBS's Turkish arm, grew at 151million Euros, +28% yoy.
- Core earnings within Greece were up 238million Euros.
- Operating costs down 8% yoy.
- For the past few months the bank has continually decreased borrowing from the ECB.

- The government's austerity measures and actions continue to hamper growth.
- The bank holds a lot of Greek debt (not as much as some other banks) that is more junk than risk. 
- It is Greece, don't expect a smooth ride owning this stock.
- Total banking revenue down 3% yoy.


NBG is not normally for the risk-adverse investor, but the chances for profit far outweigh the risks. The bank's Turkish banking branch, Finansbank, is growing as a quite robust rate. If Greece were to restructure its debt, NBG holds a growing valuable asset in Finansbank that can be sold off, and should ease the fears of some investors. NBG is also priced very cheaply; the forward P/E hovers around 7 with the P/E at 12. A potential takeover/merger of Greek Alpha Bank (ALBKY) appears to be in the horizon and would strengthen NBG and offer shareholders a chance for substantial gains. 

Much of the fears hover around the fact that Greece could default or restructure its debt due to unsuccessful austerity measures and contracting GDP growth. However, default is out of the question. Any default would send world markets into a tailspin that could create another 2008 scenario. Any restructuring would also hurt holders of Greek debt, in particular German and French banks. 

As it sits right now, the stock experiences continuous downgrades and gets beaten down in the news on a daily basis. The negatives (except for absolute default or restructuring) are baked into the price of the stock; expecting the stock to gain significantly on any positive news is not out of the question. 

For my two cents, I expect the stock to trade in a tight range for the time being. A nice entry point would be around $1.35. For the time being, one can expect the stock to trade in a fairly confined 10-12% range either way on any news that comes out of Europe. NBG has managed to stay profitable in arguably the worst economic times Greece has ever experienced and Finansbank is looking more and more like a great rainy day asset. The bank also continues to diversify and has many operations overseas in Turkey and SE Europe.

Once the whole debt crisis gets resolved (and much of that will have to do with making the Greek economy competitive and not on bailouts) and a real solution emerges, then the stock  should see a strong rise. The stock has risen significantly on speculation of future positive news; actual positive news could send the stock higher permanently. A long term price target for this stock can easily, and more than realistically, be valued at $8. In the short term, a $2-4 target price is more than achievable if a resolution is produced or more funding is given to Greece. Buying this stock, forgetting about it and never looking at it could produce massive earnings in the future. 

I remain bullish and long on NBG.

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