Eurobank Addendum: Merger Amongst Grivalia
November 28, 2018
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The really adjacent twenty-four hours after the publication of my recent slice on Eurobank, the society announced a merger with Greek existent estate investment society Grivalia. The merger volition last destructive to Eurobank's per portion value long term (by virtually 30% inward my assessment), but the bargain does get got some benefits, including reducing downside tail risks (regulators forcing some other recapitalisation). This arguably makes a larger seat right away to a greater extent than feasible, equally the degree of upside is soundless material. The stock has so far rallied virtually 10% to €0.50.
I believe it is probable that Fairfax had a role to play inward technology scientific discipline this merger, equally the merger is to a greater extent than favourable to Grivalia shareholders than it is to Eurobank shareholders. Fairfax owns 18.23% of Eurobank in addition to 51.43% of Grivalia, in addition to volition emerge with 32.93% of the combined entity. Fairfax volition hence relish non only the benefits of the merger, but equally good an increased stake inward the cheaper entity.
The bargain (including the associated NPE securitization plan) appears to confirm a lot of the key arguments made inward my master article, including that the degree of underprovisioning on Eurobank's SME/corporate mass was probable virtually €2bn, but the advent of the merger suggests the degree of trace per unit of measurement area European government are bringing to touching Greek banks to farther trim back on-balance-sheet bad debt (in excess of already-agreed, aggressive targets) may good last greater than I had estimated. This may get got made Eurobank experience compelled to accelerate its NPE reduction plan. To the extent this is true, field materially dilutive of some of the long term upside, the bargain volition get got the do goodness of reducing the peril of farther upper-case missive of the alphabet raisings, in addition to probable equally good bringing frontward a rerating inward the shares to 2019-20.
The deal
The bargain volition encounter Grivalia's about €1bn of (predominately) Greek belongings assets injected into Eurobank, inward central for the issuance of Eurobank shares which volition grant Grivalia shareholders a 40% stake inward the combined entity. Eurobank was trading at 0.2x book, in addition to Grivalia at 0.8x mass (adjusted for the €54m Grivalia volition pay out pre-closure), so the bargain volition dilute Eurobank's per-share mass value past times virtually 30% from €2.24 to €1.56, in addition to effect inward the combined grouping trading at 0.3x book. In addition, pre-provision operating lucre per portion volition last diluted from virtually €0.45 per portion to exactly €0.28 per share, due to the relatively depression degree of Grivalia earnings accretion (albeit from high quality, stable rental income streams).
The role of the bargain appears two-fold. Firstly, the injection of belongings assets volition boost Eurobank's upper-case missive of the alphabet past times virtually €1bn, in addition to thus render it with room to accelerate the removal of bad loans from its ease sheet. Concurrent with the deal, Eurobank intends to securitize in addition to deconsolidate €7bn of the company's worst loans, in addition to Eurobank estimates that this volition require a hitting to upper-case missive of the alphabet of €1.1-1.4bn - i.e. about on par with the degree of upper-case missive of the alphabet injected past times Grivalia. However, it is anticipated that this volition allow for a reduction inward the company's NPE ratio from 39% to 15% past times the halt of 2019 (two years before than the originally agreed-upon 2021).
This €1bn hitting to upper-case missive of the alphabet seems consistent with my prior back-of-the-envelope jurist of underprovisioning of some €2bn (note Eurobank volition generate some other €1bn inward PPoV betwixt right away in addition to 2019 year-end, which volition equally good render additional upper-case missive of the alphabet to facilitate NPE resolution). The remaining 15% NPEs past times 2019 year-end volition last the best quality, inward terms of collateral coverage in addition to recovery prospects, in addition to volition equally good already last good provisioned, so the banking concern volition last good positioned to study robust in addition to sustainable profitability from 2020 onwards.
However, the key number is that Eurobank is giving away 40% of the society only to accelerate these disposals past times 1-2 years. Generating nearly €1bn of upper-case missive of the alphabet internally from PPoV per year, a similar upper-case missive of the alphabet neutral practise could get got been undertaken to a greater extent than piece of cake over 2-3 years without diluting shareholders, inward accordance with its prior computer program to trim back NPEs to 15% past times 2021. In addition, the contorted securitization construction announced equally role of the bargain is deliberately designed to allow shareholders to retain pregnant upside to whatever recoveries on the disposed NPEs (including distributing several tranches straight to shareholders), which suggests that Eurobank doesn't genuinely desire to completely rid itself of the loans. Instead, Eurobank's actions seem to reverberate a rush to improve optics past times removing bad debts from its ease canvas equally before long equally possible.
I would infer from this that the banking concern is nether trace per unit of measurement area from Brussels to resolve bad debts fifty-fifty to a greater extent than rapidly than the aggressive timeframes previously agreed on (NPE reduction to 15% past times 2021). As discussed inward my prior article, this trace per unit of measurement area from Brussels is solely counterproductive in addition to unnecessary. It does niggling to assist the Greek economy, in addition to is only placing additional strains on the banking organization in addition to impairing confidence, at a fourth dimension when the economic scheme in addition to banks are already healing. Nevertheless, this is the basis inward which Eurobank lives, in addition to the bargain volition trim back the probability that the society volition last forced to heighten additional upper-case missive of the alphabet inward the future, equally an NPE ratio of exactly 15% volition effect inward trace per unit of measurement area from the Brussel's kicking beingness eased from Eurobank's neck.
Secondly, the merger volition convey inward belongings administration expertise. Grivalia has been busily acquiring lineament Greek belongings assets at high-single-digit yields, fifty-fifty at bottom-of-the-cycle rents in addition to occupancy levels. With Eurobank laid to repossess a lot of existent estate collateral inward coming years, having both the upper-case missive of the alphabet in addition to expertise to retain some of these assets in addition to maximise their recovery value, rather than only liquidating them at burn downwardly sale prices, volition last worthwhile. Grivalia is in all likelihood (conservatively) worth 1.0-1.5x book, in addition to was trading at 0.8x, so merging with Grivalia is definitely a far superior choice to simply raising €1.0bn inward fresh capital, both inward terms of reducing the amount of value-dilution, in addition to equally good bringing inward worthwhile expertise/opportunities for synergies.
How mightiness things expression inward 2020?
So assuming the €7bn NPE disposal goes according to plan, how mightiness Eurobank expression heading into 2020? As noted, pro forma for the deal, pre-provision operating lucre per portion is right away €0.28, in addition to mass value virtually €1.50 per share. A €1.1-1.4bn hitting to upper-case missive of the alphabet volition take away to last taken inward 2019 amongst the €7bn NPE disposal, which volition last partly offset past times pro-forma profits of €250-300m. Let's assume a €1bn cyberspace hitting out to the halt of 2019. This volition encounter teach out (tangible) mass value autumn to €1.30 per portion (or virtually €4.8bn, with 3.7bn diluted shares outstanding).
However, the company's NPE ratio would in addition to then last 15% (down from 39%), in addition to they would get got ejected a lot of their worst, underprovisioned legacy loans from their ease sheet, in addition to the bulk of their remaining NPEs volition last relatively good provisioned & covered past times collateral, in addition to relish amend recovery prospects.
The society has said it expects to study a render on tangible equity of at to the lowest degree 10% from 2020, equally cost of peril normalises. This implies at to the lowest degree €0.13 per share, based on FY19e NTA of €1.30 per share. This appears realistic. With PPoV per portion of €0.28, normalised provisions of order €300m, or €0.08 per portion (a cost of peril run-rate of virtually 100bp of performing loans), in addition to a taxation charge per unit of measurement of 29%, EPS would compute at €0.14 per share. Let's teach with €0.14. At the stock's electrical current portion cost of €0.50, that represents virtually 3.5x earnings.
However, importantly, Eurobank has a full of €4.8bn of deferred taxation assets (about €4.0bn pertaining to Greece), the bulk of which either get got no expiry, or really long term amortisations. With FY20e pre-tax lucre of €740m, annual taxes owing would last €215m per annum (at 29%). At this run-rate, the society would non get got to pay cash taxes for about 2 decades. Consequently, the stock's pre-tax P/E multiple is arguably to a greater extent than relevant, in addition to at €0.20 per portion inward FY20e pre-tax earnings (assuming, of course, everything goes according to plan), the stock would last on a multiple of exactly 2.5x.
Provided Greece's economic scheme continues to heal, in addition to the SPV asset disposal programme proceeds according to plan, at that spot is a goodness conduct chances that this stock trades towards €1.50 over the adjacent 12-24 months, inward my see - triple from electrical current levels - or to virtually 7.5x pre-tax earnings, in addition to a small-scale premium to tangible mass value. Furthermore, Eurobank volition last really good placed to add together value to the grouping beyond that point, equally it volition last the start well-capitalised banking grouping to emerge in addition to last inward a seat to teach distressed assets (e.g. repossessed property), equally good equally teach the offshore subsidiaries & other non-core assets of other banks soundless retrenching, in addition to hence proceed to construct out its regional presence (as it did past times acquiring Piraeus' Bulgarian subsidiary recently, on the cheap). It volition equally good last good placed to extend loans to a recovering Greek economy.
Upside has however been reduced past times some 30% compared to the pre-merger situation. However, with risks equally good reduced the stock remains attractive at €0.50 inward my opinion.
LT3000
DISCLAIMER: The inward a higher house is for informational/entertainment purposes only, in addition to should non last construed equally a recommendation to merchandise inward securities mentioned. While provided inward goodness faith, the writer provides no warranty equally to the accuracy of the inward a higher house analysis. The writer owns shares inward Eurobank in addition to may merchandise the seat or purchase to a greater extent than shares at whatever fourth dimension without notice.
I believe it is probable that Fairfax had a role to play inward technology scientific discipline this merger, equally the merger is to a greater extent than favourable to Grivalia shareholders than it is to Eurobank shareholders. Fairfax owns 18.23% of Eurobank in addition to 51.43% of Grivalia, in addition to volition emerge with 32.93% of the combined entity. Fairfax volition hence relish non only the benefits of the merger, but equally good an increased stake inward the cheaper entity.
The bargain (including the associated NPE securitization plan) appears to confirm a lot of the key arguments made inward my master article, including that the degree of underprovisioning on Eurobank's SME/corporate mass was probable virtually €2bn, but the advent of the merger suggests the degree of trace per unit of measurement area European government are bringing to touching Greek banks to farther trim back on-balance-sheet bad debt (in excess of already-agreed, aggressive targets) may good last greater than I had estimated. This may get got made Eurobank experience compelled to accelerate its NPE reduction plan. To the extent this is true, field materially dilutive of some of the long term upside, the bargain volition get got the do goodness of reducing the peril of farther upper-case missive of the alphabet raisings, in addition to probable equally good bringing frontward a rerating inward the shares to 2019-20.
The deal
The bargain volition encounter Grivalia's about €1bn of (predominately) Greek belongings assets injected into Eurobank, inward central for the issuance of Eurobank shares which volition grant Grivalia shareholders a 40% stake inward the combined entity. Eurobank was trading at 0.2x book, in addition to Grivalia at 0.8x mass (adjusted for the €54m Grivalia volition pay out pre-closure), so the bargain volition dilute Eurobank's per-share mass value past times virtually 30% from €2.24 to €1.56, in addition to effect inward the combined grouping trading at 0.3x book. In addition, pre-provision operating lucre per portion volition last diluted from virtually €0.45 per portion to exactly €0.28 per share, due to the relatively depression degree of Grivalia earnings accretion (albeit from high quality, stable rental income streams).
The role of the bargain appears two-fold. Firstly, the injection of belongings assets volition boost Eurobank's upper-case missive of the alphabet past times virtually €1bn, in addition to thus render it with room to accelerate the removal of bad loans from its ease sheet. Concurrent with the deal, Eurobank intends to securitize in addition to deconsolidate €7bn of the company's worst loans, in addition to Eurobank estimates that this volition require a hitting to upper-case missive of the alphabet of €1.1-1.4bn - i.e. about on par with the degree of upper-case missive of the alphabet injected past times Grivalia. However, it is anticipated that this volition allow for a reduction inward the company's NPE ratio from 39% to 15% past times the halt of 2019 (two years before than the originally agreed-upon 2021).
This €1bn hitting to upper-case missive of the alphabet seems consistent with my prior back-of-the-envelope jurist of underprovisioning of some €2bn (note Eurobank volition generate some other €1bn inward PPoV betwixt right away in addition to 2019 year-end, which volition equally good render additional upper-case missive of the alphabet to facilitate NPE resolution). The remaining 15% NPEs past times 2019 year-end volition last the best quality, inward terms of collateral coverage in addition to recovery prospects, in addition to volition equally good already last good provisioned, so the banking concern volition last good positioned to study robust in addition to sustainable profitability from 2020 onwards.
However, the key number is that Eurobank is giving away 40% of the society only to accelerate these disposals past times 1-2 years. Generating nearly €1bn of upper-case missive of the alphabet internally from PPoV per year, a similar upper-case missive of the alphabet neutral practise could get got been undertaken to a greater extent than piece of cake over 2-3 years without diluting shareholders, inward accordance with its prior computer program to trim back NPEs to 15% past times 2021. In addition, the contorted securitization construction announced equally role of the bargain is deliberately designed to allow shareholders to retain pregnant upside to whatever recoveries on the disposed NPEs (including distributing several tranches straight to shareholders), which suggests that Eurobank doesn't genuinely desire to completely rid itself of the loans. Instead, Eurobank's actions seem to reverberate a rush to improve optics past times removing bad debts from its ease canvas equally before long equally possible.
I would infer from this that the banking concern is nether trace per unit of measurement area from Brussels to resolve bad debts fifty-fifty to a greater extent than rapidly than the aggressive timeframes previously agreed on (NPE reduction to 15% past times 2021). As discussed inward my prior article, this trace per unit of measurement area from Brussels is solely counterproductive in addition to unnecessary. It does niggling to assist the Greek economy, in addition to is only placing additional strains on the banking organization in addition to impairing confidence, at a fourth dimension when the economic scheme in addition to banks are already healing. Nevertheless, this is the basis inward which Eurobank lives, in addition to the bargain volition trim back the probability that the society volition last forced to heighten additional upper-case missive of the alphabet inward the future, equally an NPE ratio of exactly 15% volition effect inward trace per unit of measurement area from the Brussel's kicking beingness eased from Eurobank's neck.
Secondly, the merger volition convey inward belongings administration expertise. Grivalia has been busily acquiring lineament Greek belongings assets at high-single-digit yields, fifty-fifty at bottom-of-the-cycle rents in addition to occupancy levels. With Eurobank laid to repossess a lot of existent estate collateral inward coming years, having both the upper-case missive of the alphabet in addition to expertise to retain some of these assets in addition to maximise their recovery value, rather than only liquidating them at burn downwardly sale prices, volition last worthwhile. Grivalia is in all likelihood (conservatively) worth 1.0-1.5x book, in addition to was trading at 0.8x, so merging with Grivalia is definitely a far superior choice to simply raising €1.0bn inward fresh capital, both inward terms of reducing the amount of value-dilution, in addition to equally good bringing inward worthwhile expertise/opportunities for synergies.
How mightiness things expression inward 2020?
So assuming the €7bn NPE disposal goes according to plan, how mightiness Eurobank expression heading into 2020? As noted, pro forma for the deal, pre-provision operating lucre per portion is right away €0.28, in addition to mass value virtually €1.50 per share. A €1.1-1.4bn hitting to upper-case missive of the alphabet volition take away to last taken inward 2019 amongst the €7bn NPE disposal, which volition last partly offset past times pro-forma profits of €250-300m. Let's assume a €1bn cyberspace hitting out to the halt of 2019. This volition encounter teach out (tangible) mass value autumn to €1.30 per portion (or virtually €4.8bn, with 3.7bn diluted shares outstanding).
However, the company's NPE ratio would in addition to then last 15% (down from 39%), in addition to they would get got ejected a lot of their worst, underprovisioned legacy loans from their ease sheet, in addition to the bulk of their remaining NPEs volition last relatively good provisioned & covered past times collateral, in addition to relish amend recovery prospects.
The society has said it expects to study a render on tangible equity of at to the lowest degree 10% from 2020, equally cost of peril normalises. This implies at to the lowest degree €0.13 per share, based on FY19e NTA of €1.30 per share. This appears realistic. With PPoV per portion of €0.28, normalised provisions of order €300m, or €0.08 per portion (a cost of peril run-rate of virtually 100bp of performing loans), in addition to a taxation charge per unit of measurement of 29%, EPS would compute at €0.14 per share. Let's teach with €0.14. At the stock's electrical current portion cost of €0.50, that represents virtually 3.5x earnings.
However, importantly, Eurobank has a full of €4.8bn of deferred taxation assets (about €4.0bn pertaining to Greece), the bulk of which either get got no expiry, or really long term amortisations. With FY20e pre-tax lucre of €740m, annual taxes owing would last €215m per annum (at 29%). At this run-rate, the society would non get got to pay cash taxes for about 2 decades. Consequently, the stock's pre-tax P/E multiple is arguably to a greater extent than relevant, in addition to at €0.20 per portion inward FY20e pre-tax earnings (assuming, of course, everything goes according to plan), the stock would last on a multiple of exactly 2.5x.
Provided Greece's economic scheme continues to heal, in addition to the SPV asset disposal programme proceeds according to plan, at that spot is a goodness conduct chances that this stock trades towards €1.50 over the adjacent 12-24 months, inward my see - triple from electrical current levels - or to virtually 7.5x pre-tax earnings, in addition to a small-scale premium to tangible mass value. Furthermore, Eurobank volition last really good placed to add together value to the grouping beyond that point, equally it volition last the start well-capitalised banking grouping to emerge in addition to last inward a seat to teach distressed assets (e.g. repossessed property), equally good equally teach the offshore subsidiaries & other non-core assets of other banks soundless retrenching, in addition to hence proceed to construct out its regional presence (as it did past times acquiring Piraeus' Bulgarian subsidiary recently, on the cheap). It volition equally good last good placed to extend loans to a recovering Greek economy.
Upside has however been reduced past times some 30% compared to the pre-merger situation. However, with risks equally good reduced the stock remains attractive at €0.50 inward my opinion.
LT3000
DISCLAIMER: The inward a higher house is for informational/entertainment purposes only, in addition to should non last construed equally a recommendation to merchandise inward securities mentioned. While provided inward goodness faith, the writer provides no warranty equally to the accuracy of the inward a higher house analysis. The writer owns shares inward Eurobank in addition to may merchandise the seat or purchase to a greater extent than shares at whatever fourth dimension without notice.