Stories, Greek Myths, Together With Eurobank
November 26, 2018
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Human beings honey to tell stories. It is thought yesteryear anthropologists that throughout much of human evolutionary history, large amounts of fourth dimension were spent sitting around the campsite dismiss inwards the evenings relaying stories to i some other (there wasn't much else to do). To this day, social gatherings amongst human beings are replete with stories, which are non just pleasant to relate, but are also a shape of status competition, equally humans compete to one-up each other with amend as well as to a greater extent than interesting stories.
It is out of this penchant for storytelling that legendary myths grow. Stories are non just told, but retold, as well as inwards the retelling, human beings receive got a vogue to exaggeration. Exaggeration amplifies the behave upon as well as intrigue of a story, as well as inwards the procedure the status of the teller (as the proverb goes, don't allow the facts teach inwards the way of a skillful story). Through several iterations of retelling as well as exaggeration, feats of ordinary human heroism, such equally success inwards battle, tin morph over fourth dimension into the actions of quasi-gods, such equally the slaying of three-headed dragons, as well as inwards the procedure teach increasingly untethered from the master facts. But nosotros don't care. Willful interruption of disbelief is i argue human beings bask movies so much. We similar a skillful story.
The human penchant for storytelling, exaggeration, as well as a preference for exciting narratives over to a greater extent than mundane facts, manifests repeatedly inwards markets. Stories are intuitive, interesting, as well as receive got clear actionable messages, as well as so are like shooting fish in a barrel to sell. Abstract information as well as raw facts, yesteryear contrast, are oftentimes complex, messy, as well as conflicting, as well as to a greater extent than hard to intuitively relate. This is why inexpensive stocks are invariably those with an unappealing narrative, piece the most expensive as well as pop issues of the twenty-four hours are to a greater extent than oftentimes than non replete with all kinds of exciting growth narratives. This is what captures peoples' imaginations. And a lot of the time, people teach so captivated with stories, that they tell (and retell) them without bothering to banking concern check the facts.
This lack of fact checking also has numerous other causes, including a scarcity of time, as well as unproblematic intellectual laziness. A calorie-scarce environs throughout evolutionary history has non endowed human beings (or whatsoever creatures) with a vogue to exert unnecessary effort. This is why going to the gym tin live difficult. Lions prevarication around all day, if good fed, for skillful argue - why waste matter unloosen energy unnecessarily? Intellectual laziness is the same (I seem to live immune from the latter, but definitely non the former). Fact checking is hard piece of work as well as most people simply can't live bothered.
Another crusade is that human beings similar comfortable fictions that simplify the dry ground downwards into a workable dry ground view. It is non psychologically comfortable to alive inwards a mental province where y'all realise everything y'all shout out upwards y'all know to live truthful could good live wrong. It results inwards a feeling non just of confusion, but also of powerlessness, anxiety, insecurity, as well as fear, as well as inwards some cases, identity crises. As a result, human beings create belief systems that brand the dry ground seem to a greater extent than predictable, safe, as well as controllable, fifty-fifty if those belief systems are non strictly rational.
Religion, for instance, offers this psychological comfort to many. It is interesting that inwards many developing economies, equally incomes grow as well as urbanisation increases, religious affiliation truly increases rather than decreases - the opposite of the secularising influence many powerfulness receive got assumed would accompany modernisation. This occurs because urbanisation is highly disruptive to traditional community-based ways of life. A civilisation of individualism as well as self-reliance tin experience unusual as well as deeply uncomfortable.
In this to a greater extent than disorienting milieu, the appeal of a organisation of moral guidance as well as community increases. It makes life seem to a greater extent than ordered as well as safe, as well as it also allows people to outsource a lot of their thinking on complex moral questions to an off-the-menu template that offers unequivocal, dark as well as white answers to many of life's most vexing questions. It's much easier to choose on board comfortable fictions than it is to constantly second-guess yourself as well as your beliefs, as well as fact-checking/scepticism is hence instinctively resisted. It's human nature.
Greek myths
With this context inwards mind, it is worth highlighting a neat illustration of this human penchant for storytelling, exaggeration, as well as the lack of willingness to engage inwards fact checking, that is manifesting inwards markets at the moment, which is the narrative surrounding Hellenic Republic as well as some of the Greek banks (Eurobank is the focus of this article). I am long Eurobank as well as receive got been buying fairly aggressively inwards the yesteryear few days.
Greek banking concern percentage prices receive got been crushed this year, as well as receive got hitting novel all fourth dimension lows, as well as this has contributed to, as well as amplified (in a reflexive manner), many longstanding narratives. There are many archs to this story - some new, some old. Longstanding ones are that Hellenic Republic is forever the hopeless tyke of the EU; that its authorities is irreparably insolvent; as well as that its banks, carrying non-performing loans on their residue sail representing some 40-50% of total loans (€90bn Euros inwards total across all 4 major banks), are walking-dead institutions that volition inevitably live inwards demand of perpetual recapitalisation.
Added to these narratives receive got been some novel story archs of late. Firstly, Hellenic Republic has backtracked on targeted 2019 pension reforms (further reductions). Coming amongst recent developments inwards Italy, where its novel authorities has pushed dorsum against farther austerity as well as defied obligatory financial deficit reduction targets, people receive got simply assumed that Greece's province of affairs is precisely analogous, as well as that the authorities is refusing to cutting spending to run into agreed-upon deficit as well as debt reduction targets. With authorities debt to gross domestic product of 180%, this unwillingness to practice budgetary dependent champaign agency the Greek province is assuredly bankrupt.
In addition, Hellenic Republic has lately announced a tentative excogitation to take upwards to one-half of the bad debts currently held on Greek banking concern residue sheets via the establishment of an SPV, that would teach the loans at their carrying value, inwards central for the tendering of the considerable deferred taxation assets owned yesteryear Greek banks. This measure, inwards combination with the seemingly neverending downward spiral inwards Greek banking concern percentage prices this year, has Pb many to assume this to live simply a futile as well as desperate human activity of financial technology scientific discipline aimed at avoiding what volition inevitably evidence to live the latest installment of the Greek tragedy. Adding to the sense of malaise, MSCI has announced it volition live removing Greek banks from some key indices, which is forcing passive tracker funds to dump the stocks.
The below article from the Telegraph, published on the 21st of Nov 2018, gives some flavour for the full general sentiment. It reproduces inwards total the sections pertaining to Hellenic Republic (those pertaining to Italy are omitted):
It's a seductive narrative. And inwards a complex as well as uncertain world, investors similar to rely on the handful of beliefs they know for sure to live true. "I don't know a lot of things, but I do know for sure that i shouldn't invest inwards Greek banks".
It is out of this penchant for storytelling that legendary myths grow. Stories are non just told, but retold, as well as inwards the retelling, human beings receive got a vogue to exaggeration. Exaggeration amplifies the behave upon as well as intrigue of a story, as well as inwards the procedure the status of the teller (as the proverb goes, don't allow the facts teach inwards the way of a skillful story). Through several iterations of retelling as well as exaggeration, feats of ordinary human heroism, such equally success inwards battle, tin morph over fourth dimension into the actions of quasi-gods, such equally the slaying of three-headed dragons, as well as inwards the procedure teach increasingly untethered from the master facts. But nosotros don't care. Willful interruption of disbelief is i argue human beings bask movies so much. We similar a skillful story.
The human penchant for storytelling, exaggeration, as well as a preference for exciting narratives over to a greater extent than mundane facts, manifests repeatedly inwards markets. Stories are intuitive, interesting, as well as receive got clear actionable messages, as well as so are like shooting fish in a barrel to sell. Abstract information as well as raw facts, yesteryear contrast, are oftentimes complex, messy, as well as conflicting, as well as to a greater extent than hard to intuitively relate. This is why inexpensive stocks are invariably those with an unappealing narrative, piece the most expensive as well as pop issues of the twenty-four hours are to a greater extent than oftentimes than non replete with all kinds of exciting growth narratives. This is what captures peoples' imaginations. And a lot of the time, people teach so captivated with stories, that they tell (and retell) them without bothering to banking concern check the facts.
This lack of fact checking also has numerous other causes, including a scarcity of time, as well as unproblematic intellectual laziness. A calorie-scarce environs throughout evolutionary history has non endowed human beings (or whatsoever creatures) with a vogue to exert unnecessary effort. This is why going to the gym tin live difficult. Lions prevarication around all day, if good fed, for skillful argue - why waste matter unloosen energy unnecessarily? Intellectual laziness is the same (I seem to live immune from the latter, but definitely non the former). Fact checking is hard piece of work as well as most people simply can't live bothered.
Another crusade is that human beings similar comfortable fictions that simplify the dry ground downwards into a workable dry ground view. It is non psychologically comfortable to alive inwards a mental province where y'all realise everything y'all shout out upwards y'all know to live truthful could good live wrong. It results inwards a feeling non just of confusion, but also of powerlessness, anxiety, insecurity, as well as fear, as well as inwards some cases, identity crises. As a result, human beings create belief systems that brand the dry ground seem to a greater extent than predictable, safe, as well as controllable, fifty-fifty if those belief systems are non strictly rational.
Religion, for instance, offers this psychological comfort to many. It is interesting that inwards many developing economies, equally incomes grow as well as urbanisation increases, religious affiliation truly increases rather than decreases - the opposite of the secularising influence many powerfulness receive got assumed would accompany modernisation. This occurs because urbanisation is highly disruptive to traditional community-based ways of life. A civilisation of individualism as well as self-reliance tin experience unusual as well as deeply uncomfortable.
In this to a greater extent than disorienting milieu, the appeal of a organisation of moral guidance as well as community increases. It makes life seem to a greater extent than ordered as well as safe, as well as it also allows people to outsource a lot of their thinking on complex moral questions to an off-the-menu template that offers unequivocal, dark as well as white answers to many of life's most vexing questions. It's much easier to choose on board comfortable fictions than it is to constantly second-guess yourself as well as your beliefs, as well as fact-checking/scepticism is hence instinctively resisted. It's human nature.
Greek myths
With this context inwards mind, it is worth highlighting a neat illustration of this human penchant for storytelling, exaggeration, as well as the lack of willingness to engage inwards fact checking, that is manifesting inwards markets at the moment, which is the narrative surrounding Hellenic Republic as well as some of the Greek banks (Eurobank is the focus of this article). I am long Eurobank as well as receive got been buying fairly aggressively inwards the yesteryear few days.
Greek banking concern percentage prices receive got been crushed this year, as well as receive got hitting novel all fourth dimension lows, as well as this has contributed to, as well as amplified (in a reflexive manner), many longstanding narratives. There are many archs to this story - some new, some old. Longstanding ones are that Hellenic Republic is forever the hopeless tyke of the EU; that its authorities is irreparably insolvent; as well as that its banks, carrying non-performing loans on their residue sail representing some 40-50% of total loans (€90bn Euros inwards total across all 4 major banks), are walking-dead institutions that volition inevitably live inwards demand of perpetual recapitalisation.
Added to these narratives receive got been some novel story archs of late. Firstly, Hellenic Republic has backtracked on targeted 2019 pension reforms (further reductions). Coming amongst recent developments inwards Italy, where its novel authorities has pushed dorsum against farther austerity as well as defied obligatory financial deficit reduction targets, people receive got simply assumed that Greece's province of affairs is precisely analogous, as well as that the authorities is refusing to cutting spending to run into agreed-upon deficit as well as debt reduction targets. With authorities debt to gross domestic product of 180%, this unwillingness to practice budgetary dependent champaign agency the Greek province is assuredly bankrupt.
In addition, Hellenic Republic has lately announced a tentative excogitation to take upwards to one-half of the bad debts currently held on Greek banking concern residue sheets via the establishment of an SPV, that would teach the loans at their carrying value, inwards central for the tendering of the considerable deferred taxation assets owned yesteryear Greek banks. This measure, inwards combination with the seemingly neverending downward spiral inwards Greek banking concern percentage prices this year, has Pb many to assume this to live simply a futile as well as desperate human activity of financial technology scientific discipline aimed at avoiding what volition inevitably evidence to live the latest installment of the Greek tragedy. Adding to the sense of malaise, MSCI has announced it volition live removing Greek banks from some key indices, which is forcing passive tracker funds to dump the stocks.
The below article from the Telegraph, published on the 21st of Nov 2018, gives some flavour for the full general sentiment. It reproduces inwards total the sections pertaining to Hellenic Republic (those pertaining to Italy are omitted):
Greek Crisis Returns equally Italian Banks Enter the Danger Zone
(Telegraph) -- Greece’s financial crisis has come upwards dorsum to the boil equally Athens draws upwards emergency plans to stabilize the banking system, raising concerns that the province may ultimately demand a 4th European Union rescue to escape its depression trap. Global chance aversion as well as contagion from Italy’s parallel banking drama has lifted a lid on the festering legacy of bad debts, as well as exposed the implausible methods employed yesteryear Greek regulators as well as the EU-led troika to camouflage the problem. Greek banking concern shares slumped a farther 6pc on Tuesday after 5 days of falls. They are at nowadays downwards yesteryear 60pc since May, chiefly on fears of drastic province intervention to shore upwards thinning upper-case missive of the alphabet buffers. The Athens bourse has lost a 3rd of its value this year.... ...Greece’s fresh drama has crept upwards on markets almost unawares. Most investors thought the eight-year crisis had been seat to repose with the cease of the EU’s 3rd rescue programme inwards August , fifty-fifty though the International Monetary Fund warned that Hellenic Republic was silent fundamentally insolvent without total debt relief. It said the province “could struggle to maintain marketplace access over the long run”. “Greece is real unstable as well as volition live blown out of the H2O directly if anything goes incorrect inwards the global economic scheme or if at that topographic point is a European recession,” said Professor Costas Lapavitsas from London University (SOAS). “The Greek banks are walking dead. Credit has been shrinking every unmarried calendar month as well as they are non providing the normal business office of banks inwards an economy. They receive got been burning upwards their upper-case missive of the alphabet as well as at that topographic point isn’t a penny for recapitalisation. When the existent music starts this volition teach obvious,”he said. Prof Lapavitsas said lenders had been allowed to discount the value of deferred taxation credits for 20 years as well as deem this upper-case missive of the alphabet inwards a “smoke as well as mirrors” operation. They are at nowadays unopen to exhausting fifty-fifty this expedient. “It is non existent capital. The Greek province is going to receive got to stair inwards as well as render cash,” he said. In effect, the ‘bank sovereign doom loop’ that has so long bedevilled the eurozone is silent working its curse. The Greek key banking concern is exploring a diversity of options, including the creation of a bad banking concern or special operate vehicle (SPIV) to soak upwards one-half the bad debts of the 4 systemic banks, Piraeus, Alpha, Eurobank as well as National Bank. Non-performing loans are silent €89bn. Bonds issued yesteryear the SPIV volition inwards number require a guarantee from the Greek state. “The whole thing is a con. It is unbelievable that they are doing this. The bottom line is that Hellenic Republic should non live inwards the euro,” he said. North European banks no longer receive got whatsoever important exposure to Greece. In financial terms, the latest jitters are a local affair. But the political fall-out would live serious if it became clear that the European Union authorities had yet in i trial to a greater extent than misjudged the gravity of the province of affairs when it declared ‘mission accomplished’ amid much celebration before this year. Critics say the northern creditor powers receive got refused to choose that austerity overkill from 2010 to 2018 has done so much harm to the Greek economic scheme that cipher brusque of a massive debt-write off, backed yesteryear a New Deal investment blitz, tin restore sustainable growth. There volition live a political tempest if events inwards Hellenic Republic in i trial once to a greater extent than leave of absence Europe having to pick betwixt the twin poisons of Grexit as well as some other rescue... |
__
Sorry to live a buzz kill, but at that topographic point is i of import job with this narrative - it simply isn't supported yesteryear fifty-fifty a cursory exam of the facts. It takes no analytical brilliance - just a willingness to choose a fresh look. One would promise journalists would experience compelled to banking concern check the facts before publishing, but no such luck. Some things are likewise manifestly truthful to require fact checking, it would seem.*
The higher upwards narrative begins yesteryear declaring that Athens is "drawing upwards emergency plans to stabilise the banking system", but this simply asserts that the organisation is non currently stable, without providing whatsoever evidence. A lot of the conclusions as well as inferences after drawn depend on this premise. In fact, the only thing that is non stable at the 2nd are banks' percentage prices. Everything else looks fine. And percentage prices reverberate perceptions - created yesteryear media articles just similar this i - non reality. Often the 2 are the same, but occasionally they tin widely diverge.
Instead of telling each other stories, let's simply choose a human face at recent trends inwards Eurobank's financial as well as operating performance. First as well as most obviously, piece it powerfulness come upwards equally a surprise to many people, the companionship is truly profitable, as well as has booked bottom line earnings of well-nigh €50m a quarter for 5 consecutive quarters. Nevertheless, fifty-fifty if that fact was uncovered, it would no incertitude live ascribed to an accounting fiction as well as a failure to recognise bad debts.
Secondly, let's receive got a human face at liquidity trends. As tin live seen below, since the (genuine) liquidity crisis of 2015, Greek organisation deposits receive got steadily increased, piece organisation reliance on Euro funding, including ELA funding lines (Emergency Liquidity Assistance), receive got steadily declined, as well as that decline has continued inwards recent months, non reversed. For Eurobank specifically, it's deposit inflows receive got continued, as well as its internet loans to deposits ratio has at nowadays fallen to 95% (down from 99% QoQ, as well as from 112% YoY), which has seen the company's reliance on Eurosystem funding decline virtually to zero. There is certainly no 'liquidity crisis' hither - to the contrary, liquidity is clearly improving.
System Eurofunding has declined as well as deposits increased; indeed ELA
(emergency liquidity assistance) reliance has been almost exclusively removed
Eurobank's deposits receive got grown as well as LDR has significantly improved as well as is.
at nowadays below 100%. Falling loans as well as rising deposits is real positive for liquidity.
Thirdly, what well-nigh bad debt trends? Far from careening towards a novel crisis, Eurobank has at nowadays booked 8 consecutive quarters of negative NPE (non-performing exposure) formation - i.e. the stride of 'cures' is exceeding the inflow of novel defaults. The stride of internet cures slowed somewhat inwards 3Q, but this was for seasonal reasons, as well as administration noted on its recent 3Q conference telephone band that they were expecting a important increment inwards internet negative formation inwards 4Q18 (which was said to live tracking much stronger than 1Q as well as 2Q), as well as so could good approach €500m.
In conjunction with other bad debt resolution mechanisms (sales, write-offs, as well as collateral liquidation), Eurobank has truly reduced its stock of NPEs yesteryear €2.4bn Euros inwards 9M18, as well as its ratio of NPEs has fallen from 44.7% to 39.0% YoY (and downwards from 40.7% QoQ), all piece remaining solidly profitable. A split upwards combat tin live had well-nigh the adequacy of its degree of upper-case missive of the alphabet as well as stock of provisions with honor to these legacy bad loans (see farther below), but that is non novel news, as well as things are clearly getting much better, non worse. And if Eurobank's declared bottom line profitability is exclusively fume as well as mirrors, how, exactly, did it care to volume well-nigh €150m inwards bottom-line profits during 9M18 piece also reducing NPEs yesteryear €2.4bn?
Furthermore, Eurobank made nearly €3bn of fresh loans during 9M18 (gross, non internet of paydowns/write-offs). So the assertion that the bank's financial status is hobbling its powerfulness to render back upwards to the recovering Greek economic scheme is clearly false. Yes, overall organisation loans are declining, but that is non because the banks lack the powerfulness or willingness to lend, but instead reflects loan write-offs as well as ongoing deleveraging yesteryear customers. It is hard to reckon how the banks are spiralling towards a novel crisis when liquidity weather are improving, bad debts are falling, as well as banks are making novel loans.
How/why are Greek bad debts shrinking?
This organic decline inwards bad debt is occurring because - believe it or non - Greece's economic scheme is starting to heal. gross domestic product growth has at nowadays recovered to 2%, as well as unemployment, after peaking at 27% inwards 2013, has at nowadays declined to 18-19%, as well as continues to steadily fall. Relative to a 'full employment' levels of some 5% unemployment, this represents a 40% cumulative decline inwards 'excess' unemployment.
The recovery is occurring because, after a decade of painful rebalancing, enforced reforms, deleveraging as well as hard deflation, Hellenic Republic has at nowadays corrected all of its major imbalances (excessively high authorities debt is the terminal number to live dealt with - reckon farther below). The electrical flow line organisation human relationship as well as financial accounts are inwards residue (more on the latter later), as well as Greece's unit of measurement labour costs receive got at nowadays reverted to levels inwards line with/below its northern peers. This was the fundamental crusade of Greek's economical woes inwards the offset place. With gross domestic product coming off depressionary lows, a recovery hence should non live considered surprising, given that structural imbalances receive got at nowadays been redressed.
What well-nigh the existing mount of bad debts?
But what well-nigh the existing mountainous stock of bad loans? While declining, Eurobank's stock of NPE (non-performing exposures) silent remains at nearly 40% of its gross loan volume (the xc twenty-four hours yesteryear due NPL ratio is somewhat lower at 31% - downwards from 35% YoY). Surely the banking concern must live insolvent? There are 2 key factors that are oftentimes overlooked when high on-balance sail bad loan information is thrown around, equally it was inwards the article:
*Firstly, the existing stock of provisions held against those loans is beingness overlooked. In Eurobank's case, 54% of the carrying value of these NPEs (and 68% of NPLs) receive got already been provided for (i.e. written off against equity). That solitary reduces the stock of unprovisioned NPEs to well-nigh 18%, or inwards financial terms, from well-nigh €17bn to well-nigh €8bn. The stride of negative formation, incidentally, is at nowadays running at to a greater extent than than €0.5bn per year, as well as the stride of marrow pre-provision profits also at nearly €1bn per year, so on electrical flow trends, the terminal €8bn could live fully resolved inside 4-5 years, excluding the real of import 2nd betoken below.
*Secondly as well as real importantly, the existence of collateral is beingness completely ignored. Many of the bad loans carried on banking concern residue sail receive got collateral held against them, including (most commonly) claims on existent estate. The next nautical chart shows, for instance, that 90% of consumer NPEs (often unsecured) are already fully written off, piece only well-nigh 40% of mortgages receive got been. However, Eurobank estimates that, inclusive of collateral, the coverage rises to 111%.
Given that existent estate prices receive got fallen well-nigh 40% peak-to-trough, this degree of provisioning against NPE mortgage exposures is probable adequate or at to the lowest degree around adequate - especially given that Greek existent estate prices receive got finally started to rising again, for the offset fourth dimension inwards a decade.
Importantly, one of the reasons so many bad loans are silent on the banks' books is that it has been real hard for the banks to seize as well as liquidate collateral. When bad loans are completely charged off the books, it is unremarkably an admission that no farther recoveries are probable (e.g. when a companionship has been injure up, as well as all potential legal avenues for recovery receive got already been pursued). Collateral recovery as well as liquidation has taken far likewise long inwards Greece's archaic legal system. However, long-overdue reforms receive got at nowadays occurred which are allowing banks to to a greater extent than easily enforce their rights, as well as the stride of repossessed existent estate auctions has sharply increased this year. This evolution is also reducing the incidence of 'tactical defaults' (where people don't bother to pay, reasoning that it volition live likewise complex as well as fourth dimension consuming for the banks to repossess the collateral). This is already starting to receive got a visibly positive behave upon on banks' NPE/NPL ratios.
In other words, just because these NPEs are silent on the books, does non mean that their electrical flow carrying value (nominal less accumulated provisions) is necessarily less than the recoverable amount (although they could be) - especially inwards a recovering economy. Eurobank, for instance, lately agreed to sell €1bn worth of impaired consumer loans, as well as it did so at a toll that was upper-case missive of the alphabet as well as P&L neutral, suggesting carrying values were inwards line with their economical value. With pressure level on Greek banks to trim back on-balance-sheet bad loans, the stride of sales is probable to travel on to increment inwards coming years, which volition probable allow them to demonstrate a much to a greater extent than rapid decline inwards on-balance sail bad debts than many currently expect.**
It was for this argue that inwards 9M18, Eurobank was able to trim back its stock of NPEs yesteryear €2.4bn, as well as yet stay profitable. If their loan volume was woefully under-provisioned, this would receive got been impossible. This is also how as well as why Eurobank expects to trim back its NPE ratio from higher upwards 40% to below 15% yesteryear the cease of 2021, and to do so piece remaining profitable, generating capital, as well as booking a declining cost of chance inwards the P&L, towards 100bp yesteryear 2021 (from a piffling nether 200bp at present). Many do non believe that to live possible, but given existing provisions as well as collateral; improving collateral realisability; a healing economy; strong pre-provision profitability; as well as the powerfulness to securitize as well as sell loans to investors, it is non at all unrealistic. Indeed, on electrical flow trends (there are diverse risks, of course), it is non only possible but quite likely.
That's non to say the Greek banks receive got fully written downwards all of their legacy bad debts to realisable value. If they had, the cost of chance would live negative during a catamenia where NPEs were organically shrinking, as well as yet Eurobank has continued to choose provisions at a cost-of-risk run-rate of nearly 2% (about €170m a quarter). This is the typical playbook where recovering banks utilisation organic pre-provision profitability to write off legacy back-book bad debt, thereby tardily (but invisibly) recapitalising themselves through internally-generated capital. The game is to hid your bad debts long plenty for internal upper-case missive of the alphabet generation to resolve the job over time. This undeniably continues to happen. With nearly €1bn a twelvemonth of pre-provision profits, as well as negative NPE formation trending a €0.5-1.0bn equally well, Eurobank is inwards fact quietly recapitalising at a stride of €1.5-2.0bn per year.
However, the skillful tidings is that this has already been going on for a long, long fourth dimension (not to cite the fact that several recapitalisations receive got also already occurred), such that a important fraction of the procedure of provisioning for bad debt has already been completed. So how much to a greater extent than internal recapitalisation is needed, as well as does Eurobank receive got time?
As noted earlier, Eurobank's consumer loans are mostly written off (only €150m are unprovisioned), as well as the bulk of its mortgage volume is probable mostly provisioned as well as covered yesteryear mortgage collateral. However, the adequacy of provisions for SME as well as corporate loans are harder to assess. Gross exposure hither are €9.5bn, as well as provisions are €5.4bn, leaving €4.1bn unprovided for. Many of these loans are also collateralized, all the same (often yesteryear existent estate inwards the illustration of SMEs), as well as Eurobank claims provisioning for these loans is also 101-105%, inclusive of collateral.
As noted earlier, Eurobank's consumer loans are mostly written off (only €150m are unprovisioned), as well as the bulk of its mortgage volume is probable mostly provisioned as well as covered yesteryear mortgage collateral. However, the adequacy of provisions for SME as well as corporate loans are harder to assess. Gross exposure hither are €9.5bn, as well as provisions are €5.4bn, leaving €4.1bn unprovided for. Many of these loans are also collateralized, all the same (often yesteryear existent estate inwards the illustration of SMEs), as well as Eurobank claims provisioning for these loans is also 101-105%, inclusive of collateral.
However, let's assume that collateral volition comprehend only 50% of the difference, such that Eurobank is €2bn brusque of provisions. On its electrical flow run-rate pre-provision profitability of nearly €1bn a year, it volition choose only 2 years to comprehend the shortfall, fifty-fifty assuming null loan cures equally the Greek economic scheme recovers, which is unlikely. Even if it choose 3 years, this is silent good inside the prescribed 2021 timeline Eurobank has agreed to with European authorities to trim back its NPE ratio to below 15%.
This is also where the Bank of Greece's SPV NPE resolution first is potentially interesting. The draft excogitation envisages banks exchanging bad loans at carrying value inwards central for the transfer of their (considerable) deferred taxation assets. Many receive got feared that this excogitation could live negative for banks' capital, which - depending on how it was done, could live (as DTAs shape portion of capital, so would trim back upper-case missive of the alphabet if sold, whereas the loans would live sold at carrying value; however, a reduction inwards on-balance sail loans would also trim back banks' risk-weighted-assets, reducing the amount of upper-case missive of the alphabet they demand to hold).
However, importantly, Eurobank noted on its recent 3Q18 telephone band that the excogitation is probable to live voluntary rather than compulsory, and they also noted that they did non believe novel measures were required, equally they were already highly confident inwards their powerfulness to organically resolve bad debts inwards accordance with their existing plan. This agency that the excogitation is all upside, as well as the banking concern could conceivably cherry-pick the worst as well as most underprovisioned loans on their residue sheet, as well as resolve them via DTA transfers, as well as only contend inwards a style as well as scale where it is economically advantageous for them to do so. It may impair upper-case missive of the alphabet somewhat, but they would also receive got a pick equally to how much to tender, so equally to ensure they had sufficient upper-case missive of the alphabet post-transaction.
Far from beingness a last-ditch, futile endeavor at financial technology scientific discipline yesteryear the Greek province to stave off yet some other banking crisis, equally the Telegraph article suggests, this is truly a potentially sensible, creative, as well as opportunistic first that would improve the optics of Greek banks, piece helping them monetise their important DTAs, which are worth billions of Euros. Eurobank solitary has some €4bn of DTAs, pregnant that, based on the status quo, they volition non demand to pay cash taxes for a real long time. The SPV proposal floated yesteryear the Bank of Hellenic Republic is truly a skillful idea, given that these DTAs receive got existent value given that many of Greece's banks are truly highly profitable when the P&L behave upon of the write-off of legacy bad loans is excluded.
But isn't the Greek province bankrupt?
But what well-nigh the Greek state's financial position? With authorities debt-to-GDP at 180%, sure as shooting the Greek province is insolvent?
Greece's debt-to-GDP has stabilised at around 180% of gross domestic product for well-nigh vii years now, equally is evident below. This has occurred for 4 reasons. Firstly, a pocket-size debt haircut was taken inwards 2012 yesteryear Greece's creditors. Secondly, harsh austerity measures, coupled with improved taxation collection, has improved the financial residue to the betoken that the government's 'primary surplus' (i.e. surplus before involvement payments on the debt) has reached 3.5-4.0% of GDP. This is a staggeringly high surplus for an economic scheme at depressionary lows (equivalent to 1933 USA), as well as has been achieved at the cost of much hardship for the Greek people, inwards the shout out of long discredited, but nevertheless depressingly orthodox, economical ideology (Keynes is rolling inwards his grave). At a 3.5% primary surplus, the overall residue is 0% at a 2% effective involvement charge per unit of measurement on authorities debt.
Thirdly, Greece's Eurozone creditors (and the IMF) receive got provided (and travel on to provide) important back upwards inwards the shape of low-cost funding lines with long dated, deferred maturities, contingent on continuing reforms as well as harsh austerity measures. This has maintain the overall cost of debt to the Greek authorities relatively low, as well as below the rates markets would receive got demanded (which did bankrupted the province inwards 2011), which has allowed the overall residue to approximate 0%. Existing agreements allow for Hellenic Republic to travel on to bask depression rates as well as extended maturities on large portions of its debt over a real long catamenia of time, contingent on robust primary surpluses beingness sustained.
And lastly, Greece's economic scheme has stabilised inwards recent years, as well as lately begun to grow somewhat (about 2% pa at present). The denominator inwards the debt-to-GDP equation is hence at nowadays stable to increasing.
Interestingly, Greek authorities debt is truly non unusually high on a per capita dry ground relative to other European Union members - well-nigh €30k. What is instead unusual is that gross domestic product per capita is so low, having fallen some 30% throughout a decade-long depression that has exceeded the US's Great Depression inwards its severity as well as duration. This agency that if gross domestic product per capita tin recover over fourth dimension to a to a greater extent than normalised level, the debt-to-GDP ratio could truly conceivably improve quite rapidly. If debt was held stable, as well as gross domestic product grew a just 2% pa (and say 3% nominal) - a depression charge per unit of measurement off a real depressed base of operations - inside 5 years the ratio would receive got fallen to 155%, as well as a virtuous bicycle volition so start to boot inwards equally debt levels travel on to decline, equally the involvement burden falls relative to primary income/GDP, as well as eventually Hellenic Republic would live able to access upper-case missive of the alphabet markets at lower involvement rates equally well. In addition, similar many governments, the Greek province is property rich, as well as a large swathe of privatisations are also planned inwards coming years, which volition yield additional cash that tin live used for deleveraging.
The improving financial wellness of the Greek province is evident inwards arrears clearance. Total arrears with honor to regular authorities disbursements reached equally high equally €7.3bn equally lately equally 2016, but has at nowadays fallen to €2.6bn. Once arrears clearance is over, additional funds volition live available for deleveraging.
What well-nigh recent 'backtracking' on pension reform? Does Hellenic Republic truly receive got the political volition to maintain its electrical flow elevated primary financial surpluses, so equally to enable ongoing deleveraging? The nuance that has been lost inwards the recent media-storm is that Hellenic Republic only proposed postponing pension reform inwards 2019 because the economic scheme has done amend than expected, as well as thus the primary authorities surplus is exceeding expectations (and agreed upon targets with Brussels). Consequently, the pension cuts are no longer necessary to run into primary surplus targets, as well as hence at that topographic point has been no 'backtracking' on agreed budgetary cuts. Notably, Greece's creditors lately concurred as well as assented to the deferral.
This is hugely important. This is truly a sign the economic scheme is doing much amend than expected, as well as that Hellenic Republic is on the cusp of ending what has at nowadays been a decade of harsh austerity, which has crushed the economic scheme over the yesteryear decade. As austerity eases, as well as Greek authorities spending starts rising with the economy, rather than contracting, the economic scheme volition probable laid out to recover to a greater extent than rapidly, which inwards plow volition boost taxation collection as well as allow Greek authorities spending to rising farther still, fifty-fifty piece sustaining robust primary surpluses. This is real positive. And yet markets - so accustomed to old narratives around Greece's failures of financial discipline, were non able to appreciate this nuance, equally it was drowned out yesteryear preconceived notions.
International operations
Lastly, with honor to Eurobank specifically, also overlooked has been the fact that the companionship has real profitable international divisions, operating primarily inwards Bulgaria, Cyprus, Serbia. The international divisions are currently making well-nigh €150m a twelvemonth inwards bottom-line profits. In addition, Eurobank lately reached an understanding to purchase Piraeus Bank's Bulgarian subsidiary for €75m, which inclusive of synergies, is expected to boost profits yesteryear some €25m, bringing the total to €175m. These operations are self-funding, highly profitable, as well as growing. With a marketplace capitalisation of some €1bn, Eurobank's percentage toll tin live justified yesteryear these divisions alone, placing null value on Greece.
Historically, that has been justified, equally the Eurobank parent has proven to live worth less than zero, having been recapitalised inwards the yesteryear inwards a style that wiped out shareholders. However, equally no farther recapitalisation is needed, so today's buyer of Eurobank gets the Greek performance for less than free, which is currently making some €700m inwards PPoV, as well as which should live capable of earning some €400m a twelvemonth internet of taxes, after its cost of chance normalises from 2021-22. Eurobank's deferred taxation assets of some €4bn volition also live extremely valuable equally Eurobank returns to profitability, ensuring the companionship volition non pay cash taxes for a real long time.
Conclusion
The gap betwixt the facts as well as the prevailing narrative has resulted inwards Eurobank's percentage toll - despite real important operational as well as financial progress across all metrics over the yesteryear 3 years - lately declining to novel all fourth dimension lows, as well as the stock at nowadays trades at just 0.2x tangible volume value; 5x electrical flow earnings - fifty-fifty with the company's cost of chance currently beingness elevated; 1x PPoP; as well as well-nigh 1.5x pre-tax earnings based on a normalised cost of risk, piece it volition non pay cash taxes for many years. If things travel according to plan, this could easily live a €2.50 stock inwards the adjacent 3-4yrs (vs. €0.46 at present), which would stand upwards for well-nigh 1x tangible book, as well as 7.5x normalised pre-tax earnings.
The Greek banking sector is highly consolidated as well as controlled yesteryear just 4 players, which creates the chance for a highly profitable oligopoly to emerge from the carnage of the yesteryear decade, piece a recovering economic scheme volition also render opportunities for loan growth as well as novel fee income streams. Longer term, it is quite possible Eurobank could cease upwards trading at a robust premium to book.
There are risks, of course. The biggest chance is political. Incompetent European Union leaders could endeavor to forcefulness the banks into some other unnecessary circular of upper-case missive of the alphabet raisings, although that seems relatively unlikely, provided the electrical flow economical recovery trajectory continues. Domestic politics are also unpredictable with an election coming upwards adjacent year, as well as it is possible the electorate derives inspiration from Italy as well as demands higher authorities spending (although this also seems unlikely).
Another flying of deposits offshore a la 2015 is also a chance - albeit a falling i equally the banks as well as Greek economic scheme heal - which would forcefulness the banks to rely in i trial once to a greater extent than on emergency credit lines from European authorities. The Greek economic scheme could also ever skid dorsum into recession, as well as opposite the recent vogue of property lineament healing. Rising regional bond yields are also a negative, equally it volition teach inwards to a greater extent than hard for Hellenic Republic to refinance its authorities debt at affordable rates.
Another flying of deposits offshore a la 2015 is also a chance - albeit a falling i equally the banks as well as Greek economic scheme heal - which would forcefulness the banks to rely in i trial once to a greater extent than on emergency credit lines from European authorities. The Greek economic scheme could also ever skid dorsum into recession, as well as opposite the recent vogue of property lineament healing. Rising regional bond yields are also a negative, equally it volition teach inwards to a greater extent than hard for Hellenic Republic to refinance its authorities debt at affordable rates.
Eurobank is non a depression chance investment, nor is it for the faint of heart, given the stock's extremely high volatility. However, I similar the odds at these prices. I am long.
LT3000
*For those so inclined, I recommend reading Eurobank's presentation materials inwards full. Eurobank's total 3Q18/9M18 results presentation tin live found here.
**Ironically, but non surprisingly given how incompetent many European Union regulatory authorities are, the pressure level beingness placed yesteryear Brussels on Greek banks to trim back on-balance-sheet bad debts is truly probable to live - at the margin - negative for the wellness of the Greek banks as well as the Greek economy, equally it volition forcefulness them to sell loans quickly, as well as inwards doing so, places the banks inwards a weaker bargaining seat that volition probable resultant inwards them selling the loans to a greater extent than cheaply than they powerfulness otherwise have.
They are also beingness forced to sell them at precisely the betoken inwards the bicycle where, if they held on to them, they powerfulness truly bask amend than expected recoveries, equally the Greek economic scheme continues to heal. The pressure level to trim back bad debts is hence completely counterproductive.
Incidentally, it's a shame the dry ground has so many incompetent people running so many of import authorities institutions - why tin a 36 twelvemonth old nobody blogger reckon an obvious job hither that some of the most prestigious as well as powerful institutions inwards the dry ground can't? It's depressing.
DISCLAIMER: The higher upwards is for informational/entertainment purposes only, as well as should non live construed equally a recommendation to merchandise inwards the securities mentioned inwards this article. While provided inwards skillful faith, the writer provides no warranty equally to the accuracy of the higher upwards analysis. The writer owns shares inwards Eurobank as well as may sell this seat or purchase to a greater extent than shares at whatsoever fourth dimension without notice.
**Ironically, but non surprisingly given how incompetent many European Union regulatory authorities are, the pressure level beingness placed yesteryear Brussels on Greek banks to trim back on-balance-sheet bad debts is truly probable to live - at the margin - negative for the wellness of the Greek banks as well as the Greek economy, equally it volition forcefulness them to sell loans quickly, as well as inwards doing so, places the banks inwards a weaker bargaining seat that volition probable resultant inwards them selling the loans to a greater extent than cheaply than they powerfulness otherwise have.
They are also beingness forced to sell them at precisely the betoken inwards the bicycle where, if they held on to them, they powerfulness truly bask amend than expected recoveries, equally the Greek economic scheme continues to heal. The pressure level to trim back bad debts is hence completely counterproductive.
Incidentally, it's a shame the dry ground has so many incompetent people running so many of import authorities institutions - why tin a 36 twelvemonth old nobody blogger reckon an obvious job hither that some of the most prestigious as well as powerful institutions inwards the dry ground can't? It's depressing.
DISCLAIMER: The higher upwards is for informational/entertainment purposes only, as well as should non live construed equally a recommendation to merchandise inwards the securities mentioned inwards this article. While provided inwards skillful faith, the writer provides no warranty equally to the accuracy of the higher upwards analysis. The writer owns shares inwards Eurobank as well as may sell this seat or purchase to a greater extent than shares at whatsoever fourth dimension without notice.