Greek Update #3: The Narrative Flips; Selling Piraeus
June 06, 2019
Edit
Late in conclusion year, I wrote a blog post on the Greek banks, with a detail focus on Eurobank. I discussed how the pop narrative at the fourth dimension had completely crushed Greek banking corporation percentage prices, despite clear evidence existing that the economical too banking-industry fundamentals were genuinely markedly improving, non deteriorating. I took a meaningful seat inwards Eurobank (2.0%), too eventually also almost a 50bp seat inwards Piraeus, mostly inwards the 0.60-1.15 range.
True to flat inwards markets, where stories routinely alter faster than facts, the narrative has forthwith flipped, which has sent Eurobank upward every bit much every bit 90%, too Piraeus yesteryear 5x its early-2019 lows. The magnitude of the former's recovery vs. the latter has been inhibited yesteryear its (probably unnecessary) highly-dilutive merger with Grivalia belatedly in conclusion year, which I discussed here. The merger reduced downside tail gamble along with upside, however.
Markets withdraw hold non exactly belatedly recognised that the Greek economic scheme is genuinely starting to exercise quite good (which has also seen Greek bond yields fall), but withdraw hold also responded real positively to the recent outcome of European elections, which for Greece's representatives, handed a resounding victory to Greece's to a greater extent than right-wing New Democracy party. Accompanied yesteryear Syriza's telephone phone for upcoming snap elections, it has given rising to optimism that a to a greater extent than market- too reform-oriented authorities is laid to accept power.
A novel narrative has emerging that is like shooting fish in a barrel to sell: "The economic scheme has bottomed too a novel market-friendly authorities volition supersede its socialist predecessors, too usher inwards an era of reform too rapid recovery." As is usual, the narrative is overly simplistic, too ignores (1) the important - if imperfect - reform that has already occurred nether the existing government, too the resulting recovery that is forthwith already good underway; too (2) the practical challenges to implementing reform yesteryear whatever authorities - acquaint or future; reform is seldom like shooting fish in a barrel or swift. But no bother - Hellenic Republic is forthwith a skillful tidings story too the stocks are going up, thus let's purchase kickoff too enquire questions later!
With an improving narrative, investors are forthwith rushing to endeavour to larn whatever exposure to Hellenic Republic at all, oftentimes simply buying the Greek ETF blind. Arguments are made that "the Greek ETF is downward 90% from its highs", spell the fact that the index-heavy Greek banks withdraw hold been recapitalised multiple times, diluting onetime valuations downward to essentially a permanent zero, is ignored. And to transcend things off, after the stocks' recent rallies, MSCI has also announced that it volition survive re-admitting Greek banks to diverse indices, resulting inwards the index funds who dumped the stocks close the lows only 6 months agone forthwith having to purchase them dorsum at multiples of their prior prices. The resultant has been a surge inwards Greek stocks - too peculiarly banking stocks - at a fourth dimension when broader global markets roughshod 6.5% inwards May on merchandise war/economic fears, too European banks inwards full general were sold off meaningfully. This makes the magnitude of the Greek bank's recent gains all the to a greater extent than significant.
Templeton 1 time said that in that location are ii types of investors - 'outlook too trend' investors, too 'price too value' investors, too believed almost 90% of investors were the former. Outlook too tendency investors are forthwith starting to natural springtime into Greece, too are doing thus despite the fact that prices withdraw hold already significantly risen, rendering the risk-reward ratios today far inferior to what they were 6 months ago, despite how it feels.
Granted, the outlook has potentially improved somewhat, but it has non improved all that much given the evidently-robust recovery trajectory Hellenic Republic was already on yesteryear belatedly 2018 (discussed inwards my spider web log post). True, the New Democracy political party mightiness succeed with to a greater extent than reforms, but to a greater extent than oftentimes than non speaking, it is far easier to utter a skillful game to investors than it is to execute. Furthermore, some cardinal factors withdraw hold genuinely deteriorated at the margin inwards recent months. The European Union economic scheme has continued to apace slow, for instance, too the European Union (and UK) are of import trading partners for Greece/sources of tourism. The electrical current concern human relationship has also ticked downward from 0% toward a 2-3% deficit; too Greek domestic PMI readings & other leading indicators withdraw hold also moderated from real strong levels belatedly in conclusion year.
I am a value investor, too I focus on cost too value, non the (putative) outlook, which is almost never a uncomplicated too clear-cut every bit investors believe, too I withdraw hold sold my Piraeus seat solely - most inwards the yesteryear ii days - too also reduced my Eurobank seat to almost 1.2% (and am considering trimming further). The stocks mightiness good proceed to exercise real good inwards coming months if the herd continues its inward stampede, but the truth is that the cardinal risk-reward characteristics of these stocks has genuinely meaningfully deteriorated. Value investing is all almost focusing on prices too valuations, too letting others prognosticate almost what the futurity mightiness hold.
Let's withdraw hold a closer aspect at Piraeus, which has rallied a remarkable 5x from its lows, which truthful to form, has started to trigger pro-cyclical upgrades/buy calls from diverse quarters. An like shooting fish in a barrel affair for investors rushing to purchase Pireaus to overlook is the 2bn or thus outstanding CoCos (contingent convertibles) that exist, that convert at 5.71 (current cost 2.76), which are meaningful relative to the company's 1.2bn marketplace seat cap. On a fully diluted footing Pireaus' marketplace seat cap is 2.2bn, too inwards the meantime they are paying 160m inwards involvement which is non deducted from the company's headline PPoV (but is paid for yesteryear ordinary shareholders). If the CoCos don't convert, they volition withdraw hold to maintain paying 160m a twelvemonth into perpetuity.
The company's 'core Pireaus' division, which excludes legacy bad debts, is earning almost 175m a quarter inwards PPoV (pre-provision operating profits), or 700m a year. However, if yous cyberspace CoCo payments, it's 540m to the common. If nosotros role a normalised cost of gamble of 50bp on performing exposures of almost 24bn, this subtracts some other 120m, getting 1 to pre-tax earnings of 420m. After taxation of 29%, this gets yous to 300m NPAT. They withdraw hold a lot of DTAs, thus won't pay cash taxes for a long time, but they demand role the cash exercise goodness of their monetisation over fourth dimension to supersede this simulated working capital missive of the alphabet with existent working capital missive of the alphabet (DTAs are included inwards their working capital missive of the alphabet ratios), thus shareholders cannot exercise goodness from those taxation deductions (because Piraeus has no excess official working capital missive of the alphabet higher upward regulatory requirements). There is upside to this 300m inwards marrow profits over fourth dimension every bit the company's cost-to-income (CIR) ratio continues to improve too Greek's economic scheme heals, but for the timebeing, the stock is on a 4x marrow PE (vs. 1.2bn marketplace seat cap); or almost 5x on a fully-diluted footing (NPAT of 415m excluding CoCos interest, too 2.2bn diluted marketplace seat cap) - upward from closer to 1x before this year.
If that was all in that location was to it, the stock would survive clearly inexpensive too should survive bought. However, the stock is non every bit inexpensive every bit it looks because the society silent has a lot of unrecognised bad debt on its books, which inwards economical terms (for shareholders) is analogous to a large non-interest-bearing liability held against those marrow earnings that needs to survive repaid before shareholders volition withdraw hold whatever access to those marrow earnings. Winding downward & writing off legacy assets volition in all probability eat virtually all of their marrow profits out until 2023, or some other 4 years, too volition thus probable eat a meaningful minority of earnings (perhaps 20-50%) for mayhap some other 3-5 years thereafter. When yous include this liability amongst the 4x marrow PE - fifty-fifty acknowledging the latter is struck on depressed economical activity - the high earnings yield appears less compelling than it mightiness otherwise.
Furthermore, spell marketplace seat fears of such withdraw hold abated for the timebeing, it is silent possible they volition demand to heighten to a greater extent than working capital missive of the alphabet (something fickle investors idea was inevitable every bit of late every bit iv months ago). Successful investing has a lot to exercise with identifying risks too opportunities investors are ignoring/unaware of today but which they could good concern themselves with inwards the future, rather than simply reacting to the zeitgeist of the hateful solar daytime - beingness ahead of the curve, thus to speak. It was only 6 months agone that people were focused only on the risks, too none of the opportunities, too persuasion is forthwith swinging dorsum the the other direction.
But the reality is, both the risks too the opportunities that be today be inwards a flat that is largely unchanged from what they were only 6 months ago. It's persuasion rather than the fundamentals that withdraw hold meaningfully changed. Piraeus is only barely compliant with electrical current minimum working capital missive of the alphabet requirements (including DTAs), too the reality is that they withdraw hold non yet succeeded with a targeted Tier 2 issuance, fifty-fifty if markets are forthwith happy to assume they volition forthwith most assuredly survive able to describe it off. They silent withdraw hold a lot of bad debt to move through; they are silent under-reserved for legacy loans; too the economic-political outlook is - every bit ever - silent uncertain!
To survive sure, if everything goes according to plan, this stock could easily survive trading at 8-10x marrow earnings yesteryear 2023 every bit legacy bad debt write-offs start to ease upward - 100-150%+ upside from electrical current levels (about 20-25% a twelvemonth compounded over 4 years), too in all probability to a greater extent than if European banks inwards full general re-rate upwards. That is genuinely my base of operations illustration expectation. However, in that location is quite a lot of gamble involved - they withdraw hold to succeed inwards winding downward NPEs from electrical current elevated levels of 52%; non demand (or choose) to heighten to a greater extent than equity capital; too withdraw hold the economic scheme proceed to recover steadily inwards a no-surprises environment. I tend to retrieve they volition in all probability describe it off, but it's definitely non assured.
In addition, from a marketplace seat persuasion flux signal of view, if investors at whatever signal start to worry 1 time again almost the demand for some other working capital missive of the alphabet call, the stock volition larn crushed similar it did belatedly in conclusion year/early side yesteryear side year, every bit it also volition if optimism almost the political-economic outlook for Hellenic Republic wanes (e.g. if New Democracy doesn't win the election); or (to a lesser extent) if New Democracy wins but neglect to effectuate whatever meaningful reform, too the economic scheme slows.
At electrical current prices, Eurobank appears to survive a superior risk-reward choice to Piraeus inwards my see - albeit with less upside inwards a bull scenario. The society has already raised almost 1bn inwards extra working capital missive of the alphabet (merger with Grivalia complete), too assuming they larn their securitization excogitation executed (which is on track, with binding offers received for the amend tranches, too non-binding offers inwards for lower-quality tranches), it volition terminate 2019 with a 15% NPE ratio (Pireaus 52%); amend lineament retained NPEs; higher working capital missive of the alphabet ratios; too the likelihood of moving towards a c10% reported RoTE every bit presently every bit 2020.
Far fewer assumptions are needed than for Piraeus inwards terms of achieving RoTE targets (Piraeus is targeting high-single-digit yesteryear 2023) - genuinely exactly the securitization bargain beingness finalised at unopen to anticipated pricing - too bottom-line profitability too dividend-paying capacity volition emerge every bit presently every bit 2020, too the stock is on almost 6x FY20e. The society also has the same same opportunities for increment off that base of operations through ongoing cost efficiency measures, too benefiting from a recovering Greek economy, every bit Piraeus. I personally retrieve the extra ii multiple points on marrow earnings vs Piraeus is good justified given (1) faster homecoming to profitability too dividend paying capacity (from 2020) - i.e. the lack of that large effective non-interest-bearing liability I referenced; too (2) much less gamble of farther dilution/capital calls.
However, Eurobank's valuation appeal has nevertheless also meaningfully deteriorated vs. belatedly 2018 levels. Not that much has fundamentally changed (despite progress beingness made, the securitization bargain is silent non yet complete), too the stock is forthwith trading at 6x FY20e vs. 3.5x before. While the outlook feels better too safer, inwards reality the stock forthwith has one-half the upside too twice the downside.
Meanwhile, European banks inwards full general are non only inexpensive but withdraw hold also of late got a whole lot cheaper. Italian banking corporation Unicredit, for instance, has of late been hammered, too forthwith trades for exactly 5x earnings too 0.5x TBV, too is farther along with its capital/NPE resolution actions than the Greek banks, too is also already solidly too (probably) sustainably profitable (9-10% RoTE) too is dorsum to paying dividends (30% payout, probable to movement to 50% inwards side yesteryear side few years). It also makes 40% of its earnings inwards CEE, too also has a meaningful High German business, thus it's non fifty-fifty solely an Italian bank! 1Q19 NPL trends across the Italian banks were also much amend than expected, despite a softening inwards the economy, suggesting a decade of tighter lending standards is working well. And spell Italian sovereign exposure is high, it is also high for the Greek banks, too yet Italian authorities debt to gross domestic product of almost 120% is meaningfully below Greece's 180%!
Why is Unicredit thus cheap, too why has it fallen sharply despite demonstrating favourable operating trends of late? Because the narrative on Italia has forthwith turned negative! At this stage, Unicredit appears to survive a superior risk-reward to Piraeus inwards my see (although Eurobank silent has an border I think, because the Greek economic scheme has superior recovery potential, every bit good every bit the potential for a to a greater extent than oligopolistic too profitable marketplace seat long term every bit well). Accordingly, I've rotated some of my Piraeus proceeds into a novel (albeit relatively small) position in Unicredit inwards the yesteryear few days. I've also reduced my Eurobank seat meaningfully every bit the company's valuation appeal is no longer special (although it's silent inexpensive too no longer fundamentally that risky given its beefed-up repose sheet).
While other 'outlook too trend' investors are dumping Italia too moving into Greece, I'm doing exactly the contrary because that's what 'price too value' considerations propose is the rational move.
LT3000
True to flat inwards markets, where stories routinely alter faster than facts, the narrative has forthwith flipped, which has sent Eurobank upward every bit much every bit 90%, too Piraeus yesteryear 5x its early-2019 lows. The magnitude of the former's recovery vs. the latter has been inhibited yesteryear its (probably unnecessary) highly-dilutive merger with Grivalia belatedly in conclusion year, which I discussed here. The merger reduced downside tail gamble along with upside, however.
Markets withdraw hold non exactly belatedly recognised that the Greek economic scheme is genuinely starting to exercise quite good (which has also seen Greek bond yields fall), but withdraw hold also responded real positively to the recent outcome of European elections, which for Greece's representatives, handed a resounding victory to Greece's to a greater extent than right-wing New Democracy party. Accompanied yesteryear Syriza's telephone phone for upcoming snap elections, it has given rising to optimism that a to a greater extent than market- too reform-oriented authorities is laid to accept power.
A novel narrative has emerging that is like shooting fish in a barrel to sell: "The economic scheme has bottomed too a novel market-friendly authorities volition supersede its socialist predecessors, too usher inwards an era of reform too rapid recovery." As is usual, the narrative is overly simplistic, too ignores (1) the important - if imperfect - reform that has already occurred nether the existing government, too the resulting recovery that is forthwith already good underway; too (2) the practical challenges to implementing reform yesteryear whatever authorities - acquaint or future; reform is seldom like shooting fish in a barrel or swift. But no bother - Hellenic Republic is forthwith a skillful tidings story too the stocks are going up, thus let's purchase kickoff too enquire questions later!
With an improving narrative, investors are forthwith rushing to endeavour to larn whatever exposure to Hellenic Republic at all, oftentimes simply buying the Greek ETF blind. Arguments are made that "the Greek ETF is downward 90% from its highs", spell the fact that the index-heavy Greek banks withdraw hold been recapitalised multiple times, diluting onetime valuations downward to essentially a permanent zero, is ignored. And to transcend things off, after the stocks' recent rallies, MSCI has also announced that it volition survive re-admitting Greek banks to diverse indices, resulting inwards the index funds who dumped the stocks close the lows only 6 months agone forthwith having to purchase them dorsum at multiples of their prior prices. The resultant has been a surge inwards Greek stocks - too peculiarly banking stocks - at a fourth dimension when broader global markets roughshod 6.5% inwards May on merchandise war/economic fears, too European banks inwards full general were sold off meaningfully. This makes the magnitude of the Greek bank's recent gains all the to a greater extent than significant.
Templeton 1 time said that in that location are ii types of investors - 'outlook too trend' investors, too 'price too value' investors, too believed almost 90% of investors were the former. Outlook too tendency investors are forthwith starting to natural springtime into Greece, too are doing thus despite the fact that prices withdraw hold already significantly risen, rendering the risk-reward ratios today far inferior to what they were 6 months ago, despite how it feels.
Granted, the outlook has potentially improved somewhat, but it has non improved all that much given the evidently-robust recovery trajectory Hellenic Republic was already on yesteryear belatedly 2018 (discussed inwards my spider web log post). True, the New Democracy political party mightiness succeed with to a greater extent than reforms, but to a greater extent than oftentimes than non speaking, it is far easier to utter a skillful game to investors than it is to execute. Furthermore, some cardinal factors withdraw hold genuinely deteriorated at the margin inwards recent months. The European Union economic scheme has continued to apace slow, for instance, too the European Union (and UK) are of import trading partners for Greece/sources of tourism. The electrical current concern human relationship has also ticked downward from 0% toward a 2-3% deficit; too Greek domestic PMI readings & other leading indicators withdraw hold also moderated from real strong levels belatedly in conclusion year.
I am a value investor, too I focus on cost too value, non the (putative) outlook, which is almost never a uncomplicated too clear-cut every bit investors believe, too I withdraw hold sold my Piraeus seat solely - most inwards the yesteryear ii days - too also reduced my Eurobank seat to almost 1.2% (and am considering trimming further). The stocks mightiness good proceed to exercise real good inwards coming months if the herd continues its inward stampede, but the truth is that the cardinal risk-reward characteristics of these stocks has genuinely meaningfully deteriorated. Value investing is all almost focusing on prices too valuations, too letting others prognosticate almost what the futurity mightiness hold.
Let's withdraw hold a closer aspect at Piraeus, which has rallied a remarkable 5x from its lows, which truthful to form, has started to trigger pro-cyclical upgrades/buy calls from diverse quarters. An like shooting fish in a barrel affair for investors rushing to purchase Pireaus to overlook is the 2bn or thus outstanding CoCos (contingent convertibles) that exist, that convert at 5.71 (current cost 2.76), which are meaningful relative to the company's 1.2bn marketplace seat cap. On a fully diluted footing Pireaus' marketplace seat cap is 2.2bn, too inwards the meantime they are paying 160m inwards involvement which is non deducted from the company's headline PPoV (but is paid for yesteryear ordinary shareholders). If the CoCos don't convert, they volition withdraw hold to maintain paying 160m a twelvemonth into perpetuity.
The company's 'core Pireaus' division, which excludes legacy bad debts, is earning almost 175m a quarter inwards PPoV (pre-provision operating profits), or 700m a year. However, if yous cyberspace CoCo payments, it's 540m to the common. If nosotros role a normalised cost of gamble of 50bp on performing exposures of almost 24bn, this subtracts some other 120m, getting 1 to pre-tax earnings of 420m. After taxation of 29%, this gets yous to 300m NPAT. They withdraw hold a lot of DTAs, thus won't pay cash taxes for a long time, but they demand role the cash exercise goodness of their monetisation over fourth dimension to supersede this simulated working capital missive of the alphabet with existent working capital missive of the alphabet (DTAs are included inwards their working capital missive of the alphabet ratios), thus shareholders cannot exercise goodness from those taxation deductions (because Piraeus has no excess official working capital missive of the alphabet higher upward regulatory requirements). There is upside to this 300m inwards marrow profits over fourth dimension every bit the company's cost-to-income (CIR) ratio continues to improve too Greek's economic scheme heals, but for the timebeing, the stock is on a 4x marrow PE (vs. 1.2bn marketplace seat cap); or almost 5x on a fully-diluted footing (NPAT of 415m excluding CoCos interest, too 2.2bn diluted marketplace seat cap) - upward from closer to 1x before this year.
If that was all in that location was to it, the stock would survive clearly inexpensive too should survive bought. However, the stock is non every bit inexpensive every bit it looks because the society silent has a lot of unrecognised bad debt on its books, which inwards economical terms (for shareholders) is analogous to a large non-interest-bearing liability held against those marrow earnings that needs to survive repaid before shareholders volition withdraw hold whatever access to those marrow earnings. Winding downward & writing off legacy assets volition in all probability eat virtually all of their marrow profits out until 2023, or some other 4 years, too volition thus probable eat a meaningful minority of earnings (perhaps 20-50%) for mayhap some other 3-5 years thereafter. When yous include this liability amongst the 4x marrow PE - fifty-fifty acknowledging the latter is struck on depressed economical activity - the high earnings yield appears less compelling than it mightiness otherwise.
Furthermore, spell marketplace seat fears of such withdraw hold abated for the timebeing, it is silent possible they volition demand to heighten to a greater extent than working capital missive of the alphabet (something fickle investors idea was inevitable every bit of late every bit iv months ago). Successful investing has a lot to exercise with identifying risks too opportunities investors are ignoring/unaware of today but which they could good concern themselves with inwards the future, rather than simply reacting to the zeitgeist of the hateful solar daytime - beingness ahead of the curve, thus to speak. It was only 6 months agone that people were focused only on the risks, too none of the opportunities, too persuasion is forthwith swinging dorsum the the other direction.
But the reality is, both the risks too the opportunities that be today be inwards a flat that is largely unchanged from what they were only 6 months ago. It's persuasion rather than the fundamentals that withdraw hold meaningfully changed. Piraeus is only barely compliant with electrical current minimum working capital missive of the alphabet requirements (including DTAs), too the reality is that they withdraw hold non yet succeeded with a targeted Tier 2 issuance, fifty-fifty if markets are forthwith happy to assume they volition forthwith most assuredly survive able to describe it off. They silent withdraw hold a lot of bad debt to move through; they are silent under-reserved for legacy loans; too the economic-political outlook is - every bit ever - silent uncertain!
To survive sure, if everything goes according to plan, this stock could easily survive trading at 8-10x marrow earnings yesteryear 2023 every bit legacy bad debt write-offs start to ease upward - 100-150%+ upside from electrical current levels (about 20-25% a twelvemonth compounded over 4 years), too in all probability to a greater extent than if European banks inwards full general re-rate upwards. That is genuinely my base of operations illustration expectation. However, in that location is quite a lot of gamble involved - they withdraw hold to succeed inwards winding downward NPEs from electrical current elevated levels of 52%; non demand (or choose) to heighten to a greater extent than equity capital; too withdraw hold the economic scheme proceed to recover steadily inwards a no-surprises environment. I tend to retrieve they volition in all probability describe it off, but it's definitely non assured.
In addition, from a marketplace seat persuasion flux signal of view, if investors at whatever signal start to worry 1 time again almost the demand for some other working capital missive of the alphabet call, the stock volition larn crushed similar it did belatedly in conclusion year/early side yesteryear side year, every bit it also volition if optimism almost the political-economic outlook for Hellenic Republic wanes (e.g. if New Democracy doesn't win the election); or (to a lesser extent) if New Democracy wins but neglect to effectuate whatever meaningful reform, too the economic scheme slows.
At electrical current prices, Eurobank appears to survive a superior risk-reward choice to Piraeus inwards my see - albeit with less upside inwards a bull scenario. The society has already raised almost 1bn inwards extra working capital missive of the alphabet (merger with Grivalia complete), too assuming they larn their securitization excogitation executed (which is on track, with binding offers received for the amend tranches, too non-binding offers inwards for lower-quality tranches), it volition terminate 2019 with a 15% NPE ratio (Pireaus 52%); amend lineament retained NPEs; higher working capital missive of the alphabet ratios; too the likelihood of moving towards a c10% reported RoTE every bit presently every bit 2020.
Far fewer assumptions are needed than for Piraeus inwards terms of achieving RoTE targets (Piraeus is targeting high-single-digit yesteryear 2023) - genuinely exactly the securitization bargain beingness finalised at unopen to anticipated pricing - too bottom-line profitability too dividend-paying capacity volition emerge every bit presently every bit 2020, too the stock is on almost 6x FY20e. The society also has the same same opportunities for increment off that base of operations through ongoing cost efficiency measures, too benefiting from a recovering Greek economy, every bit Piraeus. I personally retrieve the extra ii multiple points on marrow earnings vs Piraeus is good justified given (1) faster homecoming to profitability too dividend paying capacity (from 2020) - i.e. the lack of that large effective non-interest-bearing liability I referenced; too (2) much less gamble of farther dilution/capital calls.
However, Eurobank's valuation appeal has nevertheless also meaningfully deteriorated vs. belatedly 2018 levels. Not that much has fundamentally changed (despite progress beingness made, the securitization bargain is silent non yet complete), too the stock is forthwith trading at 6x FY20e vs. 3.5x before. While the outlook feels better too safer, inwards reality the stock forthwith has one-half the upside too twice the downside.
Meanwhile, European banks inwards full general are non only inexpensive but withdraw hold also of late got a whole lot cheaper. Italian banking corporation Unicredit, for instance, has of late been hammered, too forthwith trades for exactly 5x earnings too 0.5x TBV, too is farther along with its capital/NPE resolution actions than the Greek banks, too is also already solidly too (probably) sustainably profitable (9-10% RoTE) too is dorsum to paying dividends (30% payout, probable to movement to 50% inwards side yesteryear side few years). It also makes 40% of its earnings inwards CEE, too also has a meaningful High German business, thus it's non fifty-fifty solely an Italian bank! 1Q19 NPL trends across the Italian banks were also much amend than expected, despite a softening inwards the economy, suggesting a decade of tighter lending standards is working well. And spell Italian sovereign exposure is high, it is also high for the Greek banks, too yet Italian authorities debt to gross domestic product of almost 120% is meaningfully below Greece's 180%!
Why is Unicredit thus cheap, too why has it fallen sharply despite demonstrating favourable operating trends of late? Because the narrative on Italia has forthwith turned negative! At this stage, Unicredit appears to survive a superior risk-reward to Piraeus inwards my see (although Eurobank silent has an border I think, because the Greek economic scheme has superior recovery potential, every bit good every bit the potential for a to a greater extent than oligopolistic too profitable marketplace seat long term every bit well). Accordingly, I've rotated some of my Piraeus proceeds into a novel (albeit relatively small) position in Unicredit inwards the yesteryear few days. I've also reduced my Eurobank seat meaningfully every bit the company's valuation appeal is no longer special (although it's silent inexpensive too no longer fundamentally that risky given its beefed-up repose sheet).
While other 'outlook too trend' investors are dumping Italia too moving into Greece, I'm doing exactly the contrary because that's what 'price too value' considerations propose is the rational move.
LT3000