NBG: A Flickering Light in Greece's Darkness

In a previous discussion on National Bank of Greece's (NYSE: NBG  ) fourth quarter, I compared it with a flickering flame struggling to keep itself from getting smothered. But I was reluctant to be too optimistic since a flame usually gives a final flutter before getting snuffed out.

Surprisingly, the Greek bank has showed resilience by posting yet another profitable quarter. This is in spite of the hellish environment that the larger nation is facing with an ever-problematic sovereign debt crisis.

Overall performance
The bank's net income rose to $222 million -- a whopping 39% increase on a year-on-year basis. At a time when the eurozone's banking system is still singing the blues, NBG has managed to post its fifth consecutive quarterly profit. Although the group's tier 1 capital ratio slid, as compared to the last quarter, it still remains at a comfortable 12.9%, reflecting a relatively strong capital base.

Digging deeper
NBG's Turkish subsidiary Finansbank once again balanced out the group's weak home-court performance. Within the segment, Finansbank's reduced provisions and robust credit expansion helped net profit increase by 28% to $216 million. Retail lending increased significantly by 37%, with mortgage lending up by 29%. Finansbank's business lending also grew by 16% during the quarter. This was a strong overall performance for the segment.

The bank's Southeast European subsidiary also managed to pull off a profit of $8.6 million in the quarter. This was a decline of 81% from the corresponding quarter of 2010 that was due to a fall in interest income and contraction of the loan book by 4%. The decline in net interest income was primarily due to sluggish credit expansion and amplified costs of deposits. However, the parent company was able to decrease funding to the subsidiary by $980 million as compared to the first quarter of 2010, which should be considered a moral victory of sorts.

Performance at home, however, still remains dreary as NBG reported a profit of just $2.8 million -- the least among the three reporting segments. However, looking at the brighter side of things, this is a considerable improvement from a net loss of $57 million in the corresponding quarter last year. Operating expenses declined by 8% year on year but provisions zoomed 41%.

The Foolish bottom line
At the moment, Greece seems to be the epicenter of the economic furor in the eurozone. Mounting Greek debts have now become insurmountable, and European officials are warning against a restructuring since it may prove undesirable for the whole eurozone.

It is the exposure of the Greek banks to their own sovereign debt and their larger consumer environment that makes me very reluctant to even back this relatively strong performance. In fact, banks of the other PIIGS nations such as Bank of Ireland (NYSE: IRE  ) and Allied Irish Bank (NYSE: AIB  ) are the last bets I would put my money on. So, in spite of yet another impressive show by NBG, I remain on the sidelines.

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Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. The Motley Fool owns shares of National Bank of Greece SA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (20)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2011, at 4:58 PM, CraigMiles wrote:

    The facts cannot be denied but I have to believe like all things, time erases everything. I would like to believe the eurozone will choose the lesser of two evils to resolve this issue and I anticipate NBG's strong performance to continue relatively unhindered compared to complete shareholder annihilation. I don't pretend to understand the fiscal underpinnings, the only thing I understand is that the company is undervalued on fear and performing strongly at the moment. Maybe judgement day will come, maybe it won't, either way I gotta let it ride.

  • Report this Comment On May 31, 2011, at 9:47 PM, panot wrote:

    Full disclosure: I have just loaded up on NBG stock. This may be considered a risky bet by many, but I believe that NBG will come through these times and return handsome share price return. I am basing this on the following facts:

    First, unlike other other PIIGS countries the financial troubles in Greece are the result of a frivolous state, NOT irresponsible bank lending. In fact, Greek banks, led by NBG are quite conservative and they did not expose themselves to bad financing, mortgages and the like. In contrast, in Ireland the banking system with its uncontrolled lending led the country to the mess that it is now, and the Irish taxpayers are called to bailout the greedy bankers. Irish banks have posted massive losses, and cannot survive by themselves, they need government bailouts. In Greece, the state needs a bailout, not the banks. Even in the midst of the worst financial crisis ever, NBG cranks a profit (its fifth consecutive quarter as per the article above). The trouble of NBG is that it holds a large amount of Greek state debt, which it will have to write off in case the state goes bankrupt, or signifincantly write it down in case of state debt restructuring. In either case, the exposure of NBG is in the amount of Greek state debt that it holds. This is not different than other European banks that hold Greek state debt. In fact, German, French, Austrian, and other banks are much more exposed than NBG in this respect. They too will have to write down (or off) Greek debt.

    Second, NBG has subsidiaries and operations outside the Eurozone, notably in Turkey and other non-Euro countries in the Balkans. NBG's non-Eurozone operations help it mitigate reduced revenue or even loses, and provide some isolation from Euro troubles. Look at the numbers of this quarter. Finansbank (Turkey subsidiary) provides most of NBG profit.

    Third, despite the possibility of Greek state bankruptcy, NBG bankruptcy is unlikely given its strengths in other areas and countries and its defined exposure to Greek debt. Besides, I do not believe for a moment that Europe will allow Greece to bankrupt thus being the beginning of the end for Europe. NBG has been around for 170 years, and survived the balkan war, two world wars, and everything along the way, when the country was very poor. I cannot think how it will fail now.

    Fourth, take a close look at Mutual Fund holdings of NBG. They have been rising since NBG began trading under $2. It is very undervalued at this point.

  • Report this Comment On June 01, 2011, at 9:20 AM, chris12tom wrote:

    It's a good buy. I own a few thousand shares of it for the exact reasons listed above. It has had profitable quarters and the Turkish subsidiary is a very nice asset. I was expecting it to be sold off if Greece defaulted or the bank went under which isn't appearing to be the case anymore. It's a great buy. It's been around since the 1870s-80s and in that amount of time it has gone through a lot more difficult times and remained a strong bank. It's easily worth double and around $2.5. Just my opinion though.

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