Is It Finally the Right Time to Invest in National Bank of Greece?

Source: Cool V.

When investors think of financially troubled countries, nine times out of ten, Greece will make the list.

In the past few years, Greece went from an economy thriving on the periphery of the eurozone to a nation being bailed out by the European Central Bank. In the process, the real estate market has crashed, unemployment is stuck in the high 20% range, and shares of Greek companies are well off their highs as consumer demand dries up.

But for those willing to accept the risk, Greece could be home to some great buys. Here we take a look at a beaten-down investment in Greece's financial sector.

The great banking crash
For Greek banks, this recession was the perfect storm of financial destruction. On the consumer demand front, demand for loans dried up. At the same time, the Greek debt the banks had filled themselves with plummeted in value as Greece's credit rating was downgraded and speculation of a default spread through the markets.

And even as the banks tried to preserve capital, the instability of the system spooked many depositors who took their money out of the banks, further draining them of funds.

While Alpha Bank and Piraeus both have U.S. listed stock, they do not trade on a major exchange and are often times very illiquid. The only Greek bank listed on a major stock exchange in the U.S. is National Bank of Greece (NBG.DL).

Like the other large Greek banks, National Bank of Greece underwent a recapitalization earlier this year to replenish the bank's capital levels. However, since National Bank of Greece was not exactly able to raise funds from a position of strength, the resulting capital raise was highly dilutive to shareholders and gave the Greek national government a major stake in the bank.

Some positives
Despite the troubles mentioned above, National Bank of Greece has some positives on its side. The bank was able to repurchase some of the National Bank of Greece Series A Preferred Shares (NYSE: NBG-A) at $12.50 each when the shares have a liquidation value of $25.00. NBG-A shares currently trade at just a little less than the $12.50 tender offer that has since expired.

With the dividend suspended and non-cumulative, NBG-A holders will have have to rely on a growing confidence in National Bank of Greece to see share price appreciation. At some point in the future, dividends could resume since NBG-A is ahead of the common stock if the company decides to pay a dividend again.

Despite losing billions of euros over the past few years, analysts expect National Bank of Greece to edge back into the black for 2014, where earnings of $0.18 per share are expected. As the chance of the bank becoming profitable again sets in, investors are likely to begin seeing National Bank of Greece as more of a recovery investment than a perpetual cash consumer.

Similarities in Ireland
While National Bank of Greece reported major losses in Greece, Irish banks were feeling the pain of a popped real estate bubble and a souring economy to go with it. Anglo Irish Bank was wound down, and the government took nearly 100% stakes in Allied Irish Banks and Irish Life and Permanent.

Despite the carnage in the financial sector, Bank of Ireland (NYSE: IRE) managed to avoid the same level of collapse seen at its financial rivals. This is not to say the bank was able to avoid being bailed out, however.

Both Bank of Ireland and National Bank of Greece were bailed out will with billions of taxpayer euros and both had the government take highly dilutive equity stakes in them. But, after briefly falling into the $4 range, Bank of Ireland shares have more than doubled as investors begin to see a light at the end of the tunnel; that light being economic recovery in Ireland.

Even as this has happened, Bank of Ireland's trailing 12 months of earnings are still solidly in the red. Even with this, investors are looking forward and have moved Bank of Ireland shares higher based on future expectations, not current earnings.

Using the 2014 earnings estimates for National Bank of Greece, we get a forward price to earnings ratio of well over 20. Normally, this would be considered excessively high for a company with National Bank of Greece's financial situation, but we've already seen investors give a forward-looking view on Bank of Ireland shares, pricing them higher even as the last year of earnings is negative.

If National Bank of Greece can in fact report a profit for 2014, that and a recovering economy should boost confidence in the bank enough to possibly justify a higher share price.

Market confidence
Right now, most investors are understandably hesitant to put money into Greece after seeing so much disappear over the past few years. But this has depressed the prices of Greek stocks to levels where more risk-tolerant investors could pick up good value plays.

Clearly, National Bank of Greece is highly dependent on the Greek economy and would face additional downside were conditions to further deteriorate. But if confidence can return to the Greek economic system, National Bank of Greece could be poised to rise on two catalysts -- one being fundamental recovery, and the other being rising investor interest as confidence returns to the Greek market.