Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Dissecting the Clues for the Upcoming Greek Bank Stress Test Results

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Most investors in Greek banks understand their investments are risky. The true extent of this risk may become known as soon as the end of this month.

The release of the stress test results stand to produce a highly volatile event into Greek bank stocks. But there are clues about the tests already available, and they could provide insight for Greek bank investors.

The stress tests
Greece's banks have been hit hard as the economy shrinks and non-performing loans (NPLs) skyrocket. These factors have combined to wreak havoc on Greek banks, forcing them to accept 27.5 billion euros in recapitalization funds last year.

But as NPLs continue to rise and economic growth remains elusive, another set of stress tests has been ordered to examine the banks again. This set is being conducted by BlackRock (NYSE: BLK  ) and will give investors another look at the situations at Greek banks, as well as how much additional capital could be required.

Dilution risks
In general, large bank recapitalizations have been ugly events for shareholders. This is mostly because common shares are usually issued to plug the capital hole, and that results in massive share dilution. Even when the toughest times are over and the bank rebounds to a larger market capitalization, individual shares can remain well below pre-recapitalization levels because of the far greater number of shares outstanding.

An example of recapitalization and share dilution is Citigroup (NYSE: C  ) . Adjusting for a reverse split, pre-recapitalization Citigroup traded for more than $500 per share, but today, those shares fetch about 90% less. The collapse of Citigroup shares during its recapitalization was severe and shows the large risk present in holding bank shares through stress tests.

Greek banks are at the center of these stress tests and have significant risk associated with them now. While there are four major banks remaining in Greece, only National Bank of Greece (NYSE: NBG  ) trades on a major exchange in the United States. NBG has seen its share price destroyed through the Greek collapse and previous recapitalization and is now set to face another set of stress test results.

Central bank clues
Right now, there is a lot of fear surrounding NBG -- and for good reason. If the stress test results show the bank does indeed need significant amounts of new capital, shares stand to see another wave of dilution.

What we know right now are only clues as to what could be required, but those clues could be helpful for investors, or potential investors. For instance, the governor of Greece's central bank has said Greek banks will likely need more capital. That's interesting, but it leaves two questions unanswered: First, which banks need more capital? It's already widely expected that Eurobank will need more capital. If it's the only one, the stress test results would be a positive for the other Greek banks.

The second important question is: How much capital will be required? Remember, the greater amount of capital required, the greater the dilution. The central bank governor said the funds remaining in Greece's bank recapitalization fund would be adequate to cover the capital requirements. With about 8 billion euros remaining in the fund, this recapitalization should be smaller than the last one. Still, full use of this fund would result in significant dilution, so the amount of capital required is still a critical question.

Protecting your investment
From what we know so far, a few things can be reasonably assumed from current information:

  1. Large recapitalizations almost certainly mean share dilution and a lower share price.
  2. There is a lot of uncertainty around these stress test results. Should there be little or no additional capital requirements resulting from the tests, that news could propel shares higher.
  3. At least one Greek bank (almost certainly Eurobank) needs additional capital. Other banks could also require capital.
  4. This recapitalization should be smaller than the one last year, but it could still produce significant dilution.

With all of this in mind, the upcoming stress test results release is a high-risk/high-potential-reward event. In my next article, I'll discuss one way to hedge the results at a reasonable cost while not capping your upside.

One bank with safety, dividends, and growth
Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2809614, ~/Articles/ArticleHandler.aspx, 9/2/2015 1:09:17 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alexander MacLennan

Alexander MacLennan is a Fool contributor covering Industrials, Airlines, and Financial companies. He is always ready for a good growth or turnaround story and tries to find them before the market does.

Today's Market

updated Moments ago Sponsored by:
DOW 16,225.68 167.33 1.04%
S&P 500 1,934.81 20.96 1.10%
NASD 4,686.62 50.52 1.09%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 12:53 PM
BLK $295.38 Up +1.08 +0.37%
BlackRock CAPS Rating: ****
C $51.19 Up +0.25 +0.49%
Citigroup Inc CAPS Rating: ***
NBG $0.62 Down -0.02 -2.59%
National Bank of G… CAPS Rating: **