For most U.S. based investors, National Bank of Greece (NBG.DL) appears to be the best way to invest in the Greek financial system. And while I am still bullish on the long-term prospects of NBG, there is another opportunity in Greek banking that I believe deserves some attention.
Influx of public money
Last year, Greece's banks sought to plug a capital hole that totaled 28 billion euros between the largest Greek banks. With markets still skeptical of Greece and the sheer size of the capital requirements, all four major Greek banks turned to the Greek government for help.
The Hellenic Financial Stability Fund (HFSF), the ownership structure set up by the Greek government, took majority stakes in National Bank of Greece, Alpha Bank, and Piraeus Bank. Unable to raise the necessary amount from private investors, the government effectively took over Eurobank (EGFEY 0.02%) and has a stake of 98.56% today.
Return of the private money
In early March, the long awaited stress tests of Greek banks were released, and the results appear mostly positive for the banking industry as a whole. National Bank of Greece, Alpha Bank, and Piraeus Bank all look set to raise whatever capital they need from private investors.
The stress tests also identified a capital requirement of nearly 3 billion euros for Eurobank. We have known for a long time that the Greek government was going to use this set of stress tests to edge Eurobank back to private investors, and it appears the suitors are already lining up.
Ekathimerini reports that three consortiums of investors have pledged to invest up to 4 billion euros into Eurobank's capital increase, exceeding the level of the requirements. The report also notes that the HFSF will be contributing a significant part of the total capital to prevent a major devaluation of its current holding.
A profitable opportunity we've seen before
Although it may seem crazy to invest your money in a Greek bank majority owned by the Greek government, Eurobank presents a special situation. Sometime in the next few months, one of the three consortiums is likely to recapitalize the bank alongside the HFSF.
In the context of issuing new shares to attract new private money, the current Eurobank situation looks very similar to the final recapitalization of Bank of Ireland (NYSE: IRE). In the case of B of I, shares quickly lost more than half their value after the announcement of the new share issuance, however, the shares bounced back and have quadrupled since.
With no severe movement in Eurobank's shares, the market appears to have not yet reacted to the inevitable share dilution in the near-term. If the Eurobank situation follows the pattern at B of I, Eurobank shares will take a major hit in the days following the disclosure of the actual terms of the capital increase.
At that point, I see the best buying opportunity in Eurobank shares for a number of reasons. First of all, the market will have grasped the full impact of the share dilution; second, the market may temporarily overreact to said dilution; and third, the bottom of the dilution-induced drop will probably be the closest average investors can get to buying at the prices the big money investors are getting in at.
Among the big money investors currently looking at Eurobank are some of the most notable contrarian investors over the past few years. One consortium, comprised of Fairfax, Wilbur Ross, and Fidelity and Capital Research, is the same group that provided the private funds in the previously mentioned Bank of Ireland recapitalization. Their investment has proved a multibagger since as B of I has helped to lead the Irish financial recovery. Also among the list is Perry Capital, a fund that famously bought the preferred stock of Fannie Mae and Freddie Mac while it traded at pennies on the dollar and has seen its investment rise about 10-fold.
Timed event
Normally I am not one to try to time the markets nor would I recommend it to others. However, the Eurobank recapitalization represents a special situation that carries many similarities with events at Bank of Ireland.
Both situations contain government shareholdings, inevitable share dilution, big money contrarian investors, and a need to recapitalize a bank central to the nation's financial system. For investors comfortable with above average risk, the Eurobank recapitalization looks like one of the best plays in Greek banking.
While Eurobank shares do trade over the counter in the U.S., volume is low, making for poor liquidity in the U.S. market. For this reason, U.S. investors looking for more liquidity should try the Frankfurt or Athens stock exchanges, where volume is significantly higher.
Investors interested in this opportunity should continue to monitor the latest developments to ensure they can be ready when the recapitalization actually does occur. As someone bullish on the Greek financial recovery myself, I will continue to monitor the situation and may decide to buy any dilution-induced dip in Eurobank shares.
