3 European Banks That Could Be Seeing a Brighter Future Ahead

With big bank stakes from the financial bailouts, governments are looking to reprivatize the banks and recoup money for taxpayers.

Apr 10, 2014 at 10:18AM

Source: Flickr / Kivanc Nis.

Even though the U.S. government has exited its stakes in the big four U.S. based banks, there is plenty more to do in other countries where the banking system is further behind in the recovery cycle. As financial investors analyze the next couple years, it's important to know the current situation and plans in three banking nations that will have significant effects on Lloyds Banking Group (NYSE:LYG)Bank of Ireland (NYSE:IREBY), and National Bank of Greece (NYSE:NBG).


Source: Flickr / Matthew Hunt.

The British banking system can rival any nation's banks in terms of size, international presence, and fallout from the financial crisis. The British government currently has significant holdings in two of its major banks but the bank currently undergoing reprivatization efforts is Lloyds Banking Group.

The reprivatization of Lloyds is being handled in a fairly standard method of share sales. Private sales reduced the government stake from 39% to 33% and the latest institution-only sale reduced the stake to 25%. The government has noted that it would like to offer shares to the public at some point but has stuck with private institutions so far. Based on the current share sale rate, Lloyds could be fully reprivatized by 2015 in time for elections.

Ireland's financial system was among the worst hit over the past few years as a property and mortgage bubble popped. With many other institutions being wound down, Bank of Ireland remains the only major Irish bank in majority private hands.


Source: Flickr / Kevin Dooley.

Bank of Ireland came out better than its rivals but still left shareholders heavily diluted. The bank has repaid 1.8 billion euros in government assistance and put the government in the black on Bank of Ireland's portion of the bailout. The government retains a 14% stake in Bank of Ireland but doesn't seem to be in much of a hurry to sell it off. Seeing as the government is not playing an excessive role in Bank of Ireland, this stake is not a major drag on the bank.

Greek banks have been hit hard by a combination of high unemployment, a depressed economy, plunging property values, and major writedowns on Greek sovereign debt. As a result, all four major Greek banks are now majority owned by the government.

National Bank of Greece is the easiest bank for U.S. based investors to access and represents a way to invest in a turnaround in Greek financials. Currently 84% owned by the government, NBG has made operational improvements and was even able to post a profit for 2013. Even as the Greek government has its hands full with other policy and financial issues, there is a method already in place to reprivatize NBG.


Source: Flickr / John D Carnessiotis.

During the recapitalization of NBG in 2013, the Hellenic Financial Stability Fund (HFSF) issued warrants to private investors allowing these investors to purchase HFSF's shares at a defined price until Dec. 2017. The warrants are currently out of the money but the exercise price looks well within reach of the Greek economy can come back to life. In that case, private investors would exercise the warrants and purchase HFSF's stake. If the warrants remain out of the money at expiration, HFSF will need to find a new approach.

Reconstructing banking
Major banks in Britain, Ireland, and Greece were hit hard by the financial crisis with many big names relying on government assistance. As banks have recovered, the reprivatization process is beginning to move forward and in the cases of Bank of Ireland and Lloyds Banking Group, the governments themselves have been able to generate a profit for taxpayers.

National Bank of Greece and the other three major Greek banks are further behind. With large majority government ownership stakes, the framework of some reprivatization plans are beginning to take shape. Over the next few years, bank investors should watch to see how governments go about reducing their stakes in these big banks for both their effects on the banks, as well as their effects on the worldwide financial system.

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Alexander MacLennan owns shares of Bank of Ireland (Irish listed). He also owns the following options: long January 2015 $7 calls on National Bank of Greece (ADR), long December 2017 National Bank of Greece warrants (Athens listed). This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security.

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