Manager: Patrick McFadden, M2 Global
Model: M2 Global
Disclosure: Long NBG, MNKD
The current macro environment leads us to look for investments that we can hold with limited down side, while participating in upside both on an alpha and beta basis. Mannkind (NASDQ: MNKD) we view as Alpha and National Bank of Greece (NYSE: NBG), we believe, will provide some beta upside.
NBG is the largest bank in Greece, but remains profitable due to its heavy exposure to Turkey. Turkey’s economy has been on a tear, growing over 9% annualized in the fourth quarter of 2010, and inflation is somewhat controlled with April 2011 CPI around 4.3% according to the Economist Intelligence Unit.
Turkey exports agricultural goods and clothing while importing machinery, technology and energy. The Turkish lira is one of the only major currencies that is somewhat weak compared to the US dollar and the recent drop in energy prices creates a mix that will not hurt the economy. NBG, primarily due to its ownership of one of the largest banks in Turkey, has remained profitable even with the turmoil in Greece. With the Turkish economy looking fairly good through 2011, NBG should be able to weather potential additional write downs against Greek loans and assets for 2011.
Some additional perspective on NBG according to SEC filings: In 2010 the bank reserved more than $2 billion against additional write downs but maintained Tier 1 capital well above 10%. The bank generates good fee income while total revenues were nearly $12 billion with profits before taxes about 8% and cash on hand greater than $9 billion at current exchange rates. According to Yahoo Finance this represents about $3 per ADR in cash vs. a market price of $1.50 (as of 5/5/11).
Greece has a real debt burden problem and the economy will continue to suffer, however, the country is aging fast and this will help stability and increase savings rates. The retired population in Greece has nearly doubled as a percentage of total population in the last three to four decades. This will help the Greek government tighten its belt at the relative expense of the younger and smaller work force. NBG needs only for Greece to stabilize. The company, as one of the largest international banks across Eastern Europe and Turkey, will be able to grow profitability as these emerging markets become a strong future focus and Greece remains a European vacation destination.
In real estate, location is everything, and Germany cannot recreate the Aegean in the Baltic. In the end, the northern and western Europeans will support the peripheral countries in order to save their own banks, who hold the debt, and because Europe is geopolitically at risk without them. During the 1950’s Greece and Austria were key battle grounds during the cold war. This area has been strategically key to Germany and Poland in particular.
Turkey is a key NATO ally and a good trading partner for Europe, but I do not think the Germans want to cede any additional influence in the Aegean. If Europe cuts Greece loose, NBG may need to sell its Turkish interests. We believe that the likelihood of this is less than 5% on the probability scale. We think the reality is that the strength of NBG will push them to acquire other banks and become even bigger; maybe even more geographically diverse. The CEO of NBG has already stated as much in May 2011.
Given their cash position, NBG could nearly buy the entire Irish banking sector or at least a large portion of their senior debts. The ECB wouldn’t allow this but it would certainly make things interesting. Nevertheless, we think that both countries and their banks will get slowly healthier and that the financial support will be adjusted to match up with these time frames. Once this happens, the stocks will recover.
Sources:
Turkey CPI data from The Economist, http://www.economist.com/node/18651859?story_id=18651859
“National Bank of Greece Annual Report” 3/2011. https://www.sec.gov/Archives/edgar/data/1096061/000110465911017424/a11-8720_16k.htm
NBG Balance Sheet data from Yahoo Finance, https://finance.yahoo.com/quote/NBG?p=NBG
“NBG CEO says mergers can strengthen Greek banks” Reuters, 5/5. https://www.reuters.com/article/2011/05/05/greece-banks-idUKLDE74426K20110505?type=companyNews
