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  Greek bank's odyssey could be marked by peripeteia, or hamartia

BENJ GALLANDER and BEN STADELMANN

Friday, May 21, 2010

We live in Toronto (no booing please). One of the penalties of residing here is the dearth of good major league sports teams. Except for the Toronto Rock, the choices vary pretty much between crappy and crappier.

Such is the state of affairs in many ways with world currencies. The recent plight of the euro has sent people scuttling to the relative "safety" of the American dollar. Uhm, given their deficit/debt situation and the government's inability to turn the boat, perhaps the Greek goddess Ate is leading the fearful from the frying pan into the fire.

As those reading this article know, the most recent catalyst of this potential economic calamity has been Greece. Grave questions exist as to whether this country can pay back its debt. Mega-salvation dollars are being thrown in its direction so that it can avoid immediate default. Will this be enough to right the ship? This was one of the questions pondered before buying shares in the National Bank of Greece for our personal portfolios.

NBG has numerous difficulties that could cause investors to lose their shirts. The company has over $20 billion in Greek government bonds, comprising more than 15 percent of the bank's assets. These have been hammered, and it is possible there is more grief to come if Greece's debt is restructured.

Six percent of loans are non-performing, which is exceedingly high. Some depositors are taking their assets to safer climes, like Switzerland, both because of the national dangers and also because of new taxes. There is the risk that the bank's current well-capitalized financial ratios could be scuttled if these demons continue to worsen. That could lead to bankruptcy or perhaps nationalization.

Given that this has been the worst-performing financial institution in Bloomberg's index of European financial stocks, lots of people are betting on its demise and cashing their chips.

However, amidst all the negatives, there are reasons to be optimistic that NBG, which has been around since 1841, will exist for another 100 years. The bank's financial ratios are currently strong. While profitability has declined, the institution remains firmly in the black. The government's bloated payroll passes through this outfit. Plus, the bank is the largest in Greece, and a failure would be a major blot on national pride and perhaps lead to the downfall of the government.

Like many other major financial institution, NBG's operations extend well beyond its national borders. The firm owns almost all of Serbia's Vojvodanska Bank, almost 90 percent of Banca Romaneasca in Romania, plus a majority stake in Stopanska Banka in Macedonia. The bank's reach also extends to numerous other countries, including some in Africa. It is interesting to note that this enterprise earned more from its 80 percent of Finansbank in Turkey than it did from its banking operations in Greece.

NBG was not put into the Contra portfolio, as it was deemed too risky for subscribers. As Ben stated, "This is by far the most dangerous thing I've bought in years." While that is not the case for Benj, there is no question that this one ranks high on the risk-o-meter.

The price we paid for the NBG shares varied from $2.75 to $3.01. The target price is $10.24. The current price is $2.50. Time will tell if this was a brilliant contrarian play, or perhaps a dose of hemlock for the Contra Guys. Perhaps Ate is already laughing at our upcoming sorrow.


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