EGFEY - Eurobank's Financial Return: A Herculean Task Nearing Completion

2023-07-31 06:30:31 ET

Summary

• Eurobank has seen significant gains since 2018 and remains a compelling investment opportunity, with the potential to double over the next year.
• The Greek banking sector is undergoing a transformation, with the economy showing signs of recovery and the unemployment rate falling year on year.
• Eurobank's Q3 results showed strong performance across all business lines, with a net profit of €173 million and a 16% year-on-year increase in tangible book value per share.

I last wrote about Eurobank (EGFEY) back in 2018 in an article titled This Greek Tragedy Is Over - Buy Greek Banks . Since that article was published, I followed my own advice and continued adding to my position in Eurobank. Currently, it is my largest position mainly due to gains over that time period. I could easily argue that Eurobank has never been in a better position.

Still trading at a conservative P/E of 4.72, the bank's stock price has the potential to double over the next 12 months and still be at a small discount. Although it is not the great discount than it was when I originally wrote about it, Eurobank remains a compelling opportunity.

As a Seeking Alpha contributor, I often seek to uncover hidden gems in the market. This search often takes me across the globe and into a myriad of sectors. So while many people look at the financial sector and believe they are limited to big U.S. banks such as Bank of America ( BAC ) and Wells Fargo (WFC), we believe in taking a wider view. This wider view has led us to shift our focus to Greece's financial resurgence - a promising opportunity that has continued to fly under the radar since the Greek debt crisis. We believe the Greek banking sector is undergoing a significant transformation, making it ripe for potential investment.

It takes years for the market to forget bad news and the cloud that hung over Greek banks was quite thick. It has taken almost a decade for investors to become interested in Greek banks because the Greek debt collapse was so destructive to shareholder value. After the 2009 crisis, Greek banks lost over 99% of their value.

The view on Greece has changed recently and the country is no longer the economic joke of the Eurozone. This recent headline, Greek Economic Growth to Exceed Eurozone Average in 2023 from The Greek Reporter shows how sentiment regarding Greece has shifted.

With the Greek financial crisis now far behind us in our rearview mirror, the economy is showing signs of stability and recovery, providing a fertile ground for savvy investors to seize value. Although this recovery has taken almost a decade, much like Heracles aka Hercules, Greek banks had to undertake their own difficult tasks. Now many difficult tasks have been accomplished by the government and Greek businesses.

Revenue Growth Over Ten Years

For Eurobank, revenue has been growing over the last decade from a negative in 2015 to over $3 billion in each of the last two years. Earnings per share has grown $0.05 to $0.39 over the last five years. You can find more detail here in the income statement. Over the past year, investors have begun to see the value and the stock has appreciated over 120% but it is still selling at a discount.

I do think that some form of a discount in Eurobank's stock price and earnings multiple is warranted but how much is too much. Even much maligned Deutsche Bank ( DB ), trades at a P/E of 5.99. If you applied the same P/E to Eurobank, it would trade at $2.34 an almost 280% gain.

For these reasons we believe that a safe range target of $2-$3.12 is fair if everything stays the same. But what happens if earnings continue to grow and a multiple of 10-15 becomes earned due to improved expectations. This, included with our very conservative estimate of 3rd quarter revenue increasing by $50 million, leads us to be optimistic. For the year, this could improve earnings per share to around $0.45. At a ten times multiple that is $4.50 a share and at a 15x multiple that would be $6.75. This leads me to believe that shares are currently still very undervalued. If nothing changes, we believe Eurobank is worth at least $2. If fortune shines on us, Eurobank could be worth as much as $6.75.

I know this ignores the fact that something very bad could happen in Greece or to the Greek economy. When investing, one must understand that the worst can happen and occasionally does. Eurobank could go bankrupt again. Banks have proven time and again that they will blow themselves up occasionally if given the capital and the latitude. It is important to remember the pain of the previous collapse that has been forgotten. For this reason, I would consider buying a small position in a well-diversified portfolio.

For those of us that are buying in 2018 for $0.28, I think we are playing with house money.

Government Tailwinds

The Conservative Government has won the right to start a second four year term which you can read about here . Their leadership has seen the unemployment rate fall year over year:

• Greece unemployment rate for 2018 was 19.29%, a 2.2% decline from 2017.

• Greece unemployment rate for 2019 was 17.31%, a 1.98% decline from 2018.

• Greece unemployment rate for 2020 was 16.30%, a 1.01% decline from 2019.

• Greece unemployment rate for 2021 was 14.80%, a 1.51% decline from 2020.

• This government has also shown to be pro business and has provided stability and incentives for future growth to many businesses and banks.

These tailwinds partially explains the great results posted recently by Eurobank, which has emerged as a potentially strong investment target, thanks to their strong performance across all business lines in the nine-month period.

Highlights From 3Q Earnings Call

The recent 3rd quarter earnings call found here provided some interesting highlights, which I will share below.

The third quarter witnessed Eurobank's impressive net profit of €173 million, driving the cumulative figure to €932 million - a remarkable achievement, indeed. Furthermore, the tangible book value per share soared by 16% year-on-year to €1.63, signaling the company's growth potential.

Delving deeper into the core operating lines, we found encouraging trends. The nine-month period showcased an 8% increase in Net Interest Income ((NII)) and a substantial 21% growth in fees and commissions. Additionally, Eurobank achieved a remarkable cost-to-core income ratio of 46%, showing improved efficiency. The corporate provision income surged by 18%, with third-quarter core Pre-Provision Income ((PPI)) reaching €289 million.

The resilience of the Greek banking sector is evident in Eurobank's exceptional cost of risk ratio of 68 basis points, resulting in a 66% year-on-year increase in core operating profit, reaching €592 million, with an additional €212 million generated in the third quarter. Furthermore, the operations outside Greece, primarily driven by strong contributions from Bulgaria and Cyprus, delivered a solid performance with profits soaring by 39% in the nine-month period, amounting to €153 million.

Capital strength is a compelling factor for investors, and Eurobank does not disappoint. With another 20 basis points added to the capital ratios in the third quarter, the total capital ratio stands at an impressive 17.2%, a substantial 150 basis points increase in the last 12 months. Furthermore, the fully loaded CET1 ratio surged by 190 basis points to 14.2%.

The remarkable performance in trade expansion and deposits has contributed to a €2.5 billion increase in performing loans and deposits each during the nine-month period, with all core markets playing their part.

Asset quality metrics demonstrate promising improvement. NPE formation remained flat in the third quarter, outperforming initial expectations. The NPE ratio dropped to 5.6%, with a coverage rate reaching a commendable 73%.

Employee Reductions

Eurobank has consistently reduced staff which you can see in the balance sheet . In 2018, the bank employed over 13,000 people. Today the bank has less than 10,000 employees. This reduction in workforce can partially be attribute to selling off assets but also shows a commitment to lower costs. This should benefit their earnings this year and into the future.

Risks

Investing in Eurobank comes with several potential risks that investors should carefully consider. Greece's history of economic and political instability poses uncertainties for investors, and any economic downturns or political changes can impact Eurobank's operations and profitability. Additionally, the Greek banking sector has faced challenges in the past, including non-performing loans and liquidity issues, which may resurface and affect Eurobank's financial stability. Just because unemployment has been dropping doesn't mean it will continue to do so. The bank's exposure to Greek government debt also exposes it to potential risks related to fluctuations in the value of Greek bonds. Moreover, investing in Greece involves currency risk, with exchange rate fluctuations affecting the value of investments denominated in euros. Regulatory and compliance risks, along with the possibility of sovereign default and geopolitical tensions in the region, further add to the complexity of investing in Eurobank and Greece. Additionally, interest rate fluctuations can impact Eurobank's net interest margin, and credit risk associated with loans and credit portfolios remains a concern. Investors should carefully evaluate these risks before making investment decisions in the Greek banking sector.

Conclusion

We believe that the re-election of the conservative government for four more years presents an added catalyst for Greece's financial revival and the continued success of Greek banks. The growing momentum and transformative changes in the banking sector indicate a tipping point that could lead to substantial price appreciation. Investors looking for an untapped opportunity should keep a close eye on the Greek banking sector, as Eurobank may double or triple their market caps over the next three years. With a potential for growth in book value, earnings, and deleveraging, these banks could be the next success story in the financial landscape.

There are risks that investors should consider before investing in Eurobank. Country risk and currency risks as well as risks inherent in banking should all be considered before investing in Eurobank. We do currently believe that Eurobank presents an attractive opportunity for investors and has a favorable risk reward profile. As always, we advise conducting thorough research and risk assessment before making investment decisions.

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