Greek banks – quiet buy or screaming sell?

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Nothing appears more contrarian than going long the Russian rouble and short the Swiss franc. But investing in Greek banks may be up there too.

The European Central Bank’s (ECB) announcement on Wednesday that it would no longer accept Greek debt as collateral in refinancing its operations – forcing Greek banks to turn to more expensive emergency liquidity assistance via their central bank – has made a bad situation worse.

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Greek bank shares sold-off sharply in the days after the news, extending an equity market rout that was triggered by the left-wing Syriza party winning the election on January 25. Bond investors have been equally concerned. In recent days the country’s 10-year bonds have been yielding as high as 11%, while three-year bonds have blown out to close to 19%.

Amid all the political posturing, investors’ jitters have been exacerbated by deposit flight.

Since mid-December, some €11 billion of deposits have left the Greek banking system – €3 billion in December and €8 billion in January. Outflows in February are sure to happen too.

Taken together, December and January’s numbers are roughly 6% of the €164 billion of deposits in the system at the end of November, the last time official data was reported.

Deposit outflows have been driven by any number of fears. A possible deposit tax under the new anti-austerity government is the main one.

In turn, Greek banks’ usage of ECB or national central bank funding – essentially government-guaranteed bonds that are used by the banks as collateral to obtain financing – has risen from about €56 billion at the end of December to close to €75 billion.

Far higher cost

However, now that that funding channel has been effectively shut-off by the ECB, Greek banks will need to tap the emergency liquidity assistance via the Bank of Greece. And that, unfortunately, comes at a far higher cost – about 150 basis points more than the ECB’s repo rate. The outlook, then, is far from positive for Greece and its banks. But is it all that bleak?

Before the market mayhem in the first week of February, notable players lent support for contrarian plays in Greek credits. Pimco, along with hedge funds Greylock Capital and Alden Global Capital, for example, has said that, beyond the current market volatility, there is fundamental value to be found in the bonds of the country and its banks.

Lest we forget, there has been a recovery story there. Indeed, the IMF’s 2015 GDP growth expectations for Greece have been as high as 2.9%.

And Greece’s four main banks – Alpha Bank, Eurobank, National Bank of Greece and Piraeus – ultimately received a 'clean bill of health’ from the ECB’s stress tests last year, and have each raised capital too.

Alpha, for example, has a fully-loaded tier one capital ratio under the Basel III rules of 14.9%, and Piraeus 13.4% – all of which look very comfortable compared to their European banking peers.

In addition, Citi says the NPL formation trends among several Greek banks improved in the fourth quarter – one bank apparently reported a net NPL number close to zero – extending a similar trend though last year. At 0.3-0.5 times book value, Greek banks are hardly expensive either.

But while valuations may look cheap, they may not be that tempting just yet. The key question for investors is whether the recovery will be delayed by three months, 12 months or permanently?

Over to you prime minister Tsipras.