This is Wall Street value added at its purest. The day when the stock price of National Bank of Greece (NBG) is trading within millimeters of its all time low set during the March 2009 lows, and following a 70% straight decline from highs hit in September of last year, JPMorgan analyst Paul Formanko has officially submitted his bid for the client wealth destroyer of the century title (despite the guaranteed shoe-in of every Goldman Sachs "sellside analyst" for this title), by downgrading the soon to be insolvent Greek firm (which as even Formanko acknowledges has >200% of core equity exposure to GGBs) from Overweight to Underweight. The stock which now trades at around €10/share was initiated by Paul with an Overweight in May 2008, a rating from which he has never wavered, with just his price target moving up and down. His most recent PT on NBG: €25/share. Yet something happened between yesterday and today: Paul decided that the firm is no longer worth his old price target... or even half of it. His new expected price: €9.80, a 60% discount for all those who were dumb enough to listen to Paul as recently as yesterday, not just when he slapped a €45 price target at initiation in May 2008, or a €36 PT in September of 2009. And just to prove that Paul is man of action, he has also gone and downgraded every single Greek bank in his coverage universe from Overweight or Neutral to Underweight with a comparable price target cut.
And here is Paul's distinguished track record in NBG calls.
So just what is so dire to have caused Paul to finally realize that things in Greece may not be so rosy as to merit a perpetual Overweight rating? His list of concerns should make all those who think that Greece can survive even one more year with or without US support afraid. Very afraid.
On Greek Banks:
With restricted market access as concerns moved from liquidity to solvency, the severity of bank stress has increased to levels that we did not previously anticipate. A longer (2012-13) path to recovery a) stricter fiscal measures impacting asset quality (another >300-500bps over two years extending credit cycle normalization beyond 2011 impacted by 6-7% cum. GDP contraction b) increased funding costs with re-pricing of sovereign risk (new time deposits up 26 bps in March mom, 10 CDS stubbornly at >500bps) c. risk of re-capitalization/ consolidation rising (EU-IMF package first step) with d. further risk of change of ownership structure of banking assets.
Investment case on hold, despite strong share price correction YTD (-23-44%), risk reward unattractive. We remain cautious on banks, as we believe they are likely to make losses in 2010E, and possibly breakeven in 2011E, with recovery in 12-13E. NBG, EFG, Alpha to UW (from OW); removing NBG from AFL; BOC to N (from OW), Piraeus to UW (from N), keep Agricultural and Postal as UW. A potential 40% GGB restructuring could require euro €10bn-15bn in additional capital and we see >25% downside for the sector with risk of capital injections & change of ownership structure (see table 20)
If outcome less severe 1) no GGB haircut and 2) NPL stabilization before 2012 with less severe GDP contraction, we expect banks to muddle through and could support sector rebound (>50-100% potential upside on two-year view). This scenario would require ‘out-of-box measures i) collecting gold for the love of Greece campaign (done in Korea post-1998); ii) selling a lot of Government assets quickly or iii) creation of WSF to offset liabilities backed by real assets, 3) EU-IMF support package to succeed both in Greece and the EU.
And on NBG in particular:
Key risks- i) Upside risk if GGB restructuring does not takes place ii) Less than expected growth in CESEE countries, in particular Turkey, given Turkey contributes c.54% of 09 group profits
- We downgrade NBG to UW from OW and remove it from our AFL. Given its GGB exposure (>200% core equity), potential risks from restructuring remain significant. We highlight that if restructuring does not materialize, then NBG remains best positioned among the Greek banks to weather the recession - given its robust balance sheet, liquidity and highly profitable Turkish franchise (to compensate for decline in domestic business).
- We expect c.7% share price downside from current levels based on our revised PT of €9.8. Our PT has a Dec-10 year end and is based on Gordon growth model.
- Q1 preview: we expect net profits of €22mn, with NII of 999mn, fees of €155mn, and provisions of €360mn
It amusing to watch Wall Street analysts who struggle, just as Paul apparently did, to disclose all the dirty laundry they know of, yet are prevented from acting upon by employer "directives" as heaven forbid the prop desk may have a tougher time offloading its own stash of billions in NBG shares should the general public also hit the sell button at the same time.
Alternatively, it is now time to take a long hard look at the long NBG case: there is no more potent buy signal than a sellside "research analyst" going 100% negative on a stock.
h/t Jeff Matthews Is Not Making This Up, via @Reader_sav