The National Bank Of Greece: A Risk Worth Taking
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Summary
- The stock is at an attractive point due to promising financials and a price which reflects strong market under-optimism.
- The upcoming elections is a strong downside risk; however, facing against more probable upside pressure it the stock appears bullish.
- Algorithmic analysis forecasts NGB as the strongest bank growth stock in 2015; however, the risk might be too much for investors to bear.
Generally at I Know First, we don’t write about stocks which have such a high downside risk; however, our signal for NGB is just too strong to ignore. The National Bank of Greece (NYSEMKT:NGB) stands as the largest bank in Greece in terms of assets, and third largest in terms of market capitalization. The financial crisis has driven the stock price below the floor. After trading at over $650 a share, the stock is now trading at $1.71. The bank stock has been in a free fall since 2008. I believe the stock currently has a very strong upside potential, and for high risk investors is an attractive stock for 2015. There are multiple reasons for this.
- Greece is recovering; maybe slowly and among much turmoil, but it is happening. 2Q14 GDP growth of 0.4% was the first time the nation experienced growth since 1Q10. However, unlike 2010 it was not a 1 quarter fluke, and 3Q14 had a GDP growth of 1.9%. If 4Q breaks the 3% EU target, Greece could potentially come back on the map. Athens Composite Share Price Index GD currently sits on 789 after losing 36% of its value this year.
- Already on the floor, bank stocks, which should theoretically follow the economic outlook, sharply plunged, even though GDP had projected growth. With a rough 56% drop for NBG, the stock was simply oversold. The entire financial sector lost over 70% in that time period. Other large banks in Greece incurred similar losses: Piraeus (OTCPK:BPIRY) down 54%, Alpha (OTCPK:ALBKY) down 50%, and Eurobank (OTCPK:EGFEY) down 59%. With more solid financials than other banks the bank was hit hard.
- The stock lost another 9.24% on Monday (5th of January, 2015) following the German Chancellor’s and German Finance Minister’s announcement that the departure of Greece would be “manageable”. The report claimed that this would be inevitable if SYRIZA (Greek political party) leader Alexis Tsipras gets elected. This has pushed the stock even further down; it has now stabilized around $1.66. Just as tech companies enjoy stock prices well above their revenues due to investors’ over-optimism, the National Bank of Greece suffers due to under-optimism.
Why Greece leaving the European Union is Unlikely.
Elections are fast approaching, and many fear the risk of Greece leaving the eurozone is much larger than it is. First of all, the Maastricht Treaty has no written instruction as to how a country can be kicked out of the eurozone. Even if Greece simply defaults on all its payments the treaty will either have to be re-written, or Greece will have to voluntarily leave the eurozone. There are a few reasons why this is extremely unlikely.
- The legislative election will take place on the 25th of January, 2015 and will elect all 300 members to the Hellenic Parliament. Between the 30th of December and 3rd of January SYRIZA (The Radical Left Coalition) had a strong lead on ND (New Democracy) of 7.5%. The new statistics from the 3rd demonstrated a lead of only 4%. I predict a media war, starting with Merkel’s announcement, will wake Greeks up and prevent them from voting for SYRIZA in the upcoming election. Leaving the eurozone will be disastrous for the country, and as the possibility edges nearer, the media will make sure to inform them why. SYRIZA’s popularity seems to be fading fast, I estimate the parties will be tied by January 18th, and ND will take the lead there after.
(click to enlarge) - What will actually happen if Greece decides to exit the EU? First, Greece will default on all their payments, and then some new form of currency, such as a new drachma, will be created. The currency will be sharply devalued, and the only industry that will benefit is tourism. Unfortunately this is not enough to justify an exit. Importing will become more expensive; however, exporting will finally be competitive and cheap. There is a serious fundamental problem here though; Greece barely exports anything but agriculture. The true paradox is that foreign investment will become the most attractive it has ever been form a price perspective, but the loss of all good faith will prevent investors from investing in Greece. Basically, there is no scenario where this ends well for the nation.
- Practically all businesses with debt will default. Currently all loans are denominated in euros, and a new devalued currency will mean their debt will become significantly harder to repay. The reality? Greece is stuck between two fences: on one side the choice to bend down to the austerity measures of the European Commission until it is buried alive, or commit suicide and leave the eurozone. If SYRIZA threatens to exit the EU will give in and do what it takes to prevent Greece from doing so. Countries such as Spain, Portugal, and Italy know that a Greek exit will significantly hurt their access to capital. I believe strong international political pressure and media is about to start playing a major role in the Greek elections in the next two weeks.
Investing in the national bank of Greece is incredibly risky. The bank is currently headed in the right direction, as hard as things are it is doubtful the government will choose suicide over imprisonment. History has clearly shown that the instinct of survival is any organism’s first priority. Assuming the current heavy negative speculation on the stock flips to a positive one, not only will the stock recover the 60% loss due to political uncertainty, but the upside is limitless as the bank is in the strongest position to take advantage of any recovery in the next few months.
An Algorithmic Perspective on NGB
There are many resources where you can find the detailed financial analysis of NGB and see exactly why, from a book side, they are doing well. This is helpful as technical analysis for a stock with very low predictability is of very little importance. Using an algorithmic analysis we are able to predict mathematically the upward pressure on the stock, simply by tracking all money movement out of the asset itself, and all correlated assets. I Know Firstis a financial services firm that utilizes an advanced self-learning algorithm to analyze, model and predict the stock market. The algorithm predicts the flow of money in almost 2000 markets across a range of time frames (e.g., 3-day, 1-month, 1-year). The algorithm’s predictability becomes stronger in the 1-month, 3-month, and 1-year horizons, so it is particularly useful as a long investment tool, albeit that it can also be used for intraday trading.
The signal indicator of 1900 in the 1 year time horizon is indicative of direction and strength. Such a high signal suggests a very fast increase in price, even farther supported by the strong 1 month signal of 623. Our historical indicator, the predictability, suggests that historically the asset has been unpredictable; however, at these high signal levels looking at historical performance indicators is an unprofitable long term strategy. To me enough indicators are pointing in the right direction.
- The banks financials are in the right direction.
- The nation’s economic outlook is in the right direction.
- The stock is aggressively oversold.
- The algorithms signal is very high.
In comparison to the downside risks, which are:
- SYRIZA has to be elected.
- And, they decide to immediately default on their payments and leave the eurozone.
- And, the eurozone does not concede and lift some of the austerity measures set on Greece.
All three have to hold true for the downside risk to outweigh the upside potential. However; purely in terms of expected value, the stock in my opinion is Bullish in the short, medium and long term.
I Know First Research is the analytic branch of I Know First, a financial startup company that specializes in quantitatively predicting the stock market. This article was written by Daniel Hai. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article.