A reader has sent me his analysis of another Greek bank, Eurobank. He does a sum-of-the parts valuation, backs out the market’s expectation of future business and concludes that unrealistic operative improvements would have to be undertaken in order to justify the current value. In other words: Future business value explains a large part of the valuation. Great analysis. Read the whole piece!
In my discussion of Piraeus bank with David Einhorn back in November, it turned out that David is expecting the market to award Piraeus with a premium to BV three years down the road (BV of 1.5) as a result of healthy growth and profitability prospects. In other words, an investment at the prices back then only made sense if you were willing to assign a substantial value to future business – as is the case with Eurobank now. I was highly sceptical then, I remain sceptical now, although prices have come down quite a bit.
How is such a discrepancy in evaluation possible?
Of course, different opinions make a market, so there is nothing strange about that per se (although mainstream academia still operates under the “common knowledge” assumption resulting no-trade theorems, but that’s another topic). But, I think it is still helpful to understand the source of the discrepancy as thereby you understand your own thesis better. For instance, whereas it turned out that David Einhorn was more bullish on the Greek economy than me, I do not think that was the major source for our different assessment of the situation. Instead, I think David (and the market) underestimate(d) the impact of “legacy” assets, i.e. loans made in the past which are performing poorly and still on the balance sheet. The more the book value of legacy assets overestimates the market value of these assets, the higher your estimation of future business value has to be ceteris paribus.
And no amount of liquidity can solve the NPL problem for the Greek banks. After all, there is a reason why one distinguishes between a solvency and a liquidity crisis…