GEM Financials - National Bank of Greece: Wrong side of Finansbank trade, once again!

NBG - wrong side of the trade not once but twice

The National Bank of Greece has announced the sale of Finansbank, its subsidiary in Turkey, to QNB subject to regulatory approvals. The transaction has valued Finansbank just under 1x book equity, slightly below the average of 6 major banks based on current trading. Kudos to QNB for acquiring one of the best retail and SME banks in Turkey. As for NBG, we are sure they are not happy about the sale not only because Finansbank is the group's most profitable business the absence of which would reduce NBG's ROE but also because they had paid nearly 4x book to acquire the same bank about a decade ago. We can sit down and talk about how different things were 10 years ago; but this a strategic sale: QNB is not buying the business to sell it to someone else next year. Moreover, valuation span of institutional money managers is much shorter now than it was 10 years ago; so judging the acquisition value purely from how minority shareholders or institutions are valuing Turkish banks insults intelligence.

Finansbank earns the richest NIM of any bank in Turkey

Finansbank's strength comes from its top line. The bank earns sector-high NIMs. It has consistently delivered NIMs at least 100bp above the industry average. Finansbank is particularly well-positioned in retail banking products with strong cross-selling capabilities. Punching above its weight, Finansbank's credit card business is the Nation's third largest after those of Yapi Kredi and Garanti Bank. It is extremely difficult, if not impossible, to replicate Finansbank's bank card operation organically from scratch because of phenomenal adverse selection risk. Several banks have indeed failed badly trying. Finansbank's fee business is equally strong with net fees and commission income running close to 2% of its balance sheet. Where does this strong revenue business come from? Finansbank owes its sector-high spreads and strong noninterest income generation capacity to its well established network of SME enterprise clientele, some of whom have exclusive banking relationship with Finansbank and its powerful credit card operation. Not everything is good about the bank though. The flip side of this highly successful revenue business is, in fact, the cost. Generating sector high NIM and fee income hurts asset quality, and its expense ratios and credit charge-offs are also above the industry norms. High cost ratios and provisions eat a chunk of revenues; thus part of the bank's appeal on the revenue front is offset half-way thru its income statement.

QNB - this could be the deal of a lifetime

Nevertheless, the bank still earns ROEs above industry average and its earnings quality is high, which itself warrants better valuation treatment. Importantly, high expense ratios create opportunities for the new shareholder. There is indeed room for improvement on cost front. Some costs may become redundant under QNB umbrella and some functions could even be outsourced. Thus, this purchase would not only be earnings accretive to QNB shareholders almost from day one but would more importantly create synergies boosting future earnings. QNB may well be making a deal of a lifetime with the Finansbank transaction.