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In the two years since my last Eurobank writeup, the stock has doubled while the Nasdaq is down 8%.  The same thing will probably happen again the next two years to be quite honest.  Probably none of you bought it, and probably won’t this time either.  Anyway, I still like it today and haven’t sold a single share.

In October 2021 Eurobank traded for .6x tangible book and was earning an 8% ROE, so they were trading for 8x EPS.  Euribor was -50 bps then and everyone who wasn’t a mongoloid just knew that rates would be pinned to zero forever and the banking industry was doomed.  Fast forward two years and everyone who isn’t a mongoloid just knows that high inflation is permanent.  At the time I thought, you know who would benefit from some inflation would be the banks who had loans indexed to 500 year low interest rates.  Well Eurobank has benefited from some inflation and EPS has grown from €.10/shr to probably €.30/shr this year.  Book value will compound at 20-25% annually in that time.  It’s a compounder, bros.  Today at €1.52 the stock still only trades for .8x TBV and 5x run-rate EPS.  The board just approved their first dividend since 2008.  In June elections the center right New Democracy party was given additional seats in parliament, enough to carry an actual majority with no coalition, with a resounding mandate to continue implementing the economic reforms that have powered the economic recovery.

Eurobank is truly a tank today.  CET1 stands at 16.3%.  Tangible common equity to loans is 17%.  They’re reserved to 4% of loans.  Loan to deposit is 70%.  They have roughly 50% of deposits in cash and securities.  

While owning banks with low beta deposits and high beta assets worked really well on the way up, right now it isn’t my favorite thing, but let me explain why it’s probably not a big deal in this case.  

First, EU policy rates at 3.75% aren’t as elevated as US policy rates at 5.25%, so EU banks aren’t over-earning as much as US banks.  

Second, the ECB began hiking later than the Fed.  While Euribor is up 4% from the lows, loan yields only began getting traction about nine months ago because of Euribor floors, so loan yields are only up 1.5% in Q2 from the lows.  While I fully believe (and model) that loan yields come in some in 2024 and 2025, there’s not a yawning chasm between here and the NIRP lows.  I also think that NIRP was an abject failure and won’t be tried again, and MP3 was, comparatively, a resounding success, the only policy error being the quantity.  So I don’t think that 3.5% loan yields are a sensible low case scenario in an MP3 world.  

Third, Eurobank is priced like earnings have peaked, but I don’t believe that they have.  While loan yields may peak early next year, like most banks Eurobank’s bond portfolio still has some room to reprice to prevailing yields.  This, combined with more subdued loan yields, I think could mean that NIM is stable the next few years.  

Fourth, Greek unemployment is still 11% and tourism is still recovering.  So I think that deposit and loan growth could be very decent once the rate of change in interest rates moderates or reverses.  If NIM is flat and asset growth is good, it’s possible to imagine that NII is up in two years.  The output gap also provides a long tailwind for growth that most economies don’t have.  You see this in Greece’s yield curve.  

Finally, what does it look like if NIM reverts to somewhere between these lofty levels of 3% and the NIRP lows of 1.8% - let’s say 2%?  Let’s further say that provisions go back to 1.5% as in 2020.  Well, in that scenario I think Eurobank does €.15/shr in EPS, putting the stock at 10x trough EPS in a fairly vigorous recession.  That’s not terrifying.  I also don’t think NIM is going back to 2%, meaning it’s probably more like a single digit multiple on trough EPS.  And I think the stock at €1.52 would be trading at .7x TBV at the end of that year.  

If there’s not a recession and we plug the forward curve into Eurobank’s P&L, I think they could be growing revenue at GDP type rates, and see continued moderation in provisions and further efficiency gains.  Combine these things and I think pre-tax could grow at high single digits.  And because of the low book multiple there’s the possibility to repurchase a third of the shares without even touching capital ratios.  So in a base case I think it’s possible to double EPS in three years to €.50-.60/shr.  With an ROE in the high teens, and a potentially less murky macro environment, I doubt the stock would still trade for 5x EPS.  It’s not difficult to imagine the stock doubling or tripling from here.

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