Fix Hellas

November 2, 2017 1:28 PM

To see part 1, click here

To see part 2, click here

fix hellas

No economy can recover without a functioning banking system. Greece’s banks have been in chaos for nearly a decade, during which time roughly 45% of all deposits fled overseas, forcing the need for over 120 billion Euros of Emergency Liquidity Assistance (ELA) from the ECB while new loan issuance ground to a halt. As a group, the banks currently have stated Non-Performing Exposures (NPEs) of 50%, which would be even higher if not for the billions of loans that have already been re-structured and written off. There have now been three rounds of recapitalization where tens of billions of Euros have been tossed into the black-hole known as the Greek banking system. Despite all this fresh capital, more may be needed. If it sounds like a mess, that’s because it is.

Then again, Greek banks are priced for annihilation, with the group trading for 10-20% of tangible equity, about 5% of tangible equity plus provisions and a hair over one times pre-provision income. If there is a recovery, the banks are going to be extremely leveraged to it. Despite taking a few dozen meetings over the course of two weeks, my primary focus was the banks—as no other asset gives a similar amount of upside torque.

Nothing says oligopoly like the current Greek banking system where Net Interest Margins (NIMs) are well over 300bps. Somewhat fittingly, the word “oligopoly” comes from the Greek words ὀλίγος (olígos), meaning 'few', and πωλεῖν (polein), meaning 'to sell'. During the economic crisis, over a dozen failing banks were forcibly merged to create 4 systemic banks with approximately 95% market share. Additionally, the nearly 4100 branches that existed in 2008 have been reduced to just over 2000 branches today, leading to a sizable drop in cost to income. Fortunately, high NIMs and low C/I ratios create high levels of pre-provision income—high levels of pre-provision income offsets the billions in additional provisions that the Greek banks will need to build over the next few years. Therein, lies the question; how bad are these loan books currently?

Greek Banks

A bank is largely a black box to outside observers. Having met with the management teams of 3 of the 4 Greek systemic banks, I get the sense that they’re just as mystified from the inside as I am from the outside. According to their own internal estimates, due to difficulties with foreclosures in Greece, about a quarter of all NPEs are strategic defaulters—those that have the means to pay interest, but refuse to pay as there are no consequences. A substantial portion of the remaining NPEs relate to loans that may perform if they are restructured. How much of a haircut is needed? How far must payment terms be pushed back? Will borrowers re-default in the future? How do you haircut debt levels without incurring substantial moral hazard risk for existing borrowers who are performing? The banks all have their own opinions, their own strategies, their own hopes, but no one knows the answers to these questions. In the interim, the banks continue to increase provisions as rapidly as they generate pre-provision income.

If you look at the history of bank crises, there comes a point where despite substantial new equity capital having been raised, the banking sector is still effectively insolvent, but there is enough liquidity to survive a bank run. The regulators, trying not to precipitate a new crisis, then look the other way and let the banks use pre-provision income to slowly rebuild the equity base, while working aggressively to re-structure and write off loans. It becomes a muddle and it may take many years to come out of it, but it’s in everyone’s interest to ignore the current insolvency in order to re-build trust in the banks. Greece’s banks are at that stage of the cycle. The economy is bottoming, deposits are slowly returning, allowing the (ELA) to be repaid, NPEs are being restructured and overall NPE levels peaked out many quarters ago, new NPE formations are slowing and the banks are slowly mending their balance sheets while finally raising new capital in international debt markets. Normally, this is the stage in the cycle where you want to purchase bank shares. However, I remain skeptical about the Greek banks.

greece meeting 2

Off to yet another meeting...


In a normal situation, Greece would ignore the current bank insolvency and let the banks mend. That’s what happened in America coming out of the 2008 crisis. That’s what has happened in every other banking crisis. Unfortunately, this isn’t a normal situation. The Greeks do not make the rules here, the IMF and ECB do. What are their incentives? Do they want to heal the banks or do they want to make a final example of the Greeks to scare the other periphery countries? Do they want to go home and declare victory on a Greek recovery or do they want to overcapitalize the Greek banking system so that there can be no doubt about the need for further capital raises? The recent German elections have only heightened the difficulty in ascertaining the institutions intentions and increased the range of political machinations.

It all comes down to the upcoming stress test this spring; how severe would it be? How bad will the “adverse scenario” be? The Greek banks have CET1 ratios in the 17 to 18 range. Under normal circumstances, they would be considered overcapitalized—but these are not normal circumstances, these are highly political circumstances.

After each day of meetings, we sat around beers and played out the scenarios. There’s a lot of upside if the Germans relent and let the banks heal. There could be huge downside if additional highly dilutive capital raises are forced upon the banks. Those don’t sound like great odds. Sometimes, I’m willing to risk a total loss on an investment for sizable upside. This seems like one of those situations, but as the big bad event draws nearer, it is likely to scare investors and further pressure share prices—especially as ominous statements are made by those who wish to further punish Greece. It seems likely that there will be an even better entry point a few months into the future—it is also unlikely that the entry point will be materially worse.

rape of europe

What do the banks really think about the Troika? Who knows, but every time they have a meeting with Piraeus Bank, they must walk past the "Rape of Europe" by Fernando Botero in the lobby of the HQ building--funded by bailout money. Has it helped their negotiations? Who knows, but it sure lets their regulators know what the bank thinks of them...


I went to my meetings super-bullish. I am leaving somewhat neutral. I started my trip with small starter positions, after each day of meetings, I’ve let a few more shares go, to the point where I only have token positions remaining. Guessing the next 6 months of trading action is notoriously difficult, but I do not see many scenarios where Greek banks accelerate to the upside, and I foresee many where they continue to decline leading up to the stress test. Depending on how steep the declines are, I may add back some shares or do nothing. Once we know the outcomes of the stress tests, I’ll almost certainly be a buyer of either the last and final recapitalization rounds or the rally from an oversold situation if no more capital is needed. In any case, the final bottom in Greek banks will happen sometime in 2018. Despite the black-box nature of bank balance sheets, I believe that the banks are being truthful about current NPE levels and that they’re likely over-reserving—particularly if there is a recovery that allows them to restructure outstanding loans on more advantageous terms and release current reserves. Finally, recent law changes will favor the banks in allowing out of court settlements and the initiation of online property auctions will speed up the sale of foreclosed property, while scaring strategic defaulters into becoming current on their loans. While the laws have changed, the processes have yet to begin. As we see the first auctions in December, we will learn a lot more about where properties are marked on balance sheets, compared to market prices and we will get a sense for the pace of future NPE resolutions.

Overall, I’m bullish on Greece. There are still many problems, but the economy has likely bottomed. Banks are my preferred way to express that thesis and current valuations offer an attractive entry point. I’m just worried about the need to raise additional capital. When I get clarity on that, I get clarity on when to invest. In summary, there’s no reason to do much of anything today, except stay on top of the situation.

For those who want to follow along at home or directly investing on the Athens Stock Exchange, I recommend reaching out to Nikos Katsenos who’s been an outstanding guide over the past week. His group publishes great research on Greece, the banks and other publicly traded companies in Greece.


Disclosure: Funds that I manage are long shares of Alpha Bank and Piraeus Bank

Categories: Travels
Positions Mentioned: TPEIR, ALPHA
Comments (0)

My Big Fat Greek Tax Scam

October 26, 2017 10:32 AM

To see part 1, click here


Sacha Imbert (Portfolio Manager at RBC): Hey Kuppy, this receipt says we’ve just used a Bulgarian POS to pay for lunch!!!

Me: Whoa!!! That can’t be right.

Waiter: Don’t worry, it’s a famous Greek trick. Revenues go to Bulgaria, expenses stay in Athens. We also get around the exchange controls.

Me: Won’t the Greek government get upset?

Waiter: Actually, they’re pretty happy we’re screwing the Germans… How else will the economy grow?

Sacha: No wonder the Greek Banks have such profitable Bulgarian subsidiaries… haha

Yup, everything you’ve heard about Greek tax scams is true. Then again, how can you blame the Greeks. Based on all the new taxes enacted by the Troika, effective tax rates are well over 100%. If Greeks actually paid them all, there would be nothing left—so when Greeks say, “We are Greek, cheating taxes is patriotic,” they tend to mean that.

greek yachts

What crisis? Look at this row of yachts in Athens.


At the same time, this creates all sorts of distortions in the economy. Greek corporates are issuing bonds at a 200bps tighter spread than the Greek sovereign, Greek banks are starved of liquidity as Greeks shift capital overseas or into mattresses and government economic data is questionable at best. In fact, quite a few Greeks attributed the recent economic recovery to an increased use of credit cards which government statistics do a better job of capturing—as opposed to a true recovery.

During my dozens of meetings with Greeks, I always asked the same questions;

“What percentage of Greece’s economy is off the books?” 20 to 30%

“Are you hiding money offshore?” Of course

“How many secret Cypriot companies do you control?” At least 2

Is it any wonder that the economy has struggled recover? When you enact excessive taxes and regulations, people will always sidestep them with high frictional costs and losses for the overall economy—particularly if the enforcement policy wavers between lax and corrupt. How Greece eventually solves these problems will tell you a lot about how far the economic recovery can actually go.

In the interim, it’s always helpful to know that paying with cash gets you a free glass of wine and when you have run out of cash; the “broken” credit card-reader will miraculously work…

Categories: Travels
Positions Mentioned: none
Comments (0)

Greece: An Ouzo Hangover Of Mythological Proportions

October 25, 2017 1:25 AM

Back in July, I re-posted an article that my good friend, Chris, at Capitalist Exploits had written about Greece. I had found the idea of a Greek economic recovery intriguing, but hadn’t really followed up on it. Over the following weeks, a number of people reached out to me and noted that I really should take a more serious look. In particular, they said that I should look at the Greek banks, as they are potentially undervalued and highly leveraged to any recovery. Since the flight from Bishkek, Kyrgyzstan to Miami effectively passes over Greece (with a stop in Istanbul), I figured it would be silly not to stop for a few days. So, I rounded up some investor friends and decided to learn something about Greece. Here’s that story.

Sitting in Greece, the American Great Depression looks like a picnic. Greece has been in a 9 year recession that has seen almost 30% unemployment, and nearly a third of GDP disappear. Property prices are off by roughly half and tens of thousands of businesses have closed as a result of crushing debt-loads. There have now been three rounds of bank re-capitalizations and there may very well be a fourth round. In summary, the economy is a mess and Greece is insolvent. As we all know, a crisis creates opportunity and I went to Greece to learn what I could about it. However, before looking at the opportunity, it’s important to understand how Greece got into this mess.

It all started with the conversion of Drachma into Euros in 2000. This led to a virtuous cycle where Greek interest rates converged with European rates, allowing both the government and the private sector to borrow excessive sums at declining interest rates, creating a huge consumer debt and property bubble and allowing the Greek government to embark on substantial increases in social programs, that increased consumer spending. As this was going on, a shipping boom endowed many wealthy Greeks with generational sorts of profits that were plowed into more leverage and vessels, creating thousands of high-paying jobs in the process. When things were going well, they were going very well, despite multiple growing imbalances in the Greek economy.


When the 2008 crisis hit, these imbalances also hit. Unable to fund its trade, current account and fiscal deficits, Greece should have devalued its currency to become more competitive. Unfortunately, by trading Drachmas for Euros, Greece lost this ability. Greece could have defaulted, as US cities have done when faced with a similar dilemma, but the Troika threatened expulsion from the Euro if Greece did that. Instead, the government submitted to an austerity program instituted by the Troika. The problem is that when Greece cut spending and raised taxes in order to balance the budget, it also starved the overall GDP, which makes the debt to GDP ratio worse. Reduced GDP meant that businesses had less income to cover their interest costs—leading to an accelerating spate of bankruptcies. This then led Greece to miss its Troika mandated budget targets, leading to new rounds of austerity and new waves of corporate bankruptcies. Greece has been in this downward spiral for 9 years now, with annual increases in austerity that have served to further strangle the economy.

Of course, the austerity hasn’t been the only cause of the continued crisis. Political volatility, threats of a left-ward lurch in the government and anti-business actions by 3 successive governments have made these issues worse, while threats to leave the Euro have scared off international investors and domestic depositors. Fortunately, this is mostly in the past. The time to leave the Euro was in early 2015, just as the radical left SYRIZA government came into power. SYRIZA played chicken with the Troika in an effort to force debt reductions, but ultimately blinked and in the process, became dramatically less radical and more centrist. There is no longer a strong party that is politically left of SYRIZA or focused on abandoning the Euro and the center right New Democracy party is leading in the polls. Either party now seems benign for the economy while foreign investors would likely welcome a New Democracy win.

With the politics in Greece finally stabilizing, the economy itself has begun to recover. Greece completed its second IMF review in June of 2017 and following that, multiple economic statistics are printing positive for the first time since 2007. Greece floated its first sovereign bond in 9 years in July at a yield of 4.625%, more bonds are to follow. While chaotic, privatizations are finally beginning. Additionally, despite exchange controls, deposits are returning to the banking system, allowing banks to repay their ELA facilities and ultimately begin to make new loans that support economic growth. The third review is expected to be completed around March of 2018, at which point Greece will have exited from the IMF program, though it will still have to follow many conditions.


greece 4


While the economy is clearly on an up-swing, there is much that is still unhealthy; the banks have Non-Performing Exposures (NPEs) in the high 40s, the Greek government can never repay its debts and new rounds of austerity are envisioned in 2018 and 2019. Additionally, excessive bureaucracy and high taxes serve to cripple businesses, while most companies are still operating at crushing debt levels which do not allow them to de-lever, much less invest in a recovery. Finally, Greece has suffered a brain drain over the past decade that it may never fully recover from. Still, Greece is witnessing its first green shoots in a decade and as an investor, I've taken note of this.

Remember, huge gains can be made when a situation goes from awful to slightly less bad. I believe that after 9 years of economic contraction, Greece is in such a situation today and all indicators seem to show that the bottom in the economy was sometime this spring. While I expect the next few years to show a muddle with 1-2% GDP growth, a recovery from crisis to stability could lead to a lot of upside in certain sectors that have been abandoned by investors. I’ve spent the last week taking dozens of meetings with everyone from senior management at 3 of the 4 systemic banks, to property companies to senior government officials to your average Uber driver and bartender. If ever there was a time to buy into Greece, now is the time—especially as almost nobody in the investment world is talking about it—making my view one of deep contrarianism. The question for me is; how to play it?

To be continued…

Categories: Travels
Positions Mentioned: none
Comments (0)

Kuppy Does Kyrgyzstan...

October 22, 2017 4:21 AM

“No pork tonight because this is a Muslim country, but don’t worry, we’ll drink twice as much vodka to make up for it”

Yup, I’m in Kyrgyzstan, checking off another box, on my long-postponed ‘Stan tour. Like all good adventures, this one started over drinks with some new-found friends.

Him: You really should go visit our stock exchange

Me: Sure, can you make an introduction to someone there?

Him: It’s not needed. Just show up. Don’t worry, they’ll be happy to see you

The next morning, while shaking off my hang-over, I stumbled over to the Kyrgyz Stock Exchange—which isn’t the easiest place to find. I walked into a dimly lit atrium, past a fountain which hadn’t been used in years and started roaming around—doing my best impression of a lost foreigner who doesn’t speak Kyrgyz, while a security guard yelled at me, waving his arms emphatically to block me. After a few minutes of this, someone official came out and in broken English, motioned for me to come into his office.


Him: Why are you here?

Me: I want to learn about your stock exchange.

Him: Why?

Me: I’m an investor who’s invested in many frontier markets.

Him: There’s nothing to buy here.

Me: Isn’t this a stock exchange?

Him: Yeah, but too hard to buy anything.

Me: Huh?

Him: Not much trading.

Me: How much has traded so far today?

Him: (scanning a 15 year old CRT monitor) We haven’t had any trades yet today.

Me: What about yesterday?

Him: It was a huge day. Biggest in a while. There were 3 trades.

Me: That’s big?

Him: Huge!!

Me: How much dollar volume?

Him: Almost 200,000 Som.

Me: Wait, isn’t that less than US $3,000?

Him: Yea, it was a HUUUGGEEE day.

Me: What do you recommend that I buy?

Him: Nothing.

Me: Aren’t you supposed to attract investors to create volume?

Him: Maybe.

Me: What is the most popular stock on the exchange?

Him: The Manas Airport Company (owner of all the country’s airports)

Having visited many frontier markets over the year, I’ve learned that earnings are an opinion, yet dividends are real. More importantly, dividends are what is left over after the local oligarchs have had their way with the company’s actual profits. It’s their way of sharing a bit of the wealth with their favorite friends who also own shares. Dividends are also a way of showing the success of a business to the rest of the business community—hence they tend to stay constant or grow—rarely declining unless there’s an economic crisis. I tend to find them a useful benchmark for a company’s growth—however inaccurate the actual financials are.

Me: So, what is the dividend yield?

Him: 30%, but it is too low. By law, they have to pay out 25% of earnings as dividends, but we think they should pay out a higher percentage.

Me: Whoa!! Wait!! Your national airport is trading at less than one times cash flow and a 30% dividend yield? Your math must be wrong.

Him: (calling in 2 official looking ladies who discuss my question for 10 minutes in Kyrgyz) I think we might be right—maybe.

Lady: (correcting him) We don’t understand the question.

Me: Is your national airport monopoly trading at a 30% dividend yield?

Him: No.

Her: Yes.

Him: Maybe?

Me: I’m confused.

Them: So are we.

Me: Can I speak with a broker.

Him: Yes, we have those.

Me: Do any speak English?

Him: We have only one that speaks English—don’t worry, he runs the “Goldman Sachs of Kyrgystan.”

After a 10-minute walk down a dark ally, I finally found their 200 square foot office. The elevator to the 6th floor was broken (but I needed the exercise anyway).

KSE Broker

Global HQ of Goldman Sachs of Kyrgyzstan


Broker: Why are you here?

Me: (This routine again?) I want to know about which stocks to buy.

Broker: Why?

Me: You’re kidding, aren’t you supposed to try and sell me something so you can earn commissions?

Broker: Maybe.

Me: I heard your airport monopoly is trading at a 30% dividend yield.

Broker: Yes, but it’s a bad investment. They only pay out 25% of dividends.

After a quick glance at the financial statements (naturally in Kyrgyz), I realized that not only is it at less than one times cash flow, but stated cash flow and dividends are increasing at roughly 20% each year, due to continued increases in passenger traffic.

Me: Why is this at such a cheap price?

Broker: Because no one tries to buy it.

Me: How many shares traded last week?

Broker: About 13

Me: Screw it, I’m in. I’ve certainly invested in crazier things. How long do you think it will take to buy 10,000 shares?

Broker: A year or maybe 3.

Me: Well, let’s get started, I want to open an account.

Broker: Wow, we haven’t had a new client in years.

Me: Aren’t you the biggest broker in Kyrgyzstan?

Broker: Yeah, we are. No one ever wants to invest.

Kyrgyzstan is an undiscovered gem. The people are friendly, the food is great and the scenery in the countryside is amazing. Even better, it is a stable country, growing at 5% +/- a year. I guarantee you that in 10 years, there will be many more tourists landing at the airport than this year, as it’s completely undiscovered, but certainly will be. Heck, I couldn’t even spell the country’s name until last week.

The moral of the story is to never stop looking for opportunities—never stop asking ridiculous questions—never stop following up on strange leads—never let your new broker’s lack of English language skills get in the way. You may actually uncover an infrastructure asset with a 30% dividend and a 20-year history of double digit dividend growth, at less than one times cash flow, at less than 20% of stated book value and 5% of replacement cost, roughly 90% owned by Kyrgyzstan’s government with a government mandate to distribute at least 25% of cash flow in order to offset the government’s budget deficit. These things really do exist, even in a world where quants are supposed to uncover these companies. The markets are never fully efficient—it just takes some vodka with friends to get there.

Now, does anyone want to cross me a block?

To be continued…

Kyrgyz National Park

National park an hour outside of Bishkek. Pretty amazing place (too bad I was only equipped with an iPhone)

Categories: Travels
Positions Mentioned: none
Comments (0)

Mall Tour 2017 (Part III)

August 27, 2017 10:40 PM

Ever since the first Sears catalog was published in 1888 (the of its day), pundits have called for the death of retail establishments. It’s easy to see why they would think that such a thing was happening—namely stores around them were closing in rapid succession. Of course, these successive waves of retail disruption (the appearance of Woolworth’s, SS Kresge, K-Mart, Wal-Mart, the advent of malls, big box stores, the birth of suburbia, online shopping, etc.) have occurred and only served to make American retail stronger and more versatile. Only two decades ago, the mere mention of a Wal-Mart coming to a town would lead to near riots as disparate groups from local retailers to unions would unite to protest. Now, Wal-Mart itself is struggling against online retail. Despite more than a century of change, disruption and repeated waves of retailer bankruptcies, the only constant is that consumer spending has increased each decade. In the end, consumers want stuff, they just want different stuff; delivered in different ways. Those who can figure out where retail is going, are set to earn excessive profits.

I started this whole adventure (Mall Tour 1, Mall Tour 2) to see what I could learn about the direction that retail is going. While it is obvious that online shopping will control a growing percentage of the pie when it comes to retail, there will be many niches in the world of bricks and mortar that also thrive—despite or possibly because of online. If you look back twenty years, Wal-Mart’s assault on the retail industry only abated when retailers stopped competing on price, and started competing on quality, selection and service instead. If online shopping will further broaden the powers of selection and service, where are the remaining niches?

I recently read One Buck At A Time the story of Dollar Tree Inc, by Macon Brock, the co-founder of the chain. I was struck by his tenacity to drive costs lower, but also to find unique products that would retail for a dollar, while costing the company a good deal less when bought in massive quantities. What is even more interesting, is that Brock had started his empire by growing a chain of mall-based toy stores, only to have the advent of big box toy retailers like Toys R Us gain the upper hand in his industry. Rather than compete directly against the big box retailers, he admitted defeat, sold out and looked for a retail concept that would not be held hostage by the box stores. It taught him that most stores cannot compete against a larger selection, and a lower cost structure. Dollar Tree does neither—all its wares are available on the internet, but no one is going to pay for shipping an item worth only $1.00. Even better, almost all wares are impulse buys, with the convenience of basic household consumables as the draw for customers. This really struck me, as Dollar Tree is a retail concept that is more than just surviving—in fact, it’s thriving against internet options. What else will survive?

one buck at a time

That’s what I have been wondering for the past few weeks. Along the way, I’ve spent a good deal of time exploring different retail concepts. I went to the local antiques flea market. Business is healthy. These are one-of-a-kind bulky items. Despite well recognized international systems for grading and assessing wear, purchasers want to see the goods themselves in person. Next door, the local food court was humming with local produce, local prepared foods, ethnic foods. You can produce and ship from online, but you miss out on the experience of sampling dozens of products in an hour. As we moved further along in this old warehouse, we saw vintage used goods—also doing quite well. Vintage sizes aren’t always comparable with modern clothing sizes—you really do need to try them on. Here’s an epiphany, there’s a whole class of goods that can be sold online, but sell better in person. Moreover, these goods are retailed by local individuals who are perceptive to local tastes and can adapt rapidly to changes in their local community. The whole “local” movement is alive and well. The internet cannot compete with that.

What about those who cannot access the internet? This may sound stranger than you would have thought, given the proliferation of smart phones, but 7% of the population is unbanked and another 20% of the population is underbanked. Another 3% of the population is illegal. These percentages overlap, but you have many people who cannot or will not be able to order online. When you have tens of millions of customers, you have a huge addressable market that many of us largely ignore—yet by sheer size, these people represent a massive customer base. Those providing goods and services to this group will survive and thrive, especially as the economy bifurcates between those who have access to credit and those who do not.

Despite my belief in a mass-extinction event for retail and commercial real estate, I want to be clear that there will be winners. Dollar Tree is a winner, but it is all grown up. What’s the upside there? The key will be discovering the next generation of winners. I sure as hell am not setting up as an antique vendor, though many of these local retailers are more than prospering. I want actual companies to invest in. Who are the winners that are; largely immune to the internet or even supported by it? That are built for the next generation of consumer tastes? That are already at a scale so that we can invest? There is a huge wave of disruption coming. Those who can figure out the winners, will make lots of money.

To be continued…

Categories: Travels
Positions Mentioned: none
Comments (0)


Let me know when Kuppy posts a new comment. My email address is:

 (No spam, ever.)