National Bank of Greece Falls on Dilution Fear - Analyst Blog

Shares of National Bank of Greece SA NBG declined nearly 15% on Apr 14 after a Reuters report stated that the company was planning to raise additional capital by issuing shares. Headquartered in Athens, Greece, the bank will be issuing roughly €2.2 billion ($3.03 billion) worth of shares to plug in its capital deficit, though the final decision will be taken by its board of directors today.

Last month, in the stress test results announced by the Bank of Greece, the company was found to have a shortfall in capital. Consequently, National Bank of Greece announced plans to raise this amount through internal improvements and sale of non-core operations, and not through issue of additional shares.

However, the company's plan was rejected by the central bank on Apr 12. Thereafter, Reuters reported that National Bank of Greece was considering the issue of additional shares to meet this shortfall, which made investors wary. This led the shares of the bank to crash during the trading session on Monday and close at $4.46 per share.

Further, Morgan Stanley MS and The Goldman Sachs Group, Inc. GS will likely be global coordinators for the share offerings.

National Bank of Greece is approximately 84% owned by the Hellenic Financial Stability Fund (HFSF), a rescue fund established to maintain stability in Greek banking system. Notably, the company returned to profit last year, with net income of €809 million. This was a significant improvement from a loss of €2.1 billion in 2012.

National Bank of Greece's plan to issue additional shares to raise capital will lead to dilution of shareholders' value. However, we consider this move to be in the right direction.  

It is urgent for National Bank of Greece to raise capital. Instead of issuing debt to cover the shortage, we believe that the bank's plan of raising capital through share offerings is a prudent way to avoid unnecessary interest expense. Also, by opting for a less risky route to raise capital, the company will likely be financially stable in the long run.

Currently, National Bank of Greece carries a Zacks Rank #3 (Hold). A better-ranked foreign bank worth considering is ICICI Bank Ltd. IBN, which sports a Zacks Ranks #1 (Strong Buy).