Fairfax stock positions

[SafetyinNumbers]

Good point. Effectively as long as the duration of the portfolio is lower than the duration of the claims, book value shoild net benefit from higher rates. I don’t invest based on macro but my bet is that long rates end up going higher than short rates at some point during this cycle. They seem positioned well for that outcome if it happens.

[petec]

They've been very clear that they won't change how they think about reserving as a result of IFRS17. I would assume they won't let it change how they think about the investing side either. They've always been about making actual money in the long term rather than worrying about accounting book value in the short term. I very much doubt that's changed and I doubt IFRS17 drove the 1q duration decision.

 

I do think IFRS17 will slowly change the way the market think about the stock, though.

[gfp]

I can't remember off hand if it was 2 year or 3 year notes they were locking in with the futures/forwards, but I remember the rate they locked in was around 3.75%.  It should be noted that so far that was a horrible bet.  US2Y Yield is currently 4.92% and US3Y Yield is currently 4.545%.

[SafetyinNumbers]

2 hours ago, gfp said:

I can't remember off hand if it was 2 year or 3 year notes they were locking in with the futures/forwards, but I remember the rate they locked in was around 3.75%.  It should be noted that so far that was a horrible bet.  US2Y Yield is currently 4.92% and US3Y Yield is currently 4.545%.

Another way to frame is that wasn’t the bet, that was taking part of the bet off. The bet was and continues to be keeping bond duration below the claims duration. It just makes less sense to take that big an active risk when rates are higher across the curve. 

[gfp]

I'm not sure I get this focus on the "claims duration" - the float is a revolving fund that is usually growing.  This isn't some pure life insurance operation.  Berkshire has never tried to match investment duration to some measure of average claims duration.  The float's duration should be something like centuries in a well run, growing P&C insurer.

[TwoCitiesCapital]

46 minutes ago, SafetyinNumbers said:

Another way to frame is that wasn’t the bet, that was taking part of the bet off. The bet was and continues to be keeping bond duration below the claims duration. It just makes less sense to take that big an active risk when rates are higher across the curve. 

 

+1

 

My preference would be that they STOP taking huge swings on the bond portfolio. 

 

Selling everything and moving to short term bonds in 2016 meant shareholders missed out on a ton of interest income from 2016 - 2022. They appeared right upfront, but then missed the turn, and we sat at declining interest income to near 0 for 6 years without any real tangible benefit to book value and etc. 

 

I don't mind them taking active bets in fixed income, but to push the ENTIRE portfolio on a single view is crazy to me - even if the largest risk was giving up 100% of upside as opposed to the risk of loss. I'm glad to see them reducing the size of this massive bet on rates given that they missed the turn last time around. 

[Xerxes]

1 hour ago, TwoCitiesCapital said:

 

+1

 

My preference would be that they STOP taking huge swings on the bond portfolio. 

 

Selling everything and moving to short term bonds in 2016 meant shareholders missed out on a ton of interest income from 2016 - 2022. They appeared right upfront, but then missed the turn, and we sat at declining interest income to near 0 for 6 years without any real tangible benefit to book value and etc. 

 

I don't mind them taking active bets in fixed income, but to push the ENTIRE portfolio on a single view is crazy to me - even if the largest risk was giving up 100% of upside as opposed to the risk of loss. I'm glad to see them reducing the size of this massive bet on rates given that they missed the turn last time around. 

indeed. But that craziness provided opportunity for the individuals to buy the stock well below book value and substantially. 

[dartmonkey]

 

7 hours ago, gfp said:

I can't remember off hand if it was 2 year or 3 year notes they were locking in with the futures/forwards, but I remember the rate they locked in was around 3.75%.  It should be noted that so far that was a horrible bet.  US2Y Yield is currently 4.92% and US3Y Yield is currently 4.545%.

 

According to the Q1 report, their bond position went from $29,001 on Dec 31st to $32,545 on Mar 31st, so they basically invested $2.5b of cash into bonds. 2y rates went from about 4% in January, to a peak of 5% in early March, and then back down to around 4% for most of April and May, and then, late May and June back up to almost 5%, as you note. 1y yields are a little higher, 3y yields a little lower. When I saw they had put about $1.4b of cash and short term investments, plus another $1b of Q1 earnings, into 1-3y treasury bonds with a duration of about 3 years, but not more, I thought they had maybe waited a bit too long again, but no, rates are back up to 5%. 

 

Would it have been better if they had hit the top 5% treasury yields (mid-March or right now)? Should they have held out for even higher rates? Who knows, but I am glad they have locked in $1.5b of interest and dividends for the next 3 years. They have some pretty significant earnings coming in this quarter (closing of Ambridge, for instance), so they may be able to sweeten the interest income stream a bit more, now, we will see. But with their pretty stellar track record of getting their macro interest rate calls right, over the years, so I am not going to criticize them for not hitting the exact peak.

 

 

[SafetyinNumbers]

7 hours ago, TwoCitiesCapital said:

 

+1

 

My preference would be that they STOP taking huge swings on the bond portfolio. 

 

Selling everything and moving to short term bonds in 2016 meant shareholders missed out on a ton of interest income from 2016 - 2022. They appeared right upfront, but then missed the turn, and we sat at declining interest income to near 0 for 6 years without any real tangible benefit to book value and etc. 

 

I don't mind them taking active bets in fixed income, but to push the ENTIRE portfolio on a single view is crazy to me - even if the largest risk was giving up 100% of upside as opposed to the risk of loss. I'm glad to see them reducing the size of this massive bet on rates given that they missed the turn last time around. 

 

Have you figured out how much it did cost from '16-22 vs the benefit of being able to grow aggressively during a hard market by keeping the optionality? I think there is an answer to that question and it's complicated. Would make for a good case study in capital allocation. 

[SafetyinNumbers]

7 hours ago, gfp said:

I'm not sure I get this focus on the "claims duration" - the float is a revolving fund that is usually growing.  This isn't some pure life insurance operation.  Berkshire has never tried to match investment duration to some measure of average claims duration.  The float's duration should be something like centuries in a well run, growing P&C insurer.

The float should grow infinitely in a well run insurance operation but I think it makes sense to never let investment duration get to long because a mismatch adds unnecessary risk and perhaps more importantly gives up optionality. 

[TwoCitiesCapital]

59 minutes ago, SafetyinNumbers said:

 

Have you figured out how much it did cost from '16-22 vs the benefit of being able to grow aggressively during a hard market by keeping the optionality? I think there is an answer to that question and it's complicated. Would make for a good case study in capital allocation. 

 

Hard to say. Was hundreds of millions, if not billions, in foregone income. There's also the potential opportunity cost of the compounded returns on those dollars. During this period of time they also sold and repurchased subs to fund growth - they could've sold less, or at a higher valuation, if they had higher book values and could've been better capitalized to write more business when the market did get harder post-covid. 

 

How much does all that equate to versus the last 12-15 months of higher interest income and not writing down intermediate bonds? Hard to say. 

 

But this time around, I'm glad that they're locking in some of the winnings instead of pressing the bet. 

[SafetyinNumbers]

42 minutes ago, TwoCitiesCapital said:

 

Hard to say. Was hundreds of millions, if not billions, in foregone income. There's also the potential opportunity cost of the compounded returns on those dollars. During this period of time they also sold and repurchased subs to fund growth - they could've sold less, or at a higher valuation, if they had higher book values and could've been better capitalized to write more business when the market did get harder post-covid. 

 

How much does all that equate to versus the last 12-15 months of higher interest income and not writing down intermediate bonds? Hard to say. 

 

But this time around, I'm glad that they're locking in some of the winnings instead of pressing the bet. 

Having a short duration heading into a hard market when rates are rising allowed them to write a lot of business when others couldn’t. Anyway, if someone wants to do the calculations with some reasonable assumptions, it would be an interesting analysis. 

[Thrifty3000]

On 7/3/2023 at 7:48 AM, gfp said:

I can't remember off hand if it was 2 year or 3 year notes they were locking in with the futures/forwards, but I remember the rate they locked in was around 3.75%.  It should be noted that so far that was a horrible bet.  US2Y Yield is currently 4.92% and US3Y Yield is currently 4.545%.

For something like 90% of the last quarter century rates were lower than what they locked in. In that context I think what they did is pretty extraordinary.

 

Knowing they don’t have an interest rate crystal ball it feels like it would be irresponsible and overly conservative to wait for rates to hit the 99th percentile before making a move.

[Thrifty3000]

Just now, Thrifty3000 said:

For something like 90% of the last quarter century rates were lower than what they locked in. In that context I think what they did is pretty extraordinary.

 

Knowing they don’t have an interest rate crystal ball it feels like it would be irresponsible and overly conservative to wait for rates to hit the 99th percentile before making a move.

When Buffett has been asked in the past why he didn’t foresee some market top or bottom he has responded that if he had any such crystal ball he wouldn’t be investing in equities, because he would be able to make a whole lot more money trading derivatives.

[gfp]

1 hour ago, Thrifty3000 said:

Knowing they don’t have an interest rate crystal ball it feels like it would be irresponsible and overly conservative to wait for rates to hit the 99th percentile before making a move.

 

Sure but my point was that in the 3 month period they purchased these forwards the 3Y note rate was between 4.75% and 3.4%.  This isn't a case of waiting around for the 99th percentile or something.  Those were the rates available during the quarter they chose to purchase the forward contracts.  I think they thought they missed it and scrambled to lock in more at 3.75%.  

[MMM20]

Past is prologue. FFH should still have plenty of good opportunities to deploy capital at higher rates / longer duration at good risk reward. They’ve set themselves up to generate so much cash over the next few years that they probably just need to get the reinvestment roughly right for us to do just fine from ~5x earnings…

 

wake me up at US$2000…

 

Edited July 4, 2023 by MMM20

[glider3834]

https://www.bloomberg.com/news/articles/2023-07-07/greece-s-eurobank-plans-to-expand-overseas-wealth-management

[nwoodman]

MS released an updated note on the Greek Banks (attached).  Fairfax owns approx $2bn of Eurobank shares.  Eurobank closed on Friday at EUR 1.55.  Eurobank is not paying a dividend this year as the funds are being used to repurchase shares.  From the Q1 press release

 

"Rewarding shareholders is now becoming key in our strategy. Specifically for 2023, the amount earmarked for dividend distribution will be used in an optimal way to bid for the 1.4% HFSF stake through a share buyback scheme. For next year onwards, we envisage a payout ratio of at least 25%, in the form of cash dividends and share buybacks. Overall, we are pleased that we consistently outperform our targets for several years.”

 

 

greek_20230709_0000.pdf

Edited July 9, 2023 by nwoodman

[Viking]

 

@nwoodman thank you for providing the MS report. It motivated me to write an update on Eurobank.

 

Eurobank's stock is one again hitting all time highs (€1.595 today). It is now tied with Poseidon/Atlas as Fairfax’s largest equity holding. Time to do a review of what has been Fairfax’s best performing equity holding over the past couple of years. This review will focus on the numbers and will be mostly forward looking.

 

Who is Eurobank?

 

Eurobank is one of the largest banks in Greece (and the region). Its core markets are Greece, Bulgaria and increasingly Cypress. It is recognized as being one of the best managed banks in Greece.

• Q1, 2023 Management Presentation: https://www.eurobankholdings.gr/-/media/holding/omilos/grafeio-tupou/etairikes-anakoinoseis/2023/1q-2023/1q2023-results-presentation.pdf

Of interest, Eurobank, Eurolife and Grivalia (all Fairfax holdings) are all joined at the hip. More on this in another post.

 

Let’s start by looking at the big picture.

 

What are prospects for the Greek economy?

 

Greece is positioned very well right now. The Greek economy turned the corner a couple of years ago now. Tourism is booming. As is the property market. Prime Minister Mitsotakis (center-right) was just re-elected with another majority for a second consecutive 4-year term. This ensures the significant economic (pro-market) reforms to the Greek economy will continue. Greece is expected to have one of the better performing economies in Europe over the next couple of years. This is a very positive backdrop for Eurobank.

 

How much of Eurobank does Fairfax own?

 

Fairfax owns 32.2% of Eurobank (1.166 billion shares). A stake worth $2 billion today.

 

Timeline of key events for Fairfax and Eurobank:

• Dec 2014: FFH investment #1 in Eurobank of $444 million for 12.5% position
• Nov 2015: FFH investment #2 in Eurobank (recapitalization) of $389 million for 17% position
• Dec 2015: FFH purchase of 80% of Eurolife from Eurobank for $360 million
• May 2019: Eurobank recapitalization / merger with Grivalia Properties - Fairfax owns 32.4%
• July 2022: Fairfax increases stake in Grivalia Hospitality from 33.5% to 78.4% (from Eurobank) for $195 million

Importantly, Eurobank is Fairfax’s minority partner in Eurolife and Grivalia Hospitality.

 

How important is Eurobank to Fairfax?

 

Eurobank is tied with Poseidon/Atlas as Fairfax’s largest equity holding. With a market value of $2 billion, Eurobank represents about 12% of Fairfax’s total equity holdings of around $16.3 billion.

 

 

For context, Fairfax has an investment portfolio of about $56 billion, with fixed income investments of $40 billion and equities of $16.3 billion.

 

What is the trend for earnings at Eurobank?

 

Earnings have been on a steady upwards trajectory in recent years. Management is guiding to earnings of €0.22/share in 2023. Management is conservative with their forecasts. Analysts are expecting earnings to come in around €0.24/share in 2023.

 

 

How has the stock price of Eurobank performed?

 

Eurobank’s stock price has been spiking higher - it is up 176% over the past 30 months. The market value of Fairfax’s position in Eurobank is up $1.3 billion over the past 30 months, or $56 per Fairfax share. Clearly, Mr. Market is recognizing and rewarding the improving fundamentals and results at Eurobank.

 

 

How is Eurobank stock valued today?

 

Despite the 176% increase over the past 30 months, Eurobank’s stock is still cheap (sound familiar?). The stock is trading at a forward price earnings of 6.65; price to tangible book value of 0.83; return on tangible equity of 12.5%.

 

 

Note: I used the analysts guide for EPS for 2023 of €0.24/share because it is the likely number.

 

Morgan Stanley currently has a price target for Eurobank of €2.10/share = $2.29/share. With shares trading at €1.595 today this suggests 32% upside. Currently 79% of analysts who follow Eurobank have the stock rated ‘Overweight’. 

 

Of interest, if Eurobank traded at €2.10/share, Fairfax's position would be worth $2.675 billion. 

 

How is Eurobank valued on Fairfax’s books?

 

Eurobank is not a mark-to-market holding for Fairfax. Since Jan 1, 2020 it has been a consolidated holding (equity accounted). At March 31, 2023, Eurobank had a carrying value at Fairfax of $1.6 billion.

 

So as of today there is an excess of $400 million of market value over carrying value ($17/share pre-tax). This excess is not captured in Fairfax’s reported financial results (although they do highlight it in their commentary). This is a good example of where Fairfax’s book value is understated.

 

 

How do results at Eurobank flow though to Fairfax?

 

Dividends. Eurobank currently does not pay a dividend. The plan is for Eurobank to start paying a dividend in 2024. In Q1 2023, Eurobank said they are targeting a minimum payout ratio of 25% - for both dividend and buybacks - in 2024.

 

Let's assume Eurobank goes with a payout ratio of 20% for the dividend. This would likely mean an annual dividend of around €0.048/share. In this scenario, Fairfax would start receiving dividends of $61 million per year.

 

For context, Fairfax currently receives about $135 million in dividends per year from all their various holdings. A dividend from Eurobank would increase this amount by 45%. This would be significant for Fairfax. Something to watch for in 2024.

 

 

Share of profit of associates. Eurobank is a big reason we are seeing ‘share of profit of associates’ at Fairfax spike to over $1 billion per year in recent years. And as Eurobank grows earnings ‘share of profit of associates’ at Fairfax will only grow more.

 

 

Investment Gains. Down the road, as Eurobank gets more fully valued, Fairfax could start to sell down its large position. That would crystallize any 'excess of fair value over carrying value'. Today the 'excess' is $400 million.

 

How much has Fairfax earned from this holding since inception?

 

Fairfax is up about $935 million or 85% over the 8.5 years it has owned Eurobank.

 

 

 

Fairfax 2019AR Prem’s Letter: “The animal spirits are coming back to Greece and we think the Greek economy and Greek companies will thrive. Eurobank should benefit!! Our cost of 1.2 billion shares of Eurobank after the Grivalia transaction is now 94¢ versus a book value of approximately 135¢ per share post the transaction. At year end, Eurobank was selling at 68% of book value and 6.5x normalized earnings. We still believe it will be a good investment for us.”

 

Conclusion

 

Despite getting off to a terrible start in 2014, Eurobank has turned into a very good investment for Fairfax. This has only happened due to the hard work over many years from the Eurobank team in Greece, lead by CEO Fokion Karavias and Vice Chairman George Chryssikos. Having a long-term oriented, strong, supportive and patient partner in Fairfax also helped greatly.

 

Most importantly, Eurobank is poised to perform even better in the coming years. Given it is such a large holding this should benefit Fairfax shareholders greatly.

 

Making the initial investment in Eurobank also had important added benefits for Fairfax. It led Fairfax to buy 80% of Eurolife which has been an exceptional investment. It also led them to buy a 78.4% stake in Grivalia Hospitality (it is still early days on this investment). Importantly, Fairfax is viewed as being a trusted and strong foreign investor and partner in Greece.

 

Edited July 12, 2023 by Viking

[glider3834]

11 minutes ago, Viking said:

 

@nwoodman thank you for providing the MS report. It motivated me to write an update on Eurobank.

 

Eurobank's stock is one again hitting all time highs (€1.595 today). It is now tied with Poseidon/Atlas as Fairfax’s largest equity holding. Time to do a review of what has been Fairfax’s best performing equity holding over the past couple of years. This review will focus on the numbers and will be mostly forward looking.

 

Who is Eurobank?

 

Eurobank is one of the largest banks in Greece (and the region). Its core markets are Greece, Bulgaria and increasingly Cypress. It is recognized as being one of the best managed banks in Greece.

• Q1, 2023 Management Presentation: https://www.eurobankholdings.gr/-/media/holding/omilos/grafeio-tupou/etairikes-anakoinoseis/2023/1q-2023/1q2023-results-presentation.pdf

Of interest, Eurobank, Eurolife and Grivalia (all Fairfax holdings) are all joined at the hip. More on this in another post.

 

Let’s start by looking at the big picture.

 

What are prospects for the Greek economy?

 

Greece is positioned very well right now. The Greek economy turned the corner a couple of years ago now. Tourism is booming. As is the property market. Prime Minister Mitsotakis (center-right) was just re-elected with another majority for a second consecutive 4-year term. This ensures the significant economic (pro-market) reforms to the Greek economy will continue. Greece is expected to have one of the better performing economies in Europe over the next couple of years. This is a very positive backdrop for Eurobank.

 

How much of Eurobank does Fairfax own?

 

Fairfax owns 32.2% of Eurobank (1.166 billion shares). A stake worth $2 billion today.

 

Timeline of key events for Fairfax and Eurobank:

• Dec 2014: FFH investment #1 in Eurobank of $444 million for 12.5% position
• Nov 2015: FFH investment #2 in Eurobank (recapitalization) of $389 million for 17% position
• Dec 2015: FFH purchase of 80% of Eurolife from Eurobank for $360 million
• May 2019: Eurobank recapitalization / merger with Grivalia Properties - Fairfax owns 32.4%
• July 2022: Fairfax increases stake in Grivalia Hospitality from 33.5% to 78.4% (from Eurobank) for $195 million

Importantly, Eurobank is Fairfax’s minority partner in Eurolife and Grivalia Hospitality.

 

How important is Eurobank to Fairfax?

 

Eurobank is tied with Poseidon/Atlas as Fairfax’s largest equity holding. With a market value of $2 billion, Eurobank represents about 12% of Fairfax’s total equity holdings of around $16.3 billion.

 

 

For context, Fairfax has an investment portfolio of about $56 billion, with fixed income investments of $40 billion and equities of $16.3 billion.

 

What is the trend for earnings at Eurobank?

 

Earnings have been on a steady upwards trajectory in recent years. Management is guiding to earnings of €0.22/share in 2023. Management is conservative with their forecasts. Analysts are expecting earnings to come in around €0.24/share in 2023.

 

 

How has the stock price of Eurobank performed?

 

Eurobank’s stock price has been spiking higher - it is up 176% over the past 30 months. The market value of Fairfax’s position in Eurobank is up $1.3 billion over the past 30 months, or $56 per Fairfax share. Clearly, Mr. Market is recognizing and rewarding the improving fundamentals and results at Eurobank.

 

 

How is Eurobank stock valued today?

 

Despite the 176% increase over the past 30 months, Eurobank’s stock is still cheap (sound familiar?). The stock is trading at a forward price earnings of 6.65; price to tangible book value of 0.83; return on tangible equity of 12.5%.

 

 

Note: I used the analysts guide for EPS for 2023 of €0.24/share because it is the likely number.

 

How is Eurobank valued on Fairfax’s books?

 

Eurobank is not a mark-to-market holding for Fairfax. Since Jan 1, 2020 it has been a consolidated holding (equity accounted). At March 31, 2023, Eurobank had a carrying value at Fairfax of $1.6 billion.

 

So as of today there is an excess of $400 million of market value over carrying value ($17/share pre-tax). This excess is not captured in Fairfax’s reported financial results (although they do highlight it in their commentary). This is a good example of where Fairfax’s book value is understated.

 

 

How do results at Eurobank flow though to Fairfax?

 

Dividends. Eurobank currently does not pay a dividend. They would like to but Greek regulators are dragging their feet (likely waiting for the other big banks in Greece to get their house in order). The plan is for Eurobank to start paying a dividend in 2024.

 

If the payout ratio is 20% this would likely mean an annual dividend of around €0.05/share. In this scenario, Fairfax would start receiving dividends of $61 million per year.

 

For context, Fairfax currently receives about $135 million in dividends per year from all their various holdings. A dividend from Eurobank would increase this amount by 45%. This would be significant for Fairfax. Something to watch for in 2024.

 

 

Share of profit of associates. Eurobank is a big reason we are seeing ‘share of profit of associates’ spike to over $1 billion per year in recent years at Fairfax. And as Eurobank grows earnings ‘share of profit of associates’ at Fairfax will only grow more.

 

 

How much has Fairfax earned from this holding since inception?

 

Fairfax is up about $935 million or 85% over the 8.5 years it has owned Eurobank.

 

 

Fairfax 2022AR Prem’s Letter: “The animal spirits are coming back to Greece and we think the Greek economy and Greek companies will thrive. Eurobank should benefit!! Our cost of 1.2 billion shares of Eurobank after the Grivalia transaction is now 94¢ versus a book value of approximately 135¢ per share post the transaction. At year end, Eurobank was selling at 68% of book value and 6.5x normalized earnings. We still believe it will be a good investment for us.”

 

Conclusion

 

Despite getting off to a terrible start in 2014, Eurobank has turned into a very good investment for Fairfax. This has only happened due to the hard work over many years from the Eurobank team in Greece, lead by CEO Fokion Karavias and Vice Chairman George Chryssikos. Having a long-term oriented, strong, supportive and patient partner in Fairfax also helped greatly.

 

Most importantly, Eurobank is poised to perform even better in the coming years. Given it is such a large holding this should benefit Fairfax shareholders greatly.

 

Making the initial investment in Eurobank also had important added benefits for Fairfax. It led Fairfax to buy 80% of Eurolife which has been an exceptional investment. It also led them to buy a 78.4% stake in Grivalia Hospitality (it is still early days on this investment). Importantly, Fairfax is viewed as being a trusted and strong foreign investor and partner in Greece.

 

thanks a great summary Viking - also if Eurobank decide to take control of Hellenic bank  https://www.ekathimerini.com/economy/1215031/eurobank-eyes-control-of-hellenic-bank/ that could potentially also add meaningfully to their pre-tax profit growth https://cyprus-mail.com/2023/06/28/hellenic-bank-expects-pre-tax-profit-to-exceed-e200-million-in-2023/  

[Viking]

1 hour ago, glider3834 said:

thanks a great summary Viking - also if Eurobank decide to take control of Hellenic bank  https://www.ekathimerini.com/economy/1215031/eurobank-eyes-control-of-hellenic-bank/ that could potentially also add meaningfully to their pre-tax profit growth https://cyprus-mail.com/2023/06/28/hellenic-bank-expects-pre-tax-profit-to-exceed-e200-million-in-2023/  

@glider3834 thanks for all the links to articles that you post. You are quite the blood hound finding interesting and important developments that are relevant to Fairfax. 
 

i agree, Cypress is a region to watch (quite profitable). I have been very impressed with capital allocation decisions made at Eurobank over the past few years. I think they were short duration on their fixed income portfolio at the end of 2021 (sound familiar). The purchases of the stakes in Hellenic Bank (you posted) were a steal. And the sale of the Serbian assets (in a non-core market) at a good price looks smart amd well timed (provide the funds to growth in Cypress, a core market).

 

Scale really matters in banking. And it is becoming even more important. The big boys really do have massive advantages over smaller players. Makes sense we should see alot of consolidation in the coming years. Should benefit the big boys.

Edited July 12, 2023 by Viking

[nwoodman]

5 hours ago, glider3834 said:

thanks a great summary Viking - also if Eurobank decide to take control of Hellenic bank  https://www.ekathimerini.com/economy/1215031/eurobank-eyes-control-of-hellenic-bank/ that could potentially also add meaningfully to their pre-tax profit growth https://cyprus-mail.com/2023/06/28/hellenic-bank-expects-pre-tax-profit-to-exceed-e200-million-in-2023/  

Yep @Viking great work.  I am sure at the time they thought they could replicate the sugar hit from belatedly following Buffett into Bank of Ireland (valuation and timing is all).  For many years it didn’t work, but damn they learnt a lot about Greece and  that is paying off in spades now.  As @glider3834rightly points out, Eurobank has a number of opportunities in front of them, a bright future indeed.  
 

Where Fairfax is playing, deal flow counts.  I think some of the more trying investments and their patience actually further their prospects far more than the market gives them credit for. Damn we all make mistakes.  It is what we do with that hard won experience going forwards that counts.  It is all to easy to dwell on the things that haven’t worked, I did, but so glad I changed my mind, a low hurdle helps

Edited July 12, 2023 by nwoodman

[glider3834]

On 7/10/2023 at 9:54 AM, nwoodman said:

MS released an updated note on the Greek Banks (attached).  Fairfax owns approx $2bn of Eurobank shares.  Eurobank closed on Friday at EUR 1.55.  Eurobank is not paying a dividend this year as the funds are being used to repurchase shares.  From the Q1 press release

 

"Rewarding shareholders is now becoming key in our strategy. Specifically for 2023, the amount earmarked for dividend distribution will be used in an optimal way to bid for the 1.4% HFSF stake through a share buyback scheme. For next year onwards, we envisage a payout ratio of at least 25%, in the form of cash dividends and share buybacks. Overall, we are pleased that we consistently outperform our targets for several years.”

 

 

greek_20230709_0000.pdf 3.71 MB · 14 downloads

thanks nwoodman - still kicking myself over Piraeus when it was trading close to a PE of 2x a year ago -but I was already fully invested and seriously overweighted with Eurobank via Fairfax

[sleepydragon]

16 hours ago, Viking said:

 

@nwoodman thank you for providing the MS report. It motivated me to write an update on Eurobank.

 

Eurobank's stock is one again hitting all time highs (€1.595 today). It is now tied with Poseidon/Atlas as Fairfax’s largest equity holding. Time to do a review of what has been Fairfax’s best performing equity holding over the past couple of years. This review will focus on the numbers and will be mostly forward looking.

 

Who is Eurobank?

 

Eurobank is one of the largest banks in Greece (and the region). Its core markets are Greece, Bulgaria and increasingly Cypress. It is recognized as being one of the best managed banks in Greece.

• Q1, 2023 Management Presentation: https://www.eurobankholdings.gr/-/media/holding/omilos/grafeio-tupou/etairikes-anakoinoseis/2023/1q-2023/1q2023-results-presentation.pdf

Of interest, Eurobank, Eurolife and Grivalia (all Fairfax holdings) are all joined at the hip. More on this in another post.

 

Let’s start by looking at the big picture.

 

What are prospects for the Greek economy?

 

Greece is positioned very well right now. The Greek economy turned the corner a couple of years ago now. Tourism is booming. As is the property market. Prime Minister Mitsotakis (center-right) was just re-elected with another majority for a second consecutive 4-year term. This ensures the significant economic (pro-market) reforms to the Greek economy will continue. Greece is expected to have one of the better performing economies in Europe over the next couple of years. This is a very positive backdrop for Eurobank.

 

How much of Eurobank does Fairfax own?

 

Fairfax owns 32.2% of Eurobank (1.166 billion shares). A stake worth $2 billion today.

 

Timeline of key events for Fairfax and Eurobank:

• Dec 2014: FFH investment #1 in Eurobank of $444 million for 12.5% position
• Nov 2015: FFH investment #2 in Eurobank (recapitalization) of $389 million for 17% position
• Dec 2015: FFH purchase of 80% of Eurolife from Eurobank for $360 million
• May 2019: Eurobank recapitalization / merger with Grivalia Properties - Fairfax owns 32.4%
• July 2022: Fairfax increases stake in Grivalia Hospitality from 33.5% to 78.4% (from Eurobank) for $195 million

Importantly, Eurobank is Fairfax’s minority partner in Eurolife and Grivalia Hospitality.

 

How important is Eurobank to Fairfax?

 

Eurobank is tied with Poseidon/Atlas as Fairfax’s largest equity holding. With a market value of $2 billion, Eurobank represents about 12% of Fairfax’s total equity holdings of around $16.3 billion.

 

 

For context, Fairfax has an investment portfolio of about $56 billion, with fixed income investments of $40 billion and equities of $16.3 billion.

 

What is the trend for earnings at Eurobank?

 

Earnings have been on a steady upwards trajectory in recent years. Management is guiding to earnings of €0.22/share in 2023. Management is conservative with their forecasts. Analysts are expecting earnings to come in around €0.24/share in 2023.

 

 

How has the stock price of Eurobank performed?

 

Eurobank’s stock price has been spiking higher - it is up 176% over the past 30 months. The market value of Fairfax’s position in Eurobank is up $1.3 billion over the past 30 months, or $56 per Fairfax share. Clearly, Mr. Market is recognizing and rewarding the improving fundamentals and results at Eurobank.

 

 

How is Eurobank stock valued today?

 

Despite the 176% increase over the past 30 months, Eurobank’s stock is still cheap (sound familiar?). The stock is trading at a forward price earnings of 6.65; price to tangible book value of 0.83; return on tangible equity of 12.5%.

 

 

Note: I used the analysts guide for EPS for 2023 of €0.24/share because it is the likely number.

 

Morgan Stanley currently has a price target for Eurobank of €2.10/share = $2.29/share. With shares trading at €1.595 today this suggests 32% upside. Currently 79% of analysts who follow Eurobank have the stock rated ‘Overweight’. 

 

Of interest, if Eurobank traded at €2.10/share, Fairfax's position would be worth $2.675 billion. 

 

How is Eurobank valued on Fairfax’s books?

 

Eurobank is not a mark-to-market holding for Fairfax. Since Jan 1, 2020 it has been a consolidated holding (equity accounted). At March 31, 2023, Eurobank had a carrying value at Fairfax of $1.6 billion.

 

So as of today there is an excess of $400 million of market value over carrying value ($17/share pre-tax). This excess is not captured in Fairfax’s reported financial results (although they do highlight it in their commentary). This is a good example of where Fairfax’s book value is understated.

 

 

How do results at Eurobank flow though to Fairfax?

 

Dividends. Eurobank currently does not pay a dividend. The plan is for Eurobank to start paying a dividend in 2024. In Q1 2023, Eurobank said they are targeting a minimum payout ratio of 25% - for both dividend and buybacks - in 2024.

 

Let's assume Eurobank goes with a payout ratio of 20% for the dividend. This would likely mean an annual dividend of around €0.048/share. In this scenario, Fairfax would start receiving dividends of $61 million per year.

 

For context, Fairfax currently receives about $135 million in dividends per year from all their various holdings. A dividend from Eurobank would increase this amount by 45%. This would be significant for Fairfax. Something to watch for in 2024.

 

 

Share of profit of associates. Eurobank is a big reason we are seeing ‘share of profit of associates’ at Fairfax spike to over $1 billion per year in recent years. And as Eurobank grows earnings ‘share of profit of associates’ at Fairfax will only grow more.

 

 

Investment Gains. Down the road, as Eurobank gets more fully valued, Fairfax could start to sell down its large position. That would crystallize any 'excess of fair value over carrying value'. Today the 'excess' is $400 million.

 

How much has Fairfax earned from this holding since inception?

 

Fairfax is up about $935 million or 85% over the 8.5 years it has owned Eurobank.

 

 

 

Fairfax 2019AR Prem’s Letter: “The animal spirits are coming back to Greece and we think the Greek economy and Greek companies will thrive. Eurobank should benefit!! Our cost of 1.2 billion shares of Eurobank after the Grivalia transaction is now 94¢ versus a book value of approximately 135¢ per share post the transaction. At year end, Eurobank was selling at 68% of book value and 6.5x normalized earnings. We still believe it will be a good investment for us.”

 

Conclusion

 

Despite getting off to a terrible start in 2014, Eurobank has turned into a very good investment for Fairfax. This has only happened due to the hard work over many years from the Eurobank team in Greece, lead by CEO Fokion Karavias and Vice Chairman George Chryssikos. Having a long-term oriented, strong, supportive and patient partner in Fairfax also helped greatly.

 

Most importantly, Eurobank is poised to perform even better in the coming years. Given it is such a large holding this should benefit Fairfax shareholders greatly.

 

Making the initial investment in Eurobank also had important added benefits for Fairfax. It led Fairfax to buy 80% of Eurolife which has been an exceptional investment. It also led them to buy a 78.4% stake in Grivalia Hospitality (it is still early days on this investment). Importantly, Fairfax is viewed as being a trusted and strong foreign investor and partner in Greece.

 

 

16 hours ago, Viking said:

 

@nwoodman thank you for providing the MS report. It motivated me to write an update on Eurobank.

 

Eurobank's stock is one again hitting all time highs (€1.595 today). It is now tied with Poseidon/Atlas as Fairfax’s largest equity holding. Time to do a review of what has been Fairfax’s best performing equity holding over the past couple of years. This review will focus on the numbers and will be mostly forward looking.

 

Who is Eurobank?

 

Eurobank is one of the largest banks in Greece (and the region). Its core markets are Greece, Bulgaria and increasingly Cypress. It is recognized as being one of the best managed banks in Greece.

• Q1, 2023 Management Presentation: https://www.eurobankholdings.gr/-/media/holding/omilos/grafeio-tupou/etairikes-anakoinoseis/2023/1q-2023/1q2023-results-presentation.pdf

Of interest, Eurobank, Eurolife and Grivalia (all Fairfax holdings) are all joined at the hip. More on this in another post.

 

Let’s start by looking at the big picture.

 

What are prospects for the Greek economy?

 

Greece is positioned very well right now. The Greek economy turned the corner a couple of years ago now. Tourism is booming. As is the property market. Prime Minister Mitsotakis (center-right) was just re-elected with another majority for a second consecutive 4-year term. This ensures the significant economic (pro-market) reforms to the Greek economy will continue. Greece is expected to have one of the better performing economies in Europe over the next couple of years. This is a very positive backdrop for Eurobank.

 

How much of Eurobank does Fairfax own?

 

Fairfax owns 32.2% of Eurobank (1.166 billion shares). A stake worth $2 billion today.

 

Timeline of key events for Fairfax and Eurobank:

• Dec 2014: FFH investment #1 in Eurobank of $444 million for 12.5% position
• Nov 2015: FFH investment #2 in Eurobank (recapitalization) of $389 million for 17% position
• Dec 2015: FFH purchase of 80% of Eurolife from Eurobank for $360 million
• May 2019: Eurobank recapitalization / merger with Grivalia Properties - Fairfax owns 32.4%
• July 2022: Fairfax increases stake in Grivalia Hospitality from 33.5% to 78.4% (from Eurobank) for $195 million

Importantly, Eurobank is Fairfax’s minority partner in Eurolife and Grivalia Hospitality.

 

How important is Eurobank to Fairfax?

 

Eurobank is tied with Poseidon/Atlas as Fairfax’s largest equity holding. With a market value of $2 billion, Eurobank represents about 12% of Fairfax’s total equity holdings of around $16.3 billion.

 

 

For context, Fairfax has an investment portfolio of about $56 billion, with fixed income investments of $40 billion and equities of $16.3 billion.

 

What is the trend for earnings at Eurobank?

 

Earnings have been on a steady upwards trajectory in recent years. Management is guiding to earnings of €0.22/share in 2023. Management is conservative with their forecasts. Analysts are expecting earnings to come in around €0.24/share in 2023.

 

 

How has the stock price of Eurobank performed?

 

Eurobank’s stock price has been spiking higher - it is up 176% over the past 30 months. The market value of Fairfax’s position in Eurobank is up $1.3 billion over the past 30 months, or $56 per Fairfax share. Clearly, Mr. Market is recognizing and rewarding the improving fundamentals and results at Eurobank.

 

 

How is Eurobank stock valued today?

 

Despite the 176% increase over the past 30 months, Eurobank’s stock is still cheap (sound familiar?). The stock is trading at a forward price earnings of 6.65; price to tangible book value of 0.83; return on tangible equity of 12.5%.

 

 

Note: I used the analysts guide for EPS for 2023 of €0.24/share because it is the likely number.

 

Morgan Stanley currently has a price target for Eurobank of €2.10/share = $2.29/share. With shares trading at €1.595 today this suggests 32% upside. Currently 79% of analysts who follow Eurobank have the stock rated ‘Overweight’. 

 

Of interest, if Eurobank traded at €2.10/share, Fairfax's position would be worth $2.675 billion. 

 

How is Eurobank valued on Fairfax’s books?

 

Eurobank is not a mark-to-market holding for Fairfax. Since Jan 1, 2020 it has been a consolidated holding (equity accounted). At March 31, 2023, Eurobank had a carrying value at Fairfax of $1.6 billion.

 

So as of today there is an excess of $400 million of market value over carrying value ($17/share pre-tax). This excess is not captured in Fairfax’s reported financial results (although they do highlight it in their commentary). This is a good example of where Fairfax’s book value is understated.

 

 

How do results at Eurobank flow though to Fairfax?

 

Dividends. Eurobank currently does not pay a dividend. The plan is for Eurobank to start paying a dividend in 2024. In Q1 2023, Eurobank said they are targeting a minimum payout ratio of 25% - for both dividend and buybacks - in 2024.

 

Let's assume Eurobank goes with a payout ratio of 20% for the dividend. This would likely mean an annual dividend of around €0.048/share. In this scenario, Fairfax would start receiving dividends of $61 million per year.

 

For context, Fairfax currently receives about $135 million in dividends per year from all their various holdings. A dividend from Eurobank would increase this amount by 45%. This would be significant for Fairfax. Something to watch for in 2024.

 

 

Share of profit of associates. Eurobank is a big reason we are seeing ‘share of profit of associates’ at Fairfax spike to over $1 billion per year in recent years. And as Eurobank grows earnings ‘share of profit of associates’ at Fairfax will only grow more.

 

 

Investment Gains. Down the road, as Eurobank gets more fully valued, Fairfax could start to sell down its large position. That would crystallize any 'excess of fair value over carrying value'. Today the 'excess' is $400 million.

 

How much has Fairfax earned from this holding since inception?

 

Fairfax is up about $935 million or 85% over the 8.5 years it has owned Eurobank.

 

 

 

Fairfax 2019AR Prem’s Letter: “The animal spirits are coming back to Greece and we think the Greek economy and Greek companies will thrive. Eurobank should benefit!! Our cost of 1.2 billion shares of Eurobank after the Grivalia transaction is now 94¢ versus a book value of approximately 135¢ per share post the transaction. At year end, Eurobank was selling at 68% of book value and 6.5x normalized earnings. We still believe it will be a good investment for us.”

 

Conclusion

 

Despite getting off to a terrible start in 2014, Eurobank has turned into a very good investment for Fairfax. This has only happened due to the hard work over many years from the Eurobank team in Greece, lead by CEO Fokion Karavias and Vice Chairman George Chryssikos. Having a long-term oriented, strong, supportive and patient partner in Fairfax also helped greatly.

 

Most importantly, Eurobank is poised to perform even better in the coming years. Given it is such a large holding this should benefit Fairfax shareholders greatly.

 

Making the initial investment in Eurobank also had important added benefits for Fairfax. It led Fairfax to buy 80% of Eurolife which has been an exceptional investment. It also led them to buy a 78.4% stake in Grivalia Hospitality (it is still early days on this investment). Importantly, Fairfax is viewed as being a trusted and strong foreign investor and partner in Greece.

 

I would like to add Fairfax also owns BABA

he may even own Tencent too

[nwoodman]

1 hour ago, glider3834 said:

thanks nwoodman - still kicking myself over Piraeus when it was trading close to a PE of 2x a year ago -but I was already fully invested and seriously overweighted with Eurobank via Fairfax

I hear you.  I have held Eurobank in the past but soured on owning Fairfax positions, especially after ORH, ATCO etc.  Probably irrational but the real loser is the taxman