NATIONAL BANK OF GREECE SA 20-F 2007
Documents found in this filing:
Washington, D.C. 20549
Date of event requiring this shell company report
For the transition period from ____________________ to ____________________
Commission file number 001-14960
(Exact name of Registrant as specified in its charter)
NATIONAL BANK OF GREECE S.A.
(Translation of Registrants Name into English)
THE HELLENIC REPUBLIC
(Jurisdiction of incorporation or organization)
86 Eolou Street
10232 Athens, Greece
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
* Not for trading but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Securities Exchange Act of 1934:
Number of outstanding shares of each of the Registrants classes of capital or common stock as at December 31, 2006, the close of the period covered by the annual report:
475,287,219 Ordinary shares of nominal value 5.00 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o No x
NoteChecking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer o Non-accelerated filer o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 x
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Historically, Greek law prohibited banks from engaging directly in financial service activities outside their traditional deposit and loan functions. Therefore, specialized financial institutions were established in Greece, each for the provision of a particular type of financial service. A Greek bank that sought to provide multiple financial services to its customers would establish several subsidiaries, each a specialized institution within the banks integrated group of diverse financial services companies. As a consequence of this historical practice, the Greek financial services sector today is characterized by a group of specialized companies established around a principal bank. National Bank of Greece S.A. is such a principal bank, around which our consolidated subsidiaries are organized.
All references in this annual report on Form 20-F (the Annual Report) to the Bank or NBG are to National Bank of Greece S.A. without its subsidiaries. The Bank and its consolidated subsidiaries, collectively, are referred to in this Annual Report as the NBG Group or the Group. All references in this Annual Report to we, us or our are, as the context requires, to the Bank or to the NBG Group as a whole.
The NBG Group operates in many countries and earns money and makes payments in many different currencies. All references to Greek drachmas, or GRD are to Greek drachmas, all references to $, U.S. dollars, USD or US$ are to United States dollars and all references to , EUR or to euro are to the lawful currency of the member states of the European Union that have adopted the single currency in accordance with the Treaty Establishing the European Community, as amended by the Treaty on European Union and the Treaty of Amsterdam. References to EMU are to the European Economic and Monetary Union. All references to R are to South African rand, all references to CYP are to Cyprus pounds, all references to BGN are to Bulgarian leva, all references to RON are to Romanian Lei, all references to TRY are to Turkish new lira, all references to CSD are to Serbian dinars, all references to CHF are to Swiss francs, all references to JPY are to Japanese YEN and all references to MKD are to Macedonian denars.
Greece adopted the euro as its national currency on January 1, 2001, at which time the drachma ceased to exist as a separate legal currency. From January 1, 2001, the Greek drachma became the national denomination of the euro in Greece and was fixed against the euro at a rate of 1.00 = GRD 340.750. On January 1, 2002, euro bank notes and coins were introduced in the EMU countries and on March 1, 2002, drachmas (and all other national denominations of the euro) ceased to be legal tender and were replaced entirely by euro notes and coins. Financial statements for the NBG Group are therefore expressed in euro in this Annual Report.
Solely for convenience, this Annual Report contains translations of certain euro amounts into U.S. dollars at specified rates. These are simply convenience translations and you should not expect that a euro amount actually represents a stated U.S. dollar amount or that it could be converted into U.S. dollars at the rate suggested, or any other rate. In this Annual Report, the translations of euro amounts into U.S. dollars, where indicated, have been made at the noon buying rate for cable transfers of euro into U.S. dollars of US$1.00 = 0.7486, as reported by the Federal Reserve Bank of New York (the Noon Buying Rate) on June 11, 2007. Similar convenience translations, such as translations of South African rand, Cyprus pounds, Macedonian denars, Bulgarian leva, Romanian lei, Serbian dinar and Turkish new lira into U.S. dollars, where indicated, have been made at the respective rates of South African rand 7.2230 per U.S.$1.00, Cyprus pounds 0.4369 per U.S.$1.00, Macedonian denars 45.8137 per U.S.$1.00, Bulgarian leva 1.4645 per U.S.$1.00, Romanian lei 2.4467 per US$1.00, Serbian dinar 61.0915 per US$1.00
and Turkish new lira 1.3398 per US$1.00. These are the respective Noon Buying Rates for the stated currencies on June 11, 2007.
The table below sets out the highest and lowest exchange rate between the euro and the U.S. dollar, for each of the completed six months preceding the filing of this Annual Report:
The following table sets forth the average exchange rates between the euro and the U.S. dollar for each of the five years ended December 31, 2002, 2003, 2004, 2005 and 2006 and for the current annual period through June 11, 2007. The following exchange rates have been calculated using the average of the Noon Buying Rates for euro during each of the past five annual periods, and for the current period through June 11, 2007.
This Annual Report includes forward-looking statements. Such items in this Annual Report include, but are not limited to, statements under Item 3.D, Risk Factors, Item 4.B, Business Overview and Item 5, Operating and Financial Review and Prospects. Such statements can be generally identified by the use of terms such as believes, expects, may, will, should, would, could, plans, anticipates and comparable terms and the negatives of such terms. By their nature, forward-looking statements involve risk and uncertainty, and the factors described in the context of such forward-looking statements in this Annual Report could cause actual results and developments to differ materially from those expressed in or implied by such forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about the Group, including, among other things:
· our ability to develop and expand our business;
· our ability to expand into new markets;
· our ability to profit from synergies from past and planned acquisitions;
· our ability to reduce costs;
· our ability to integrate new information technology systems into our operations and to use these new systems to enhance profitability;
· our ability to take advantage of new technologies;
· the adequacy of our current provisions against problem loans, as well as future charges for non-performing loans;
· overall economic conditions in Greece;
· political and economic conditions in the countries outside Greece in which we operate, particularly in Turkey and in South Eastern Europe (SEE);
· volatility in the worlds securities markets;
· the effects of regulation (including tax regulations and capital adequacy requirements) in Greece and other jurisdictions where we operate;
· the effects of European Economic and Monetary Union;
· the effects of litigation;
· capital spending and financial resources;
· our future revenues; and
· other factors described under Item 3.D, Risk Factors.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report might not occur. Any statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future.
Readers are cautioned not to place undue reliance on such forward-looking statements, which are based on facts known to us only as of the date of this Annual Report.
A. Selected Financial Data
The following information as at, and for the years ended, December 31, 2002, 2003, 2004, 2005 and 2006 has been derived from the consolidated financial statements of the Group. These financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP) and have been audited by our principal auditors Deloitte Hadjipavlou Sofianos & Cambanis S.A. The financial statements of our significant subsidiary Finansbank S.A. have been audited by KPMG Akis Bagimsiz Denetim ve SMMM A.S. The selected financial and operating data should be read in conjunction with Item 5 in this Annual Report and with the Groups audited U.S. GAAP financial statements and the notes thereto as at December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006 (the U.S. GAAP Financial Statements) included elsewhere in this Annual Report.
The following tables set forth selected financial information for the Group for the years ended December 31, 2002, 2003, 2004, 2005 and 2006.
The number of shares as adjusted to reflect changes in capital is presented in the following table:
(1) Certain amounts in prior periods have been reclassified to conform to the current presentation and to reflect the disposal of Atlantic Bank of New York and NBG Canada. See Note 19 to the U.S. GAAP Financial Statements included in this Annual Report. Also, certain amounts in prior periods have been re-expressed in euro.
(2) Solely for the convenience of the reader, the translation of euro into U.S. dollars has been made at the Noon Buying Rate of US$1.00 = 0.7486 on June 11, 2007. For information regarding the historical rates of exchange between the euro and the U.S. dollar, refer to IntroductionCurrency and Financial Statement Presentation in this Annual Report.
(3) Summary other comprises (i) occupancy expenses, (ii) equipment expenses, (iii) deposit insurance premiums and (iv) other non-interest expenses.
(4) Certain employee benefit plans which were previously accounted for as defined benefit plans were accounted for in 2002 and onwards either as defined contribution plans or plans no longer sponsored by the Bank.
(5) The weighted average number of common shares takes into account the merger of the Bank with the National Bank for Investment and Industrial Development (ETEBA), our former investment banking subsidiary, in December 2002, the capitalization of reserves in May 2003, the capitalization of reserves in May 2004, the merger of the Bank with National Investment Co. in December 2005, the merger of the Bank with National Real Estate S.A. in April 2006, the rights issue of four new shares for every ten shares in June 2006 and the share capital increase due to the exercise of stock options (adjustment effective as at January 25, 2007).
(6) The cash dividends declared per share information reflects dividends declared and paid in the year indicated in respect of net profits of the previous completed financial year, in accordance with the Banks dividend policy. See Dividends in this Item 3.A.
(1) Certain amounts in prior periods have been reclassified to conform to the current presentation and to reflect the disposal of Atlantic Bank of New York and NBG Canada. See Note 19 to the U.S. GAAP Financial Statements included in this Annual Report.
(2) Solely for the convenience of the reader, the translation of euro into U.S. dollars has been made at the Noon Buying Rate of US$1.00 = 0.7486on June 11, 2007. For information regarding the historical rates of exchange between the euro and the U.S. dollar, refer to IntroductionCurrency and Financial Statement Presentation in this Annual Report.
(3) Assets classified as held for sale comprise assets of NBG Canada and Atlantic Bank of New York which were sold in February 2006 and April 2006, respectively.
(4) Summary other assets comprises (i) equity method investments, (ii) goodwill, (iii) software and other intangibles, net, (iv) premises and equipment, net, (v) customers liability on acceptances, (vi) accrued interest receivable, (vii) derivative assets, and (viii) other assets.
(5) Liabilities classified as held for sale comprise liabilities of NBG Canada and Atlantic Bank of New York which were sold in February 2006 and April 2006, respectively.
(6) Summary other liabilities comprises (i) other borrowed funds, (ii) acceptances outstanding, (iii) accounts payable, accrued expenses and other liabilities, (iv) insurance reserves, (v) derivative liabilities and (vi) minority interests.
(1) Calculated by dividing net income by average total assets as shown in Item 4.E under the subsection Average Balances and Interest Rates.
(2) Calculated by dividing net income by average total equity. Average total equity is equal to the arithmetical average of total equity at the beginning and at the end of the period, these being the only dates for which the Group has calculated net equity according to U.S. GAAP.
(3) Calculated by dividing average total equity by average total assets as shown in Item 4.E under the subsection Average Balances and Interest Rates.
For exchange rate information, see IntroductionCurrency and Financial Statement Presentation.
Under Greek law, the Bank can pay dividends out of:
· distributable profits for the year, comprising profits net of tax, losses carried forward, and prior years tax audit differences; and
· retained earnings, special reserves or ordinary reserves to the extent they exceed the amount required to be maintained by law.
Before paying dividends, the Bank, in accordance with our Articles of Association and Greek corporate law (codified law 2190/20), must allocate between 5% and 20% of our net profits to an ordinary reserve until this reserve equals at least one-half of the Banks share capital. Under the Banks Articles of Association and Greek corporate law, and subject to the limitations described above and below, each year the Bank is required to pay a minimum dividend out of the net profits for the year, if any, equal to the greater of:
· 6% of the Banks share capital; or
· 35% of the net profits of the Bank on a standalone basis for the year (after the deduction of statutory reserves and any profits resulting from the sale of equity participations that represent at least 20% of the paid-up share capital of a subsidiary company in which the Bank has held an equity participation for at least ten years). According to Greek law 3460/2006, unrealized profits from
marking securities to market will be deducted from net profits in order to determine the minimum dividend.
However, a majority representing at least 70% of the Banks paid-up share capital may vote that the Bank pay dividends amounting to 6% of the Banks share capital even in the event that this is not the greater amount.
Calculation of all such amounts is based on the financial statements of the Bank prepared in accordance with IFRS.
Any distribution of distributable profits in excess of the required dividend payments described above must be approved by a General Meeting of Shareholders (the Banks annual general meeting, which is referred to in this Annual Report as the General Meeting), with ordinary quorum and majority voting requirements, following a proposal of the Banks board of directors (which we refer to in this Annual Report as the Board of Directors or the Board). No distribution can be effected if, on the closing date of the last financial year, the total shareholders equity is, or will become after that distribution, lower than the total of the Banks share capital and the reserves, the distribution of which is prohibited by Greek law or the Banks Articles of Association. In any event, dividends may not exceed net profits for the last financial year, as increased by distributable reserves, the distribution of which is permitted as resolved at the General Meeting, and profits carried forward from previous years, and as decreased by any loss in the previous financial year and any compulsory reserves required by law or the Banks Articles of Association.
In the event that the mandatory minimum dividend payments equal 35% of the net profits for the year (after the deduction of statutory reserves and any profits resulting from the sale of equity participations that represent at least 20% of the paid-up share capital of a subsidiary company in which the Bank has held an equity participation for at least ten years), a majority of the Banks shareholders representing at least 65% of the paid-up share capital may vote to pay the lower dividend of 6% of the Banks share capital. The remaining undistributed dividend must then be transferred to a special reserve which must, within four years following the General Meeting, be distributed in the form of a share dividend. However, a majority representing 70% of the Banks paid-up capital may vote to waive this share dividend.
Once approved, dividends must be paid to shareholders within two months of the date on which the Banks annual financial statements are approved. Normally, dividends are declared and paid in the year subsequent to the reporting period. Dividends are forfeited to the Greek Government if they are not claimed by shareholders within five years following December 31 of the year in which they were declared.
On May 18, 2004, at the Banks General Meeting, the Banks shareholders approved the distribution of a cash dividend in the amount of 0.65 per share with respect to the year ended December 31, 2003. On May 17, 2005, at the Banks General Meeting, the Banks shareholders approved the distribution of a cash dividend in the amount of 0.60 per share with respect to the year ended December 31, 2004. On April 27, 2006, at the Banks General Meeting, the Banks shareholders approved the distribution of a cash dividend in the amount of 1.00 per share with respect to the year ended December 31, 2005. On May 25, 2007 at the Banks General Meeting, the Banks shareholders approved the distribution of a cash dividend in the amount of 1.00 per share with respect to the year ended December 31, 2006.
The following table sets forth the actual dividends declared by the Bank for the corresponding periods and the dividends as a percentage of previous years net income. For financial years up to and including the year ended December 31, 2004, dividends declared by the Bank in the following year are based on Greek GAAP, whereas for the financial years ended December 31, 2005 and December 31, 2006 dividends are based on IFRS.
(1) Solely for the convenience of the reader, the translation of euro into U.S. dollars has been made at the Noon Buying Rate of US$1.00 = 0.7486 on June 11, 2007.
The Bank currently expects to continue to pay dividends in accordance with the formula described above, subject to the financial condition of the Bank, the funding needs of our investment program and other relevant considerations.
Normally, dividends are declared and paid in the year subsequent to the reporting period. Up to and including the fiscal year ended December 31, 2005, dividends are accounted for once declared. Beginning in 2006, the Group changed its policy and now records a liability related to the mandatory minimum dividend payment computed as 35% of the net profits for the year less unrealized gains. The mandatory minimum dividend liability recognized in 2006 amounts to 210,877 thousand. The effect of the mandatory minimum dividend in prior years is immaterial.
If you are considering purchasing our shares or American Depositary Receipts, you should carefully read and think about all the information contained in this document, including the risk factors set out below, prior to making any investment decision.
Risks Relating to Our Business
The majority of our operations and loan portfolio are concentrated in Greece. For the financial year ended December 31, 2006, approximately 55.7% of our total income from continuing operations, and as of December 31, 2006, 73.9% of our loans and advances to customers, were derived from our operations in Greece. As a result, the state of the Greek economy significantly affects our financial performance as well as the market price and liquidity of the Banks shares. To an increasing extent, our performance is affected
by the economic conditions and levels of economic activity in other countries in which we operate, such as Bulgaria, Romania, the Former Yugoslav Republic of Macedonia (FYROM) and especially Turkey, from which 12.4% of our total income and 15.2% of our loan portfolio were derived in 2006. Consequently, an economic slowdown, a deterioration of conditions in Greece or other adverse changes affecting the Greek economy or the economies of these other countries could result in, among other things, higher rates of credit defaults on loans or declines in new borrowing, which could adversely impact our business, financial condition, cash flows and results of operations. Moreover, the political environment both in Greece and in other countries in which we operate may be adversely affected by events outside our control, such as changes in government policies, EU Directives in the banking sector and other areas, political instability or military action affecting Europe and/or other areas abroad and taxation and other political, economic or social developments in or affecting Greece and the countries in which we operate or may plan to expand.
As a result of our acquisition of Finansbank A.S. (Finansbank), we are subject to operating risks in Turkey, including the following:
· Turkey is a parliamentary democracy, and, although stable, is not free from political uncertainty. In particular, Turkey is in the process of seeking integration into the EU, and on October 3, 2005, accession negotiations with the EU were opened. There can be no assurance, however, that Turkey will be able to meet the criteria applicable to become a member state of the EU or that the EU will maintain its current approach regarding the candidacy of Turkey. Failure of Turkey to become an EU member state could have a negative impact on the Turkish economy and Finansbanks operations.
· Political instability in the Middle East and military operations in neighboring Iraq have increased the political and economic risks in the region. The current situation in Iraq may contribute to further tension and may result in terrorist activities in Turkey. These risks may have an impact on the Turkish economy and our operations there.
· Turkey has many characteristics of a developing economy. Over the past two decades, the Turkish economy has undergone a transformation from a highly protected and regulated system to a more free market economy. The Turkish economy has, in general, responded well to this transformation, showing an overall pattern of growth from 1992 to 2006. However, the Turkish economy has experienced a succession of financial crises, including those in 2000 and 2001, as well as macroeconomic imbalances, including substantial budget deficits, significant balance of payments deficits, high inflation rates and high real interest rates. In addition, Turkey has experienced hyperinflation until recently. There can be no assurance that Turkey will not face more financial crises, which could have a negative impact on Finansbanks operations.
· Historically, the Turkish currency has been subject to significant volatility against the euro and other currencies. For example, the Turkish Lira depreciated by 18% against the euro from May 8, 2006 to June 20, 2006. However, from our acquisition of Finansbank at August 18, 2006 to June 11, 2007 the Turkish Lira has appreciated by 4.6% against the euro. These fluctuations could have a negative impact on the value of our investment in Finansbank and on our overall profitability.
· Relations between Greece and Turkey have gone through periods of tension. As a result of our acquisition of Finansbank, Finansbank may be adversely affected by negative perceptions of Greece that may be held by certain of Finansbanks customers. A significant loss of customers could have a material adverse effect on the development of our business in Turkey and on our overall profitability.
· We believe the general level of macroeconomic and political risk to be higher in Turkey than in other countries whose economies and banking markets are more developed and that are already members of the EU. While we believe there is potential for substantial growth in the Turkish banking market, there is no guarantee that such growth will occur or that Finansbank will be able to benefit from that growth. Adverse macroeconomic and political events, which limit economic growth in Turkey or restrict the growth of the banking market, would adversely affect Finansbanks business and could adversely affect the Banks business, results of operations or financial condition.
Apart from our operations in Greece and Turkey, we have built up substantial operations in Bulgaria, Romania, FYROM, Serbia and other developing economies. Our international operations are exposed to the risk of adverse political, governmental or economic developments in the countries in which we operate. In addition, most of the countries outside Greece in which we operate are emerging markets where we face particular operating risks. These factors could have a material adverse effect on our financial condition and results of operations. Our international operations also expose us to foreign currency risk. A decline in the value of the currencies in which our international subsidiaries receive their income or hold their assets relative to the value of the euro may have an adverse effect on our financial condition and results of operations.
We are actively pursuing expansion of our international market position, principally through acquisitions in SEE, Eastern Europe and the Southeastern Mediterranean region. We are currently evaluating a number of acquisition candidates in these regions and, consequently, we anticipate that our operations and our shareholders will increasingly be exposed to risks associated with acquisitions generally, as well as specific risks relating to business operations in these emerging markets.
Interest rates are highly sensitive to many factors beyond our control, including monetary policies and domestic and international economic and political conditions. As with any bank, changes in market interest rates could affect the interest rates we charge on our interest-earning assets differently than the interest rates we pay on our interest-bearing liabilities. This difference could reduce our net interest income. Since the majority of our loan portfolio effectively re-prices in five years or less, rising interest rates may also result in an increase in our impairment losses on loans and advances if customers cannot refinance in a higher interest-rate environment. Further, an increase in interest rates may reduce the demand for loans and our ability to originate loans. Conversely, a decrease in the general level of interest rates may adversely affect us through, among other things, increased pre-payments on our loan and mortgage portfolio and increased competition for deposits. Likewise, a decrease in interest rates may affect our ability to issue mortgage-backed securities, securitize parts of our balance sheet or otherwise issue debt securities.
The Greek banking industry has historically enjoyed high loan margins compared to other EU member states. However, as Greeces economy converges with those of other countries in the European Union, margins have been declining. In addition, the adoption of rules for the enhancement of transparency in the financial services market by the Bank of Greece and recent court judgments on consumer protection are expected to result in lower margins with respect to consumer loans and credits for banks operating in Greece. A further decline in lending margins would have a negative impact on our results from operations.
Deregulation has led to increased competition in the Greek banking sector. In addition, consolidation among Greek banks has led to increased competition resulting from the increased efficiency and greater resources of these combined entities. We also face competition from foreign banks, some of which have resources significantly greater than our own. Notwithstanding our leading position in Greece in certain products and services, we may not be able to continue to compete successfully with domestic and international banks in the future.
Increased competition from existing competitors or from new entrants to the Turkish market could limit Finansbanks ability to grow or to maintain its market share and could cause downward pressure on margins, which could adversely affect the Groups ability to meet its strategic objectives in Turkey. At the same time, convergence with the economies of existing EU member states could result in decreasing interest rate levels in Turkey, which could lead to a decline in Finansbanks interest margins.
Part of our strategy is to increase profitability by making our operations more efficient. Our ability to realize one component of this, reducing staff, is limited by Greek labor laws, our company collective agreement, current employment regulation and our desire to maintain good relations with our employees. As a result, we will continue to depend on voluntary redundancies and attrition to achieve staff reductions. We will continue to assess whether we will be able to reduce our staff. However, we may not always be successful in doing so.
In common with other large companies in Greece that are, or were, in the public sector, the employees of the Bank and certain of our subsidiaries participate in employee-managed pension schemes. The Bank makes significant contributions to these schemes. In addition, the Bank and several of our subsidiaries offer other post-retirement benefit plans, including medical benefit plans. Our consolidated net liability under these plans at December 31, 2006 was 245.7 million, determined by reference to a number of critical assumptions that are subject to potential variation. Such variation may cause us to incur significantly increased liability in respect of these obligations. For more information on these assumptions and our current obligations under pension plans, see Note 38 to the U.S. GAAP financial statements for the year ended December 31, 2006, included in this Annual Report.
Legislation passed in 1992 provides that state-controlled employers, as well as employers that had been controlled by the state in the past (including the Bank), are not liable for annual operating deficits of their company-specific main pension funds in excess of the amount of the annual operating deficit recorded in 1992. Under this legislation, the Bank is responsible for operating deficits of its Main Pension Fund up to 25.2 million per year. The Bank has not been required to make any relevant payment to the Main Pension Fund up to this date. However, we expect that the Main Pension Fund will experience operating deficits in the future and that the Bank may be required to make payments to this Fund to cover these deficits. In addition, it is currently unclear what effect new legislation and the potential merger of the Main Pension Fund into the main state sponsored fund (IKA), described below, could have on the Banks obligations with respect to these operating deficits.
In recent years, the Greek Government has introduced legislation seeking to reform the Greek pension system. In 2002, the Greek Government passed legislation under which it provided that the plans that operate in the form of public-law entities, including the Banks employees Main Pension Fund, would merge with the main state sponsored Social Security Fund (IKA) by 2008. In 2005 and 2006, the Greek
Government passed further legislation (Law 3371/2005, as amended) permitting certain bank employee main pension schemes to merge into IKA earlier than in 2008, and permitting other bank employee auxiliary pension schemes to merge with the new Insurance Fund of Bank Employees (ETAT). The new law provides that, in connection with the merger of auxiliary schemes with ETAT, the relevant employer shall make a payment to ETAT solely in an amount to be determined by an independent economic study commissioned by the Ministry of Finance pursuant to this legislation.
In April 2006, the Bank applied under Law 3371/2005, as amended, to merge its Auxiliary Pension Fund into ETAT, and to merge the Main Pension Fund with IKA earlier than 2008. It is possible that we may make a significant cash payment to ETAT in connection with the merger of the Banks employee pension schemes with ETAT.
The foregoing developments, as well as future interpretations of existing laws and any future legislation regarding pensions and pension liabilities or other post-retirement benefit obligations, may increase the liability of the Bank or its subsidiaries with respect to pension and other post-retirement benefit plan contributions to cover actuarial or operating deficits of those plans.
Most of our employees belong to a union and the Greek banking industry has been subject to strikes, such as in June 2005 when the Union of Greek Bank Employees went on strike for 23 days over pension reform legislation then under consideration by the Greek Parliament. Moreover, strikes over issues such as pensions and wages occur sporadically. Accordingly, labor unrest could have a material adverse effect on the Banks operations.
Pursuant to Greek law, the Bank ceases to accrue interest on commercial loans in Greece when they are delinquent for 180 days, and on consumer and credit card loans when they are delinquent for 100 days. This is longer than would be the case if such loans were extended in some European countries and in the United States, where loans are generally considered non-performing if they are delinquent for 90 days. Consequently, there is a risk our financial statements may understate our level of non-performing loans and overstate our interest income relative to banks in other countries.
Non-performing loans represented approximately 3.4% of our total loan portfolio as at December 31, 2006. As a result of certain tax and legal considerations, non-performing loans generally remain on our balance sheet significantly longer than for other banks in the EU. See Item 4.E, Business OverviewSelected Statistical DataThe Groups Treatment of Non-Performing Loans.
Our current credit approval and monitoring procedures focus on the borrowers cash flow and ability to repay in an effort to improve the quality of our loan assets and mitigate future provisions for non-performing loans. However, we cannot assure you that these credit approval and monitoring procedures will reduce the amount of provisions for loans that become non-performing in the future. Future provisions for non-performing loans could have a materially adverse impact on our operating results. In addition, a downturn in the global economy would potentially result in a higher proportion of non-performing loans.
As a result of our activities, we are exposed to a variety of risks, among the most significant of which are credit risk, market risk, operational risk, liquidity risk and insurance risk. Failure to control these could result in material adverse effects on our financial performance and reputation.
· Credit Risk. Credit risk is the risk of financial loss relating to the failure of a borrower to honor its contractual obligations. Credit risk arises in lending activities and also in various other activities where we are exposed to the risk of counterparty default, such as our trading, capital markets and settlement activities. Counterparty default can be caused by a number of reasons, which we may not be able to accurately assess at the time we undertake the relevant activity. Moreover, we cannot assure you if and when a complete and fully reliable database of non-defaulted loans will be available to us. The database that monitors defaulting customers across the banking system in Greece (Teiresias), reliably monitors defaults, but not aggregate amounts of non-defaulted loans outstanding to a debtor. Consequently, the Bank is subject to the risk that its counterparties may have borrowed unsustainably large amounts from other banks. While Teiresias is in the process of setting up a database for non-defaulted loans, this database is incomplete, and we cannot assure you if and when a reliable database of non-defaulted loans will be available to us.
· Market Risk. Market risk includes, but is not limited to, interest rate, foreign exchange rate, bond price and equity price risks. Changes in interest rate levels, yield curves and spreads may affect our net interest margin. Changes in currency exchange rates affect the value of assets and liabilities denominated in foreign currencies and the value of our assets in foreign currencies and may affect income from foreign exchange dealing. The performance of financial markets may cause changes in the value of our investment and trading portfolios. We have implemented risk management methods to mitigate and control these and other market risks to which we are also exposed. However, it is difficult to predict with accuracy changes in economic or market conditions and to anticipate the effects that such changes could have on our financial performance and business operations.
· Liquidity Risk. The inability of any bank, including us, to anticipate and provide for unforeseen decreases or changes in funding sources could have consequences on such banks ability to meet its obligations when they fall due.
· Operational Risk. Operational risk corresponds to the risk of loss due to inadequate or failed internal processes, or due to external events, whether deliberate, accidental or natural occurrences. Internal processes include, but are not limited to, employees and information systems. External events include floods, fires, earthquakes or terrorist attacks, fraud by employees or others, errors by
employees, failure to comply with regulatory requirements and conduct of business rules or equipment failures.
· Insurance Risk. Insurance risk is the risk to earnings due to mismatches between expected and actual claims. Depending on the insurance product, this risk is influenced by macroeconomic changes, changes in customer behavior, changes in public health, pandemics and catastrophic events (earthquake, industrial disaster, terrorism, etc.).
We maintain trading and investment positions in debt, currency, equity and other markets. These positions could be adversely affected by volatility in financial and other markets, creating a risk of substantial losses. Volatility can also lead to losses relating to a broad range of other trading and hedging products we use, including swaps, futures, options and structured products. For further information on market risk exposures in those portfolios, you should refer to Item 4.E, Selected Statistical DataCredit QualityRisk Management below.
If any of the variety of instruments and strategies that we use to hedge our exposure to various types of risk in our businesses is not effective, we may incur losses. Many of our strategies are based on historical trading patterns and correlations. Unexpected market developments therefore may adversely affect the effectiveness of our hedging strategies. Moreover, we do not hedge all of our risk exposure in all market environments or against all types of risk. In addition, the manner in which gains and losses resulting from certain ineffective hedges are recorded may result in additional volatility in our reported earnings.
As most other banks do, we rely on communications and information systems provided by third parties to conduct our business. Any failure or interruption or breach in security of these systems could result in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and/or loan organization systems. We cannot provide assurances that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures or interruptions could result in a loss of customer data and an inability to service our customers, which could have a material adverse effect on our financial condition and results of operations.
Although the Greek Government does not directly own any of our shares, it may exercise a degree of indirect influence on us, through certain state-related entities (primarily pension funds, most of whose boards of directors are appointed by the Greek Government), which on June 11, 2007, owned shares representing approximately 17.9% of our issued share capital. See Item 7.A, Major Shareholders and Related Party TransactionsMajor ShareholdersState Interests.
Our Articles of Association do not provide any special voting rights to any class of shares or shareholders and there is no law in Greece that gives control over the Bank to the Greek Government. However, if there is not a full voting participation by all of our shareholders at a given shareholders meeting, these state-related entities, despite holding a minority of our total shares, may have a voting majority at such meeting. For instance, this could allow them to influence the election of members of our Board of Directors.
Typically, when we acquire a banking business, we acquire all of its liabilities as well as its assets. Our acquisition procedures may fail to identify all actual or potential liabilities of a company prior to its acquisition, and we may be unable to obtain sufficient indemnities to protect ourselves against such acquired liabilities. For example, the failure to identify and accurately determine the level of credit risk or market risk to which an acquired bank is exposed prior to its acquisition may lead to unexpected losses following the acquisition, which may have a significant adverse effect on our results of operations and financial condition.
Risks Relating to Our Industry
Regulation of the banking industry in Greece has changed in recent years pursuant to changes in Greek law, largely to comply with applicable EU Directives. In addition, the Bank of Greece, the central bank in Greece, has in recent years introduced regulatory changes in the Greek banking sector. In January 1999, the Bank of Greece introduced new provisioning policies that require Greek banks to make provisions depending on the status and the type of a given loan and the number of days the loan has been in arrears. These provisioning policies were amended in January 2003 and January and November 2005 and generally require Greek banks, including us, to increase their provisions for capital adequacy purposes. We cannot predict what regulatory changes may be imposed in the future, either as a result of regulatory initiatives in the European Union, by the Bank of Greece or by U.S. securities regulators. If we are required to make additional provisions or increase our reserves, as may result from the proposed New Basel Capital Accord (discussed below) and other potential regulatory changes, this could adversely affect our financial condition or results of operations.
In 1988, the Basel Committee on Banking Supervision adopted capital guidelines (which are referred to in this Annual Report as the Basel guidelines) based on the relationship between a banks capital and its credit risks. The Basel guidelines have been implemented by banking regulators in most industrialized countries, including Greece. The Basel guidelines are intended to strengthen the soundness of the international banking system and reduce competitive inequality among international banks by harmonizing the definition of capital and the basis for the evaluation of asset risks and by establishing a uniform target capital adequacy ratio of capital to risk-weighted assets.
In October 2005, the Council of the European Union published the final proposal for the re-casting of Directive 2000/12/EC of March 20, 2000, relating to the taking up and pursuit of the business of credit institutions, and Directive 1993/6/EEC of March 15, 1993, on the capital adequacy of investment firms and credit institutions. The final Directives 2006/48/EC and 2006/49/EC of the European Parliament and of the Council, which introduced the Basel II Capital Adequacy Framework (the New Basel Capital Accord), have been finalized and were published in June 2006. As a result of the adoption of these Directives by the Bank of Greece, the Bank may be required to maintain higher levels of capital, which could decrease our operational flexibility and increase our financing costs. Consequently, we cannot assure you that the New Basel Capital Accord will not have a material adverse effect on our financial condition or results of operations.
Risks Relating to the Markets
The market price of our shares traded on the ATHEX is denominated in euro. Fluctuations in the exchange rate between the euro and other currencies may affect the value of the Banks shares in the local currency of investors in the United States and other countries that have not adopted the euro as their currency. Additionally, cash dividends on our shares are paid in euro and, therefore, are subject to exchange rate fluctuations when converted to an investors local currency, including US dollars.
The principal trading market for our shares is the ATHEX. The ATHEX is less liquid than major stock markets in Western Europe and the United States. As a result, shareholders may have difficulty assessing the past performance of the shares based on our prior trading record on the ATHEX. In 2006, average daily trading value on the ATHEX was approximately 343 million, while in the first three months of 2007 it was approximately 460 million. In comparison, average daily trading value on the London Stock Exchange was approximately 23,772 million in 2006 and approximately 31,800 million in the first three months of 2007.
As at December 31, 2006, the aggregate market value of all shares listed on the ATHEX was approximately 158 billion. The market value of our shares listed on the ATHEX on that date was 16.6 billion, representing approximately 10.5 % of the capitalization of all companies listed on the ATHEX. We cannot make assurances about the future liquidity of the market for our shares.
The market price of our shares has been subject to volatility in the past, and could be subject to wide fluctuations in response to numerous factors, many of which are beyond our control. These factors include the following:
· actual or anticipated fluctuations in our operating results;
· results of operations of our competitors;
· the condition of the Greek economy and other economies in the Eurozone;
· potential or actual sales of large amounts of the Banks shares into the market;
· our competitors positions in the market;
· changes in financial estimates by securities analysts;
· conditions and trends in the banking sector in Greece and elsewhere in Europe; and
· the general state of the securities markets (with particular emphasis on the Greek and financial services sectors).
Under Greek law and our Articles of Association, prior to the issuance of any new shares, we must offer holders of our existing shares pre-emptive rights to subscribe and pay for a sufficient number of shares to maintain their existing ownership percentages. These pre-emptive rights are generally transferable during the rights trading period for the related offering and may be traded on the ATHEX.
U.S. holders of the ordinary shares and ADRs may not be able to receive (and trade) or exercise pre-emptive rights for any such offering of shares unless a registration statement under the Securities Act is
effective with respect to such rights or an exemption from the registration requirements of the Securities Act is available. Our decision to file a registration statement with respect to any future offering will depend on the costs and potential liabilities associated with any such registration statement, as well as the perceived benefits of enabling U.S. holders of ordinary shares and ADRs to exercise their pre-emptive rights and any other factors we may consider appropriate at the time.
If U.S. holders of the ordinary shares and ADRs are not able to receive (and trade) or exercise pre-emptive rights granted in respect of their ordinary shares in any rights offering by us then they might not receive the economic benefit of such rights. In addition, their proportional ownership interests in the Bank will be diluted.
National Bank of Greece S.A. was founded in 1841 and incorporated as a société anonyme pursuant to Greek law as published in the Greek Government Gazette number six on March 30, 1841. Our current corporate form will expire on February 27, 2053, but may be further extended by a resolution of the General Meeting of Shareholders. The Banks headquarters and our registered office are located at 86 Eolou Street, 10232 Athens, Greece. The telephone number of the Bank is (+30) 210 334 1000. The Banks agent for service in the United States is Corporation Service Company, 1133 Avenue of the Americas, Suite 3100, New York, NY 10036.
The Bank has operated a commercial banking business for 166 years. In that time, the Bank has expanded to become a large, diversified financial services group that today comprises the NBG Group. As part of our diversification, the Bank founded the Ethniki Hellenic General Insurance Company in 1891 and the National Mortgage Bank of Greece S.A. (NMB) in 1927. Until the establishment in 1927 of the Bank of Greece as the central bank of Greece, the Bank, in addition to commercial banking activities, was responsible for issuing currency in Greece. The Bank expanded its business further when, in 1953, it merged with Bank of Athens S.A. On October 2, 1998, the Bank merged into NMB to enhance revenue generation, realize cost-saving efficiencies and provide more integrated mortgage lending services to the Banks customers. In December 2002, the Bank fully acquired and integrated the operations of the National Bank for Investment and Industrial Development (ETEBA), an investment bank that was a majority-owned subsidiary of the Bank. As part of our ongoing effort to improve our portfolio structure and effectively respond to changes in the domestic and international markets, in December 2005 the Bank fully acquired and integrated the operations of our subsidiary the National Investment Company S.A., a securities portfolio management company. The Banks efforts to integrate further our operations and enhance our overall structure also led to the full acquisition and integration on March 31, 2006, of our subsidiary National Real Estate SA (National Real Estate).
The Bank intends to expand through organic growth, and to continue to evaluate acquisition, joint venture and partnership opportunities as they arise. In keeping with this strategy, we have expanded our presence in SEE. In October 2003, we acquired Banca Romaneasca in Romania, and in 2005 we acquired Eurial, a Romanian automobile leasing company, as well as Alpha Romania Insurance, which we acquired from Alpha Bank. These acquisitions followed on the expansion of our banking activities through the acquisitions of Stopanska Banka AD in FYROM and 89.9% of the share capital of United Bulgarian Bank AD in Bulgaria in 2000.
In February 2006 we sold our subsidiary NBG Canada, and in April 2006 we sold our subsidiary Atlantic Bank of New York.
In 2006 we undertook our largest international acquisition to date. On August 18, 2006, we acquired 46% of the ordinary shares and 100% of the founder shares in Finansbank, a commercial and retail bank in Turkey, from Fiba Holding A.S. (Fiba Holding), Fina Holding A.S. (Fina Holding), Girisim
Factoring A.S. (Girisim Factoring) and Fiba Factoring Hizmetleri A.S. (Fiba Factoring) (together, the Fiba Sellers) for a consideration of USD 2,323 million and USD 451 million, respectively. As at December 31, 2006, Finansbank was the fifth largest privately-owned bank in Turkey in terms of its consolidated assets and equity. In order to finance our acquisition of Finansbank, we increased our share capital through a rights issue in July 2006 by payment in cash with preemptive rights to our existing shareholders at a ratio of four new shares for every ten shares. FIBA Sellers retained a residual stake of 9.68% in the ordinary share capital of Finansbank, which is subject to certain put and call agreements, as provided for in the shareholders agreement between the Bank and FIBA Sellers, exercisable for a two-year period commencing on August 18, 2008, at a multiple of between 2.5 and 3.5 times the book value of Finansbanks ordinary share, subject to certain performance criteria. The sellers also agreed and undertook to attend any general meetings of Finansbank and to vote such number of shares they then own as is equal to the difference between 50.01% of the ordinary shares and the total number of ordinary shares then owned by the Bank in accordance with the instructions and directions of the Bank. Based on that, it was deemed that the Bank obtained a controlling interest on August 18, 2006 and as such this acquisition was within the scope of FAS 141 Business Combinations. As a result of Turkish Capital Markets legislation, NBG made a mandatory offer to minority shareholders. During the mandatory tender offer period between January 8 and January 29, 2007, the Bank acquired a further 43.44% of Finansbanks outstanding ordinary shares. On April 5, 2007, we sold 5% of Finansbanks share capital to the International Finance Corporation (IFC). This stake is subject to certain put and call agreements, as provided in the shareholders agreement between NBG and IFC, exercisable in seven years. Following the completion of the mandatory tender offer and the sale of shares to the IFC, we have proceeded to acquire further outstanding ordinary shares in Finansbank. Up to June 11, 2007 (the most recent practicable date), we had acquired 2,488,042 shares of Finansbank, 0.2% of its outstanding share capital, for a consideration of 7.7 million (TRY 14.3 million).
On September 12, 2006, we entered into an agreement with the Republic of Serbia for the acquisition of 99.4% of the share capital of Vojvodjanska Banka a.d. NoviSad (Vojvodjanska) for the cash consideration of 360 million. The acquisition was effected on December 31, 2006. We have also deposited a further 25 million in an escrow account until December 2007. The escrow is set against certain expected recoveries from Vojvodjanskas fully provided non-performing loan portfolio and will be released to us on a to basis against any shortfall in recovery.
On March 21, 2007, we acquired 100% of P&K Investment Services SA, a large Greek investment services company, from its selling shareholders (P&K Sellers), for a consideration of 48.7 million, 43.9 million of which was paid to the P&K Sellers upon closing. The remaining consideration will be released to the P&K Sellers on March 21, 2010, conditional on the attainment of key targets set out in the pre-agreed business plan. On May 10, 2007, P&K Investment Services SA sold its subsidiary P&K Mutual Fund Management SA to Millennium Bank AE for 1.68 million.
On April 19, 2007, we signed an agreement for the sale of our minority shareholding in AGET Heracles to majority shareholders Lafarge Group. Pursuant to this agreement, we sold 18,480,899 shares, representing 26% of the share capital of AGET Heracles. This sale is consistent with our stated strategy to focus on our core banking activities and exit from non-financial participations. The sale price was agreed at 17.40 per share, or 321.6 million in total and was in line with the average closing price of the last 30 trading days preceding the transaction.
The increased demand for individual pensions and mortgages in Turkey has created a rapidly growing insurance business for these products. In May 2007, Finansbank applied to the General Directorate of Insurance in Turkey and has received permission to establish Finans Emeklilik ve Hayat A.S. (Finans Pension). This new company will complete its organizational preparations and obtain a licence to conduct life, personal accident and pension insurance business, and is expected to commence operations shortly. Finans Pension will be headed by highly experienced management in the Turkish insurance industry, and
its board of directors will include members of the parent insurance company of the Group, whose know-how will assist with the rapid development of the new company.
The table below sets out the Banks principal items of capital expenditure for 2004, 2005 and 2006.
(1) Principally representing the acquisition of additional shares in National Investment Company (September 2004), Banca Romaneasca (March 2004) and United Bulgarian Bank (July 2004).
(2) Principally representing the participation in Ethniki Insurance, National Investment Company and Banca Romaneascas share capital increase
(3) Principally representing the acquisitions of Finansbank and Vojvodjanska and the participation in Banca Romaneascas capital increase.
(4) Other capital expenditures domestically and abroad principally represent reorganization expenses, branch renovation expenses, expenses relating to establishment of new branches and expenses relating to reallocation of existing branches.
The acquisition of Finansbank was funded by the proceeds of the issuance of 135,707,764 new ordinary shares of the Bank at the price of 22.11 per share. No third party financing was required in relation to any of our capital expenditures.
Also, as part of a strategy to streamline our operations, we continue to divest non-core equity investments and real estate that are unrelated to our principal financial services businesses, and to commit the released resources to more profitable activities. As part of our program of disposing of non-core assets, we have made significant domestic divestitures in the last four years, as summarized in the table below. In 2006 we also disposed of our subsidiaries Atlantic Bank of New York and NBG Canada as part of our program to focus on developing markets.
For further information on disposals of non-core assets, see Item 5Key Factors Affecting Our Results of OperationsDisposals of Non-core Assets.
(1) In 2004, we made a disposal of 12.5 million of our equity investment in OTEnet, approximately 7 million of our equity investment in the Central Securities Depository and approximately 5.5 million in the cement, leasing, security and saltworks sectors. During 2005 the Bank made disposals of 28 million in ELTECH and 1.7 million in Hellascom, sold all of its holding in Lykos Paperless Solutions SA for 982 thousand and also sold 7.07% of Eviop Tempo SA for 854 thousand, decreasing its participation to 21.21% from 28.28%. During 2006, the Bank made a disposal of 6.5 million of our former subsidiary Astir Alexandroupolis AXE, CAD 71.3 million in NBG Canada, US$388.4 million in Atlantic Bank of New York, 2.5 million in AGRIS and other smaller disposals of total value 0.8million.
(2) Represents disposals of real property that was acquired by the Bank primarily through foreclosure proceedings. These properties were located primarily in Greece.
No public takeover offers for our shares have been made by third parties during the 2006 financial year or the current financial year, as at the date of this Annual Report.
We are the largest financial institution in Greece in terms of loans to customers and market capitalization, according to an internal review of published financial statements of Greek banks. Our core focus outside Greece is in Turkey and SEE, where we currently operate in Bulgaria, Serbia, Romania, Albania, Cyprus and FYROM. Altogether, we have a presence in 12 countries outside Greece. We offer our customers a wide range of integrated financial services, including:
· commercial and retail banking services (including mortgage lending);
· investment banking, capital markets, venture capital and advisory services;
· asset management; and
In addition, we are involved in various other businesses, including the hotel business, property management and real estate and business and IT consulting.
The Bank is our principal operating company, representing 71.6% of our total assets as at December 31, 2006.
The Banks liabilities measured under U.S. GAAP, represent 78% of our total liabilities as at December 31, 2006. While the Bank conducts most of our banking activities, it is supported by seven foreign banking subsidiaries: Finansbank AS, United Bulgarian Bank AD, Vojvodjanska Banka a.d. Novi Sad, Banca Romaneasca SA, Stopanska Banka ad Skopje, NBG Cyprus Ltd. and South African Bank of Athens. We intend to continue to expand our operations in SEE, Eastern Europe and the Southeastern Mediterranean region.
The following table summarizes our relative assets, revenues, net income before tax, income tax expense and depreciation and amortization expense under U.S. GAAP attributable to our banking and other operations, showing the relative contributions of Greek and foreign activities. Our business and revenues are not materially affected by seasonal variations.
(1) Includes, non-financial services subsidiaries in Greece.
According to our analysis of publicly available financial statements of Greek commercial banks, the Bank is the largest commercial bank in Greece in terms of assets, deposits, loans and number of branches. As at December 31, 2006, the last date for which such information is publicly available, approximately 25% of all deposits with, and approximately 20% of all loans made by, Greek commercial banks (excluding specialized credit institutions) were held or made by the Bank.
We are one of the most diverse financial services groups in Greece according to our analysis of the published financial statements of Greek banks. According to this report, in addition to our banking activities, we are currently the largest and most active participant by volume in the national electronic dealing system of Greek Government bonds. We estimate that we have approximately 11.8% duration-weighted participation in the primary market while we handle approximately an 18.0% of the average daily volume in the secondary market for Greek government securities. Also, on December 31, 2006, we had approximately 7.2 billion in assets under management, and we are currently the largest asset manager in the Greek market, according to data published by the Association of Greek Institutional Investors.
We are also a leader in providing many other financial services in Greece. For example, we are the largest mortgage lender and the largest insurance operator (in terms of revenues), the leading provider of securities trading services, following the acquisition of P&K Group of Companies in March 2007 and one
of the leading Greek underwriters of domestic equity securities. For more information regarding the acquisition of P&K Group of Companies see the section on Stock Brokerage in this Item 4.B.
We use a variety of marketing and distribution channels to maintain and enhance our market position, including telemarketing (particularly for credit card sales), radio, television and press advertising and distributing promotional information brochures in our branches. As part of our marketing strategy, we seek to capitalize on our existing relationships with individual customers through cross-selling efforts aimed at increasing such customers awareness of other products that are offered by Group companies. For instance, our mortgage customers are informed of our insurance products, through which they may insure against damage to their property and against events and circumstances that might cause them to default on their mortgage loans. Our marketing strategy also includes indirect marketing, pursuant to which we have entered into agency agreements with retailers, such as automobile dealers, who agree to offer our consumer loan products to their customers in connection with purchases of consumer goods. In addition, we employ various alternative distribution methods, such as cooperation with real estate agents and construction businesses in the sale of mortgage loans. We have also entered into contractual arrangements with mobile telephone service providers in Greece that enable us to offer to our customers certain banking services, such as balance inquiries, through their mobile telephones. We provide basic banking services over the internet, including the transfer of funds between accounts, balance inquiries, bill payments, stock brokerage and subscription to initial public offerings on the ATHEX.
The banking sector has expanded rapidly in recent years, due to both deregulation and technological advances. As at December 31, 2006, there were 46 domestic and foreign banks and other credit institutions operating in Greece (excluding cooperative banks). Domestic banks in Greece can be grouped into one of two principal categories: universal banks (commercial and/or investment banks) and specialized credit institutions.
Traditionally, commercial banks have dominated the Greek financial services market. However, specialized credit institutions have expanded into commercial banking as a result of significant liberalization of the Greek financial services industry, thereby increasing competition in the market. The distinction between commercial and investment banks ceased to exist formally and the Bank of Greece classifies all banks operating in Greece as universal banks, with the exception of the Consignment Deposits and Loans Fund (which is a legal entity of public law, fully owned and controlled by the Greek Government). The Postal Savings Bank has recently received a general banking license and has become a universal bank.
There are currently two banks that are controlled, directly or indirectly, by the Greek Government: Bank of Attica and ATE Bank (formerly the Agricultural Bank of Greece). Over the last few years, the Greek Government proceeded to privatize a large number of credit institutions. For example, in 1998, the Greek Government privatized the Bank of Central Greece and Creta Bank, in early 1999, Ionian Bank, and, in March 2002, ETBA, an ATHEX listed industrial development bank. Additionally, a portion of the Greek Governments indirect shareholding of General Hellenic Bank was sold to private investors in April 1998 and a majority stake was sold to Société Générale in early 2004. The Bank of MacedoniaThrace was also formerly state-controlled until the Group and the Hellenic Postal Savings Bank sold 37% of its total equity to Bank of Piraeus, a private commercial bank, in April 1998. In 2000, Frances Crédit Agricole purchased a 6.7% interest in Emporiki Bank, which was further increased to 9.0% in 2002, in connection with the Greek Governments privatization project. In August, 2006 Crédit Agricole acquired a 71.97% interest in Emporiki Bank. Moreover, the Greek Government proceeded with the partial privatizations of the Postal Savings Bank and ATE Bank through the listing of their shares on the ATHEX.
Although there are currently 19 private banks incorporated in Greece, there has been a recent trend towards consolidation. For example, Ergobank S.A. and EFG Eurobank S.A. merged in July 2000 to form EFG Eurobank Ergasias. EFG Eurobank Ergasias merged with Telesis Bank in early 2002 and with UnitBank in December 2003. Similarly, Bank of Macedonia-Thrace, Bank of Piraeus and Xios Bank merged in June 2000, creating the Piraeus Group. The Piraeus Group subsequently acquired a 57.8% interest in ETBA, in March 2002, which was previously a majority state-owned industrial development bank listed on the ATHEX. ETBA was merged entirely into the Piraeus Group in December 2003. In December 2002, the Bank merged with ETEBA (our investment banking arm). In addition, since September 2000, Banco Commercial Portuguese, a Portuguese bank, has been active in the Greek market through Millenium Bank. In 2006, Egnatia Bank and Marfin Bank, along with Laiki Bank, a Cyprus-based bank with a Greek subsidiary, formed a new unified group.
In recent years, most of the major Greek banks have expanded internationally, establishing or enhancing their presence in SEE. In addition to the Banks acquisition of controlling stakes in Finansbank and Vojvodjanska during 2006 and the first months of 2007, other Greek Banks have proceeded with acquisitions of banks in the region. Eurobank became the 100% shareowner of Nacionalna Stedionica Banca in Serbia in March 2007 and took control of over 90% of DZI Bank in Bulgaria in December 2006. Also, in March 2007, EFG concluded the purchase of a 99% stake of Universal Bank in Ukraine, and at the same time completed the acquisition of a 70% stake in Tekfenbank in Turkey. Alpha Bank acquired 50% of the Turkish Alternatifbank, a member of Anadolu Group. ATE Bank made its first expansion steps in SEE by acquiring a 20% stake in AIK Bank in Serbia in October 2006 and a 69% stake of MindBank in Romania in January 2007.
Specialized Credit Institutions
There is currently one such specialized institution, following the reclassification of ATE Bank, the Postal Savings Bank and Aspis Bank as universal banks in keeping with the expansion of the ranges of their services.
The only remaining specialized credit institution is the Consignment Deposits and Loans Fund, which is an autonomous financial institution, organized as a public law entity under the supervision of the Ministry of Finance. Its activities mainly consist of the acceptance of consignments (in cash or in kind), the granting of housing loans to qualifying borrowers (primarily civil servants) and the support of regional development.
We do not consider the Consignment Deposits and Loans Fund to be our competitor for commercial banking customers.
There are 24 foreign-owned or incorporated credit institutions that are well established in the Greek banking market. The principal participants in the industry, and our principal foreign competitors in Greece, include Citibank, Bank of Cyprus, Royal Bank of Scotland and HSBC. With the exception of Bank of Cyprus, Citibank and HSBC, the majority of foreign banks operating in Greece have little presence in retail banking services.
Domestic universal banks controlled a market share of approximately 83% of total assets in the Greek banking sector, amounting in total to 270 billion as at December 31, 2006, the last date for which such information is currently available, according to our analysis of publicly available information.
Foreign banks controlled a market share of approximately 14% of Greek banking assets at that date, while specialized institutions had a market share of approximately 3%, and state-controlled universal
banks controlled approximately 9% of the Greek universal banks total assets as at December 31, 2006, according to our analysis of publicly available information.
As of April 2002, Greek law allows non-banking institutions that are licensed by the Bank of Greece in accordance with the Act of the Governor of the Bank of Greece No. 2485/31.1.2002, to extend consumer credit or loan facilities. These institutions are in direct competition with universal banks in the consumer credit sector.
The table below shows the breakdown of assets, loans outstanding and deposits in the universal banking sector for the Bank and our six main competitors in Greece as at December 31, 2006. These figures exclude one specialized credit institution and have been compiled by the Bank based on publicly available information. This table also excludes specific market shares of foreign banks, as no official information with respect to the year ended December 31, 2006, is available to date for such banks.