NATIONAL BANK OF GREECE SA 20-F 2009
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Date of event requiring this shell company report
For the transition period from to
Commission file number 001-14960
EQNIKH TRAPEZA THS
NATIONAL BANK OF GREECE S.A.
THE HELLENIC REPUBLIC
86 Eolou Street
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 Registrant's classes of capital or common stock as at December 31, 2008, the close of the period covered by the annual report:
496,654,269 Ordinary Shares of nominal value €5.00 per share
25,000,000 Series A Preference Shares of a nominal value of €0.30 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 ý 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 ý
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 ý 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 ý Accelerated filer o Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ý International Financial Reporting Standards as issued by the International Accounting Standards Board o Other o
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 o Item 18 o
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 ý
Information Regarding National Bank of Greece S.A. and the National Bank of Greece Group
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 bank's 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.
Currency and Financial Statement Presentation
The NBG Group operates in many countries and earns money and makes payments in many different currencies. 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 introduced at the start of the third stage of the European Economic and Monetary Union in accordance with the Treaty Establishing the European Community, as amended, which was adopted by the Hellenic Republic as of January 1, 2001. All references to the "Eurozone" are to the member states of the European Union (the "EU") that have adopted the euro as their national currency in accordance with the Treaty on European Union signed at Maastricht on February 7, 1992. All references to "BGN" are to Bulgarian leva, all references to "£" or "GBP" are to British pounds, all references to "RSD" are to Serbian dinars, all references to "CYP" are to Cyprus pounds, all references to "JPY" are to Japanese yen, all references to "MKD" are to Macedonian dinars, all references to "RON" are to Romanian lei, all references to "TRY" are to Turkish new lira and all references to "ZAR" are to South African rand.
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 = €0.7133, as certified for customs by the Board of Governors of the Federal Reserve Bank of New York (the "Noon Buying Rate") on June 30, 2009. Similar convenience translations, such as translations of South African rand, Macedonian dinars, 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 7.73 per US$1.00, Macedonian dinars 43.6465 per US$1.00, Bulgarian leva 1.3838 per US$1.00, Romanian lei 2.9767 per US$1.00, Serbian dinars 66.7138 per US$1.00 and Turkish new lira 1.5292 per US$1.00. These are the respective Noon Buying Rates for the stated currencies on June 30, 2009. 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, 2004, 2005, 2006, 2007 and 2008 and for the current annual period through June 30, 2009. The following exchange rates have been calculated using the average of the Noon Buying Rates for euro on the last day of each month during each of the past five annual periods.
Special Note Regarding Forward-Looking Statements
This Annual Report includes forward-looking statements. Such items in this Annual Report include, but are not limited to, statements made 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:
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, 2004 through 2008 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. The selected financial and operating data should be read in conjunction with Item 5, "Operating and Financial Review and Prospects", in this Annual Report and with the Group's audited U.S. GAAP financial statements and the notes thereto as at December 31, 2007 and 2008 and for the years ended December 31, 2006, 2007 and 2008 (the "U.S. GAAP Financial Statements") included elsewhere in this Annual Report.
The number of shares as adjusted to reflect changes in capital is presented in the following table:
SELECTED FINANCIAL RATIOS
For exchange rate information, see "IntroductionCurrency and Financial Statement Presentation".
On May 17, 2005, at the Bank's General Meeting of Shareholders, the Bank's 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 Bank's General Meeting of Shareholders, the Bank's 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 Bank's General Meeting of Shareholders, the Bank's 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. On April 17, 2008, at the Bank's General Meeting of Shareholders, the Bank's shareholders approved the distribution of a dividend in the amount of €1.40 per share with respect to the year ended December 31, 2007. All shareholders received €0.40 in cash. The remaining €1.00 was received in the form of shares at a rate of 4 to 100 as approved at the Bank's repeat General Meeting of Shareholders on May 15, 2008.
On June 2, 2009, the Bank's General Meeting of Shareholders approved the non-payment of dividend to ordinary shareholders and the payment of dividends to preferred shareholders as follows:
The following tables set forth the actual dividends per ordinary share paid by the Bank for the years ended December 31, 2004, 2005, 2006, 2007 and 2008 in respect of ordinary shareholders. For financial years up to and including the year ended December 31, 2004, dividends declared by the Bank
are based on Greek GAAP, whereas for the financial years ended December 31, 2005 and onwards, dividends are based on IFRS.
For a description of the Bank's dividend policy please refer to Item 8, "Financial Information".
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
D. Risk Factors
If you are considering purchasing our ordinary shares, preference shares or American Depositary Receipts ("ADRs"), 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 the Current Financial Crisis
We are vulnerable to the current disruptions and volatility in the global financial markets.
Since September 2007, the global financial system has experienced difficult credit and liquidity conditions and disruptions resulting in reduced liquidity and greater volatility and widening of credit spreads, both generally and with respect to Greek issuers in particular. In September 2008, global financial markets deteriorated sharply following the bankruptcy filing by Lehman Brothers Holding, Inc. ("Lehman Brothers"). In the days that followed, it became apparent that a number of other major financial institutions, including some of the largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies, were experiencing significant funding and capitalization difficulties. The resulting lack of credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity have adversely affected our business, financial condition and results of operations. Furthermore, continued or worsening disruption and lack of liquidity in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us, or at all.
The financial problems faced by our customers generally could adversely affect us.
Market turmoil and deteriorating macro-economic conditions, especially in Greece, Turkey and SEE, could materially adversely affect the liquidity, businesses and/or financial conditions of our borrowers, which could in turn further increase our non-performing loan ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In the context of continued market turmoil, worsening macro-economic conditions, declining consumer spending and increasing unemployment, the value of assets collateralizing our secured loans, including homes and other real estate, could decline significantly, which could result in impairment of the value of our loan assets and as well as be accompanied by an increase in our non-performing loan ratios. In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.
Moreover, many nations' economies, both advanced and less developed, are widely considered to be in the midst of, or about to enter, economic recession. Further economic deterioration, especially in Greece, Turkey and SEE or their significant trading partners would adversely affect our income, results of operations, business and prospects.
Government interventions aimed at alleviating the financial crisis are subject to uncertainty and carry additional risks.
In an attempt to restore stability in the financial system, the United States, European and other governments have intervened on an unprecedented scale by making funds available and taking other measures designed to facilitate access to capital and support financial institutions and other industries that have been affected by the market turmoil. In November 2008, the Greek Parliament approved the Hellenic Republic bank support plan, with the objective, among others, of strengthening Greek banks' capital and liquidity positions. See Item 4.B, "Business OverviewRegulation and Supervision of Banks in GreecePlan for the Support of the Liquidity of the Greek Economy" for a detailed description of the current plan.
There is no assurance that these measures will improve liquidity conditions or otherwise achieve their intended effects, and a failure of these measures could prolong or exacerbate global and local adverse market conditions and materially harm our business, financial condition and results of operations.
In addition, some of these measures could lead to increased ownership and control by the Hellenic Republic over financial institutions and further consolidation in the financial industry. With respect to the Hellenic Republic bank support plan, our participation has resulted in the Hellenic Republic's direct representation on the board of directors of the Bank ("Board of Directors" or "Board") and its possession of certain veto rights over shareholders' resolutions. See also Item 4.B, "Business OverviewRegulation and Supervision of Banks in GreecePlan for the Support of the Liquidity of the Greek Economy". Furthermore, our preference shares issued to the Hellenic Republic under this plan may become convertible into ordinary shares in certain circumstances, and could therefore have a significant dilutive effect on the value of our ordinary shares, as well as result in direct government voting representation at our annual and extraordinary shareholder meetings.
We are exposed to risks potentially faced by other financial institutions.
We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and counterparties generally have led to market-wide liquidity problems and could lead to losses or defaults
by other institutions. These liquidity concerns have negatively impacted, and may continue to negatively impact, inter-institutional financial transactions in general. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties. In addition, our credit risk may be exacerbated when the collateral we hold cannot be realized upon or is liquidated at prices not sufficient for us to recover the full amount of the loan or derivative exposure. Despite the risk control measures we have in place, recent events, including the collapse of Lehman Brothers, illustrate the difficulties in predicting counterparty risk. A default by a significant financial counterparty, or liquidity problems in the financial services industry in general, could have a material adverse effect on our business, financial condition and results of operations.
Our wholesale borrowing costs and our access to the debt capital markets depend significantly on our credit ratings.
On December 11, 2008 Moody's Investors Services Limited ("Moody's") confirmed the Bank's "negative outlook" status, while its long-term credit rating remains Aa3. Standard & Poor's Rating Services, a division of the McGraw Hill Companies ("Standard & Poor's"), confirmed the Bank's "negative outlook" status on May 4, 2009 although it confirmed BBB+ for the Bank's long-term credit rating. Fitch Ratings Ltd. ("Fitch") confirmed the Bank's "negative outlook" status on March 13, 2009 although it confirmed the Bank's A- long-term credit rating. Any reduction in the long-term credit ratings of the Bank, could increase our wholesale borrowing costs. Any reductions may also limit our access to the debt capital markets and trigger additional collateral requirements in derivative contracts and other secured-funding arrangements. As a result, any reduction in the Bank's credit ratings could adversely affect our access to liquidity and competitive position or have a negative impact on our earnings and financial condition.
Through its holding of preference shares in the Bank, the Hellenic Republic is in a position to exert influence over the Group.
The Hellenic Republic directly owns all 70 million non-transferable redeemable preference shares issued under the capital facility of the Hellenic Republic bank support plan. This direct stake in the Bank endows the Hellenic Republic with voting rights at the general meeting of preferred shareholders and requires the inclusion of a government-appointed representative, on our Board, who attends the general meeting of ordinary shareholders of the Bank (the "General Meeting"). This representative has the ability to veto actions relating to the distribution of dividends and the remuneration of certain of the Bank's directors and senior management as well as influence the strategic decisions of the Group. See also Item 4.B, "Business OverviewRegulation and Supervision of Banks in GreecePlan for the Support of the Liquidity of the Greek Economy". In addition, the Hellenic Republic will have a preemptive right to subscribe for new ordinary shares that are not subscribed for by holders of rights pursuant to the rights issue currently undertaken by the Bank, which may result in an increase in the Hellenic Republic's shareholding.
There is a risk that the Hellenic Republic might seek to exert influence over the Group and may disagree with certain decisions of the Bank and the Group relating to dividend distributions, benefits policies and other commercial decisions which may ultimately limit the operational flexibility of the Group.
Furthermore, the Hellenic Republic also has interests in other Greek financial institutions and an interest in the health of the Greek banking industry and other industries generally, and those interests may not always be aligned with the commercial interests of the Group or its shareholders. Shareholders may disagree as to whether an action opposed or supported by the Hellenic Republic is in the best interests of the Group generally.
There can be no assurance that, if economic conditions do not improve or continue to deteriorate and/or if the financial position of the Group deteriorates, further government intervention will not take place.
The Bank may not pay dividends to its ordinary shareholders.
As a result of our participation in the Hellenic Republic bank support plan, our dividends are subject to a maximum of 35% of the Bank's distributable profits (on an unconsolidated basis) for as long as the Bank participates in the Hellenic Republic bank support plan, and any decisions regarding distribution of dividends can be vetoed by the Hellenic Republic representative who sits on our Board and attends the General Meeting. Our participation has also resulted in the issuance of fixed return preference shares to the Hellenic Republic. In addition, in June 2008, we issued 25 million non-cumulative, non-voting redeemable preference shares. Payments of dividend on these existing preference shares and payments of the fixed return for the preference shares issued pursuant to the Hellenic Republic bank support plan take preference over distributable profits otherwise available to our ordinary shareholders. Pursuant to Greek Law 3756/2009, we did not pay any cash dividends to our ordinary shareholders in 2009 in respect of the 2008 financial year. There can be no assurance that subsequent legislation will not prohibit us from paying cash dividends in subsequent years. Furthermore, as a result of the global financial crisis and deteriorating macro-economic conditions, our net profits may decline. Consequently, we may not be able to pay dividends to our ordinary shareholders in 2010, and if current market conditions persist or if we continue to participate in the Hellenic Republic bank support plan, in the near-to medium-term. See also Item 8.A, "Consolidated Statements and Other Financial InformationPolicy on Dividend Distributions".
Risks Relating to Our Business
The state of the economic and political environments in Greece, Turkey and SEE significantly affect our performance.
For the financial year ended December 31, 2008, 55.1% of our total income, and as of December 31, 2008, 70.2% of our gross loans 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 Bank's 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, especially Turkey (see this Item 3.D, "Risk FactorsRisks Relating to Our BusinessOperating in Turkey carries specific macroeconomic and political risks"), from which 14.5% of our gross loan portfolio and 30.4% of our total income were derived in 2008, and SEE countries (see this Item 3.D, "Risk FactorsRisks Relating to Our BusinessWe conduct significant international activities and are expanding in emerging markets"), from which 12.8% of our gross loan portfolio and 12.0% of our total income were derived in 2008. Consequently, an economic slowdown, a deterioration of economic or political conditions in Greece, or other adverse changes affecting the Greek economy or the economies of other countries in which we operate, 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 economic and 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. Finally, further changes in macro-economic conditions such as the level and liquidity of the global financial and other asset markets, investor sentiment and the availability and cost of credit may adversely affect our business, results of operations or financial condition.
Operating in Turkey carries specific macroeconomic and political risks.
As a result of the Group's acquisition of Finansbank A.S. ("Finansbank") in August 2006, the Group is subject to operating risks in Turkey, including the following:
Changes in the competitive environment in Turkey may adversely affect Finansbank's business.
Increased competition from existing competitors or from new entrants to the Turkish market could limit Finansbank's ability to grow or to maintain its market share and could cause downward pressure on margins, which could adversely affect the Group's ability to meet its strategic objectives in Turkey.
We conduct significant international activities and are expanding in emerging markets.
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 business, 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.
From time to time, we pursue expansion of our international market position through acquisitions and organic growth in SEE, and the Southeastern Mediterranean region.
Volatility in interest rates may negatively affect our net interest income before provisions for loan losses and have other adverse consequences.
Interest rates are highly sensitive to many factors beyond our control, including monetary policies and domestic and international economic and political conditions. The period since September 2007 has been a period of volatile interbank lending rates. Following the collapse of Lehman Brothers, central banks have sharply decreased interest rates. There can be no guarantee that further events will not alter the interest rate environment again.
As with any bank, changes in market interest rates 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 before provisions for loan losses and net interest margins. Since the majority of our loan portfolio effectively reprices in five years or less, rising interest rates may also result in an increase in our allowance for loan losses 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, lower net interest margins, increased pre-payments on our loan and mortgage portfolio and increased competition for deposits.
Non-performing loans have had a negative impact on our operations and may continue to do so.
Non-performing loans represented approximately 2.8% of our total customer loans portfolio as at December 31, 2008. Since then, this percentage has increased. See Item 4.E, "Selected Statistical DataCredit Quality and Risk ManagementNon-Performing Loans, Allowance for Loan Losses, and Loan Loss Experience" and Item 5.A, "Operating and Financial Review and ProspectsKey Factors Affecting our Results of OperationsNon-Performing Loans". The effect of the continuing deterioration of global macroeconomic conditions on the regions in which we operate will lead to additional non-performing loan generation during the second quarter and for the remainder of 2009. Our current credit approval and monitoring procedures focus on the borrower's cash flow and ability to repay in an effort to improve the quality of our loan assets and mitigate future allowances for loan losses. 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. In addition, the outlook for the global economy in 2009 and 2010 remains unstable for the economies of Greece, Turkey and SEE. This may
result in adverse changes in the credit quality of our borrowers, with increasing delinquencies and defaults. Future provisions for non-performing loans could have a materially adverse effect on our operating results.
We face significant competition from Greek and foreign banks.
The general scarcity of wholesale funding has led to a significant increase in competition for retail deposits. We also face competition from foreign banks, some of which may have resources greater than our own. We may not be able to continue to compete successfully with domestic and international banks in the future.
Our ability to reduce staff in Greece is limited.
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 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 achieving such reductions.
The loss of senior management may adversely affect our ability to implement our strategy.
Our current senior management team includes a number of executives that we believe contribute significant experience and expertise to our management in the banking sectors in which we operate. The continued success of our business and our ability to execute our business strategy will depend, in large part, on the efforts of our senior management. For instance, a change of government in Greece could lead to the departure of certain senior managers. If a substantial portion of our senior management leaves us, our business may be materially adversely affected.
We may be unable to recruit or retain experienced and/or qualified personnel.
Our growth depends, in part, on our ability to continue to attract, retain and motivate qualified and experienced banking and management personnel. Competition in the Greek and other SEE banking industries for personnel with relevant expertise is intense, due to the relatively limited availability of qualified individuals. To recruit qualified and experienced employees and to minimize the possibility of their departure, we provide compensation packages consistent with evolving standards in the relevant labor markets. However, inability to recruit and retain qualified and experienced personnel in Greece, Turkey and SEE, or manage our current personnel successfully, could have a material adverse effect on our business, financial condition, results of operations or prospects.
We could be exposed to significant future pension and post-retirement benefit liabilities.
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 and certain of our subsidiaries make 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 as at December 31, 2008 was €414.1 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 our current obligations under pension plans and the assumptions by reference to which they are determined, please refer to Note 38 to the U.S. GAAP financial statements for the year ended December 31, 2008, included in this Annual Report.
Following legislation passed in April 2008, the Bank's main pension plan and the main pension branch of Ethniki Hellenic General Insurance S.A.'s ("EH") post-retirement and health plan, both of which are defined-contribution plans, have been incorporated into the main pension branch of the state-sponsored social security fund ("IKAETAM") as of August 1, 2008. Pursuant to this legislation, the Bank will contribute into IKAETAM €25.5 million per year for 15 years starting from December 2009.
In addition, in 2005 and 2006, the Hellenic Republic passed legislation permitting bank employee auxiliary pension schemes to merge with the new Insurance Fund of Bank Employees ("ETAT"). The relevant legislation 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 financial report commissioned by the Ministry of Finance pursuant to this legislation. Subsequently, in April 2006 the Bank applied under Greek Law 3371/2005, as amended, to merge its Auxiliary Pension Fund into ETAT. It is possible that we may have a future requirement to make a significant cash payment to ETAT in connection with the merger of the Bank's 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.
The Greek banking sector is subject to strikes.
Most of the Bank's employees belong to a union and the Greek banking industry has been subject to strikes over the issues of pensions and wages. Bank employees throughout Greece went on strike for twelve days in 2008 and two days in 2009 (up to June 30, 2009), largely to further their demands for wage increases and in opposition to pension reforms proposed by the Hellenic Republic in March 2008. Prolonged labor unrest could have a material adverse effect on the Bank's operations in Greece.
We are exposed to credit risk, market risk, liquidity risk, operational risk and insurance risk.
As a result of our activities, we are exposed to a variety of risks. Among the most significant of these risks are credit risk, market risk, liquidity risk, operational risk and insurance risk. Failure to control these risks could result in material adverse effects on our financial performance and reputation.
changes in the value of our investment and trading portfolios. This has been the case during 2008 and the first quarter of 2009, with market volatility resulting in significant reductions in the value of such portfolios. We have implemented risk management methods to mitigate and control these and other market risks to which our portfolios 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.
Deteriorating asset valuations resulting from poor market conditions may adversely affect our future earnings.
In recent years, Greece and SEE have experienced rapid expansion in the retail and residential mortgage credit markets. An economic slowdown or increase in real interest rates in these countries could result in an increase in non-performing loans and significant changes in the fair values of our exposures. Severe market events, as exemplified by recent events affecting the market for asset-backed CDOs, the US sub-prime residential mortgage market and the leveraged finance sector, are difficult to foresee and, if they occur in markets in which we operate, could result in us incurring significant losses. Moreover, an increase in market volatility or adverse changes in the liquidity of our assets could impair our ability to value certain of our assets and exposures. Valuations in future periods, reflecting then-prevailing market conditions, may result in significant changes in the fair values of these assets and exposures. In addition, the value ultimately realized by us will depend on the fair value as determined at that time and may be materially different from the current or estimated fair value. Any of these factors could require us to recognize write-downs or realize impairment charges, any of which may adversely affect our financial condition and results of operations.
We may incur significant losses on our trading and investment activities due to market fluctuations and volatility.
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 11, "Quantitative and Qualitative Disclosures about Market Risk".
Our hedging may not prevent losses.
If any of the variety of instruments and strategies that we use to hedge economically 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 methodology by which gains and losses resulting from certain ineffective hedges are recorded may result in additional volatility in our reported earnings.
An interruption in or a breach of security in our information systems may result in business disruptions and other losses.
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, and 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 result in a loss of customers or have a material adverse effect on our reputation, financial condition and results of operations.
State-related entities may have an important influence on the Bank.
In addition to representation on the Board of Directors as a result of our participation in the Hellenic Republic bank support plan, and any direct holding of our ordinary shares it may acquire in the Rights Offering, the Hellenic Republic 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 Hellenic Republic). As of June 2, 2009, domestic pension funds owned approximately 17.3% of our share capital, and other domestic public sector related legal entities and the Church of Greece owned approximately 7.6%.
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. See Item 7.A, "Major ShareholdersState Interests".
Future acquisitions may result in unexpected losses.
Our strategy includes expansion by acquisition, and acquisitions may lead to unexpected losses or integration difficulties. 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. Furthermore, our acquisition procedures may fail to identify that the values of certain assets are impaired. 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. Further, we may not realize expected synergies which may impact our results, and management may be distracted.
Regulation of the banking industry may change.
Regulations governing the banking and financial services industries are subject to change, particularly in the current market environment, where there have been unprecedented levels of government intervention and changes to the regulations governing financial institutions. As a result of
these and other ongoing and possible future changes in the financial services regulatory landscape (including requirements imposed by virtue of our participation in any government or regulator-led initiatives, such as the Hellenic Republic bank support plan), we may face greater regulation in Greece, Turkey and SEE. Compliance with such changes may increase our capital requirements and costs, heighten disclosure requirements, restrict certain types of transactions, affect our strategy and limit or require the modification of rates or fees that we charge on certain loan and other products, any of which could lower the return on its investments, assets and equity. We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities.
Risks Relating to the Markets
Exchange rate fluctuations could have a significant impact on the value of our shares.
The market price of our shares traded on the Athens Exchange ("ATHEX") is denominated in euro. Fluctuations in the exchange rate between the euro and other currencies may affect the value of the Bank's 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 ordinary shares are paid in euro and, therefore, are subject to exchange rate fluctuations when converted to an investor's local currency, including US dollars.
The ATHEX is less liquid than other major exchanges.
The principal trading market for our ordinary 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 2008, the average daily trading value on the ATHEX was approximately €315.9 million, while in the first six months of 2009 it was approximately €171.1 million. In comparison, the average daily trading value on the London Stock Exchange was approximately €7,423 million in 2008.
As at December 31, 2008, the aggregate market value of all shares listed on the ATHEX was approximately €68.2 billion, while as at June 30, 2009 it was approximately €82.4 billion. The market value of our ordinary shares listed on the ATHEX on December 31, 2008 and June 30, 2009 was €6,556 million and €7,917 million, representing approximately 9.6% and 11.9%, respectively, of the capitalization of all companies listed on the ATHEX. We cannot make assurances about the future liquidity of the market for our shares.
Our share price has been, and may continue to be, volatile.
The market price of our shares has been subject to significant 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:
The exercise of pre-emptive rights may not be available to US holders of the Bank's ordinary shares and American Depositary Receipts.
Under Greek law and our Articles of Association, prior to the issuance of any new ordinary shares, we must offer holders of our existing ordinary shares pre-emptive rights to subscribe and pay for a sufficient number of ordinary 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.
US holders of the Bank's ordinary shares and American Depositary Shares evidenced by American Depositary Receipts ("ADRs") may not be able to receive, 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 US holders of ordinary shares and ADRs to exercise their pre-emptive rights and any other factors we may consider appropriate at the time.
If US holders of the Bank's ordinary shares and ADRs are not able to receive (and trade) or exercise pre-emptive rights granted in respect of their 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.
A. History and Development of the Company
History and Development of the NBG Group
National Bank of Greece S.A. was founded in 1841 and incorporated as a société anonyme pursuant to Greek law. Our current corporate form will expire on February 27, 2053, but may be further extended by a shareholder resolution passed at the the General Meeting. The Bank's 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 Bank's agent for service of process 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 168 years. Since our foundation, our business has expanded to become a large, diversified financial services group that today comprises the Group. As part of our diversification, the Bank founded Ethniki Hellenic General Insurance S.A. in 1891 and the National Mortgage Bank of Greece S.A. ("NMB") in 1927. Until the establishment of the Bank of Greece as the central bank of Greece in 1928, 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 with National Mortgage Bank of Greece S.A. to enhance revenue generation, realize cost-saving efficiencies and provide more integrated mortgage lending services to the Bank's 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 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 securities portfolio management subsidiary, the National Investment Company S.A.
The Bank's efforts to further integrate its operations and enhance its overall structure also led to the absorption-merger of our wholly owned subsidiary National Real Estate on March 31, 2006 and to the spin-off of the Bank's warehousing section into our wholly-owned subsidiary, Pronomiouhos S.A.
Genikon Apothikon Hellados, which was completed on March 17, 2008 and which is accounted for as an asset held for sale (See Note 19 to the U.S. GAAP financial statements included in this Annual Report). We also merged with National Management & Organization Co. ("Ethnokarta") through absorption, effective as at March 31, 2007.
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 that was subsequently renamed NBG Leasing IFN S.A., as well as Alpha Romania Insurance, which we acquired from another Greek bank. These acquisitions followed the expansion of our banking activities through the acquisitions of Stopanska Banka AD-Skopje in FYROM and UBB in Bulgaria in 2000.
Acquisitions, Capital Expenditures and Divestitures
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., Fina Holding A.S., Girisim Factoring A.S. and Fiba Factoring Hizmetleri A.S. (together, the "Fiba Sellers") for a consideration of US$2,323 million and US$451 million for ordinary shares and founder shares, respectively. 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. The Fiba Sellers retained a residual stake of 9.68% in the ordinary share capital of Finansbank, which was subject to a call option exercisable by us, and a put option (to us) exercisable by the Fiba Sellers for a period of two years commencing on the second anniversary of the initial acquisition. As a result of Turkish capital markets legislation, the Bank made a mandatory offer to the minority shareholders of Finansbank. During the mandatory tender offer period between January 8 and January 29, 2007, the Bank acquired a further 43.44% of Finansbank's outstanding ordinary shares, for a consideration of €1,733 million, through the Istanbul Stock Exchange ("ISE"). On April 5, 2007, we disposed of 5% of Finansbank's share capital to the International Finance Corporation ("IFC"). This shareholding remains subject to a call option exercisable by us, and a put option (to us) exercisable by the IFC within 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. On August 19, 2008, we accepted the proposal of Fiba Holding to acquire the remaining shares of Finansbank held by the Fiba Sellers (9.68%). The exercise price was determined in accordance with the agreement and amounted to US$697 million. At December 31, 2008, we had acquired substantially all of the remaining 95% of Finansbank's outstanding share capital (excluding the 5% stake held by the IFC and subject to the put and call options), for a consideration of €3,883.3 million.
In January 2006, following a decision of the Board of Directors of the Bank dated December 20, 2005, we participated in the share capital increase of Banca Romaneasca. Pursuant to the share capital increase, which was completed in February 2006, 122.5 million new shares were issued, and the Bank held 194.4 million shares, representing 98.9% of the total number of shares. The Bank paid about €60.4 million in relation to the share capital increase.
In February 2006 we disposed of our subsidiary NBG Canada, and in April 2006 we disposed of our subsidiary Atlantic Bank of New York, in line with our strategy to diversify away from mature markets and focus on emerging markets.
On February 22, 2006, Group companies National Insurance Brokerage S.A. and UBB agreed with American International Group ("AIG") to establish a life insurance company and a general insurance company in Bulgaria. National Insurance Brokerage S.A. and UBB will each own a 30% of the share capital of the two new companies, while the remaining 40% and the management of the companies will
be held by American Life Insurance Company and AIG Central Europe & CIS Insurance Holdings Corporation. The total share capital of the life insurance company was set at BGN 6 million (€3.1 million) and for the general insurance company at BGN 5.4 million (€2.8 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. Novi Sad ("Vojvodjanska") for a total cash consideration of €360 million. The acquisition was effected on December 31, 2006. Pursuant to the acquisition agreement, we deposited a further €25 million in an escrow account to set off certain expected recoveries from Vojvodjanska's fully provided non-performing loan portfolio until December 2007. The recoveries as at December 31, 2007 amounted to €7.7 million, which have been offset by a payment to the Republic of Serbia out of the escrow account. As a result, the cost of the acquisition of Vojvodjanska and net assets at acquisition have been increased by this amount.
From 11 through to December 25, 2006, the Bank via a mandatory tender offer acquired 191.2 million shares of Finans Leasing, corresponding to 2.55% of its share capital and 72.3 million shares of Finans Investment Trust corresponding to 5.3% of its share capital. The total consideration paid amounted to EUR 4.2 million and EUR 0.6 million respectively.
On March 21, 2007, we acquired 100% of P&K Investment Services S.A., 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 S.A. disposed of its subsidiary P&K Mutual Fund Management S.A. to Millennium Bank AE for €1.7 million. In May 2007 we merged our wholly-owned subsidiaries P&K Securities S.A. and National Securities S.A. to create National P&K Securities S.A. The Greek Ministry of Development approved the merger on December 14, 2007.
On April 19, 2007, we signed an agreement for the disposal of our minority shareholding in AGET Heracles to its majority shareholder Lafarge Group. Pursuant to this agreement, we disposed of 18,480,899 shares, representing 26% of the share capital of AGET Heracles. This disposal was 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.
In May 2007, Finansbank applied to the General Directorate of Insurance in Turkey for, and has received, permission to establish Finans Emeklilik ve Hayat A.S. ("Finans Pension"). The company completed its corporate organization and obtained a license to conduct life and personal accident insurance business dated November 21, 2007 and a license to conduct individual pension business dated April 11, 2008. Finans Pension has commenced operations in life and personal accident business. The increased demand in recent years for individual pensions in Turkey has created a rapidly growing insurance business for Finans Pension products.
On May 30, 2007, the Bank acquired from TBIF Financial Services BV 100% of the share capital of TBI Lizing d.o.o., a leasing company in Serbia, for €2.5 million.
On September 3, 2007, NBG Leasing d.o.o Belgrade established a 100%-owned subsidiary, NBG Services d.o.o. Belgrade, with approved capital of RSD 756,000.
On September 24, 2007, we announced a voluntary takeover bid in cash of €5.50 per share for the 23.08% of the share capital of EH held by minority shareholders. As at December 31, 2007, we held 100% of the share capital of EH. On January 14, 2008, at an Extraordinary General Meeting, EH shareholders approved the filing with the Capital Markets Commission ("CMC") for de-registration of the company's shares from the ATHEX, and on February 7, 2008, de-registration was approved.
In October 2007, we exercised our minority buy-out option for Vojvodjanska and through a public tender offer acquired 1,727 common shares at a price of RSD 70 per share. After this share purchase, we became the sole shareholder of Vojvodjanska and delisted its shares from the Belgrade Stock Exchange on November 28, 2007. On November 14, 2007, we proposed a share capital increase of Vojvodjanska of €53 million, which was completed on December 19, 2007. On November 19, 2007, we proposed the merger of the Vojvodjanska with NBG Beograd through absorption of the latter by the former. The merger was approved by the Central Bank of Serbia on February 5, 2008 and was completed on February 14, 2008.
On December 17, 2007, the Bank established a new subsidiary, CPT Investments Ltd, with a contribution of €401 million to its share capital. On September 30, 2008 the Bank contributed to the share capital increase of CPT Investments Ltd the amount of EUR 311.2 million.
In February 2008 the Bank established two wholly owned subsidiary companies, NBG Finance (Dollar) Plc and NBG Finance (Sterling) Plc.
Beginning on April 21, 2008, we acquired 8,604,000 shares in the Hellenic Postal Savings Bank through on-exchange share purchases over the ATHEX. The shares acquired correspond to a 6.05% shareholding in Hellenic Postal Savings Bank. Together with the 816,000 Hellenic Postal Savings Bank shares (a 0.57% shareholding) already owned by the Bank, our total shareholding in Hellenic Postal Savings Bank corresponds to 6.62%. Total consideration amounted to €115.1 million.
On May 30, 2008 Banca Romaneasca increased its share capital and the Bank contributed the amount of EUR 41.2 million. Furthermore, on December 22, 2008 Banca Romaneasca increased its share capital and the Bank contributed the amount of EUR 41.6 million.
On July 16, 2008 the Bank disposed of its 30% associate, Siemens Enterprise Communications S.A. The agreed total consideration amounted to €11.4 million.
On November 25, 2008 following the decision of General Meeting of the Shareholders of Astir Palace Vouliagmenis S.A. ("Astir Palace") for its share capital increase, the Bank, as the main shareholder, contributed the amount of EUR 99.6 million.
On December 16, 2008 Ethniki Hellenic General Insurance S.A increased its share capital and the Bank contributed the amount of EUR 137.5 million.
The table below sets out the Bank's principal items of capital expenditure for 2006, 2007 and 2008:
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 three 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 emerging markets.
The table below sets out the Bank's principal divestitures for 2006, 2007 and 2008.
For further information on disposals of non-core assets, see Item 5, "Operating and Financial Review and ProspectsKey Factors Affecting Our Results of OperationsDisposal of Non-Core Assets."
B. Business Overview
We are the largest financial institution in Greece by market capitalization, holding a significant position in Greece's retail banking sector, with more than 10 million deposit accounts, more than one million lending accounts, 579 branches and 1,446 ATMs as at December 31, 2008. Our core focus outside of Greece is in Turkey and SEE, where we currently operate in Bulgaria, Serbia, Romania, Albania, Cyprus and FYROM. Altogether, we have a presence in eleven countries outside Greece. We offer our customers a wide range of integrated financial services, including:
In addition, we are involved in various other businesses, including hotel and property management, real estate and IT consulting.
The Bank is our principal operating company, representing 70.8% of our total assets as at December 31, 2008. The Bank's liabilities represent 76.3% of our total liabilities as at December 31, 2008. While the Bank conducts most of our banking activities, it is supported by eight non-Greek
banking subsidiaries: Finansbank A.S., United Bulgarian Bank ADSofia ("UBB"), Vojvodjanska, Banca Romaneasca S.A. ("Banca Romaneasca"), Stopanska Banka A.D.Skopje ("Stopanska Banka"), the National Bank of Greece (Cyprus) Ltd. ("NBG Cyprus"), South African Bank of Athens Ltd. ("SABA") and Finansbank (Malta) Ltd. We intend to continue to expand our operations in SEE and the Southeastern Mediterranean region.
We hold leading positions in many financial services products in Greece. As at December 31, 2008, we had the largest market share of deposits and mortgage loans in Greece, with 31.0% in core deposits and 23.8% in mortgage lending, respectively, according to our internal analysis of published information of the Bank of Greece and other Greek banks; moreover, we were first in life and non-life insurance with market shares of 21.2% and 13.4%, respectively according to data published by the Greek Private Insurance Supervisory Committee. We are also strongly positioned in consumer and credit card lending, According to our internal analysis of published information by the Bank of Greece, we are second with a market share of 17.8% as at December 31, 2008 and first in fund management with a market share of 26.6% as at the same date. We believe that our leadership in financial services in Greece provides a strong platform upon which we will be able to successfully and prudently grow our business.
Banking Activities in Greece
Most of our banking business is domestic and includes retail, corporate and investment banking. As at December 31, 2008, 70.1% of the Group's total assets were Greek Retail Banking and Greek Corporate & Investment Banking ("Greek Banking") related assets. The Group's Greek banking operations account for 72.4% of our total lending activities as at December 31, 2008.
The following table sets forth details of Greek Banking loans and deposits at December 31, 2008:
We believe that the Bank has a significant advantage in attracting domestic deposits from retail and corporate clients due to the:
The charts below indicate the increases in Greek Banking loans and Greek Banking deposits including balances with Central Banks attributable to the Bank from December 31, 2006 through December 31, 2008.
Greek Banking Loans
Greek Banking Deposits
Greek Banking Distribution Channels
As at December 31, 2008, we operated in Greece through 579 branches, one private banking unit, one unit for financial institutions and 10 specialized banking units that deal exclusively with troubled and non-performing loans. As at December 31, 2008, we had 1,466 ATMs, of which at least 597 were situated in key locations outside of our branches, such as supermarkets, metro stations, shopping
centers, hospitals and airports (530 of our ATMs are equipped with cash deposit devices). During 2008, the total number of ATM transactions reached approximately 86 million transactions with a total value of €17.6 billion. In addition, we have developed alternative distribution channels, such as an e-banking platform targeted at both corporate and retail clients. During 2008, approximately 121,000 new corporate and retail clients were connected through our phone banking services, with the total number of phone and internet banking users reaching approximately 337,000. The total number of electronic transactions during 2008 was approximately 23.6 million with a total value of approximately €14.8 billion. We operate a contact center, through which the Bank provides information and transaction services through the use of a voice portal and a manned help desk, which began operation in 2007, and "Fast Line", a telephone service unit of consumer lending through which loan requests of up to €50,000 may be instantly addressed by phone.
The Bank's branches are located in almost every major city and town in Greece. Approximately 45% of the Bank's branches are located in Athens, Piraeus and Thessaloniki, the major population centers in Greece. The Bank is engaged in a continuous process of rationalizing the organization of its branch network in order to reduce costs, primarily by centralizing back-office functions to free more employees to work on sales activities directly with customers. In addition, the Bank is continuing to consolidate redundant branches in order to maintain equivalent geographic coverage at a lower cost. As at December 31, 2008, the Bank operated 230 full banking branches and 349 retail banking branches.
We participate in DIAS Interbanking Systems S.A., which currently has 40 banks as shareholder-participants, including the Bank. DIAS Interbanking Systems provides interbank services such as check clearing, ATM networking, fund transfers and payroll and pension services for the benefit of customers of shareholder-participants.
We use a variety of marketing channels to maintain and enhance our market position, including telemarketing (particularly for credit card sales and consumer loans), radio, television, press and internet 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 and electronics chain stores, 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 and with accountants and consultants in the sale of small business 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 certain banking services over the internet, including the transfer of funds between accounts, balance inquiries, bill payments, stock brokerage services and subscriptions to initial public offerings on the ATHEX.
Recently, we have introduced "i-bank", a new web-based portal which allows our clients to select the ideal place and method to transact with the Bank in order to achieve immediate and reliable service at low cost. Our "i-bank" is being implemented at Group level in all countries where we operate, which will create convergence across our distribution channels through the utilization of a common platform for trans-border products and services.
All of our retail banking activities in Greece are conducted by the Bank. The Bank offers retail customers a number of different types of deposit and investment products, as well as a wide range of traditional services and products.
As a result of the ongoing credit crisis, we have adopted a more conservative approach to new consumer lending, with a greater emphasis on risk-averse lending criteria. As a result, we expect slower credit expansions across each of our products throughout the remainder of 2009.
The following table illustrates our estimated market share in Greece for certain categories of retail banking activities as at the dates indicated:
Our large customer base and our extensive network of branches and ATMs are advantages that will facilitate the Bank's access to the largest and most diverse depositor base in Greece, providing the Bank with a large, stable and low-cost source of funding.
Savings and Investment Products
Savings and investment products of the Bank are offered both in euro and in other currencies. In Greece, the Bank had €66.6 billion in total deposits as at December 31, 2008 compared with €52.7 billion as at December 31, 2007. In response to customer demand, the Bank offers investment products with high yields. These products include repurchase agreements between the Bank and our clients (backed by Greek government bonds), Greek government bonds from the Bank's proprietary portfolio, capital guaranteed principal products and a wide range of mutual funds and unit trust products provided by NBG Asset Management S.A., which is 100% owned by Group companies. See Item 4.B, "Business OverviewBanking Activities in GreeceGlobal Markets & Asset Management".
Consumer Credit Products
The Bank holds a strong position in consumer retail banking in Greece and offers its customers a variety of consumer finance solutions: credit cards, revolving loans, amortized personal loans and consumer loans for vehicles and durable goods.
The Bank's portfolio of consumer credit products amounted to €6,566.5 million as at December 31, 2008 an 18.4% increase compared to €5,547.6 million at December 31, 2007. In 2008 disbursements of new consumer loans exceeded €1.9 billion, a 10% annual increase. As at December 31, 2008, consumer loan balances accounted for 12.9% of the Bank's total lending portfolio.
The Bank is among the most active credit card issuers in Greece, having circulated more than 1.1 million cards and managing a total credit card portfolio of €1.7 billion as at December 31, 2008, compared to €1.5 billion as at December 31, 2007. Despite competition in the Greek credit cards market, the Bank maintained a strong position during 2008 by issuing 276,000 new credit cards and increasing the Bank's portfolio in terms of the number of cards by 9.6% to 1.12 million and in terms of outstanding balances by 12.5% to €190 million net incremental balances from 2007 year-end. During
2008, the Bank focused on increasing its customer base through the expansion of sales channels while at the same time implementing credit criteria, and a more effective and targeted portfolio management.
Beginning in October 2008, we began implementing enhanced credit scoring procedures in connection with the credit risk evaluation of our retail lending products, including the underwriting process, account monitoring and marketing strategies.
The Bank is the largest mortgage lender in Greece according to our internal analysis of information published by the Bank of Greece and has increased its market share to 23.8% at the end of 2008 from 23.6% at the end of 2007. As at December 31, 2008, the Bank's outstanding mortgage balances amounted to €17,756.1 million, compared to €15,660.2 million at December 31, 2007, posting an increase of 13.4%, and constituting 34.8% of its total lending to enterprises and households in Greece. The volume of new loan disbursements amounted to €3.5 billion in 2008.
Mortgage products are offered through our extensive branch network, although strong emphasis is also placed on expanding the use of alternative distribution channels such as real estate agents, construction companies and insurance brokers.
We offer a wide range of mortgage products, with floating, fixed, or a combination of fixed and floating interest rates. Since August 2008, floating rate products are indexed, based on three-month EURIBOR plus a maximum of 3%, depending predominantly on the customer's credit profile, loan-to-value and the amount borrowed. We introduced mortgages in Swiss francs in January 2007, with a low trigger rate for the first year, and a higher fixed rate for the next three or five years. The "ESTIA CHF" line of products offer protection for up to six years against currency fluctuations over 5% in exchange for a 0.20% rate increase. Loans in Swiss francs accounted for 8.4% of new disbursements during 2008.
In addition to fire and earthquake property insurance, we began offering an optional life insurance plan together with mortgages in 2008, improving the quality of our mortgage credit. This option has been very successful, with 80% of new mortgages in 2008 carrying a life insurance plan. For further information, see Item 4.B, "Business OverviewInsurance."
We offer loans subsidized by the Hellenic Republic or Workers' Housing Organization to special groups. In aggregate, these loans accounted for approximately 10% of new loan disbursements in 2008.
Small Business Lending Unit
The Small Business Lending Unit ("SBL Unit"), a part of the Bank's Retail Banking Division consisting of three credit centers situated in Athens, Thessaloniki and Patras, manages the provision of credit to businesses with annual turnover of up to €2.5 million. The SBL Unit offers lending solutions as outlined below, which cover the full range of business credit needs:
In addition, customized financing products are targeted at certain categories of businesses and professionals such as medical practices, trade unions, attorney unions, gas stations, car dealers, pharmacies and food and restaurant establishments. Furthermore, the SBL Unit offers term loans geared towards medium- and long-term working capital needs for the financing of asset purchases.
For the promotion of the aforementioned products, the SBL Unit also cooperates with alternative sale channels such as financial and tax advisors, brokers and insurance agents on a commission fee basis. These affiliations are based on strict service level agreements and sales performance monitoring.
The SBL Unit has recently adopted new procedures governing its active participation in the Institute of Financing Small & Medium Sized Enterprises ("TEMPME S.A."), which facilitates small and medium-sized enterprise financing by issuing state guarantees on loans covering up to 80% of loan principal. In 2009, the SBL Unit's participation in TEMPME S.A. has produced approximately 10,000 applications resulting in over €1 billion in disbursements. The Hellenic Republic has decided to prolong the state guarantee program until the end of 2009.
We offer payment services to our clients participating in all local interbank payment channels. We are also a member of the euro interbank channels of TARGET, TARGET2, EBA for Euro 1, Step 1 and Step 2 services. As a member of Step 2, the Bank is the main Greek entry point for Eurozone payments. For payments, especially outside the Eurozone, the Bank maintains a global network of correspondent banks. The Bank is currently in the process of implementing a program to centralize its payment operations.
We have been offering factoring services since 1996, including domestic factoring services such as debt collection, management and account monitoring and advancing of funds for companies' outstanding claims. Internationally, we offer export credit, credit risk coverage, monitoring services, management and debt collection services. Factoring services are provided through the Bank's corporate credit centers, which comprise a specialized division of the Bank. The Bank's corporate credit centers also provide lending services to small and medium-sized enterprises, offering a synergistic complement of services to these clients.
The Bank has recently incorporated a subsidiary, Ethniki Factors S.A., which will manage and administer its factoring activities domestically and internationally.
The Bank's commercial loan portfolio in Greece comprises approximately 50,000 corporate clients, including Small and Medium Sized Enterprises ("SMEs"), and most of the largest corporate groups in Greece. As a Group, we are able to offer corporate clients a wide range of products and services, including financial and investment advisory services, deposit accounts, loans denominated in euro and other currencies, foreign exchange services, insurance products, custody arrangements and trade finance services.
As a result of the recent credit crisis, the Bank has adopted a more conservative approach to new commercial lending, with a greater focus on larger corporate borrowers that it perceives to be lower-risk. As a result, the Bank expects slower credit expansions in its commercial lending portfolio during 2009 compared to 2008.
The Bank lends to all sectors of the economy. As at December 31, 2008, domestic commercial lending (including loans to the public sector) amounted to €26,875.4 million and represented 52.7% of the total domestic loan portfolio of the Bank. Its lending exposure to the ten largest performing loans to non-affiliated enterprises amounted to €2,885.1 million as at December 31, 2008, representing approximately 5.7% of its domestic loan portfolio.
The Bank offers:
The Bank lends in the form of credit lines, which are generally at variable rates of interest with payment terms of up to 12 months for working capital purposes whereas for financing of investments, payment terms exceed 12 months. In addition, the Bank provides letters of credit and guarantees for its clients. At December 31, 2008, the Bank had standby letters of credit and financial guarantees written amounting to €3.8 billion. Most loans are collateralized to a certain degree, although Greek law imposes significant delays to foreclosing on collateral.
The Bank also participates in, advises on and arranges large syndicated loans with both domestic and foreign banks. Generally, these loans finance large domestic and international infrastructure projects and borrowings by large corporations and state-controlled entities. For example, in 2008 the Bank participated in the financing of three new motorways in Greece: the Aegean Motorway (in the eastern part of central Greece), Olympia Odos (in the Peloponnese) and Nea Odos (in central Greece), the Severn CCGT power plant in Great Britain, an oil exploration rig in Norway and the Bina Istra Motorway in Croatia.
The table below sets forth certain key interest rates charged by the Bank:
Greece is a maritime nation with a long tradition in ship-owning and is one of the world's largest ship-owning and ship-flagging nations. Shipping remains one of the most important sectors of the Greek economy and the Bank is one of the most active participants in the local market, as well as one of the strongest competitors to foreign banks involved in shipping finance in Greece, according to an analysis of shipping finance made by Petrofin S.A., a financial consultancy firm specializing in the shipping industry.
The Bank has traditionally provided financing for many of the largest Greek shipping companies. As at December 31, 2008, outstanding shipping loans (mainly concerning bulk shipping) were €1,932.4 million, representing approximately 3.8% of the Bank's total domestic loan portfolio compared to €1,238.8 million or 3.3% of the Bank's total domestic loan portfolio, as at December 31, 2007. Of the Bank's shipping finance portfolio 17% as at December 31, 2008 concerned the financing of new vessels (new buildings), with the remainder relating to financing purchases of used vessels. The Bank's shipping finance activities are carried out almost exclusively through its Piraeus-based operation.
The Bank's conventional shipping finance and syndicated loan portfolio consists of first-tier shipping groups involved in diversified shipping activities (e.g., dry, wet, liner or ferry shipping) in a continuous effort towards improving quality, spreading risk and enhancing the profitability of its shipping loan portfolio. Nearly all of the Bank's shipping loans are secured by vessels.
The shipping industry is highly cyclical, experiencing volatility in revenues and cash flows resulting from changes in the demand and supply of vessel capacity. The demand for vessels is influenced by, among other factors, global and regional economic conditions, developments in international trade and changes in seaborne and other transportation patterns. None of these factors is within the Bank's control. However, the decline in international oil and commodity prices has eased costs for the industry during 2008. During the last quarter of 2008, freight rates (especially in dry cargo) have been heavily influenced by the global financial turmoil. During 2009, the shipping markets are expected to remain at lower-than-average historical levels (with variations between dry and wet sub-markets) due to increased tonnage supply (new-building vessel deliveries) and modest demand for shipping services, as a consequence of macro-economic conditions. As at December 31, 2008, the Bank's non-performing loans attributable to this sector stood at €18.0 million, compared to €19.4 million as at December 31, 2007. All aforementioned figures for non-performing loans relate entirely to facilities provided in the 1980s and 1990s.
In terms of the outlook for 2009, the Bank is closely monitoring existing shipping facilities. The Bank's management believes that this effort will result in it maintaining its presence in this sector in the years to come.
Domestic Investment Banking
Over the past five years, the Bank has acted as underwriter in 18 out of 21 domestic private sector initial public offerings. During the same period, the Bank participated in two privatization offerings in Greece, while being a lead manager in many of the largest offerings in Greece. In 2007, the Bank's share of the amount underwritten was €33.2 million. During 2008, no domestic initial public offering took place.
The Bank is also active in project finance and, during 2008, provided project finance advisory services to the Hellenic Republic on the Greek Motorways Project, which consists of seven motorway concession schemes. The Bank is also a leading advisor to the Hellenic Republic for the new PFI Projects initiative, where it is involved as advisor in five projects regarding 24 schools, two hospitals, six
university buildings, two regional government buildings and student accommodation facilities for two regional universities. The Bank also provides finance to major infrastructure projects both in Greece and abroad through its participation in the respective syndicated loan facilities.
We began leasing activities in 1990 through our subsidiary, Ethniki Leasing . Ethniki Leasing leases land and buildings, machinery, transport equipment, furniture and appliances, computers and communications equipment. As at and for the year ended December 31, 2008, Ethniki Leasing had assets of €836.8 million and revenues of €50.1 million, before elimination of intercompany transactions and balances.
Banking Activities outside of Greece
We operate, as a Group, in eleven countries outside Greece. As at December 31, 2008, our international network comprised 1,221 branches outside Greece (including Bank branches in the United Kingdom, Albania, Egypt, Cyprus and Guernsey and subsidiaries), which offer traditional banking services and financial products and services. As a result of the merger of NBG Serbia with Vojvodjanska, the Bank currently has seven commercial banking subsidiaries in Turkey, Bulgaria, Romania, FYROM, Serbia, Cyprus and South Africa. Furthermore Finansbank's subsidiary in Malta, (transferred to NBG I BV in February 2009), is active in commercial banking. Lastly, the Bank also operates through its branches in Albania and Egypt.
Our policy, since the early 1990s, has been to focus on the Bank's regional strength in SEE by strengthening our existing network and expanding into growing markets that present low banking penetration and greater profit margins and also to withdraw from mature markets where growth prospects are limited. In particular, we seek to develop our wholesale banking business by targeting major financial centers to which we can offer Greek and Balkan lending exposure. Our retail banking presence in some geographical areas may only be justified by our success in niche markets in which we have the ability to exploit significant advantages.
Since 2000, the Bank has expanded its presence in SEE through acquisitions and greenfield start-ups. The Bank's regional strategy aims at diversifying our operations and enlarging our footprint to cover a region with attractive economic prospects. The Bank offers commercial banking services to customers in the region through our branches and subsidiaries in Bulgaria, Serbia, Romania, FYROM and Albania.
On August 18, 2006, we acquired 46% of the ordinary share capital and 100% of the founder shares of Finansbank, a Turkish commercial bank headquartered in Istanbul. The Fiba 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 tender offer to minority shareholders. During the mandatory tender offer period (January 8 to January 29, 2007), we acquired a further 43.44% of Finansbank's outstanding ordinary shares in public hands. In April 2007, following an agreement signed in January of the same year, we disposed of 5% of Finansbank's shares to IFC (the relevant agreement includes put and call options). On August 19, 2008, we accepted the proposal of Fiba Holding to acquire the remaining shares of Finansbank held by the Fiba Sellers (9.68%).
The exercise price was determined in accordance with the agreement and amounted to US$697 million. Furthermore, from February 2007 to December 2008 we acquired a further 0.67% of the outstanding share capital of Finansbank. As of December 31, 2008 we held 94.79% of the ordinary capital of Finansbank. Finansbank's group of companies includes Finans Leasing, Finans Invest, Finans Portfolio Management, Finans Investment Trust, IBTech and Finans Pension. See Item 4.A, "History and Development of the Company".
Finansbank was the fifth largest private bank in Turkey in terms of total assets, loans and deposits as at December 31, 2008, according to data from the Banks Association of Turkey, and it offers a wide range of retail, commercial, corporate, private banking and international trade finance services. In addition, financial leasing, capital market, corporate finance, portfolio management and brokerage services are provided by Finansbank's subsidiaries. As at December 31, 2008, Finansbank operated through a network of 458 branches in 55 cities, of which 47 were opened during 2008, making it the fifth largest Turkish bank by size of branch network. On December 31, 2008, Finansbank had 9,986 employees, a 10% increase from December 31, 2007.
In the analysis that follows of Finansbank's and its subsidiaries' business, all amounts are before elimination of intercompany transactions and balances with the rest of the Group.
In 2008, Finansbank contributed €346.6 million in net income to the Group compared to €304.4 million in 2007. Finansbank's income before income tax expense was €425.4 million as at December 31, 2008 and €376.2 million as at December 31, 2007. As at December 31, 2008, total gross lending was €10,252.8 million while total deposits reached €8,274.6 million, compared to €10,202.8 million and €8,435.1 million, respectively, as at December 31, 2007. Total assets of Finansbank as at December 31, 2008 were €14.6 billion, accounting for 14.4% of our total assets compared to €14.5 billion and 15.9% as at December 31, 2007. In 2008, 40.0% of the Group's net income from continuing operations before income tax expense was derived from our Turkish operations compared to 23.1% in 2007.
Finansbank Corporate Banking serves large corporations through its eight branches in the four largest cities in Turkey. In 2008, Corporate Banking has prioritized the growth of a high-quality, diversified loan portfolio; lending balances amounted to TRY 12.7 billion as at December 31, 2008, compared to TRY 10.9 billion as at December 31, 2007.
Finansbank Corporate Banking has benefited from integration into the Group in 2007, taking advantage of our reputation and experience in international markets to launch post-delivery finance products in the shipping sector and to enhance its credibility in the local syndication market.
Finansbank Commercial Banking serves medium-sized companies located in 22 cities in Turkey through its head office, four regional offices (three in Istanbul and one in Ankara) and an extensive distribution network that includes 53 branches. The strategy of Commercial Banking is to serve a range of customers while obtaining sustainable profitability.
Finansbank Commercial Banking loan and deposit volumes increased by 10% and 18% respectively in 2008. TRY deposits increased by 63% in 2008 to TRY 879.4 million from TRY 540.6 million in 2007.
Finansbank Investment Banking consists of Project Finance, Corporate Finance and Technical Consulting. Investment Banking acts as a client relations specialist while providing medium- to long-term loans and other products.
Finansbank SME Banking has been serving Finansbank's SME clients since 2003. Finansbank was the first bank in Turkey to provide sector support packages, such as tourism and agriculture support packages. It also pioneered the "Kobifinans" project to serve its clients' information and consultancy needs through magazines, internet portals and call centers. By the end of 2008, SME Banking was active in 252 branches while total credit volume increased by 29% compared to the end of 2007 and reached TRY 4.9 billion.
Finansbank Retail Banking recorded significant loan growth in 2008. Finansbank's mortgage portfolio increased 35.5% from TRY 3.0 billion in 2007 to TRY 4.1 billion in 2008. The car loan portfolio for individuals increased 6.7% from TRY 420.0 million in 2007 to TRY 448.1 million in 2008. Retail lending market share stood at 7.8% as at December 31, 2008. Notably, Finansbank commands over 10% of the outstanding mortgage balances in the market.
Finansbank's total retail deposit market share rose from 3.66% to 3.94% in 2008. Total retail deposits grew 35% during 2008 and reached TRY 10.6 billion as at December 31, 2008, while TRY savings accounts grew by 60% during the same period.
Micro Business Banking operates under Retail Banking and focuses on servicing small businesses with an annual turnover of up to TRY 1 million and professionals such as doctors, lawyers, engineers and accountants.
In October 2007, CardFinans launched a new campaign under the concept "The Power is Yours", introducing ten new product features including interest-free loans, an instant card facility, cash advance features, detailed statement analysis and unemployment insurance. During the "Power is Yours" campaign, almost 300,000 new card applications were received through alternative acquisition channels such as SMS, internet and outdoor marketing activities. The new instant card facility, "CardFinans in 15 minutes", has been implemented in 82 branches throughout Turkey.
During 2008 Finansbank increased its annual credit card spend volumes from TRY 9.3 billion to TRY 14.1 billion, and its loans from TRY 2.6 billion to TRY 3.5 billion with a 36.7% growth rate that was above the market and its main competitors. As at December 31, 2008, Card Finans' loan market share was 10%, the highest level for the company's history. Monthly spend volume reached 7.6% market share and exceeded TRY 1.2 billion.
Alternative Distribution Channels
As at December 31, 2008, 61% of all transactions were made through alternative distribution channels (the internet, phone banking, ATM, IVR and POS machines). The number of online banking customers exceeded 911,000, an increase of 37% compared to 2007. The total number of transactions through Finansbank Internet Banking increased by 38% in 2008.
Finansbank's ATM network grew by 18% in 2008 as the number of ATMs reached 1,206 compared to 1,018 in 2007. ATM transaction volume increased by 83% in 2008. Visitors to the Finansbank website reached 2.8 million by the end of 2008.
Finansbank Private Banking has been providing investment products and asset management services to high net worth individuals in 2008 through seven Private Banking Centers and 32 Private Banking Corners located in Finansbank's branches in all major cities throughout Turkey.
Following internal forecasts on the performance of domestic and international markets and an analysis of the global political and economic situation, domestic and international investment instruments are offered by Private Banking to meet clients' needs. Recommended instruments include time deposits, mutual funds, emerging market bonds, US Treasury bills and bonds, domestic and international equities and bonds, corporate bonds, currency exchange, forward contracts, futures, options and structured products. Finansbank Private Banking employs 75 specialized financial advisors. In 2008, Finansbank Private Banking had approximately US$3.5 billion in assets under management, an increase of over 17% compared to 2007.
The most significant subsidiaries of Finansbank include the following:
Finans Invest was established in December 1996 and began operations in January 1997. The company provides a wide range of financial services to both individual and institutional investors, including investment counseling and brokerage services, portfolio management, fund investment services and corporate finance and international investment services. The company ranks second by volume of stocks traded on the Instanbul Stock Exchange (the "ISE") with a 5.18% market share, according to a breakdown of stock market transactions by ISE members. Finans Invest's client portfolio amounted to TRY 1.1 billion as at December 31, 2008. Total assets of Finans Invest on December 31, 2008 amounted to TRY 68.7 million and its net income as of December 31, 2008 was TRY 7.4 million.
Finans Leasing was established in March 1990. As at December 31, 2008 Finans Leasing ranked fourth in the leasing sector in Turkey, according to the Turkish Leasing Association, with a total business volume representing a market share of 8.2%. Finans Leasing's target customer segment is SMEs, and it was one of the first leasing companies in Turkey to identify the investment needs of SMEs, targeting them as a distinct market segment. Finans Leasing has a lease portfolio that is diversified across several industries, with the proportion of finance lease receivables as at December 31, 2008 of: construction (16.4%), agriculture (11.5%), health (11.1%), manufacturing (12.3%), textiles (14.2%), transportation and communication (6.4%) and metallurgy and mining (6.0%). As at December 31, 2008, total assets of Finans Leasing reached TRY 1,568.0 million and its net income was TRY 51.6 million compared to TRY 1,181.3 million and TRY 50.4 million respectively, in 2007.
Finans Portfolio Management
Finans Portfolio Management was established in May 2000, currently manages five ETFs, 12 mutual funds, three principal protected funds, one absolute return fund, five pension funds, two funds of funds and one closed-end fund. Finans Portfolio Management also manages discretionary portfolios for high net worth individuals and selected institutional clients. Finans Portfolio Management's market share in Turkey's mutual funds industry (including ETFs) was 2.93% as at December 31, 2008. As at the same date, total assets amounted to TRY 15.4 million and net income (including ETFs) was TRY 6.0 million.
In 2008, Finansbank and Finans Portfolio Management introduced four new funds: three principal protected funds and an absolute return fund. Finansbank's market share in mutual funds grew due to the decline of returns of other alternative investment instruments and the increase of the mutual funds volume in "Automatic Account", a demand deposit account in which funds that exceed a certain threshold are invested in mutual funds by Finansbank for the benefit of the account holder. The introduction of the new funds was also the major contributor to the continuing increase in market share, which as at December 31, 2008 stood at 2.93%.
Finans Investment Trust
Finans Investment Trust, established in 1995, is a closed-end investment company, managing portfolios composed of capital and money market instruments. Its shares have been traded on the ISE since 1996. Finans Investment Trust's total assets amounted to TRY 16.6 million as at December 31, 2008, and its net income as of December 31, 2008 was TRY 11.7 million.
Finansbank (Malta) Ltd. ("Finansbank Malta") was established on June 30, 2005 and is owned by NBG (Malta) Holdings Ltd., which was sold by Finansbank to NBG International B.V. on February 24, 2009. As at and for the year ended December 31, 2008, total assets of Finansbank Malta reached €1,835.0 million as at December 31, 2008 and its net income as of December 31, 2008 was €25.4 million compared to €1,657.6 million and €28.9 million respectively as at December 31, 2007.
Finans Pension (See Item 4.B, "Business OverviewInsurance.")
Selected financial information with respect to Finansbank Group as at December 31, 2008 is provided in the table below:
The Bank's international operations include the Bank's branches in Albania, Egypt and Cyprus as well as banking subsidiaries in six countries: NBG Cyprus; Stopanska Banka A.D.Skopje, based in Skopje, FYROM; United Bulgarian Bank ADSofia, with its headquarters in Sofia, Bulgaria; Banca Romaneasca S.A., based in Bucharest, Romania; Vojvodjanska in Serbia; and the South African Bank of Athens, as well as other subsidiaries, primarily in the leasing sector. Our International operations contributed €325.3 million or 39.6% of net income to the Group and accounted for €11.2 billion or 11.0% of Group total assets as at and for the year ended December 31, 2008. Likewise total gross loans were €9.2 billion at December 31, 2008, up 37.7% from €6.6 billion at December 31, 2007, while deposits surpassed €5.6 billion at December 31, 2008, up 1.8% from €5.5 billion at December 31, 2007.
Our International network is described below. In the analysis that follows, all amounts are before elimination of intercompany transactions and balances.
National Bank of Greece S.A.: Foreign Branches
As at December 31, 2008, the Bank had 40 foreign branches in four countries, including one in the United Kingdom, one in Guernsey, 30 in Albania, one in Cyprus and seven in Egypt. Currently, the Bank's branches in Albania lend primarily to certain of the Bank's established Greek corporate clients operating in that country, but also to certain local corporate clients that have significant liquid assets and other collateral. The table below provides selected financial information of the Bank's foreign branches as at and for the year ended December 31, 2008, on a total basis before consolidation adjustments:
The table above relates solely to the business of the Bank's foreign branches (with the exception of the United Kingdom and Guernsey branches, which are considered part of either domestic or other international operations) and not to the branches of the Bank's non-Greek subsidiaries.
United Bulgarian Bank ADSofia
United Bulgarian Bank ADSofia ("UBB") is a commercial bank with headquarters in Sofia, which provides retail and corporate finance services in Bulgaria. We acquired UBB in 2000 and currently hold a 99.9% interest in UBB. During 2008, the UBB branch network continued to expand, opening 47 branches in cities and towns throughout Bulgaria. UBB also opened two business centers dedicated entirely to servicing SME customers during the year. At December 31, 2008, the UBB distribution network included 279 units (37 full functional branches, 190 basic branches, 43 in-store branches and 9 business centers). During 2008, UBB recorded 37.6% growth in its loan portfolio compared to December 31, 2007, due to a 43.4% growth in corporate loans and 31.5% growth in its retail loan portfolio. At December 31, 2008, UBB's market share in Bulgaria was 12.3% for corporate loans, 18.3% for consumer loans and 17.4% for mortgage loans, while its market share in non-bank customer deposit base was 11% according to data published by the National Bank of Bulgaria. As at December 31, 2008, UBB operated 799 ATMs, and 8.572 POS terminals in Bulgaria. During 2008, UBB issued over 119,000 of credit cards in Bulgaria under the logos of MasterCard, VISA and VISA Electron. At December 31, 2008 UBB held a 13% market share with respect to debit cards in Bulgaria.
Selected financial information with respect to UBB as at and for the year ended December 31, 2008 is provided in the table below.
Banca Romaneasca S.A.
Banca Romaneasca is a universal bank which provides a range of retail, SME and corporate banking services in Romania. The Bank acquired Banca Romaneasca in October 2003 and currently holds 89.07% of its share capital. The European Bank for Reconstruction and Development ("EBRD") is the second-largest shareholder of Banca Romaneasca, with 10.21% of its share capital. A share capital increase of RON 355 million was approved in March 2008 and completed in December 2008. The Bank and EBRD subscribed proportionally.
As at December 31, 2008, Banca Romaneasca had a countrywide distribution network consisting of 149 banking units and was the first bank in Romania to provide money-transfer services. Banca Romaneasca launched several new products and services during 2008, primarily dedicated to SME and retail activity, and increased its overall (total assets) market share measured by total assets from 2.7% to 2.9% as at December 31, 2008, according to statistics published by the Central Bank of Romania.
Selected financial information with respect to Banca Romaneasca as at and for the year ended December 31, 2008, is provided in the table below.
Stopanska Banka A.D.Skopje
Stopanska Banka is a universal bank headquartered in Skopje and registered in FYROM that provides payment transfers, brokerage, credit and deposit-taking services in FYROM and abroad. In 2000, we acquired Stopanska Banka and currently hold a 73.04% stake, while the EBRD and the IFC hold stakes of 10.8% each. The remaining 5.4% is held by other minority shareholders.
Stopanska Banka operates a large branch network in FYROM, with a dense nationwide network of ATMs and POS terminals. Following its latest reorganization activities, as at December 31, 2008, Stopanska Banka had 66 branches, and continues the transformation of its branch network into modern sales outlets. Stopanska Banka is also a leader in e-banking within FYROM, promoting Internet and SMS banking and offering its clients electronic payment facilities. Stopanska Banka aims to continue improving its loan portfolio by targeting high net worth customers, such as SMEs and large companies. As at December 31, 2008, Stopanska Banka's market share in FYROM was 38.4% in retail lending, 28.9% in retail deposits, 20.2% in corporate lending and 25.8% in corporate deposits, according to statistics published by the National Bank of FYROM.
Selected financial information with respect to Stopanska Banka as at and for the year ended December 31, 2008, is provided in the table below:
National Bank of Greece (Cyprus) Ltd.
The NBG Cyprus, which has its headquarters in Nicosia, had 17 branches, four satellite branches and one foreign exchange bureau as at December 31, 2008. NBG Cyprus provides a range of commercial and retail banking services. In 2008, NBG Cyprus followed a policy of loan portfolio quality improvement and growth, introducing relationship initiatives with new and existing customers it views as reliable.
Selected financial information with respect to NBG Cyprus as at and for the year ended December 31, 2008, is provided in the table below:
The South African Bank of Athens Ltd.
SABA, which the Bank founded in 1947, had 10 branches across South Africa, primarily in urban centers at December 31, 2008. SABA offers traditional commercial and retail banking services, with particular emphasis on retail and commercial banking services for the SME market in South Africa. During 2008, SABA continued to attract new business in the SME sector, increasing its loans (net of allowance for loan losses) by 5.4% compared to 2007.
Selected financial information with respect to SABA as at and for the year ended December 31, 2008, is provided in the table below:
In December 2006, we acquired a 99.4% stake in Vojvodjanska and, in October 2007, we became the sole shareholder. In February 2007, the Bank's branch network in Serbia of 24 branches became the NBG Beograd subsidiary. Following relevant decisions of the shareholders' general assemblies of Vojvodjanska and NBG Beograd, dated January 3, 2008, the latter has been absorbed by the former and the merger was completed on February 14, 2008. As a result of this merger, our total presence in the Serbian market amounts to 204 branches.
Vojvodjanska's market shares in retail and corporate loans as at December 31, 2008 were approximately 6.8% and 7.1% respectively according to our internal analysis of data from the Serbian Association of the Banks Credit Bureau. Furthermore, its 204 branches serve over 1,187,000 private accounts and 105,000 SME and large company accounts. Vojvodjanska is also a leading issuer of Visa debit and credit cards and DinaCards and has a market share of approximately 6% of Serbia's domestic and international payments.
Selected financial information with respect to Vojvodjanska and NBG Beograd on a consolidated basis as at December 31, 2008, is provided in the table below:
As part of its International operations, the Group offers leasing services through certain of its foreign subsidiaries.
Global Markets & Asset Management
The Bank launched its private banking operations ("Private Banking") in 2003 and currently offers services domestically and internationally from the Bank's international private banking units in London. Private Banking received the "Best Private Banking in Greece" award as the result of a 2008 survey conducted by Euromoney magazine.
Private Banking provides high net worth clients with services and investment choices tailored to the customer's own investment profile. Advisory and discretionary asset management services are provided by NBG Asset Management S.A., adding important solutions to the Bank's investment services. For information related to NBG Asset Management S.A., see Item 4.B, "Business OverviewBanking Activities in GreeceGlobal Markets & Asset Management".
The Bank and each of our banking subsidiaries carry out their own treasury activities within the prescribed position and counterparty limits. These activities include:
The Group's Treasury is active across a broad spectrum of capital market products and operations, including bonds and securities, interbank placements in the international money and foreign exchange markets and market-traded and over-the-counter financial derivatives. It supplies the branch network with value-added deposit products, and the client base includes institutions, large corporations, insurance funds and large private-sector investors. In general, the Bank and our subsidiaries enter into derivatives transactions for economic hedging purposes or in response to specific customer requirements. The Bank also trades actively on a proprietary basis, primarily in euro-denominated Greek government securities and, to a lesser extent, in the spot foreign exchange market and is a general clearing member in the Eurex derivatives exchange. In recent years, the Bank's treasury-related activities have represented a significant source of revenues. In 2008, total turnover for foreign exchange trading and money market transactions by the Bank's central dealing room in Athens was approximately €257 billion and €734 billion respectively (compared to €153 billion and €704 billion, respectively, in 2007).
The Bank is active in the primary and secondary trading of Greek government securities, as well as in the international Eurobond market. The Bank is a founding member of the Group of Greek Government Securities Primary Dealers which was established by the Bank of Greece in early 1998. In accordance with Bank of Greece statistics for 2008, the Bank had a weighted participation in the primary market of 13.3% and handled 25% of the daily average volume in the secondary market of securities of the Greek government. During 2008, following the deterioration in macro-economic conditions and the lack of liquidity in the global financial and other asset markets, our treasury activities have been substantially reduced.
The Bank also conducts a portion of its treasury activities through its subsidiary CPT Investments Ltd ("CPT"). As at December 31, 2008, CPT's portfolio comprised German and Greek government bonds, with total assets amounting to €1.4 billion.
The Bank offers custodian services to its foreign and domestic institutional clients who hold securities listed on the ATHEX, as well as remote settlement and custody services on the Cyprus Stock Exchange. The Bank offers trade settlements, safekeeping of securities, corporate action processing, income collection, proxy voting, tax reclamation, brokerage services, customized reporting, regular market flashes and information services. The Bank also acts as global custodian to its domestic institutional clients who invest in securities outside Greece. As of December 31, 2008, the Bank is the only local custodian that offers custody and back-office services to foreign broker-dealers who are remote electronic traders on the ATHEX.
The Bank acts as an agent for approximately 76 domestic institutional clients (four mutual funds, three investment companies, 20 insurance companies and 49 pension funds) and 36 foreign institutional clients, including several leading global custodians, as at December 31, 2008. The Bank also offers custodian services to private Greek investors and had approximately 136,000 active custody accounts as at December 31, 2008. Over 1,300 customers of Bank custody accounts hold only government debt in their portfolios and approximately 95,000 customers maintain only mutual fund units in their portfolios.
Our domestic fund management business is operated by NBG Asset Management Mutual Funds S.A. ("NBG Asset Management"), which is wholly owned by the Group. NBG Asset Management manages funds that are made available to customers through the Bank's extensive branch network. NBG Asset Management has remained in the forefront of the Greek mutual funds market for three consecutive years, ranking first in terms of net asset value according to the Association of Greek Institutional Investors.
As at December 31, 2008, NBG Asset Management's total assets under management were €2.8 billion, a 63.7% decrease, from December 31, 2007 mainly due to reduction in market values of investments. Its market share in Greece was 26.6% as at December 31, 2008, compared to 31.1% as at December 31, 2007, according to the Association of Greek Institutional Investors.
NBG Asset Management offers 27 investment funds under the brand name Delos, one under the P&K brand name and 13 under the NBG International SICAV and NBG Synesis SICAV brand names, which are registered in Luxemburg. NBG Asset Management offers a wide range of investment products that provide to institutional and private investors access to significant markets in stocks, bonds and money market products, in Greece and internationally.
In 2008, NBG Asset Management expanded its range of investment services. The company offers a more integrated range of contemporary investment services such as:
As at December 31, 2008, NBG Asset Management has approximately 400 institutional and 100,000 private investors, totaling €2.76 billion assets under management. The total value of funds managed since 2004 is set forth in the table below:
Delos Delta FasmaForeign Bond Fund has a three-year investment horizon and a return linked to the average performance of the Dow Jones EURO STOXX 50 Index, as observed quarterly. The fund was launched in July 2008 and closed for subscriptions one month later, gathering investments of almost €70 million.
The Delos Tactical AllocationBalanced Domestic Fund offers an absolute return fund, which provides stable returns with low correlation to the markets. Its objective is to take advantage of low stock valuations and follow an active management approach. The fund had assets under management of approximately €17.1 million as at December 31, 2008.
Delos Delta Click I-Bond Fund offers initial capital protection and access to the performance of the Dow Jones EURO STOXX 50 Index. The fund will be launched to the public during 2009.
ATHEX Exchange-Traded Fund (NBG AM ETF)
On June 29, 2009, we launched an ETF based on the General Index of the ATHEX.
Global Investment Banking
In addition to our domestic activities, we also conduct investment banking activities through NBG International Ltd. ("NBGI"), which also conducts private equity and venture capital transactions from its London and Athens offices.
In 2008, NBGI's Debt Capital Markets team arranged several fixed income transactions. These included a €4 billion reopening, via syndication, of the outstanding Hellenic Republic 30-year benchmark bond, a US$1.5 billion, five-year bond issued by the Hellenic Republic, and the reopening of the credit facility of Giurgiu, a Romanian municipality.
In 2008, the NBGI Equity Capital Markets team completed two transactions. NBGI acted as joint bookrunner in Forthnet's €300 million rights issue and as co-manager in the CHF 16 billion share capital increase of UBS AG.
In 2008, the NBGI Corporate Finance Advisory team advised major corporate clients in several projects. NBGI executed two tender offers in Greece, advising the Grimaldi Group on the tender for Minoan Lines and Crown Europe on the tender for Crown Hellas Can. NBGI also continued its cooperation with Finansbank's Investment Banking team, promoting cross-border transactions. NBGI and FinansInvest advised Frigoglass on the acquisition of SFA Sogutma.
NBGI's revenues were €12.3 million and €16.3 million in 2008 and 2007, respectively.
National P&K Securities is the Bank's brokerage arm and was founded in 2007 following the merger of the Bank's former subsidiary companies National Securities S.A. and P&K Securities S.A. National P&K Securities offers a spectrum of investment services to both individual and institutional customers.
As at December 31, 2008, National P&K Securities had a market share of 14.8% of trades brokered by total trading volume on the ATHEX, ranking third in terms of total trading volume, according to the ATHEX data.
The provision of capital markets and advisory services in Greece has become increasingly competitive, with a number of banks and brokerage houses participating actively in this area.
Private Equity and Venture Capital
With offices in London, Athens, Paris, Istanbul, Bucharest and Sofia, NBGI subsidiary NBGI Private Equity Limited ("NBGI Private Equity") manages the private equity funds described below. In 2008, NBGI Private Equity continued to grow, increasing its funds under management including undrawn amounts to approximately €800 million as at December 31, 2008, compared to €570 million at December 31, 2007. Its activities continue to focus on investments in the United Kingdom, France, Greece, Turkey and SEE, investing both in private equity and venture assets.
NBG Private Equity Fund LP and NBGI Private Equity Fund II LP
The NBG Private Equity Fund LP is a €100 million fund created in August 2000 to invest in small to medium-sized UK companies. The Bank is the sole investor in the fund. During 2008, the NBG Private Equity Fund LP ("UK Fund I") made one further successful exit and, despite two investments
failing to produce returns, has an established track record, having exited nine of its 13 investments to realize an overall gross 44.2% internal rate of return and a money multiple of 4.2.
NBGI Private Equity Fund II LP ("UK Fund II") held its first closing on June 20, 2007 at GBP 62.4 million, with the Bank acting as cornerstone investor and with external investors also participating. With further investment from external investors, the fund size is expected to grow to approximately GBP 100 million, underwritten by the Bank. The UK Fund II has made four investments to date, investing GBP 20.5 million in its first investee company.
NBG South Eastern Europe Fund LP, NBGI SEE Development Capital Fund LP, NBGI SEE Real Estate Fund LP and NBGI SEE Energy Fund
The NBG South Eastern Europe Fund LP was originally established in February 2004 with a capital commitment of €20 million from the Bank. In March 2006, the commitment of the Bank, the sole investor in the fund, was increased to €100 million. As at the end of 2008, the NBG South Eastern Europe Fund LP has made two investments in Greece and one in Bulgaria. The NBGI SEE Development Capital Fund LP sits alongside the NBG South Eastern Europe Fund LP and also has a commitment of €100 million from the Bank, the sole investor in the fund. This fund was formally closed to new investments in March 2007 and primarily invests in SMEs incorporated or operating in Greece and in Central and Eastern Europe (with a focus on Balkan countries), the former Soviet Union, Cyprus and other markets which, at the discretion of the fund's manager, are considered to be in SEE. The NBGI SEE Development Capital Fund successfully exited an investment in October 2008, realizing €3.7 million in capital gains and dividend income for the fund.
In Greece and SEE, NBG Private Equity Ltd. now manages targeted funds of €250 million and operates from London, Athens, Romania and Bulgaria to take advantage of the buy-out and expansion capital opportunities that these markets provide. For the latter part of 2008, NBG South Eastern Europe Fund and NBG SEE Development Capital Fund have not made further investments.
NBGI SEE Real Estate Fund LP invests in small to medium-sized real estate or real estate owning companies, with a geographic focus in SEE. The fund's first closing was held on September 19, 2007 with the Bank as the sole investor committing €50 million. The target size of the fund is €100 million with further commitments sought from external investors for the second closing. NBGI SEE Real Estate Fund LP invested €9 million in three investments during 2008: one investment in each of Bulgaria, Montenegro and Romania.
The NBGI Energy Fund was established in the latter part of 2008 with a commitment of €100 million from the Bank and further fundraising is continuing. The NBGI Energy Fund is assessing investment opportunities in renewable energy, but no investments have been made as yet.
NBGI France Fund and NBGI Turkish Private Equity Fund
Both of these funds were established in the final quarter of 2008 with commitments from the Bank of €50 million and €100 million, respectively. No investments have been made as yet. Depending on market conditions, further third party funds may be sought for NBGI France Fund.
NBG Technology LP
NBG Technology LP was established in 2001 and currently has capital commitments of €42 million, half of which have been committed by the Bank. NBG Technology LP aims to invest primarily in the equity or equity-related capital of unlisted SMEs operating in the technology, media and telecommunication sectors throughout Europe. NBGI Private Equity is the manager of the fund and employs a specialist team of investment professionals to manage the Fund, under the brand "NBGI Ventures".
In 2007, NBG Technology LP completed its first exit in 2007, successfully disposing of its remaining shareholding in Direct Energie S.A. in November. The successor fund, the NBGI Technology Fund II LP, was closed in August 2007 at €30 million, with the Bank as the sole investor, but with the aim of attracting external investors up to final close with a minimum target of €60 million. To date, NBG Technology Fund II LP, which invests primarily in medical technology ventures, has made four new investments that total €9.9 million.
NBG Greek Fund Limited
NBG Greek Fund Limited, a Cypriot company wholly-owned by the Bank, was established in 1998 with committed capital of €44 million. The scope of NBG Greek Fund Limited is to invest primarily in rapidly growing Greek companies. In 2004, NBG Greek Fund Limited reduced its committed capital down to €15 million and is divesting its current holdings which, at the end of 2008, had an estimated market value of about €2.3 million.
We provide insurance services primarily through our wholly-owned subsidiary, Ethniki Hellenic General Insurance S.A. EH offers a full range of products such as life, accident and health insurance for individuals and groups, fire, calamity, credit, motor, marine hull and cargo insurance, and general third party liability. Through the expertise of its personnel and the reorganization of its internal procedures, EH provides advanced insurance solutions that can meet the demands of the increasingly competitive Greek insurance market.
EH provides insurance products through 42 branch offices, 167 sales agencies with 2,800 tied agents, who sell only EH Insurance products, and 1,298 independent insurance brokers. In addition, insurance products are distributed to consumers through the Bank's extensive branch network.
EH maintained its leading position in the Greek insurance market, despite adverse financial conditions, during 2008, with a 21.2% market share in life insurance and 13.4% in property and casualty insurance, respectively, according to the Greek Private Insurance Supervisory Committee.
In EH's non-life insurance business, gross written premiums were €379.2 million for the year ended December 31, 2008, compared to €386.2 million in 2007.
In EH's life insurance business, gross written premiums for the year ended December 31, 2008 were €403.0 million compared to €428.9 million in 2007.
Gross written premia from bancassurance products "Prostheto+" and "Frontizo" reached €158.2 million in 2008 compared to €137.5 million in 2007.
Bancassurance premiums for fire insurance increased by 10.4% and for term life coverage by 46.0% during the period. For more information on our bancassurance business, see below "Bancassurance".
With a view towards expansion in SEE, EH operates two Cypriot subsidiaries in collaboration with NBG Cyprus which are active in life and non-life insurance. EH also operates in Romania, where it holds a 95% share in Societate Comerciala Asigurari Garanta S.A. ("Garanta"). Garanta offers consumer credit insurance and personal accident products through the network of four banks, namely Banca Romaneasca, Alpha Bank Romania, Pireaus Bank Romania and Romextera.
In Bulgaria, EH operates two insurance companies jointly with UBB and AIG: UBB AIG Life Insurance Company and UBB AIG Insurance & Reinsurance Company, for life and non-life insurance, respectively. These companies promote bancassurance products in the Bulgarian market. Additionally, on March 27, 2007, EH, in partnership with UBB, founded UBB Insurance Broker AD, in which EH holds 20% of the share capital.
National Insurance Brokerage S.A., a Greek insurance broker acquired in 2005 by EH, contributes to the further expansion of services provided in the maritime and aviation insurance markets.
EH provides bancassurance products through our insurance brokerage subsidiary NBG Bancassurance S.A. ("NBGB"), which assumes no insurance underwriting risk, and the Bank's extensive network in Greece.
NBGB provides products in two categories:
Finans Pension was established on July 4, 2007. As at December 31, 2008 Finans Pension ranked eleventh in the Turkish life insurance industry measured by gross written premiums, with a market share of 3%, according to data from the Association of the Insurance and Reinsurance Companies of Turkey. As at and for the year ended December 31, 2008, the total assets of Finans Pension reached TRY 51.5 million, and its net income was TRY 3.0 million.
Real Estate Management
The Bank engages in real estate management activities, including warehousing and third-party property management. As at December 31, 2008, the Bank owned 1,586 real estate units, 1,170 of which were buildings the Bank acquired for our own business purposes or through seizure of collateral on loan foreclosures. The book value of those assets was €310.5 million as at December 31, 2008. In addition, Ethniki Kefalaiou S.A., a wholly owned subsidiary of the Bank that is engaged in asset and liability management, including asset liquidation, managed 44 properties with an aggregate book value of €13.4 million as at December 31, 2008. Most of these properties have been bought in recent years from the Bank, which acquired them on realization of collateral under non-performing loans. In line with our strategy of streamlining our activities, we intend to continue to dispose of certain non-core real estate holdings through Ethniki Kefalaiou S.A. For the year ended December 31, 2008, proceeds from the sale of land and buildings by the Bank amounted to €68.8 million and €1.7 million by Ethniki Kefalaiou S.A compared to €113.1 million and €6.7 million for the year ended December 31, 2007.
National Real Estate performed warehousing functions and held real estate property as a subsidiary. On March 31, 2006, the Bank absorbed National Real Estate and on March 17, 2008 completed the spin-off of the general warehouses branch to its wholly owned subsidiary Pronomiouchos S.A. Genikon Apothikon Ellados. See Item 4.D, "Property, Plant and Equipment" for general information regarding our real estate holdings and Item 4.A, "History and Development of the Company" for information regarding our principal real estate divestitures in recent years. The Bank intends to continue to divest real estate holdings as part of its non-core asset divestment strategy.
Consulting and Professional Training
Ethnodata S.A. ("Ethnodata") and its subsidiary, Ethnoplan S.A. ("Ethnoplan"), provide consulting and development in the area of information systems and software to other companies in the Group and to third parties. In addition, the Bank runs a training center for its employees as well as for other banks in Greece and abroad. The Bank's training center offers training courses and participates in programs funded by the EU.
We also engage in business consultancy services through Planet S.A., a business consultancy firm based in Athens in which the Bank held a 31.18% stake, as at December 31, 2008.
Our presence in the tourism sector is through the Bank's subsidiary, Astir Palace, owner of the Astir Palace Hotel Complex, which is currently under the management of Starwood Hotels & Resorts Worldwide Inc.
In 2008, Astir Palace invested more than €30 million in renovations. Major investment projects completed include the conversions of the hotel's bungalows into luxury villas and the "Club House" restaurant into the "Matsuhisa" restaurant, the renovation of "Astir Beach" restaurant, "Restaurant 37" and several other upgrades. The Afrodite Hotel has not been operational during past years and is currently being rebuilt. Additionally, Astir Palace is contemplating a new conference center and events spaces.
In November 2008, Astir Palace completed a share capital increase of €99.7 million. The Bank contributed €99.6 million, raising its participating interest from 78.06% to 85.35%. The share capital proceeds were used to repay loan financing of €84.7 million, while the remaining cash will be directed towards servicing Astir Palace's investment program and working capital requirements.
Our equity method investment portfolio includes participations in Greek corporations.
The following table sets out equity participations in which we hold in excess of 20% but less than 50%, or in which we do not have control as at December 31, 2008:
Equity participations in which the percent of ownership interest held by the Group is less than 20% are accounted as portfolio investments in accordance with SFAS 115 "Accounting for certain investments in debt and equity securities", as the Group does not have the ability to influence the operations of the investees. Equity participations in which the percent of ownership interest held by the Group is greater than 20% but less than 50%, or which are jointly controlled by the Group and other entities, are accounted for using the equity method because the Group can influence the operations of the investees.
UBB AIG Insurance and Reinsurance Company and UBB AIG Life Insurance Company are jointly controlled by Group companies UBB and EH and companies of AIG.
Intellectual Property, Contracts and Manufacturing Processes
Our business and profitability are not materially dependent on patents or licenses, industrial, commercial or financial contracts or new manufacturing processes.
We compete with other banks, financial services firms and a wide range of insurance companies in providing mutual fund, capital markets and advisory services and financial and insurance products. Internationally, we compete with banking firms of varying size and geographic scope.
The following sets forth a breakdown of loans and deposits for the Bank and its five main competitors in Greece as at December 31, 2008. We have compiled these figures based on the publicly available non-consolidated financial statements of each entity below:
The Banking Services Sector in Greece
The Greek banking sector has expanded rapidly in recent years, due to both deregulation and technological advances. As of April 2009, the date of the most recent available information, there were 66 credit institutions in Greece: 19 Greek commercial banks, 16 cooperative banks and 30 foreign banks, as well as specialized credit institutions (Source: Bank of Greece, List of Credit Institutions in Operation).
Traditionally, commercial banks have dominated the Greek financial services market. However, specialized credit institutions have expanded into commercial banking thereby increasing competition in the market. The distinction between commercial and investment banks has ceased to formally exist 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 under public law, fully owned and controlled by the Hellenic Republic). Universal banks have been shielded to some degree from the deteriorating interbank lending conditions as they are able to access funding through deposits, compared to institutions that are unable to draw on such deposit bases.
There are three banks that are controlled, directly or indirectly, by the Hellenic Republic: Bank of Attica, Hellenic Postal Savings Bank and ATE Bank (formerly the Agricultural Bank of Greece). Over the last ten years, the Hellenic Republic has proceeded with privatizing a large number of credit institutions. The most recent developments were the disposal of a majority stake of Geniki Bank to Société Générale in early 2004 and of Emporiki Bank to Crédit Agricole in August 2006. In addition, the Hellenic Republic proceeded with the partial privatizations of the Hellenic Postal Savings Bank and ATE Bank through the listing of their shares on the ATHEX.
In recent years, many of the major Greek banks have expanded internationally, establishing or enhancing their presence in SEE. In addition to the Bank's 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 EFG became the owner of 100% of the shares 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, Eurobank EFG concluded the purchase of a 99% stake of Universal Bank in Ukraine, and completed the acquisition of the majority of shares in Tekfenbank in Turkey. Alpha Bank acquired the majority of shares of the Ukrainian OJSC Astra Bank in 2008. ATE Bank made its first expansion steps in SEE by acquiring a 20% stake in AIK Bank in Serbia and a stake of MindBank in Romania during the same year (source: Financial Statements of the Banks for the fiscal years 2006 and 2007).
In April 2009, according to data published by the Bank of Greece, there were 30 foreign-owned or incorporated credit institutions that were well established in the Greek banking market. These 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.
Specialized Credit Institutions
The Consignment Deposits and Loans Fund, an autonomous financial institution organized as a public law legal entity under the supervision of the Ministry of Finance, is the only remaining specialized credit institution in Greece. Its activities include 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.
As of April 2002, Greek law allows non-banking institutions that are licensed by the Bank of Greece to extend consumer credit or loan facilities. These institutions are in direct competition with universal banks in the consumer credit sector.
The Banking Services Sector in SEE & Turkey
In 2008, the macroeconomic performance of SEE countries in which the Group has a presence (Albania, Bulgaria, Romania, Serbia, Cyprus and FYROM) and Turkey remained relatively strong, despite adverse external and domestic conditions since September 2008. Based on publicly available estimates, real GDP growth reached 6.4% and 1.1%, respectively, in SEE and Turkey in 2008 compared to 6.2% and 4.7%, respectively, during 2007. In both cases, the high growth rates reflect the systematic implementation of structural and institutional reforms in the context of the region's European orientation and the expansion of financial intermediation. Inflation stood at 6.3% and 10.1%, respectively, in SEE and Turkey at the end of 2008, reflecting supply shocks from the significant increase in international oil and food prices in the first eight months of 2008.
Furthermore, Turkey remains dependent on external financing, and its economy is exposed to the effects of the global credit crisis. During the fourth quarter of 2008, Turkey's economic growth was negative for the first time since the fourth quarter of 2001, bringing whole-year 2008 growth to 1.1%. In December 2008, the IMF revealed that Turkey may require IMF assistance to meet its funding requirements for 2009. If Turkey's economy contracts this year, as we expect, such a contraction would have a negative impact on Finansbank's operations in Turkey.
High current account deficits in SEE and Turkey, which had widened significantly over the past years, stabilized in 2008, despite higher international oil and commodity prices during the first eight months of 2008. The current account deficit-to-GDP ratio stood at 15.5% and 5.7%, respectively, in SEE and Turkey in 2008 compared to 15.0% and 5.9%, respectively, in 2007. However, a large part of the 2008 current account gap in SEE and Turkey was financed by non-debt-generating foreign direct investment ("FDI") inflows despite the ongoing global liquidity crisis. FDI inflows coverage of the current account deficit stood at 49.4% and 37.6%, respectively, in SEE and Turkey in 2008.
The improved performance of banks also reflects the acceleration in financial intermediation that has taken place since 2001. Financial intermediation has deepened markedly in SEE and in Turkey on the back of strong economic activity and a restructured banking sector.
In 2008, despite a sharp economic slowdown in the fourth quarter, banking activity in SEE strengthened further. During 2008, loans and deposits recorded impressive growth rates of 33.7% and
12.1%, respectively, while the corresponding penetration rates stood at 61.3% and 53.6%. Lending to households remained the main driver of credit activity in SEE as a whole, growing by 34.4% during 2008 and bringing the household loans-to-GDP ratio to 27.0%.
In 2008, ratios that are reflective of the level of financial intermediation by banking institutions in Turkey increased, despite a sharp slowdown in economic activity and high interest rates. During 2008, bank deposits and loans increased by 27.4% and 31.1%, respectively, while their corresponding penetration rates stood at 45.6% and 36.1% of GDP.
Regulation and Supervision of Banks in Greece
We are subject to financial services laws, regulations, administrative actions and policies in each location where we operate.
The Bank of Greece is the central bank in Greece. It is responsible for the licensing and supervision of credit institutions in Greece, in accordance with Greek Law 3601/2007, Greek Law 3746/2009 on the Greek deposit and investment guarantee fund, Greek Law 3691/2008 on anti-money laundering provisions and other relevant laws of Greece, each as amended. It also has regulatory and supervisory powers relating to the operation of credit institutions in Greece.
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 August 2007, the EU directives regarding the adoption of the new Basel Capital Accord, known as Basel II, were incorporated into Greek law relating to the business of credit institutions and to the capital adequacy of investment firms and credit institutions. Following this, on August 20, 2007, the Bank of Greece issued ten Governor's Acts specifying the details for the implementation of Basel II, which took effect from January 1, 2008.
Recently, the Greek Government implemented the Hellenic Republic bank support plan to strengthen Greek banks' capital and liquidity positions. For more information concerning our participation in this plan see below "Plan for the Support of the Liquidity of the Greek Economy".
Credit institutions operating in Greece are obliged to observe the liquidity ratios prescribed by the Bank of Greece (Act No. 2560/2005 of the Governor of the Bank of Greece as amended by Act No. 2614/2009 of the Governor of the Bank of Greece which takes effect from July 1, 2009), maintain efficient internal audit, compliance and risk management systems and procedures (Act No. 2438/1998 and No. 2577/2006 of the Governor of the Bank of Greece, as amended by Acts Nos. 242/2007 and 2597/2007 of the Governor of the Bank of Greece), submit to the Bank of Greece periodic reports and statements (Act No. 2606/2008 of the Governor of the Bank of Greece) and provide it with such further information as it may require, and (in connection with certain operations or activities) make notifications to or request the prior approval (as the case may be) of the Bank of Greece, in each case in accordance with the applicable laws of Greece and the relevant Acts, Decisions and Circulars of the Bank of Greece (each as in force from time to time).
Pursuant to Greek Law 3601/2007, the Bank of Greece Governor's Acts and other relevant laws of Greece, the Bank of Greece has the power to conduct audits and inspect the books and records of credit institutions. In case of breach, the Bank of Greece is empowered to require the relevant credit institution to take appropriate measures to remedy the breach, impose fines (Act No. 2602/2008 of the Governor of the Bank of Greece), appoint an administrator and finally (where the breach cannot be remedied or in case of insolvency) revoke the license of the credit institution and place it into special liquidation under its supervision. In the case of insufficient liquidity of a credit institution, the Bank of Greece may order a mandatory extension of its due and payable obligations for a period not exceeding two months (which can be extended for a further one-month period) and appoint an administrator under its supervision.
In accordance with Greek Law 2832/2000, in cases of breach of the regulatory framework, in addition to other powers to impose sanctions under specific laws, the Bank of Greece has the general power to impose sanctions against credit institutions.
Plan for the Support of the Liquidity of the Greek Economy
In November 2008, the Greek Parliament passed Greek Law 3723/2008 setting forth a €28 billion support plan for the liquidity of the Greek economy, referred to as the "Hellenic Republic bank support plan". The law was passed with the goal of strengthening Greek banks' capital and liquidity positions in an effort to safeguard the Greek economy from the adverse effects of the international financial crisis.
The Hellenic Republic bank support plan is comprised of the following three pillars:
Participating banks that utilize either the capital or guarantee facility will have to accept a government-appointed director. Such director shall be additional to the existing directors of the participating banks and will have veto power on corporate decisions both at board and shareholder assembly level pertaining to directors and senior management compensation and dividend policy. However, the government-appointed director may only utilize its veto power following a decision of the Minister of Economy and Finance or if he considers that the relevant corporate decisions may
jeopardize the interests of depositors or materially affect the solvency and effective operation of the participating bank. In addition, those banks will be required to limit maximum executive pay to that of the Governor of the Bank of Greece, and must not pay bonuses to senior management as long as they participate in the Hellenic Republic bank support plan. Also, during that period, dividend payouts for those banks, in respect of the year 2008, are disallowed, and, in respect of the financial year 2009 and any following years of participation in the plan, will be limited to up to 35% of distributable profits of the participating bank (at the parent company level). According to Greek Law 3756/2009, participating banks may only distribute stock dividends in relation to financial year 2008, which must not be from treasury shares, and may not purchase their own shares. These provisions do not apply to the payment of dividends in respect of preference shares issued by credit institutions and traded on foreign organized markets.
Furthermore, participating banks are obliged not to pursue aggressive commercial strategies, including advertising the support they receive from the plan in an attempt to compete favorably against competitors that do not enjoy the same protection. Participating banks are also obliged to avoid expanding their activities or pursuing other aims, in such a way that would lead to unjustifiable distortions of competition. To this end, the participating banks must ensure that the mean growth rate of their assets on a yearly basis will not exceed the highest of the following ratios:
To oversee the implementation and regulation of the plan, Greek Law 3723/2008 provides for the establishment of a supervision council (the "Council"). The Council will be chaired by the Minister of Economy and Finance. Members will include the Governor of the Bank of Greece, the Deputy Minister of Economy and Finance, who is responsible for the Greek General Accounting Office, other public officials and the government-appointed directors at each of the participating banks. The Council will convene on a monthly basis with a mandate to supervise the correct and effective implementation of the plan and ensure that the resulting liquidity will be used for the benefit of the depositors, the borrowers and the Greek economy overall. Participating banks which fail to comply with the terms of the plan will be subject to certain sanctions, while the liquidity provided to them may be revoked in whole or in part.
Towards the end of 2008, the Bank, along with Eurobank EFG, Alpha Bank, Piraeus Bank and ATE Bank, among others, announced that it would participate in the plan. The deadline for inclusion in the plan was February 1, 2009.
The Bank agreed to participate in the plan although it believes it has adequate liquidity and sound capital ratios. The Bank's main reasons for participating are:
According to a resolution adopted by shareholders at an Extraordinary General Meeting held on January 22, 2009, the Bank issued 70 million redeemable preference shares at a par value of €5 each, with the cancellation of the preemptive rights of the existing shareholders in favor of the Hellenic
Republic. The issue was fully subscribed by the Hellenic Republic, through the transfer by the latter to the Bank of an equivalent amount of Greek government bonds, in accordance with Greek Law 3723/2008. For more information concerning the effects of our participation in the Hellenic Republic bank support plan, see Item 10.J, "Relationship with the Hellenic RepublicHellenic Republic as Shareholder".
Of the other banks in Greece, participating in the Hellenic Republic bank support plan, Eurobank EFG and Alpha Bank increased their share capital by €950 million, Piraeus Bank by €370 million, and ATE Bank by €675 million, the Hellenic Postal Savings Bank by €225 million and Attica Bank by €100 million. Emporiki Bank, a subsidiary of Credit Agricole S.A., has not utilized the facilities of the support plan but has proceeded with a share capital increase of €850 million.
Limitations apply to the compounding of interest. In particular, the compounding of interest with respect to bank loans and credits only applies if the relevant agreement so provides and is subject to limitations that apply under article 30 of Greek Law 2789/2000 (as amended by article 42 of Greek Law 2912/2001 and article 47 of Greek Law 2873/2000) and article 39 of Greek Law 3259/2004 (as supplemented by article 8 of Greek Law 3723/2008).
Since 1992, Greek Law 2076/1992, as amended by Greek Law 3601/2007, has permitted mortgage banks to grant to customers loans and credit that are secured by Greek real and personal property and certain types of personal security, such as cash.
Mortgage lending is extended mostly on the basis of pre-notation filings, which are less expensive and easier to record than actual mortgages and may be converted into full mortgages upon receiving a judgment subject to appeal only before the Hellenic Supreme Court from the relevant Greek court in the event of default.
Compulsory Deposits with the Central Bank
The compulsory reserve requirement framework of the Bank of Greece has been altered in line with Eurosystem regulations. Effective July 10, 2000, reserve ratios are determined by category of liabilities and replace the single reserve ratio of 12% previously in force for commercial banks. The reserve ratio is set at 2% for all categories of liabilities comprising the reserve base, with the exception of the following liabilities to which a zero ratio applies:
This requirement applies to all credit institutions.
Guidelines for Risk-based Capital Requirements
After a long period of consultation and cooperation among international banks and regulatory authorities, in June 2004 the Basel Committee on Banking Supervision issued a revised capital adequacy framework and, in November 2005, the Basel Committee on Banking Supervision issued its final proposals on the new capital standards, known as the new Basel Capital Accord or Basel II. Basel II promotes the adoption of certain specified risk management practices. It introduces risk-sensitive,
conceptually sound approaches for the calculation of capital requirements that take into account the sophistication of risk management systems and methodologies applied by banks.
The revised framework retains key elements of the 1988 capital adequacy framework, including the general requirement for banks to hold total capital equivalent to at least 8% of their risk-weighted assets, the basic structure of the 1996 Market Risk Amendment regarding the treatment of market risk and the definition of eligible capital.
A significant innovation of the revised framework is the greater use of assessments of risk provided by banks' internal systems as inputs to capital calculations. In taking this step, the framework also puts forward a detailed set of minimum requirements designed to ensure the integrity of these internal risk assessments. The revised framework introduces capital requirements for operational risk and also directs banks to establish an internal capital adequacy assessment process. This process accounts for market, credit and operational risks as well as other risk, including, but not limited to, liquidity risk, concentration risk, interest rate risk in the banking book, business risk and strategic risk.
The revised framework provides a range of options of escalated sophistication for determining the capital requirements for credit risk and operational risk. Various options allow banks and supervisors to select approaches that are most appropriate for their own operations and their financial market infrastructure. Furthermore, Basel II significantly enhances the requirements for market disclosures on both quantitative and qualitative aspects of risk management practices and capital adequacy.
The Basel II framework was implemented in June 2006 by means of EU Directives 2006/48 and 2006/49. These EU directives were enacted in Greece in August 2007 by means of Greek Law 3601/2007. Following the adoption of Greek Law 3601/2007 on August 20, 2007, the Bank of Greece issued ten Governor's Acts related to the implementation of Basel II, which took effect from January 1, 2008.
On November 9, 2007, the Bank applied to the Bank of Greece requesting authorization to implement the Basel II capital adequacy framework. Specifically, the Bank of Greece's approval was sought for permission to use:
The Bank's request was granted by the relevant Bank of Greece authority in charge of bank supervision.
The Bank is in compliance with the new regulations regarding Basel II and consistently applies all relevant rules, guidelines and Bank of Greece Governor's Acts since January 1, 2008, at Bank level and at Group level. The Bank uses both the option for gradual implementation of IRB in its portfolios and the option for permanent exemption of certain categories of exposures from the application of IRB.
The Bank has developed a comprehensive and well-documented roll-out plan that should enable the Group to gradually implement IRB with respect to the aggregate loan exposures included in the banking book (except those permanently exempted) within four years. At the initiation of IRB implementation, 50% of the nominal amount of the Bank's aggregate loan exposures were included in IRB, and over 75% is expected to be included within the first two years.
In 2008, the European Commission submitted a Proposal for a Directive of the European Parliament and the European Council amending Directives 2006/48/EC and 2006/49/EC regarding
banks affiliated with central institutions, certain own funds items, large exposures, supervisory arrangements and crisis management.
Additional Reporting Requirements
Following the adoption of Basel II guidelines, the Bank of Greece issued a Governor's Act (2606/2008) determining the new reporting requirements for credit institutions in Greece. The new requirements include reports on the following:
The new reporting framework is put into effect for data with a reference date from March 31, 2008.
The Bank submits to the Bank of Greece a full set of the regulatory reports both at Bank level and at Group level, on a quarterly basis.
Capital Requirements in Our Foreign Markets
Banking regulations in Turkey are evolving in parallel to the global changes and international regulatory environment. We expect Turkey to adopt regulations implementing Basel II, but the timing of these regulatory changes has not yet been specified. We expect Serbia to fully adopt the Basel II framework from January 1, 2011, according to the recently released "Activity Plan for Basel II implementation" issued by the National Bank of Serbia. Romania, Bulgaria and Cyprus, as EU members, have already adopted the Basel II framework.
Deposit and Investment Guarantee Fund
A Greek deposit guarantee fund (the "Deposit Guarantee Fund") was implemented in September 1995. Currently, the fund, which is a private entity according to Greek Law 2832/2000, is administered jointly by the Bank of Greece, the Hellenic Bank Association, the Ministry of Economy and Finance, and the Association of Greek Cooperative Banks.
The Deposit Guarantee Fund is funded by annual contributions of participating credit institutions and cooperative banks pursuant to Greek Law 3714/2008, which amended Greek Law 2832/2000 and Presidential Decree 329/2000. The level of each participant's annual contribution is generally determined according to certain percentages applied to the total amount of eligible deposits. If accumulated funds are not sufficient to cover the claimants whose deposits become unavailable, participants may be required to pay an additional contribution. However, this contribution may not exceed an amount equal to 300% of a bank's last annual contribution. This additional contribution is set off against the annual contributions of following years. Greek law had adopted the minimum level of coverage provided under the applicable EU directive, which amounts to €20,000 per depositor per credit institution. However, following recent market developments, and based on the resolutions of the meeting of the EU Economic and Financial Affairs Council ("ECOFIN") on October 7, 2008, the coverage level was increased to €100,000 until December 31, 2011, in accordance with Greek Law 3714/2008. Annual contributions of participating credit institutions and cooperative banks were accordingly increased by a factor of five. The deadline may be extended by a decision of the Greek Minister of Economy and Finance.
On February 16, 2009, certain protections of the existing Deposit Guarantee Fund relating to deposits and investment services were modernized, and the fund was renamed the "Deposit and Investment Guarantee Fund" ("TEKE"), by means of Greek Law 3746/2009. The coverage level in respect of deposits was maintained at €100,000, while the proposed level of coverage extended to credit institution clients relating to the provision of investment services was set at €30,000.
Prohibition of Money Laundering and Terrorist Financing
Greece, as a member of the Financial Action Task Force ("FATF") and as a member state of the EU, fully complies with FATF recommendations and the relevant EU legal framework.
In August 2008, the Greek Parliament adopted Greek Law 3691/2008 on the prevention and suppression of money laundering and terrorist funding, which implemented EU Council Directives 2005/60/EC and 2006/70/EC. The main provisions of Greek legislation on money laundering and terrorist financing are as follows:
In July 2002, the Greek Parliament adopted Greek Law 3034/2002, which implemented the International Convention for the Suppression of the Financing of Terrorism, with which we are fully compliant. Additionally, we comply with the USA PATRIOT Act of 2001, which took effect in October 2001 and which has implemented a range of new anti-money laundering requirements on banks and other financial services institutions worldwide.
The Bank of Greece, through its Banking and Credit Affairs Committee, has also issued Decision No. 281/5/2009 on the "Prevention of the use of the credit and financial institutions, which are supervised by the Bank of Greece, for the purpose of money laundering and terrorist financing". Decision No. 281/5/2009 takes into account the principle of proportionality, the obligations of all credit and financial institutions and FATF recommendations. The decision also reflects the common understanding of the obligations imposed by European Regulation 1781/2006 on the information on the payer accompanying funds transfers to payment service providers of payees.
Finally, Greek banks are bound to follow Regulation (EC) 1781/2006 of the European Parliament and European Council of November 15, 2006 on information on the payer accompanying transfer of funds.
Equity Participation by Banks
Banks must follow certain procedures regarding holdings in other companies.
Pursuant to Greek Law 3601/2007, credit institutions may not have a qualifying holding, the amount of which exceeds 15% of its own funds in an undertaking, that is not a credit institution, a financial institution, an insurance or re-insurance company, an investment firm or an undertaking carrying on activities which are a direct extension of banking or concern services ancillary to banking. The total amount of a credit institution's qualifying holdings in such undertakings may not exceed 60% of its own funds. A "qualifying holding" means a direct or indirect holding in an undertaking which represents 10% or more of the capital or the voting rights, or which makes it possible to exercise a significant influence over the management of that undertaking.
For the calculation of the above thresholds, the following shares or holdings are not taken into account:
The above thresholds or the time limits referred to above may be exceeded in exceptional cases following a decision of the Bank of Greece to that effect, provided that the credit institution either increases its own funds or takes equivalent measures. The Bank of Greece may also allow the thresholds and the time limits to be exceeded, provided that the excess is fully covered by its own funds, which are not taken into account for the calculation of the capital adequacy ratio.
According to the Bank of Greece Act 2604/2008, credit institutions must obtain central bank prior approval to acquire or increase a qualifying holding in the share capital of credit institutions, financial institutions, insurance and re-insurance companies, investment firms, information technology companies, financial data collection and processing companies, asset and liability management companies, real estate property management companies, paying systems management companies and external credit assessment institutions. The provisions of such Act do not apply to branches of credit institutions with their registered seat in a country of the European Economic Area, or outside the European Economic Area provided that the Bank of Greece has recognized the equivalency of their supervisory regime.
Prior approval for the acquisition or increase of a qualifying holding is not required in any of the following circumstances:
Subject to EU regulations, new and significant holdings (concentrations) must be reported to the Greek Competition Commission according to Greek Law 703/1977, as in force.
The CMC and the ATHEX must be notified once certain ownership thresholds are crossed with respect to listed companies. See Item 9.C, "The Offer and ListingMarkets".
Our medium-term strategy involves exploiting our key competitive strengths. In the near term, in the face of a financial crisis characterized by tight liquidity conditions and weakening customer credit quality, our strategic priorities are to safeguard the quality of our loan portfolio, maintain a strong capital base and maintain a strong pre-provision profit.
The Bank's strategy is to be a leading provider of financial services in the wider SEE region. We believe our success so far is the result of measured organic expansion combined with carefully considered strategic acquisitions, notably our acquisition of Finansbank. Our focus has been on high-growth countries in the region with traditional ties to Greece and a European orientation. Moreover, the current environment has confirmed the prudence of the Bank's historically conservative
approach to risk management and its continued efforts to contain costs. Combined with the inherent advantages of our strong liquidity position and capital base, the Bank has a powerful platform to implement its strategic vision as the economic environment improves.
Managing the Effects of the Financial Crisis
Despite the adverse environment, one of the Group's key strategic goals is to sustain and enhance its sources of income and keep operating costs firmly under control. The success in sustaining the Group's core banking income, as reflected in the 6.6% annual growth in our net interest income after provision for loan losses in 2008, illustrates the competitive advantage of a relatively low cost of funding and sustained efforts to reprice risk. Our efforts to contain costs and improve efficiency have intensified and are aimed at controlling administrative expenses by consolidating procurement and rationalizing and centralizing processes, particularly back office tasks, as well as improving the overall management of human resources. As a result, domestic general and administrative expenses are expected to increase at roughly the same pace as inflation, while in the wider SEE region we estimate that operating expenses will grow at a slower pace than in previous years, reflecting the suspension of previous plans in relation to rapid branch expansion. The ongoing effort to contain operating costs is reflected in the small 4.0% increase in these costs in 2008 compared with 2007.
Conservative Risk Policy
Our principal initiatives in managing the global economic downturn follow from our traditionally conservative credit policies and involve the more careful expansion of our loan portfolio with the objective of preserving our liquidity and capital, while maintaining our long-standing relationships with our clients. We have preemptively implemented stricter credit criteria in product areas and geographies which we consider to be more susceptible to the current global economic downturn. Specifically, these stricter credit criteria apply to SMEs in Greece, Turkey and SEE, the commercial real estate sector in SEE, and unsecured foreign-currency-denominated consumer lending across all regions.
The conservative structure of the Group's loan book reflects a prudent management approach. The largest part of the loan book comprises mortgages and corporate lending, sectors in which the Bank has succeeded in gaining substantial market share, as compared with consumer loans and lending to SMEs. Accordingly, credit risk is relatively low and is concentrated, among other things, on financing supported by strong collateral.
In addition, with respect to foreign exchange risk, the Group's retail lending in foreign currency does not comprise a significant part of the total, although in Turkey retail loans are granted exclusively in the local currency.
Moreover, due to the deepening crisis, we have transferred a number of staff from loan approvals to debt recovery, both in Greece and in our international subsidiaries. Furthermore, we have revised our policy for collection of loans in arrears. With regard to the structure of the investment portfolio, the dominant component is conservative placements in sovereign bonds, which amounted to €11.7 billion and comprised almost 81.2% of the total portfolio at December 31, 2008.
We are focusing on balancing the growth in both lending and deposits across the Group. Our loan-to-deposit ratio stood at 87.5% at December 31, 2008. Moreover, in 2008, our market share of deposits increased significantly, underscoring, we believe, the confidence of depositors in the ability of the Bank to weather the current crisis. Customer deposits comprised 75% of total sources of funding for the Group's business at December 31, 2008.
Protecting the Capital Base
We have taken and will continue to take significant measures to protect our capital base. In recent years we have withdrawn from the mature markets of North America and Western Europe, liquidated non-core shareholdings in industrial sectors, reinvested 2007 dividends in 2008, which increased capital by €477 million, and issued preference shares totaling US$625 million, which improved the Group's Tier I capital adequacy ratio to 10.0% as at December 31, 2008. On June 22, 2009, we launched tender offers for any and all of our outstanding non-cumulative, non-voting preferred securities issued by our wholly owned subsidiary, National Bank of Greece Funding Limited, and guaranteed on a subordinated basis by the Bank. Based on the results of the tender offers, which were announced on July 6, 2009, the bank purchased approximately €450 million nominal value at an aggregate cost of €284 million. These tender offers, will create additional core Tier I capital of €166 million, although Tier I capital and Total capital will be reduced by €284 million.
Achieving Long-Term Growth in Greece and Our Core Foreign Markets
As a result of our strong capital position and tighter control over credit and costs, we believe we are well positioned to withstand adverse market conditions and prepare for our longer-term growth strategies in Greece, Turkey, SEE and other markets. These longer-term strategies are discussed in more detail below:
Domestic Retail Banking
We believe the Greek domestic banking market offers attractive growth prospects, especially in the retail segment. In December 2008, household lending-to-GDP stood at 48.2% compared to 53.0% for the Eurozone as a whole, while mortgages-to-GDP in Greece stood at 32.1% compared with 37.8% for the Eurozone. In the longer term, we intend to further strengthen our leading position in retail banking by targeting our broad depositor baseone of our key competitive advantageswhich also enables us to increase cross-selling potential at the Group level, in particular as regards retail products and bancassurrance. We intend to continue to exploit our strong position in mortgage lending, where we currently represent approximately 25% of the market. During 2008, we disbursed €3.5 billion in new mortgages. As a result, our total mortgage portfolio grew to €17.8 billion as at December 31, 2008 from €15.7 billion as at December 31, 2007. We believe the success of our mortgage business is due to our extensive branch network, customer loyalty and the innovative products that the Bank offers. Despite tighter housing market conditions and slowing economic activity, we consider mortgage lending to be a strategic priority in view of its relatively high asset quality and of the long-term relationship it creates with customers, which provides a strong platform for cross-selling activity.
In addition, we enjoy long-standing relationships with our major corporate customers and we will continue to develop these relationships. Our corporate customer base comprises most leading large corporations in Greece. Our relationship extends to offering full banking services including insurance, cash management, and private banking.
Our International Markets
In view of the fact that banking penetration levels in Greece in the medium term are increasing to levels closer to the European median and due to the limited scale of the Greek market, we have been expanding in markets that are characterized by lower credit penetration and better growth prospects. To this end, we succeeded in substantially strengthening our presence in the wider region of SEE. The desire to expand into new dynamic markets led to two important acquisitions in 2006, in Turkey and Serbia. The acquisition of Finansbank, the fifth largest private-sector bank in Turkey, signaled the establishment of a solid international presence, giving us access to the Turkish market of 70 million inhabitants.
Our strategy is to continue integrating our international operations within a common framework. To this end, substantial progress has been made towards the integration of financial reporting, performance management, risk management, corporate governance and regulatory compliance and will continue further with respect to operations. We also monitor investment opportunities in the region that would result in high synergies with the Group.
Investment, Wealth Management and Insurance Services
In the area of investment services, we completed our acquisition of P&K Investment Services (including its subsidiaries P&K Securities and P&K MFMC) in early 2007, with a view to offering integrated securities firms in the markets in which we operate. For further information, see Item 4.B, "Business OverviewGlobal Markets and Asset ManagementStock Brokerage" below. In asset management, our long-term strategies involve strengthening efforts to enhance the mix of higher performing fund categories, with special emphasis placed on exploiting our extensive branch network as a sales channel. With respect to insurance, in addition to the benefits from the long-term rationalization of domestic market penetration, we expect to achieve significant synergies through our participation in the international insurance markets. For instance, we acquired Alpha Insurance in Romania in February 2006, and in Turkey, we launched Finans Pension. In bancassurance, we intend to take advantage of the synergies derived from our broad customer base. We plan to enhance the performance of our insurance business by more effectively deploying our sales network. For further information regarding our insurance business, see Item 4.B, "Business OverviewInsurance".
According to our recently-developed IT strategy, since April 2009, the Group is progressing toward fully centralized operations, utilizing one primary and one secondary disaster/recovery data center. Our IT infrastructure is hosted in the new Athens data center that recently became the Bank's primary data center. Based on a phased approach, domestic and international network systems are operated and monitored from this data center. Our disaster/recovery data center will support the international network. In case of severe malfunction of the primary site, the disaster/recovery center will take over operations in less than four hours time and without any data loss.
With regard to the IT applications domain, our strategy is for all affiliate banks to use a common core banking system, the TEMENOS T24 system. The system is customized for the needs of the Group by a competency center established and operating in Bulgaria. Similar centers have been established for major complementary systems such as our SAP ERP system, which we use on a Group-wide basis. As another key to our IT strategy, specific Group needs for specialized IT systems and applications will be covered by common satellite solutions, centrally evaluated and selected, such as solutions for risk management, fraud management, audit management and anti money laundering handling.
C. Organizational Structure
Set forth below is a chart indicating the individual companies within the Group and the participation (direct and indirect) in each company at December 31, 2008.
D. Property, Plant and Equipment
As at December 31, 2008, we owned approximately 2,500 properties, approximately 1,900 of which are buildings. These properties are, for the most part, held free of encumbrances. Most of our properties are attributable to our branches and offices through which we maintain our customer relationships and administer our operations. Most of our other properties have been acquired as a result of foreclosure on the collateral of defaulted loans. There are no environmental issues of which we are aware of that may affect the Bank's utilization of our real estate assets.
The Group's real estate portfolio from continuing operations was recorded at a net book value of €699.3 million as at December 31, 2008, which is included in the U.S. GAAP financial statements under "premises and equipment". Those of our properties that have been acquired as a result of foreclosure on the collateral of defaulted loans had a book value of €107.7 million as at December 31, 2008, and are included under "other assets" in the Group's U.S. GAAP financial statements. Management believes that the current aggregate market value of real estate assets exceeds their book value. We are not always able to realize the full market value of real estate which we are required to or wish to sell because of variations in the property market and legal impediments to the open market sale of such property. However, in order to expedite the process of divesting these non-core assets, we have simplified the auction process and have established a subsidiary, Ethniki Kefalaiou S.A., which acquires
from the Bank and our subsidiaries certain real estate assets with the sole purpose of realizing more efficiently the value of such assets for the Group. For more information on the Group's management of its properties see Item 4.B, "Business OverviewOther Real Estate Management".
E. Selected Statistical Data
Information included in this section, except where otherwise stated, relates to the Bank and its subsidiaries. The statistical data presented below may differ from data included in the consolidated financial statements of the Group included elsewhere in this Annual Report. In certain cases, the statistical data is derived from statutory reports and from statistical data reported in the forms prescribed by the central bank for regulatory purposes. Such data are compiled as a normal part of our financial reporting and management information systems. Unless otherwise noted, amounts presented below are based on U.S. GAAP financial information.
Average Balances and Interest Rates
The following tables set forth the average balances of our assets and liabilities for the years ended December 31, 2006, 2007 and 2008, from our domestic and foreign continuing operations and, for interest-earning assets and interest-bearing liabilities, provide the amount of interest earned or paid and the average rate of such interest for such asset or liability, as applicable. Where available, the Group calculates the average balances for certain line items on the basis of daily averages. To the extent that daily information is not available for other balances and without causing undue burden or expense, the Group utilizes quarterly, monthly or annual balances.
The following tables analyze the change in our net interest income attributable to changes in the average volume of interest-earning assets and interest-bearing liabilities, and changes in their respective interest rates for the periods presented from our continuing operations. Amounts due to changes in volume have been calculated by multiplying the change in volume during the year times the average rate for the preceding year. Amounts due to changes in rates have been calculated by multiplying the change in the current year average rate times the volume of the current year.