NATIONAL BANK OF GREECE SA 20-F 2011
Date of event requiring this shell company report
Commission file number 001-14960
EQNIKH TRAPEZA THS
NATIONAL BANK OF GREECE S.A.
THE HELLENIC REPUBLIC
86 Eolou Street
PapagrigorisInvestor Relations manager
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, 2010, the close of the period covered by the annual report:
956,090,482 Ordinary Shares of nominal value EUR 5.00 per share
25,000,000 Series A Preference Shares of a nominal value of EUR 0.30 per share
70,000,000 Redeemable Preference Shares of a nominal value of EUR 5.00 per share issued to the Hellenic Republic
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
Table of Contents
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 the principal bank, around which our consolidated financial services 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 EU 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 "JPY" are to Japanese yen, all references to "MKD" are to Macedonian dinars, all references to "RON" are to Romanian lei, all references to "TL" are to Turkish 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 = EUR 0.6956, as certified for customs by the Federal Reserve Bank of New York (the "Noon Buying Rate") on May 31, 2011. The respective Noon Buying Rates for the South African rand, Macedonian dinar, Bulgarian leva, Romanian lei, Serbian dinar and Turkish lira are: South African rand 6.8185 per US$1.00, Macedonian dinars 42.7215 per US$1.00, Bulgarian leva 1.3596 per US$1.00, Romanian lei 2.8697 per US$1.00, Serbian dinars 67.3148 per US$1.00 and Turkish lira 1.5958 per US$1.00. 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 and the euro and the Turkish lira (TL) for each of the five years ended December 31, 2006, 2007, 2008, 2009 and 2010 and for the current annual period through May 31, 2011. 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 these 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, 2006 through 2010 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"). 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, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010 (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".
Non GAAP measures
This Annual Report contains references to certain measures which are not defined by U.S. GAAP, namely "adjusted loans" and "deposits excluding interbank deposits". The Group defines "adjusted loans" as "Net loans" excluding an amortizing loan to the Greek State of EUR 5.3 billion expiring in September 2037 (see Item 4.E, "Selected Statistical DataAssetsLoan Portfolio"). The Group defines "deposits excluding interbank deposits" as "Total deposits" deducting "Interbank deposits" amounting to:
The Group uses the measure "adjusted loans" to distinguish loans originated by the Group from the loan provided to the Greek State. Furthermore, the Group uses the measure "deposits excluding interbank deposits" in order to enhance the comparability of its financial performance between reporting periods, particularly in light of increased funding from ECB resulting from the pressure experienced by the Hellenic Republic in its public finances. "Adjusted loans" and "deposits excluding interbank deposits" are not financial measures determined in accordance with U.S. GAAP and, accordingly, should not be considered as an alternative to other measures derived in accordance with U.S. GAAP.
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 EUR 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 EUR 1.40 per share with respect to the year ended December 31, 2007. All shareholders received EUR 0.40 in cash. The remaining EUR 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 dividends to ordinary shareholders as a result of the participation of the Bank in the Hellenic Republic bank support plan and the payment of dividends to preferred shareholders as follows:
On May 21, 2010, the Bank's General Meeting of Shareholders approved the non-payment of dividends to ordinary shareholders as a result of the participation of the Bank in the Hellenic Republic bank support plan and the payment of dividends to preferred shareholders as follows:
On June 23, 2011, the Bank's General Meeting of Shareholders approved the non-payment of dividends to ordinary shareholders as a result of the participation of the Bank in the Hellenic Republic bank support plan and the non-payment of dividends to holders of our non-cumulative non-voting redeemable preference shares and to the Greek State, as sole holder of the 70,000,000 preference shares issued as part of our participation in the Hellenic Republic bank support plan, in accordance with the Bank's Articles of Association, the Law 3965/2011 and the provisions of article 44a in combination with articles 42c and 43 of the Greek Companies Act, which prohibit the payment of dividends in the absence of sufficient distributable funds.
The following tables set forth the actual dividends per ordinary share paid by the Bank for the years ended December 31, 2006, 2007, 2008, 2009 and 2010 in respect of ordinary shareholders. For more information on how dividends are distributed see Item 8.A, "Consolidated Statements and Other Financial InformationPolicy on Dividend Distributions".
For a description of the Bank's dividend policy please refer to Item 8, "Financial Information".
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. If any of the events described below actually occur, our business, financial condition or results of operations could be materially adversely affected, and the value and trading price of our ordinary shares, preference shares or ADRs may decline, resulting in a loss of all or a part of any investment in our ordinary shares, preference shares or ADRs. Furthermore, the risks described below are not the only risks we face. Additional risk factors not currently known or which are currently believed to be immaterial may also have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to the Hellenic Republic Economic Crisis
Uncertainty resulting from the Hellenic Republic's economic crisis is having and is likely to continue to have a significant adverse impact on our business, results of operations and financial condition.
For the financial year ended December 31, 2010, 53.6% of our total interest and non-interest income and as of December 31, 2010, 70.1% of our loans, were derived from our operations in the
Hellenic Republic. In addition, our holdings of EUR 10.9 billion in Greek government bonds represented 9.2% of our total assets, 127.9% of our total permanent equity and 60.5% of our fixed income portfolio (amounting to EUR 18.1 billion) as of December 31, 2010. Accordingly, the quality of our assets, our financial condition and our results of operations are heavily dependent on macroeconomic and political conditions prevailing in Greece.
The Greek economy has faced and continues to face unprecedented macroeconomic headwinds since the beginning of 2010, originating from sizeable fiscal imbalancesthe extent of which has been demonstrated with the release of the significantly revised estimates of the 2009 deficit and debt figures in October 2009which were compounded by other deep-rooted structural vulnerabilities. These developments, in conjunction with the concomitant multi-notch downgrades of the Greek sovereign debt by all major rating agencies, starting in 2009 and continuing in 2010 and 2011, were translated into rapidly deteriorating financial market conditions for Greek assets (with increased yields on Greece's government bonds) and an effective closing of financial markets to Greek banks since April 2010. Specifically, in April 2010 the Hellenic Republic's credit rating was lowered by Fitch Ratings Ltd. ("Fitch") to BBB-, by Moody's Investors Services Limited ("Moody's") to A3 and by Standard & Poor's Financial Services LLC ("Standard & Poor's") to BB+, which is below investment grade.
The credit rating of the Hellenic Republic has been subsequently lowered several times by all three credit rating agencies and as of June 16, 2011 was lowered by Standard & Poor's to CCC with a negative outlook, by Fitch to B+ with credit watch negative, and by Moody's to Caa1 with a negative outlook. See "Our borrowing costs and liquidity levels may be negatively affected by further downgrades of the Hellenic Republic's credit rating" for the chronology of the downgrades.
In May 2010, the Greek government agreed to a stabilization program, jointly supported by the IMF, the ECB and the member states of the eurozone (the "IMF/eurozone Stabilization and Recovery Program", see also Item 4.B, "Business OverviewThe Macroeconomic Environment in GreeceThe Hellenic Republic's Economic Crisis" and Item 4.B, "Business OverviewRegulation and Supervision of Banks in Greece"). As part of this Program, the Greek government committed to implement measures to decrease government expenses and increase revenues with a view to reducing the general government deficit, to below 3% by 2014 from an upwardly revised deficit of 15.5% of GDP in 2009. The original target for 2010 was 8.2% of GDP subsequently revised to 9.5% of GDP. The IMF/eurozone Stabilization and Recovery Program projected Greek government debt to peak at an upwardly revised percentage of approximate 160% of GDP in 2013-2014 from an upwardly revised 127% of GDP in 2009. The revised targets reflect revisions undertaken at the time of the first review of the Program in the summer of 2010, and primarily reflect the redefinition of the general government deficit and debt, broadening its coverage.
Despite strong efforts to reduce debtmeasures equivalent to 7.5% of GDP were taken in 2010 and measures equivalent to 7% of GDP were expected in 2011the IMF/eurozone Stabilization and Recovery Program was not meeting its conditions at the time of the fourth review commenced in May 2011. The general government deficit reached 10.5% of GDP in 2010, and tax revenue was significantly below target in the first quarter of 2011. In large part, the fiscal shortfall reflects a more severe recession than originally projected. GDP, in real terms, declined 2.1% in 2009, 4.2% in 2010 and is expected to decline 3.0% to 3.5% in 2011.
As a result of the above developments, it appears likely that a new program will be proposed with funding from the IMF and the EU. It is expected that this new program will provide the Hellenic Republic additional time to reach its fiscal targets and implement structural reforms. It is also expected that debt reduction will be accelerated through the implementation of an ambitious privatization and government real estate development program. The conditions of this new program will likely include additional fiscal measures that will apply from 2011, including a medium-term fiscal adjustment program. Approval of the fiscal measures for 2011 and the medium-term fiscal adjustment program are
conditions for the completion of the fourth review of the existing Program prior to the release of the fifth tranche of IMF and EU funding support of EUR 12 billion.
The new program may also include private sector participation only on a voluntary basis, renewing maturing Greek government debt with new purchases of Greek government debt. Although the form of such participation has recently been a subject of contention between the official creditors and the ECB, a solution may have been reached that seeks private sector participation on the condition that it does not trigger a technical default according to certain credit rating agencies. It should be noted that a technical default according to certain rating agencies would arise if a voluntary restructuring occurs under coercion and thus any form of voluntary participation runs the risk of triggering a technical default. An agreement between the official creditors on burden sharing between official and existing private sector creditors will have to be reached for the new program to be agreed. The details of the new program are likely to be agreed in late summer or early autumn 2011.
Debt reduction was expected to be facilitated by a reduction in interest rates payable on loans to the EU. At the EU Summit on May 16, 2011, it was agreed to reduce the interest rate on EU loans to the Hellenic Republic by 100 basis points and to extend their maturity from 3.5 years to 7.5 years. Upon its ratification by EU member states, the decision will smooth the Greek government's redemption profile and reduce its borrowing needs in 2014 and 2015 by EUR 17 billion annually.
For more information about the main elements of each reform and the substantial risks to the program, see Item 4.B, "Business OverviewThe Macroeconomic Environment in GreeceThe Hellenic Republic's Economic Crisis".
The tensions relating to Greek public finance have affected the liquidity and profitability of the financial system in the Hellenic Republic and have resulted in:
Despite the Greek government's commitment to implement the necessary reforms which will be included in the likely successor program, certain analysts believe that there are concerns as to its eventual success.
An agreement on a new program may fail to materialize. In addition, the fifth tranche under the existing program to be disbursed by early July 2011, is expected to be conditional on, among other things, the following elements which carry risks: (i) the approval by the Greek parliament of additional fiscal measures for 2011 of approximately EUR 6.5 billion; and (ii) the approval by the Greek parliament of the medium-term fiscal program containing measures of about EUR 22 billion. These elements challenge the unity of the governing socialist party. In this context, Greek political risk has also increased substantially in the past few months, with defections in the governing party and a reorganisation of the cabinet as well as increased social unrest.
A failure to successfully implement the IMF/eurozone Stabilization and Recovery Program may lead to termination of the financial support by the IMF, the ECB and the EU, which would create the
conditions for a credit event with respect to Hellenic Republic debt or lead to a default by the Hellenic Republic on its debt. Such a credit event could happen as a result of many actions, including a re-profiling of amortization payments to extend those payments several years into the future and reducing their value, or even a restructuring of Greek debt constituting a large reduction in value to creditors.
Even if the Hellenic Republic successfully implements the IMF/eurozone Stabilization and Recovery Program, government debt as a percentage of GDP is projected to rise to approximately 160% of GDP in 2013. It remains uncertain whether, even if the IMF/eurozone Stabilization and Recovery Program is successfully implemented, the Greek economy will grow sufficiently to ease the financing constraints of the Hellenic Republic. These concerns may result in a credit event with respect to the Hellenic Republic occurring earlier and prior to the completion of the IMF/eurozone Stabilization and Recovery Program. In this event, current macroeconomic conditions in Greece will be exacerbated. The market reaction will be negative and business activity will deteriorate, which will have a material adverse effect on our business, results of operations and financial condition. Our holdings of EUR 10.9 billion in Greek government bonds represented 9.2% of our total assets, 127.9% of our total permanent equity and 60.5% of our fixed income portfolio (amounting to EUR 18.1 billion) as of December 31, 2010. If a credit event with respect to the Hellenic Republic were to occur, our regulatory capital would be severely affected due to our direct exposure to the debt of the Hellenic Republic, requiring the Bank to raise additional capital and thus diluting existing shareholders significantly. There can be no assurance that the Bank could raise all the capital it needs on acceptable terms.
Similar developments could be triggered by any further significant deterioration of global economic conditions, including the credit profile of other EU countries such as Ireland, Portugal, or the creditworthiness of Greek or international banks, which may give rise to concerns regarding the ability of the Hellenic Republic to meet its funding needs. These developments could:
Recessionary pressures stemming from the IMF/eurozone Stabilization and Recovery Program have had and may continue to have an adverse effect on our business, results of operations and financial condition.
Our business activities are dependent on the level of banking, finance and financial products and services we offer, as well as our customers' capacity to repay their liabilities. In particular, their levels of savings and credit demand are heavily dependent on customer confidence, employment trends, the state of the economies in countries in which we operate, and the availability and cost of funding. Recessionary pressures may have an adverse effect on our business, results of operations and financial condition.
The magnitude of the fiscal adjustments agreed under the IMF/eurozone Stabilization and Recovery Program and any subsequent amendments to this Program are likely to continue having a significant effect on economic activity in the Hellenic Republic, adding to the possible negative impact arising from the sharp drop in consumer and business confidence resulting from the recent economic crisis and ongoing sizeable macroeconomic imbalances. In this respect, the cumulative decline in economic activity between 2010 and 2011 is likely to exceed 7.5% taking a heavy toll on disposable income, spending and debt repayment capacity of the Greek private sector. If the IMF/eurozone Stabilization and Recovery Program is not implemented successfullyespecially with respect to the
ambitious structural reform agenda, or if additional austerity measures are required to counterbalance potential deviations from the Program's targetseconomic activity may register a sharper than initially expected drop in 2011, with the future recovery delayed further.
The worsening macro economic conditions in the Hellenic Republic are materially adversely affecting the liquidity, businesses and/or financial conditions of our borrowers, which are in turn further increasing our non-performing loan ratios, impairing our loan and other financial assets and resulting in decreased demand for borrowings in general and increasing deposit outflows.
Loans to businesses and households are expected to remain under considerable pressure in Greece as the sizeable downward pressure on household disposable incomes and firms' profitability from the austerity measures as well as the resulting deterioration in the business environment against a backdrop of tighter credit criteria and stressed liquidity conditions are likely to impair further demand for loans. In addition, the need to reduce our dependency on ECB funding will also increase the likelihood of deleveraging, reducing our loans to the economy. Moreover, 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.
In the context of continued market turmoil, worsening macro-economic conditions and increasing unemployment, coupled with declining consumer spending and business investment and the worsening credit profile of our corporate and retail borrowers, the value of assets collateralizing our secured loans, including houses and other real estate, could decline significantly. Such a decline could result in impairment of the value of our loan assets or an increase in the level of non-performing loans, either of which may have a material adverse effect on our business, results of operations and financial condition.
We are currently severely restricted in our ability to obtain funding in the capital markets and are heavily dependent on the ECB for funding and liquidity, which may be affected by changes in ECB rules relating to the eligibility of collateral such as Greek government bonds and guarantees.
Concerns relating to the impact of the economic crisis may adversely affect the Bank's credit risk profile, delay its return to the markets for funding, increase the cost of such funding and/or trigger additional collateral requirements in repo contracts and other secured funding arrangements, including with the ECB.
The severity of pressure experienced by the Hellenic Republic in its public finances has restricted the access of the Bank to the capital markets for funding, particularly unsecured funding and funding from the short-term inter-bank market because of concerns by counterparty banks. These markets are now effectively closed to all Greek banks. Since the end of 2009, maturing inter-bank liabilities have not been renewed, or have been renewed only at higher costs. In addition, deposit outflows beginning in late 2009 and continuing through to the first half of 2011 continue to put pressure on the liquidity position of many Greek banks.
Reflecting the loss of access to market funding as well as the sharp decline in deposits, our net ECB funding has increased considerably since the start of the crisis. As at December 31, 2010, our net ECB funding amounted to EUR 19.9 billion. As at December 31, 2010, the total amount of the instruments pledged in favor of the ECB exceeded EUR 35 billion, including EUR 12 billion of guarantees provided under the second pillar of the Hellenic Republic bank support plan (see Item 4.B, "Business OverviewRegulation and Supervision of Banks in GreeceThe Hellenic Republic Bank Support Plan").
Access to ECB funding collateralized by Greek government bonds has been maintained by ECB rule changes. In May 2010, the ECB announced that it would suspend certain minimum credit rating requirements for Greek government bonds and would accept Greek government bonds as collateral, irrespective of their credit rating. The ECB has not yet determined the length of the period of
suspension of the rating requirement. In addition, the ECB has also permitted the use of bank issued bonds, benefiting from Greek government guarantees, as eligible collateral for liquidity purposes, a rule change applying to all member countries. The ECB has purchased Greek government bonds in the secondary market, thus supporting their valuation and therefore their value as collateral.
The liquidity we receive from the ECB may also be affected by changes in ECB rules. Specifically, the suspension of the ECB's minimum rating requirement in respect of Greek government bonds may end at a time when the Greek government's credit ratings make it ineligible for use in ECB liquidity operations. In addition, the amount of funding available from the ECB is tied to the value of the collateral we provide, including the market value of our holdings of Greek government bonds, which itself may decline in response to ratings actions. If the value of our assets declines, then the amount of funding we can obtain from the ECB will be correspondingly limited. In addition, if the ECB were to revise its collateral standards or increase the rating requirements for collateral securities such that these instruments were not eligible to serve as collateral with the ECB, this could materially increase the Group's funding costs and limit its access to liquidity. The ECB could also place time limitations on the use of government guaranteed securities as eligible collateral, and may set conditions for the continued use of liquidity under exceptional terms. Furthermore, it is unclear how long the ECB will offer unlimited access to short-term repos, or continue its bond purchase program. In the event these exceptional terms are terminated, or the terms on which such access is offered change in a way which materially prejudices the Bank, this could adversely affect our access to liquidity and increase its funding costs significantly.
In addition, we use our covered bonds for use as collateral with the ECB. Our covered bonds may also become ineligible for use as collateral as a result of further credit ratings downgrades. If Greek sovereign ratings are further downgraded, are rated as defaults or are withdrawn, this will likely have a material adverse effect on our ability to continue to access current levels of funding from the ECB, or access such funding at all.
An accelerated outflow of funds from customer deposits could cause an increase in our costs of funding and have a material adverse effect on our operating results, financial condition and liquidity prospects.
Historically, one of our principal sources of funds has been customer deposits. Since we rely on customer deposits for the majority of our funding, if our depositors withdraw their funds at a rate faster than the rate at which borrowers repay their loans, or if we are unable to obtain the necessary liquidity by other means, we may be unable to maintain our current levels of funding without incurring higher funding costs or having to liquidate certain of our assets, or increase access to the ECB under its exceptional terms. In 2010, an outflow of customer deposits, which we believe mainly reflected concerns regarding the Hellenic Republic's economic crisis, as well as higher liquidity needs of domestic depositors following the increase in Greek VAT in 2010, led to a decrease in the Group's domestic deposits excluding interbank deposits at December 31, 2010 by 11.4% compared with December 31, 2009. This outflow of domestic deposits has continued in 2011, in line with market outflows as reported by the BoG in June 2011, for the four months period to April 30, 2011.
The ongoing availability of customer deposits to fund the Bank's loan portfolio is subject to potential changes in certain factors outside the Bank's control, such as depositors' concerns relating to the economy in general, the financial services industry or the Bank specifically, ratings downgrades, significant further deterioration in economic conditions in Greece and the availability and extent of deposit guarantees. Any of these factors on their own or in combination could lead to a reduction in the Bank's ability to access customer deposit funding on appropriate terms in the future and to sustained deposit outflows, both of which would impact on the Bank's ability to fund its operation and meet its minimum liquidity requirements.
Any loss in consumer confidence in the Bank's banking businesses, or in banking businesses generally, could significantly increase the amount of customer deposit withdrawals in a short period of time. If the Bank or its subsidiaries experience a sustained level of withdrawals, this may have an adverse effect on the Group's results, financial condition and prospects. Unusually high levels of withdrawals could prevent the Bank or another member of the Group from funding its operations and meeting its minimum liquidity requirements. In those extreme circumstances the Bank or another member of the Group may not be in a position to continue to operate without additional funding support, which it may be unable to secure.
There are risks associated with the Bank's potential need for additional capital and liquidity, most notably from a higher-than-expected deterioration in asset quality, as well as greater-than-anticipated asset impairments.
The Bank is required by regulators in the Hellenic Republic and other countries in which it undertakes regulated activities to maintain adequate capital. Where it undertakes regulated activities elsewhere in the European Economic Area (the "EEA"), it will remain subject to the minimum capital requirements prescribed by regulators in the Hellenic Republic, except in jurisdictions where it has regulated subsidiaries, which will be subject to the capital requirements prescribed by local regulators. The Bank is subject to the risk of having insufficient capital resources to meet the minimum regulatory capital requirements. In addition, those minimum regulatory requirements are likely to increase in the future, the methods of calculating capital resources may change and/or the manner in which the existing regulatory requirements are applied may change. At the beginning of the fourth quarter of 2010, the Bank in a preemptive attempt to fortify its capital position completed a share capital increase which totaled approximately EUR 1.8 billion in cash.
As of December 31, 2010, the Group had a Tier I capital ratio of 13.1% and an overall capital adequacy ratio of 13.7%. The Bank has announced its intention subject to market conditions to sell a minority stake in its Turkish subsidiary, leaving its holdings at no less than 75%, which would provide an additional support to its capital ratios. Unfavorable conditions in the capital markets, however, may prevent any such sale from occuring.
Effective management of the Bank's regulatory capital is critical to its ability to operate its businesses, to grow organically and to pursue its strategy. Any change that limits the Bank's ability to manage its balance sheet and regulatory capital resources effectively (including, for example, reductions in profits and retained earnings as a result of write-downs or otherwise, increases in risk weighted assets, delays in the disposal of certain assets) or to access funding sources could have a material adverse impact on its financial condition and regulatory capital position.
The Bank's ability to maintain its regulatory capital ratios could be affected by a number of factors during the current sovereign crisis in Greece. The Bank's Core Tier I ratio could be directly impacted by worse-than-expected after-tax results, a deterioration in credit quality of the Bank's assets that exceeds expectations, and most notably, greater than anticipated asset impairments or potential losses on its significant holdings of Hellenic Republic debt or in view of new regulatory requirements (currently BoG applies a regulatory filter on the valuation losses of the available-for-sale debt instruments and such losses are disregarded for capital adequacy purposes), or the occurence of a credit event with respect to the Hellenic Republic's debt. As at December 31, 2010, Greek government bonds represented 9.2% of total assets and 127.9% of total permanent equity.
Moreover, in the current crisis, if more capital was needed, there is a risk that the Bank would be unable to raise all the capital it needs on acceptable terms. If the Bank is unable to raise the requisite capital, it may be required to further reduce the amount of its risk weighted assets and engage in the disposition of core and other non-core businesses, which may not occur on a timely basis or achieve prices which would otherwise be attractive to the Group. Any failure by the Bank to maintain its minimum regulatory capital ratios could result in administrative actions or other sanctions, which in
turn may have a material adverse effect on the Bank's operating results, financial condition and prospects (see Item 4.B, "Business OverviewRegulation and Supervision of Banks in Greece"). This could potentially lead to further capital injections from the Greek government, which would increase Greek government control of the Bank and dilute the interests of existing shareholders.
The IMF/eurozone Stabilization and Recovery Program and receipt of state aid may subject the Bank to additional burdens and subject our shareholders to potentially significant dilution.
Declining profitability and the possibility of operating losses in what could be a drawn-out recession risks eroding the capital bases of Greek banks, including the Bank. The IMF/eurozone Stabilization and Recovery Program, therefore, contains a third pillar in the form of the HFSF intended to maintain the stability of the Greek banking system by providing capital support in the form of preference or ordinary shares, if a significant decline in capital buffers occurs. The HFSF has been established under Greek Law 3864/2010. Any credit institution that, in the opinion of the BoG, runs a risk of failing to meet its capital adequacy requirements and that has not strengthened its own capital base through capital raisings from existing or new shareholders, may, either upon its own initiative or upon recommendation by the BoG, apply for the capital support available through the HFSF.
If the Bank is unable to further strengthen its capital base to meet its capital adequacy requirements, the Bank may have to apply for capital support available through the HFSF. As a result of any funds provided by the HFSF to the Bank, the HFSF may exercise significant control over the operations of the Bank and could have a material adverse effect on its profitability, capital management and financial condition. Furthermore, the Bank and the HFSF will have to jointly develop a detailed restructuring plan or amend any such plan which has already been submitted to the European Commission, according to EU state aid rules and the European Commission practices.
The capital support program under the IMF/eurozone Stabilization and Recovery Program would strengthen the core capital base of the Greek banks in the form of preference shares convertible into ordinary shares (if a bank fails the stress tests and other financial targets in the restructuring plan). The preference shares already issued under the Hellenic Republic bank support plan are also convertible into ordinary shares of the issuing bank in certain circumstances. Any such issuance of ordinary shares will dilute shareholders' interests in the Bank and may result in shareholders losing value of the shares they hold at such time. The conversion ratio will only be determined at the time of conversion and the full dilutive effect of any such conversion will therefore only be known at that time.
Negative results in the Bank's stress testing may lead to further capital increases or loss of public confidence in the Bank.
Stress tests analyzing the European banking sector recently have been, and we anticipate they will continue to be, published by national and supranational regulators, and the results of a new and more stringent test are expected to be published in the second half of 2011. Specifically, NBG is participating in current stress tests being conducted by the European Banking Authority ("EBA"), which will take into account the impact of, among other things, capital stress arising as a result of sovereign debt crises. Loss of confidence in the banking sector following the announcement of stress tests regarding a bank or the Greek banking system as a whole or market perception that any such tests are not rigorous enough also could have a negative effect on the Bank's cost of funding and may thus have a material adverse effect on its operations and financial condition.
Greek banks may be required in the future to meet more stringent capital requirements regarding core Tier I ratio. If a bank fails to meet any such new requirements by accessing the capital markets, it would be required to receive additional capital from the HFSF, and thus, the HFSF may exercise significant control over the operations of that bank, which could have a material adverse effect on its business, profitability, capital management and financial conditions.
Our borrowing costs and liquidity levels may be negatively affected by further downgrades of the Hellenic Republic's credit rating.
Since 2009, the Hellenic Republic has undergone a series of credit rating downgrades and in 2010 moved to below investment grade. On June 14, 2010, Moody's further lowered its credit rating for the Hellenic Republic by four notches from A3 to Ba1, below investment grade. On December 17, 2010 Moody's lowered its credit rating for the Hellenic Republic by three notches, from Ba1 to B1. On January 14, 2011 Fitch lowered its credit rating for the Hellenic Republic by one notch from BBB- to BB+, below investment grade. On March 29, 2011 Standard & Poor's lowered its credit rating for the Hellenic Republic by two notches, from BB+ to BB-. On May 9, 2011, Standard & Poor's furthered lowered its credit rating for the Hellenic Republic by another two notches, from BB- to B. Furthermore, on May 20, 2011 Fitch lowered its credit rating for the Hellenic Republic by three notches from BB+ to B+ and on June 3, 2011 Moody's lowered its credit rating for the Hellenic Republic by 3 notches, from B1 to Caa1 with a negative outlook. Finally, on June 16, 2011, Standard & Poor's lowered its credit rating for the Hellenic Republic from B to CCC with credit watch negative. The rationale for these downgrades was that a deepening recession and rising debt service costs would make it harder for the Hellenic Republic to meet its IMF/eurozone Stabilization and Recovery Program targets and increase the likelihood that the Hellenic Republic would not be able to service its debt in full, without recourse to extraordinary support.
A downgrade of the Hellenic Republic's rating may occur again in the future in the event of a continuing deterioration in public finances as a result of a poor performance or as a result of the measures proposed being perceived as insufficient. Accordingly, the cost of risk for the Hellenic Republic would increase further, with negative effects on the cost of risk for Greek banks and thereby on their results. Further downgrades of the Hellenic Republic could result in a corresponding downgrade in the Bank's credit rating.
Negative sentiment surrounding the Hellenic Republic, including further downgrades of the sovereign rating, could also further increase the debt servicing cost of the Hellenic Republic, resulting in increased taxation and lower Greek government spending. This could further delay the country's economic stabilization and eventual recovery by raising the borrowing costs for the banks which is ultimately passed on to the customers, as well as result in credit rationing. This will ultimately affect the Bank's future business volumes and put additional strains on its liquidity, profitability and asset quality.
Our wholesale borrowing costs and access to liquidity and capital have been negatively affected by a series of recent credit rating downgrades of the Bank and may be negatively affected by further downgrades.
Since October 2009, we have experienced a series of credit ratings downgrades principally reflecting the series of downgrades in the Hellenic Republic's credit rating and the Greek economic crisis. These downgrades may continue. Any further reductions in the long-term credit ratings of the Bank could delay the Bank's return to the capital and inter-bank markets for funding, increase our borrowing costs and/or restrict the potential sources of available funding available to the Bank (in view of the increased capital and liquidity requirements for funding counterparties associated with holding lower-rated securities). See also "We are currently severely restricted in our ability to obtain funding in the capital markets and are heavily dependent on the ECB for funding and liquidity, which may be affected by changes in the ECB rules relating to the eligibility of collateral such as Greek government bonds and guarantees." Any further reductions may also trigger additional collateral requirements in derivative contracts and other secured funding arrangements and may result in counterparties no longer being willing to enter into hedging transactions with the Bank. As a result, any further reductions 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.
Deteriorating asset valuations resulting from poor market conditions may adversely affect our future earnings through a negative impact on our trading income as well as the recovery value of collateral.
An increase in financial market volatility or adverse changes in the liquidity of our assets could impair our ability to value certain of our assets and exposures. 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. Any of these factors could require us to recognize additional write downs or realize impairment charges, any of which may adversely affect our financial condition and results of operations as well as our capital.
The global economic slowdown and economic crisis in Greece have resulted in an increase in non-performing loans and significant changes in the fair values of our credit exposures. A substantial portion of our loans to corporate and individual borrowers are secured by collateral such as real estate, securities, vessels, term deposits and receivables. In particular, as mortgage loans are one of our principal assets, we are currently highly exposed to developments in real estate markets, especially in Greece. From 2002 to 2007, demand for housing and mortgage financing in Greece increased, significantly driven by, among other things, economic growth, declining unemployment rates, demographic and social trends, the desirability of Greece as a vacation destination and historically low interest rates in the eurozone. During late 2007, the housing market began to adjust in Greece as a result of excess supply and higher interest rates. In 2008 economic growth came to a halt and since 2009 economic activity began to contract at an accelerating pace of 2.3% and 4.4% per cent annually in 2009 and 2010 respectively. Furthermore, retail interest rates continued to increase, housing oversupply persisted against a backdrop of increasing uncertainty which further weakened demand. As a result, home prices began declining, with home prices in March 2011 approximately 11% below their June 2008 peak. The sharp increase in unemployment during the economic crisis, which in early 2011 exceeds 15% from 7.2% in September 2008, aggravated the situation, with mortgage delinquencies increasing.
Continued decline in the general Greek economy or a general deterioration of economic conditions in any industries in which our borrowers operate or in other markets in which the collateral is located, may result in decreases in the value of collateral securing the loans to levels below the outstanding principal balance on some loans disbursed mainly in the few years prior to the crisis. A decline in the value of collateral securing these loans or the inability to obtain additional collateral may require us to establish additional allowance for loan losses. In addition, a failure to recover the expected value of collateral in the case of foreclosure or the inability to initiate foreclosure proceedings due to domestic legislation may expose us to losses which could have a material adverse effect on our business, financial condition and results of operations.
The Bank does not currently pay dividends to its shareholders.
Under Greek Law 3723/2008 in conjunction with Greek Laws 3965/2011, 3844/2010 and 3756/2009, we did not pay any cash dividends to our ordinary shareholders in 2011 in respect of the 2010 financial year, in 2010 in respect of the 2009 financial year or in 2009 in respect of the 2008 financial year. Subsequent legislation or the issuance of shares to the HFSF may prohibit us from paying cash dividends in subsequent years, according to Greek Law 3864/2010.
In June 2008, we issued 25 million non-cumulative, non-voting redeemable preference shares at issue price of USD 625 million. If the Bank has sufficient distributable funds, each preference share is entitled to USD 2.25 per share dividend per annum paid in cash.
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 this plan, and any decisions regarding distribution of dividends and remuneration can be vetoed by the Hellenic Republic representative who sits on our Board and attends
the General Meeting. Our participation in pillar one of the Hellenic Republic bank support plan has also resulted in the issuance of EUR 350 million fixed return preference shares to the Hellenic Republic.
Payments of dividends on the redeemable 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. No dividend will be paid to holders of US preferred securities and to the Hellenic Republic as holder of preferred shares in 2011 for the 2010 financial year in accordance with the Bank's Articles of Association, the Law 3965/2011 and the provisions of article 44a in combination with articles 42c and 43 of the Greek Companies Act, which prohibit the payment of dividends in the absence of sufficient distributable funds.
Furthermore, as a result of the economic crisis in Greece, our profitability may decline further. Consequently, we may not be able to pay cash dividends to our shareholders in future years as well, if current market conditions persist, if we continue to participate in the Hellenic Republic bank support plan or if we are required to issue shares to the HFSF, in the near-to medium-term (see Item 8.A, "Consolidated Statements and Other Financial InformationPolicy on Dividend Distributions"). In the longer term, we may also be further restricted from making distributions as a result of changes to capital requirements preventing the payment of dividends during periods of financial stress.
Government and inter-governmental interventions aimed at alleviating the financial crisis carry additional risks.
Government and inter-governmental interventions aimed at alleviating the financial crisis could lead to increased ownership and control of financial institutions by the Hellenic Republic or other entities and further consolidation in the banking sector. For example, during the 2008 - 2009 global financial crisis, various governments responded to credit or liquidity concerns in certain banks by nationalizing or partially nationalizing those banks or putting them through a form of resolution or recapitalization process. During that period, even if banks were not fully nationalized, shareholders experienced significant dilution and loss of value.
Risks Relating to Volatility in the Global Financial Markets
We are vulnerable to the ongoing disruptions and volatility in the global financial markets.
Although the global economic recovery has gained momentum since the third quarter of 2009, in many economies with which Greece has strong export links, the strength of the rebound has been moderate relative to the severity of the recession. Activity remains dependent on highly accommodative macroeconomic policies and is subject to downside risks, as room for countercyclical policy measures has sharply diminished and fiscal fragilities have come to the fore. Policymakers in many advanced economies have publicly acknowledged the need to urgently adopt credible strategies to contain public debt and excessive fiscal deficits and later bring them down to more sustainable levels. The implementation of these policies may restrict economic recovery, with a corresponding negative impact on our business and results of operations.
In financial markets, concerns surfaced in a progressive widening of intra-Euro area government bond and sovereign credit default swap ("CDS") spreads for several Euro area issuers with large fiscal imbalances. Against a background of increasing unease over the macro/financial implications of sizeable fiscal imbalances, investors have reduced their investment in these countries. Continued reduction in investment flows may restrict economic recovery, with a corresponding negative impact on our business, results of operations and financial condition, including our ability to fund our operations.
Results of operations, both in Greece and our international operations, in the past have been, and in the future may continue to be, materially affected by many factors of a global nature, including political and regulatory risks and public finances' conditions; the availability and cost of capital; the liquidity of global markets; the level and volatility of equity prices, commodity prices and interest rates; currency values; the availability and cost of credit; inflation, the stability and solvency of financial institutions and other companies; investor sentiment and confidence in the financial markets; or a combination of these factors.
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. Sovereign credit pressures may weigh on Greek financial institutions, limiting their funding operations and weakening their capital adequacy by reducing the market value of their sovereign and other fixed income holdings. 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. 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, capital position and results of operations.
Risks Relating to Our Operations Outside of the Hellenic Republic
Our Turkish operations make a significant contribution to our net profit, and operating in Turkey carries certain macroeconomic and political risks.
Turkish operations through Finansbank, our Turkish subsidiary, represented 18.9% of our gross loans as at December 31, 2010 (compared to 15.0% as at December 31, 2009) and accounted for 31.6% of our total interest and non-interest income and contributed EUR 458.8 million to our net income for the year ended December 31, 2010 (compared to 26.7% and EUR 412.9 million respectively for the year ended December 31, 2009). As a result the Group is subject to operating risks in Turkey, including the following:
financial crises, which could have an adverse effect on Finansbank's business and could adversely affect the Group's business, results of operations or financial condition.
At the time of our share capital increase in September 2010, we announced plans to sell a minority interest in Finansbank through an offering that may comprise both primary and secondary shares. We currently intend to complete this offering when market conditions are favorable; however, our decision to proceed with the offering and its timing are subject to various considerations, including market conditions, offer size and structure and obtaining all necessary regulatory and other approvals. A
reduction in our level of ownership in Finansbank would result in a reduction in the level of Finansbank's contribution to the Group's earnings going forward.
Any loss in consumer confidence in Finansbank's banking operations may lead to an accelerated outflow of funds from customer deposits and could cause an increase in our costs of funding.
Historically, Finansbank's principal sources of funds have included individual deposits. All Finansbank's individual deposits are effectively short-term deposits (the average maturity of individual deposits in 2010 was approximately 48 days), which could expose Finansbank to liquidity risks if retail customers were to withdraw large amounts of their deposits or do not roll over their term deposits upon maturity. Although customer deposits have increased in 2011, any loss in consumer confidence in Finansbank's banking operations could significantly increase the amount of individual deposit withdrawals in a short space of time, or, result in higher interest rates on individual deposits, which could significantly increase Finansbank's cost of funding. Finansbank also relies heavily upon other types of short-term liabilities in addition to individual deposits for its funding. As at December 31, 2010, 95% of Finansbank's other borrowed funds and long-term debt had maturity of less than one year. Given such reliance upon short-term liquidity, there can be no assurance that in the event of a sudden or unexpected shortage of funds in the banking system or otherwise Finansbank will be able to maintain its levels of funding and at commercially reasonable terms.
A deterioration of the credit quality of Finansbank's loans could have a material adverse effect on Finansbank's and the Group's business, financial condition and results of operations.
The 2009 economic downturn had an adverse effect on the financial condition of some of Finansbank's corporate and retail customers and, in some instances, ultimately affected their ability to service and repay their obligations. This has led to an increase in Finansbank's impaired loans that are more than 90 days past due accompanied by increased allowance for loan losses. Furthermore, in 2010 Finansbank has increased its exposure to retail customers, whose loans generally yield higher interest income but also tend to have higher levels of default than loans of corporate customers. There can be no assurance that continued weakness in consumer spending, high unemployment, decreased profitability of corporate businesses, increasing numbers of insolvencies and/or deterioration of the credit quality of corporate customers will not result in continued increases in the levels of Finansbank's impaired loans in the future, which could have a material adverse effect on Finansbank's and the Group's business, financial condition and results of operations.
A reduction in Finansbank's current long-term ratings may increase Finansbank's funding costs.
A reduction in the current long-term ratings of Finansbank or any of its principal subsidiaries may increase Finansbank's funding costs, limit its access to the capital markets and trigger additional collateral requirements in derivative contracts and other secured funding arrangements. In addition, any further deterioration in NBG's credit rating or any decrease in Turkey's sovereign credit rating could affect Finansbank's ability to obtain financing. Any such reduction or deterioration could have a material adverse effect on Finansbank's and the Group's business, financial condition and results of operations.
Changes in the competitive environment in Turkey may adversely affect Finansbank's business.
The Turkish banking sector is highly competitive and has in recent years undergone a period of consolidation. As at December 31, 2010, there were a total of 45 banks (excluding the Turkish central bank and four "participation banks" (i.e. interest-free banking institutions)) licensed to operate in Turkey. A small number of these banks have a significant presence in the industry. The intense competition may increase the pressure for Finansbank to expand the range and sophistication of its products and services currently offered as well as to reduce its margins. Increased pricing competition
in the Turkish banking markets may also impact customer behavior patterns and loyalty. In addition, state-owned banks in Turkey historically have had access to inexpensive funding in the form of significant Turkish Government deposits, which has provided a competitive advantage over private banks. Any failure to maintain customer loyalty or to offer customers a wide range of competitive products could have a material adverse effect on Finansbank's and the Group's business, financial condition and results of operations.
We conduct significant international activities in emerging markets, which carries certain political, governmental or macroeconomic risks.
Apart from our operations in the Hellenic Republic and Turkey, we have built up substantial operations in Bulgaria, Romania, Former Yugoslavian Republic of Macedonia ("FYROM"), Serbia and other developing economies. The Group's SEE operations accounted for 10.7% of our gross loans as at December 31, 2010 (compared to 11.6% as at December 31, 2009) and 12.4% of our total interest and non interest income as at and for the year ended December 31, 2010 (compared to 11.8% for the year ended December 31, 2009). 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 the Hellenic Republic 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.
The economic crisis in Greece may:
Risks Relating to Our Business
We have incurred and may continue to 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 continuing volatility in financial and other markets and the Greek sovereign debt crisis, creating a risk of substantial losses. Significant decline in perceived or actual values of the Group's assets has resulted from previous market events. Continuing volatility and further dislocation affecting certain financial markets and asset classes could further impact the Group's financial condition, results of operations and prospects. In the future these factors could have an impact on the mark-to-market valuations of assets in the Group's available-for-sale ("AFS"), trading portfolios and financial assets and liabilities for which the fair value option has been elected. These include significant holdings of Greek government bonds. In addition, any further deterioration in the performance of the assets in the Group's AFS and held-to-maturity ("HTM") portfolios could lead to impairment losses. The AFS and HTM portfolios accounted for 15.3% of the Group's total assets as at December 31, 2010. 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 RiskMarket Risk".
The increase of non-performing loans may have a negative impact on our operations in the future.
Non-performing loans represented 7.0% of our loans portfolio as of December 31, 2010 (compared to 4.9% as at December 31, 2009) of which 65.4% were to borrowers in Greece (see Item 4.E, "Selected Statistical DataCredit QualityNon-Performing Loans, Allowance for Loan Losses, and Loan Loss Experience" and Item 5, "Operating and Financial Review and ProspectsKey Factors Affecting our Results of OperationsNon-Performing Loans"). The effect of the economic crisis in Greece, the implementation of the IMF/eurozone Stabilization and Recovery Program and adverse macroeconomic conditions in the countries in which we operate may result in adverse effects on the credit quality of our borrowers, with increasing delinquencies and defaults. In accordance with Greek Law 3869/2010, debtors that are individuals and cannot be declared bankrupt and who are in a state of permanent inability to pay their debts not attributable to willful misconduct, have the ability to adjust their debts and may be released from a portion of such debts through filing of an application to the competent court (see Item 4.B, "Business OverviewRegulation and Supervision of Banks in Greece"). In addition, collateral collections are more difficult in a period of economic recession and in view of existing legislation relating to valuation of collateral in enforcement proceedings. Moreover, as a result of the financial crisis, and for the protection of the weaker ones, auctions have been suspended until September 30, 2011, in cases where the outstanding balance does not exceed EUR 200,000 (pursuant to Legislative Act dated January 4, 2011, having been ratified by Law 3949/2011 (See "Applicable bankruptcy laws and other laws and regulations governing creditors' rights in Greece and various SEE countries may limit the Group's ability to obtain payments on defaulted credit"). Future provisions for non-performing loans could have a materially adverse effect on our profitability.
Volatility in interest rates may negatively affect our net interest income 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. There can be no assurance that further events will not alter the interest rate environment in Greece and the other markets in which the Group operates. Cost of funding is especially at risk for the Bank in view of increased ECB funding and the tight liquidity conditions in the domestic deposit market.
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. Since the majority of our loan portfolio effectively re-prices within a year, 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 our clients' capacity to repay in the current economic circumstances.
We face significant competition from Greek and foreign banks.
The general scarcity of wholesale funding since the onset of the economic crisis has led to a significant increase in competition for retail deposits in Greece. 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. These competitive pressures on the Group may have adverse effect on our business, results of operations and financial condition.
The state of the political environment in the Hellenic Republic, Turkey and SEE significantly affect our performance.
The economic and political environment in the Hellenic Republic, Turkey 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 the Hellenic Republic, Turkey and the countries in which we operate or may plan to expand. Particularly in Greece, political risk has also increased substantially in the past few months, with defections in the governing party and a reorganization of the cabinet as well as increased social unrest.
Applicable bankruptcy laws and other laws and regulations governing creditors' rights in Greece and various SEE countries may limit the Group's ability to obtain payments on defaulted credits.
Bankruptcy laws (Greek Law 3869/2010) and other laws and regulations governing creditors' rights vary significantly within the region that the Group operates in. In some countries, the laws offer significantly less protection for creditors than the bankruptcy regimes in Western Europe and the United States. If the current economic downturn persists or worsens, bankruptcies could intensify, or applicable bankruptcy protection laws and regulations may change to limit the impact of the recession on corporate and retail borrowers. Such changes may have an adverse effect on the Group's business, results of operations and financial condition.
Changes in consumer protection laws might limit the fees that the Group may charge in certain banking transactions.
Changes in consumer protection laws in Greece, Turkey and/or other jurisdictions where the Group has operations could limit the fees that banks may charge for certain products and services such as mortgages, unsecured loans and credit cards. If introduced, such laws could reduce the Group's net income, though the amount of any such reduction cannot be estimated at this time. There can be no assurance that such effects will not have an adverse effect on our business, results of operations and financial condition.
Our business is subject to increasingly complex regulation which may increase our regulatory and capital requirements.
The Group is subject to financial services laws, regulations, administrative actions and policies in each jurisdiction where it operates. All of these regulatory requirements 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. In response to the global financial crisis, national governments as well as supranational groups, such as the EU, have been considering significant changes to current regulatory frameworks, including those pertaining to capital adequacy, liquidity and scope of banks' operations. 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 the Hellenic Republic, Turkey and SEE. Current and future regulatory requirements may be different across each of these locations and even requirements with EEA-wide application may be implemented or applied differently in different jurisdictions.
Compliance with these new requirements may increase our regulatory capital and liquidity 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 the Group's investments, assets and equity. We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities. The new regulatory framework may have significant scope and may have unintended consequences for the global financial system, the Greek financial system or our business, including reducing competition, increasing general uncertainty in the markets or favoring or disfavoring certain
lines of business. We cannot predict the effect of any such changes on our business, financial condition, cash flows or future prospects.
Regulation of the banking industry in the Hellenic Republic has changed in recent years largely as a result of Greece's implementation of applicable EU directives and in response to the economic crisis in the Hellenic Republic. In this context,
When implemented (as required by October 31, 2012), the Solvency II Directive (Directive 2009/158/EC) will alter significantly the capital structure and overall governance of the Group's life assurance business, and this may have an impact on the capital structure of the Group.
The European Commission has published several consultation and other policy documents indicating its intention to implement the Basel III standards throughout the EEA by way of further changes to the Directives 2006/48/EC and 2006/49/EC and/or additional regulations. It is anticipated that the initial legislative proposals will be published during 2011. The Commission's intention is that agreement be reached on the final form of legislation by the end of 2011, with implementation by banks being required by January 2013.
Finansbank is subject to a number of banking and other regulations in Turkey, in particular those of the Banking Regulation and Supervision Agency of Turkey ("BRSA"). Banking regulations in Turkey are evolving in parallel to the global changes and international regulatory environment. The Turkish regulator has announced the roadmap for Basel II and stated that starting from June 2011, the banks in Turkey will report their results according to both Basel I and Basel II; and after June 2012 only Basel II will be used.
Our ability to reduce staff in the Hellenic Republic 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 bargaining agreement and the current employment regulation. 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 further reduce our staff. However, we may not always be successful in achieving staff 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 the Hellenic Republic 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 competitive position 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. Under the terms of the Hellenic Republic bank support plan, as currently applicable, the Bank is prohibited from paying bonuses to the members of the Board of Directors, the Chief Executive Officer and any general managers or their substitutes. Furthermore, as a result of the economic crisis and regulatory restrictions on bonus payments, we are limiting or restricting the bonuses we pay our personnel, which may inhibit the retention and recruitment of qualified and experienced personnel. However, inability to recruit and retain qualified and experienced personnel in the Hellenic Republic, 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. This risk has increased in view of the current economic situation in Greece.
We could be exposed to significant future pension and post-employment benefit liabilities.
Like other large companies in the Hellenic Republic 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-employment benefit plans, including medical benefit plans. Our consolidated net liability under these plans as of December 31, 2010 was EUR 299.9 million, determined by reference to a number of critical assumptions. These include assumptions about movements in interest rates which may not be realized. 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 39 to the US GAAP Financial Statements.
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-employment 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"). Pursuant to this legislation, the Bank will contribute into IKAETAM EUR 25.5 million per year for 15 years 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.
In addition, Greek Law 3863/2010 amended substantially the structure and operation of the Greek pensions system. These developments, as well as future interpretations of existing laws and any future legislation regarding pensions and pension liabilities or other post-employment benefit obligations, including those under the IMF/eurozone Stabilization and Recovery Program may increase the liability of the Bank or its subsidiaries with respect to pension and other post-employment benefit plan contributions to cover actuarial or operating deficits of those plans.
The Greek banking sector is subject to strikes which may adversely affect the Group's operations.
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 the Hellenic Republic went on strike for 18 days in 2010. Bank employees have gone on strike 5 days thus far in 2011 (up to June 17, 2011), largely to express their opposition to the new austerity measures implemented in light of the IMF/eurozone Stabilization and Recovery Program. Greek bank unions in general participate in general strikes which have increased. Prolonged labor unrest could have a material adverse effect on the Bank's operations in the Hellenic Republic, either directly or indirectly, for example on the willingness or ability of the government to pass the reforms necessary to successfully implement the IMF/eurozone Stabilization and Recovery Program.
The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgments and estimates that may change over time or may not be accurate.
In establishing the fair value of certain financial instruments, the Group relies on quoted market prices or, where the market for a financial instrument is not sufficiently active, internal valuation models that utilize observable financial market data. In certain circumstances, the data for individual financial instruments or classes of financial instruments utilized by such valuation models may not be available or may become unavailable due to changes in financial market conditions. In such circumstances, the Group's internal valuation models require the Group to make assumptions, judgments and estimates to establish fair value. In common with other financial institutions, these internal valuation models are complex, and the assumptions, judgments and estimates the Group is required to make often relate to matters that are inherently uncertain, such as expected cash flows. Such assumptions, judgments and estimates may need to be updated to reflect changing facts, trends and market conditions. The resulting change in the fair values of the financial instruments could have a material adverse effect on the Group's earnings and financial condition. Also, recent market volatility and illiquidity has challenged the factual bases of certain underlying assumptions and has made it difficult to value certain of the Group's financial instruments. Valuations in future periods, reflecting prevailing market conditions, may result in changes in the fair values of these instruments, which could have an adverse effect on the Group's results, financial condition and prospects.
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.
Credit Risk. Credit risk is the risk of financial loss relating to the failure of a borrower to honor its contractual obligations. Credit risk arises in lending activities and also in various other activities where we are exposed to the risk of counterparty default, such as our trading, capital markets and settlement activities. Counterparty default can be caused by a number of reasons, which we may not be able to accurately assess at the time it undertakes the relevant activity. Credit risk has increased significantly since September 2007 and we are using all available sources of information, including the Credit Bureau services of Tiresias, which are now considered adequately complete, to monitor this trend in Greece.
Market Risk. Market risk includes, but is not limited to, interest rate, foreign exchange rate, bond price and equity price risks. Changes in interest rate levels, yield curves and spreads may affect our net interest margin. Changes in currency exchange rates affect the value of assets and liabilities denominated in foreign currencies and may affect income from foreign exchange dealing. The performance of financial markets or financial conditions generally may cause changes in the value of our investment and trading portfolios. We have implemented risk management methods to mitigate and control these and other market risks to which 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.
Liquidity Risk. The inability of any bank, including the Bank, to anticipate and provide for unforeseen decreases or changes in funding sources could have consequences on the bank's ability to meet its obligations when they fall due. The severity of pressure experienced by the Hellenic Republic in its public finances has restricted the access to markets for the Bank, which currently relies almost entirely on the ECB. See "Risks Relating to the Hellenic Republic Economic CrisisWe are currently severely restricted in our ability to obtain funding in the capital markets and are heavily dependent on the
ECB for funding and liquidity, which may be affected by changes in ECB rules relating to the eligibility of collateral such as Greek government bonds and guarantees".
Operational Risk. Operational risk corresponds to the risk of loss due to inadequate or failed internal processes, or due to external events, whether deliberate, accidental or natural occurrences. Internal events include, but are not limited to, fraud by employees, clerical and record keeping errors and information systems malfunctions or manipulations. External events include floods, fires, earthquakes, riots or terrorist attacks, fraud by outsiders and equipment failures. Finally, we may also fail to comply with regulatory requirements or conduct of business rules.
Insurance Risk. Insurance risk is the risk to earnings due to mismatches between expected and actual claims. Depending on the insurance product, this risk is influenced by macroeconomic changes, changes in customer behavior, changes in public health, pandemics and catastrophic events such as earthquakes, industrial disasters, fires, riots or terrorism.
Although the Bank believes that its risk management and risk mitigation policies are adequate, our risk management processes may not prevent all instances of fraud. In addition, continuing volatility as a result of market forces out of our control could cause the Bank's liquidity position to deteriorate. Such deterioration would increase funding costs and limit the Bank's capacity to increase its credit portfolio and the total amount of its assets, which could have a material adverse effect on the Bank's business, financial condition or results of operations.
We may not successfully complete all elements of our capital plan announced in September 2010.
Concurrently with our announcement of the rights offering in September 2010, we announced that we intend to dispose of a minority stake in the share capital of the Group's Turkish subsidiary, Finansbank, of which we own 94.8%, (the "Finansbank Offering") through an offering that may comprise both primary and secondary shares. NBG intends to retain a majority equity stake in Finansbank of at least 75%. Our decision to proceed with the offering and its timing are subject to various considerations, including market conditions, offer size and structure and obtaining all necessary regulatory and other approvals. The Finansbank Offering may be further delayed, may fail to achieve its objectives or may not be consummated.
Our hedging may not prevent losses.
If any of the variety of instruments and strategies that we use to hedge our exposure to various types of economic 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. For example, we are exposed to Turkish lira fluctuations and do not always hedge this exposure. Finally, the methodology by which certain risks are economically hedged may not qualify for hedge accounting, which may result in additional volatility in the Group's income statement. We have not hedged the sovereign credit risk of the Hellenic Republic.
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.
The Hellenic Republic and state-related entities may have an important influence on the Bank.
In 2008, the Greek Parliament approved the Hellenic Republic bank support plan, in response to the difficult funding conditions in 2008. The Greek Parliament originally approved for EUR 28 billion in 2008 and augmented the support plan by EUR 40 billion in 2010 and another EUR 30 billion in 2011. The Hellenic Republic bank support plan, as amended, comprised three tranches or pillars:
As at May 31, 2011, the Hellenic Republic directly owns all 70 million non transferable redeemable preference shares issued by NBG under the capital facility of the bank support plan. This direct stake in NBG provides the Hellenic Republic with voting rights at the general meeting of preferred shareholders and requires the participation on the Board of Directors of NBG of a Government appointed representative, who attends the general meeting of ordinary shareholders of NBG (the "General Meeting"). This representative has the ability to veto actions relating to decisions on strategic issues or decisions that will materially amend the legal or financial situation of NBG for which the General Meeting is competent, the distribution of dividends, the remuneration of NBG's directors and senior management in certain circumstances. By its letter dated October 11, 2010 regarding NBG's rights offering initiated by the September 10, 2010 decision of its Board of Directors, the Hellenic Republic exercised in full its pre-emptive right arising from its holding of preference shares to subscribe for new shares and convertible equity notes that would not be subscribed for by holders of rights and their transferees, equal to approximately 10.3%. Consequently, the Hellenic Republic directly holds 1.23% of the Bank's ordinary shares. (see Item 4.B, "Information on the CompanyBusiness OverviewRegulation and Supervision of Banks in GreecePlan for the Support of the Liquidity of the Greek Economy"). NBG also participates in the second and third pillars of the Hellenic Republic bank support plan.
In addition, 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 December 31, 2010, domestic pension funds owned approximately 16.3% of our share capital, and other domestic public sector related legal entities and the Church of Greece owned approximately 7.4% 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 non-controlling level of our total shares, may have a voting majority at such meeting (see Item 7.A, "Major ShareholdersState Interests").
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 and management decisions which may ultimately limit the operational flexibility of the Group.
If economic conditions do not improve or continue to deteriorate or if the financial position of the Group deteriorates, further government or inter-governmental intervention may take place through the HFSF. Any further government or inter-governmental intervention, including through the HFSF, may
have a material adverse effect on the interest of other holders of our securities, results of operations and financial condition. Capital shares issued under the HFSF will provide it with significant management powers (see Item 4.B, "Business OverviewRegulation and Supervision of Banks in Greece").
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. An action supported by the Hellenic Republic may not be in the best interests of the Group or its shareholders generally.
There may be limited growth in our loan portfolio.
In the current economic environment, our Greek loan portfolio may continue to decline, and our foreign loan portfolio may not grow at historic rates or may even decline. Furthermore, there are a limited number of high credit quality customers to whom banking services may be provided in our target markets. The pace of our loan portfolio growth may be constrained by, among other factors, the health of the Greek economy in light of the economic crisis and the IMF/eurozone Stabilization and Recovery Program and our ability to increase lending volumes to customers that meet our credit quality standards. If we are unable to further expand our loan portfolio in general and/or our customer base in particular, we may not generate sufficient interest income to offset any decline in net interest margins, which could have a material adverse effect on our business, financial condition and results of operations.
We could be subject to additional taxes.
Due to the uncertainty regarding the success of the IMF/eurozone Stabilization and Recovery Program, new taxes may be imposed on the Group, such as the "one-off" taxation on profitable companies, and existing taxes may be increased. In 2010, the Group was subject to a EUR 79.1 million windfall tax, which comprised of a tax on 2009 earnings of EUR 26.1 million and a reversal of a tax credit from withholding tax of EUR 53.0 million relating to interest income from bonds. In addition, at the European Council Summit held on June 17, 2010, representatives agreed that Member States should introduce a system of levies and taxes on financial institutions to promote an equitable distribution of the costs of the global financial crisis. Any additional taxes imposed on us in the future may have a material adverse effect on our business, results of operations and financial condition.
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 euros. 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, any cash dividends on our ordinary shares are paid in euros and, therefore, are subject to exchange rate fluctuations when converted to an investor's local currency, including U.S. 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 other 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 2010, the average daily trading value on the ATHEX was EUR 139.3 million, while in
the first five months of 2011 it was EUR 111.1 million. In comparison, the average daily trading value on the London Stock Exchange was approximately GBP 4.6 billion in 2010.
As at December 31, 2010, the aggregate market value of all shares listed on the ATHEX was approximately EUR 65.4 billion, while as at April 29, 2011 it was approximately EUR 59.3 billion. The market value of our ordinary shares listed on the ATHEX on December 31, 2010 and May 31, 2011 was EUR 5.8 billion and EUR 4.7 billion, representing approximately 8.9% and 9.8%, 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.
Holders in the United States of the Bank's Ordinary Shares and American Depositary Shares evidenced by American Depositary Receipts ("ADRs") may not be able to exercise pre-emptive rights for any such offering of shares unless a registration statement under the U.S. Securities Act of 1933, as amended ("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 holders in the United States of the Bank's Ordinary Shares and ADRs are not able to 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.
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 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 170 years. Since our founding, our business has expanded to become a large, diversified financial services group. As part of our diversification, the Bank founded EH in 1891. 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.
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 EUR 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 (See Item 10.C, "Material Contracts"). 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. Currently we hold 94.80% of Finansbank's outstanding share capital (a 5% stake held is by the IFC and subject to the put and call options). Non-controlling interests ("NCI") that are subject to put options held by third parties are accounted for as described in Note 3 to the U.S. GAAP Financial Statements.
On January 14, 2010, the Extraordinary General Meeting of the Bank approved the contribution of real estate property of the Bank with a carrying amount of EUR 168.4 million to a real estate investment company under the name "NBG Pangaea Real Estate Investment Company" ("NBG Pangaea"), which is a wholly-owned subsidiary of the Bank.
On May 19, 2010, Eterika Plc was liquidated.
On August 17, 2010, the Bank acquired 21.6% of Stopanska Banka ADSkopje, from European Bank for Reconstruction and Development (EBRD) and from International Finance Corporation (IFC) possessing 10.8% shareholding each, through put and call arrangements as provided for in the 2001 shareholders agreement, between the Bank and EBRD and IFC, for the acquisition of Stopanska Banka AD-Skopje. The total consideration paid amounted to EUR 35.2 million.
On September 3, 2010, Banca Romaneasca S.A. established NBG Factoring Romania IFN S.A. Banca Romaneasca S.A. owns 99% and NBG Leasing IFN S.A. owns 1% of the new company.
On November 4, 2010, following the Finansbank's Board of Directors August 2, 2010 decision, the share capital of the Finansbank was increased by TL 551.3 million (TL 547.1 million in cash and TL 4.1 million by capitalization of reserves). The cash contribution by the Group amounted to TL 518.7 million and covered by the proceeds from repayment by Finansbank of subordinated debt amounting to TL 495.8 million (USD 325 million) and cash payments by the reinvestment of the dividend received TL 22.9 million.
On November 16, 2010, NBG International Inc. (NY) was liquidated.
During December 2010, Finans Invest acquired from the market 5.11% of Finans Finansal Kiralama A.S. (Finans Leasing), a subsidiary company, listed in Istanbul Stock Exchange, with a cost of TL 20.5 million, increasing its shareholding in Finans Leasing to 13.32%.
On August 13, 2010, the Bank increased its shareholding in Finans Leasing, through a tender offer. The Bank acquired 27.3% of the share capital for EUR 42.3 million (TL 81.7 million). After these acquisitions the NBG Group owns 90.89% of Finans Leasing.
In April 2010, Finansbank disposed of 10.73% of its participation in Finans Yatirim Ortakligi A.S. (Finans Investment Trust) for TL 2.7 million. After this transaction the Group owns 71.93% of the entity.
The table below sets out the Group's principal items of capital expenditure for 2008, 2009 and 2010.
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 these released resources to more profitable activities.
The table below sets out the Group's principal divestitures for 2008, 2009 and 2010.
We are the largest financial institution in Greece by market capitalization, holding a significant position in Greece's retail banking sector, with more than 11 million deposit accounts, more than three million lending accounts, 574 branches and 1,481 ATMs as at December 31, 2010. Our core focus outside of Greece is in Turkey and SEE, where we currently operate in Bulgaria, Serbia, Romania, Albania, Cyprus and FYROM. We offer our customers a wide range of integrated financial services, including:
The Bank is our principal operating company, representing 69.9% of our total assets as at December 31, 2010. The Bank's liabilities represent 75.7% of our total liabilities as at December 31, 2010. 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 Banka A.D. Novi Sad, 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 NBG Bank (Malta) Ltd. We intend to continue to expand our operations in SEE and the Southeastern Mediterranean region when conditions permit.
We hold leading positions in many financial services products in Greece. As at December 31, 2010, we had the largest market share of deposits and mortgage loans in Greece, with 29.5% in core deposits and 25.4% 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 23.2% and 18.4%, respectively, according to data published by the Greek Private Insurance Supervisory Committee for the nine-month period ended September 30, 2010. We are also strongly positioned in consumer and credit card lending, where, according to our internal analysis of information published by the Bank of Greece, we are first with a market share of 19.6% as at December 31, 2010. We are also second in mutual fund management with a market share of 17.3% as at the same date according to Hellenic Fund and Asset Management Association. 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.
For a breakdown of our total revenues by category of activity and geographic market, see Item 5.A, "Operating ResultsSegmental Information".
Banking Activities in Greece
Most of our banking business is domestic and includes retail, corporate and investment banking. The Group's Greek banking operations account for 70.0% of our total lending activities as at December 31, 2010 the ("Greek Banking Loans"). Banking activities in Greece includes the Bank's domestic operations, Ethniki Leasing S.A. ("Ethniki Leasing") and Ethniki Factors S.A. In this section, "Banking Activities in Greece", financial information pertaining to the Bank relates to banking activities in Greece.
The following table sets forth details of the Greek Banking loans and deposits at December 31, 2010:
We believe that the Bank has a significant advantage in attracting domestic deposits from retail and corporate clients due to the:
The chart below indicate the fluctuations in Greek Banking loans and Greek Banking deposits excluding interbank deposits attributable to the Bank from December 31, 2008 through December 31, 2010.
Greek Banking Distribution Channels
As at December 31, 2010, we operated in Greece through 574 branches, one private banking unit, one unit for financial institutions and seven specialized banking units that deal exclusively with troubled and non-performing loans. As at December 31, 2010, we had 1,481 ATMs, of which at least 627 were situated in key locations such as supermarkets, metro stations, shopping centers, hospitals and airports (39% of our ATMs are equipped with cash deposit devices). During 2010, the total number of ATM transactions reached approximately 98 million with a total value of EUR 18.4 billion. In addition, we have developed alternative distribution channels, such as an e-banking platform targeted at both corporate and retail clients. During 2010, the total number of phone and internet banking users increased by 17% reaching approximately 508 thousand, out of which 292 thousand were also phone banking users. The total number of electronic transactions during 2010 was approximately 38.6 million with a total value of approximately EUR 20 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 EUR 50,000 may be instantly addressed by phone.
The Bank's branches are located in almost every major city and town in Greece. Approximately 46% 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, 2010, the Bank operated 233 full banking branches and 341 retail banking branches.
We participate in DIAS Interbanking Systems S.A., which currently has 41 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.
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 EUR 50.1 billion in deposits (excluding interbank deposits) as at December 31, 2010, compared with EUR 56.5 billion as at December 31, 2009. 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 Mutual Funds S.A. ("NBG Asset Management"), which is 100% owned by Group companies. See Item 4.B, "Business OverviewBanking Activities in GreeceGlobal Markets & Asset Management".
We offer payment services to our clients participating in all local interbank payment channels. We are also a direct member of the euro interbank channels of TARGET, TARGET2, EBA for Euro 1, Step 1 and Step 2. 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 completing the centralization of its payment operations. Our Cash Management product offering in Greece leverages extensively the Bank's branch network in providing our customers with on-line transaction processing particularly as regards electronic collection 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 economic 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 2011, also in line with the market conditions.
The following table illustrates our estimated market share in Greece for certain categories of retail banking activities as at the dates indicated:
We believe our strong corporate image and name recognition in Greece, 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.
Consumer Lending Products
Despite the economic crisis, NBG maintained its strong position in consumer retail banking in 2010, offering a wide range of consumer finance solutions. The Bank is among the most active credit card issuers in Greece, having circulated approximately 1 million cards and managing a total credit card portfolio of EUR 1.8 billion as at December 31, 2010.
During 2010, the Bank focused on restructuring consumer loans and deleveraging the portfolio, targeting financially healthy customers for new loans and simplifying as well as strengthening credit processing. In particular, the Bank focused on implementing more stringent credit criteria as well as a more effective and targeted portfolio management. The Bank has also modified the way in which it grants loans and takes on new customers by targeting customers that plan to invest rather than consume. In addition to focusing on the financial return of an investment, the Bank also promotes energy saving home improvements including photovoltaic installations.
Our basic goal for 2011 is to manage the increasing defaults in most portfolios by offering a broader range of restructuring products and helping customers to stay on track with their loan payments.
The Bank is the largest mortgage lender in Greece according to its internal analysis of information published by the Bank of Greece and has increased its market share to 25.4% at the end of 2010 from 25.1% at the end of 2009. As at December 31, 2010, the Bank's outstanding mortgage balances amounted to EUR 19.5 billion, compared to EUR 19.4 billion as at December 31, 2009, posting an increase of 0.7% and constituting 35.3% of its total lending to enterprises and households in Greece. The volume of new mortgage loan disbursements amounted to EUR 1.4 billion in 2010.
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. The share of loans generated through such alternative channels accounted for approximately 22% of new disbursements in 2010.
As a response to the current market conditions, NBG adopted more stringent underwriting criteria with lower payment-to-income ratios ("PTI"), lower loan-to-value ratios ("LTV"), higher application score and a more refined risk pricing model which takes into consideration all the aforementioned parameters, as well as the loan purpose. As a result, NBG readjusted upwards mortgage spreads incorporating the higher cost of funding and higher credit risk.
We offer a wide range of mortgage products, with floating, fixed, or a combination of fixed and floating interest rates. Floating rate mortgages are indexed, based on three-month Euribor plus a spread of up to 3.5%, depending predominantly on the customer's credit profile, LTV ratio and the amount borrowed. These products accounted for approximately 90% of total 2010 loan disbursements.
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 almost 80% of new mortgages in 2009 and 2010 carrying a life insurance plan. In July 2009, the Bank's range of insurance products was further enriched with the introduction of a mortgage payment insurance plan that guarantees up to 18 monthly loan installments in case of a borrower's involuntary unemployment or temporary disability due to illness or accident. This new insurance product is complementary to life insurance plans and further improves the safety of mortgage payments. Almost all new mortgages in 2010 carried the payment insurance plan. For further information, see "Insurance" below.
During 2010, the Bank's activity was mainly focused on debt restructurings. The restructuring terms included lower payments, extended loan maturity, payment or interest rate caps and skip payments. In 2011, the Bank will continue its restructuring efforts while also introducing flexible terms in performing loans, such as interest-only periods, installment ceilings, interest rate caps etc.
In 2011 new mortgage production is expected to be lower than in 2010. The Bank will expand its mortgage portfolio in a conservative way by applying more stringent underwriting criteria and a conservative pricing policy, and intends to expand mainly into the new field of green mortgage products and energy saving products.
Small Business Lending Unit
The Small Business Lending Unit ("SBL Unit") manages the extension of credit to small businesses with annual turnover of up to EUR 2.5 million and total exposure up to EUR 1.0 million.
The SBL Unit offers lending solutions as outlined below, which cover a full range of business credit needs:
During 2010, the SBL Unit sponsored a total of 2,700 companies with disbursements of EUR 170.0 million, particularly emphasizing on green entrepreneurship and photovoltaic power plants. The new disbursements for 2010 were EUR 535.0 million.
In 2010 the SBL Unit focused on troubled debt restructuring for 8,200 enterprises.
In addition to customized financing products targeted at certain categories of businesses and professionals such as medical practices, trade unions and car dealers, 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, and are now limited to the existing partners only.
The SBL Unit recently adopted new procedures governing its active participation in the Institute of Financing Small & Very Small Sized Enterprises ("TEMPME S.A."), which facilitates financing of these enterprises by issuing state guarantees on loans to them covering up to 80% of loan principal. In 2010, the SBL Unit's participating in TEMPME S.A. evaluated approximately 2.2 thousand applications resulting in over EUR 57 million in disbursements.
Corporate and Investment Banking
The Bank's commercial loan portfolio in Greece comprises approximately 62 thousand 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 ongoing economic crisis in Greece, 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 even slower credit expansions in its commercial lending portfolio during 2011 compared to 2010.
The Bank lends to all sectors of the economy. As at December 31, 2010, domestic commercial lending (including loans to the public sector) amounted to EUR 28.9 billion and represented 52.2% of the total domestic loan portfolio of the Bank. Its lending exposure to the ten largest performing loans to non-affiliated enterprises amounted to EUR 3.3 billion as at December 31, 2010, representing 6.0% of its domestic loan portfolio.
The Bank offers:
The Bank lends primarily in the form of credit lines, which are generally at variable rates of interest with payment terms of up to 12 months. In addition, the Bank provides letters of credit and guarantees for its clients. At December 31, 2010, the Bank had standby letters of credit and financial guarantees amounting to EUR 3.8 billion. Most loans are collateralized to a certain degree, although Greek law imposes significant delays to foreclosing on collateral.
Since March 2010, the Bank has launched corporate MID and SBL restructuring products some of which fall under Law 3816/2010 (see Item 4.B, "Business OverviewSettlement of Business and Corporate Debt). These products mainly offer a grace period of two years with capital payments only, prolongation of maturity up to 10 years and/or reduction of the interest rate up to 3%. The terms of the restructured loan depend on the balance restructured, the amount of existing or new collateral and any upfront payment made by the customer. In addition for some products, if the loan is repaid in accordance with the renegotiated terms, a discount on interest paid may be offered to the customer.
The table below sets forth certain key nominal 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. The Bank's shipping finance activities are carried out almost exclusively through its Piraeus-based operation.
The Bank has traditionally provided financing for many of the largest Greek shipping companies. As at December 31, 2010, outstanding shipping loans (mainly concerning bulk shipping) were EUR 2.2 billion, representing 4.0% of the Bank's total domestic loan portfolio compared to EUR 1.9 billion or 3.5% of the Bank's total domestic loan portfolio, as at December 31, 2009. Of the Bank's shipping finance portfolio as of December 31, 2010, 7.3% concerned the financing of new vessels (new buildings), with the remainder relating to financing purchases of second hand vessels.
The Bank's conventional shipping finance and syndicated loan portfolio consists of first-tier shipping groups involved in diversified shipping activities (e.g., dry bulk, wet bulk, liner business) in a continuous effort towards maintaining 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 that are not within the Bank's control. During 2010, freight rates in dry bulk shipping have remained at levels considered satisfactory by most participants, whereas in wet bulk they have stayed below desired levels. In container shipping, however,
values and rates posted an impressive increase from a very low level during 2009. During 2011, 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.
The Bank's goal for 2011 remains to closely monitor existing shipping facilities while at the same time supporting existing clientele through facilities provided under terms fully aligned with current market conditions. The Bank's management believes that this effort will result in maintaining a high quality portfolio and its solid presence in this sector in the years to come.
The Bank is also active in project finance and, during 2010, continued its lending activity to large infrastructure projects in Greece, while no new loans were advanced for projects outside Greece. The increase of the domestic loan portfolio in 2010 was mainly due to the Bank's participation in financing motorway concession projects, which during 2010 have entered the construction phase. The progress of construction of these projects during the next three to four years will lead to a significant increase of NBG's domestic loan portfolio, since the total commitment of the Bank amounts to EUR 349.5 million, compared to EUR 91.1 million disbursed until December 31, 2010.
Advisory activity in 2010 to the public and private sector developed at a considerably lower pace, as the execution of certain projects was postponed by the Greek Government in the context of the current economic environment. However, the Bank as head of an international team of advisors, provides financial advisory services to government bodies for two projects, namely "24 schools complexes in Attica" and "Thrace Democritus University Student Accommodation". International tenders for the implementation of these projects are currently under way. The Bank also leads a group of domestic and international firms in providing financial advisory services to the Public Real Estate Co, an entity in charge for the development of a portfolio of national properties, selected by their value and is also assisting GAIAOSE (a 100% subsidiary of Greek Railway OrganizationOSE) in the development of a Logistics Center in Attica through an international tender and is also engaged in the restructuring negotiations between the Hellenic Republic and a multitude of international and Greek banks for the concession projects in Greece, involving four motorways. Currently, the Bank is participating in international tenders for the provision of financial advisory services to entities controlled by the Greek Government, relating to the development of major real estate assets (International Thessaloniki Fair and Thessaloniki Port Organization).
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 December 31, 2010, 60% of the finance lease receivables of Ethniki Leasing were to the trading and services sector, 17% to industry and mining, 21% to construction and real estate and 2% to other sectors. As at and for the year ended December 31, 2010, Ethniki Leasing had total assets of EUR 750.2 million and interest income of EUR 29.6 million, before elimination of intercompany transactions and balances.
We have been active in the provision of factoring services since 1994. In May 2009, Ethniki Factors S.A. a wholly-owned factoring subsidiary of NBG was established, as part of the strategic decision to expand our factoring operations in Greece. This new company is a specialist factoring agency that meets the changing and demanding requirements of the market. Ethniki Factors S.A. offers a comprehensive range of factoring services including prepayment (discounting), management and
collection of receivables, credit control, and protection for credit risk. Ethniki Factors S.A. provides both domestic and international factoring services.
In 2010, NBG Investment Banking focused on providing advisory services in mergers and acquisitions as well as in tender offers. NBG acted as the advisor of ATE Bank in its capacity as shareholder of the Hellenic Duty Free Shops (HDFS)for the triple merger of the listed companies Folli FollieHDFS, and ELMEC. In terms of tender offers, NBG was the advisor for ATE Bank for the voluntary tender offer to the shareholders of ATE Insurance S.A., as well as an advisor to Lomond Metal Products Services SA for the mandatory tender offer to the shareholders of Crown Hellas Can SA.
With regards to debt capital markets, NBG acted as a Joint Arranger in ATE Bank's EUR 5.0 billion Euro Medium Term Note (EMTN) Programme and continued to provide its services to the Public Power Corporation, as a Joint Arranger, of its EUR 2.0 billion EMTN Programme.
During 2010, due to the adverse economic conditions prevailing in Greece, many companies postponed or suspended their plans to raise funding in the equity capital markets. As a result, no initial public offering took place on the Athens Exchange during 2010. However, during 2010, NBG acted as a co-lead manager on the international offering of Deutsche Bank's EUR 10.2 billion share capital increase.
Global 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 ("OTC") financial derivatives. It supplies the branch network with value-added deposit products, and its 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 2010, total turnover for foreign exchange trading and money market transactions by the Bank's central dealing room in Athens was approximately EUR 206 billion and EUR 1,107 billion respectively (compared with approximately EUR 265 billion and EUR 599 billion, respectively, in 2009).
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.
The Bank also conducts a portion of its treasury activities through its subsidiary CPT Investments Ltd ("CPT"), which the Bank includes in its consolidated financial statements. As at December 31, 2010, CPT's portfolio comprised Greek government bonds and corporate bonds, with a carrying amount of EUR 1.7 billion.
The Bank launched its private banking operations ("Private Banking") in 2003 and is dedicated to serving the high net worth clientele, by offering first-class services that maximize clients' personal aspirations. Our team of investment experts provides customers with continuous support and direct access to the major international financial centers and Private Banking services of a global reach.
Each Private Banking client is unique, with specific financial needs and goals. The understanding of client's personal investment profile is the essence of Private Banking. To that end, a personal and long-standing relationship between the Bank and the client is established, based on trust, confidence and discretion, such that the client's requirements can be efficiently and effectively addressed.
As the Private Banking team provides services on execution basis only, 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 GreeceInvestment BankingGlobal Markets & Asset Management".
NBG Private Banking received the Euromoney Private Banking Award "Best Private Banking in Greece" for 2008 and 2010.
The Bank offers custodian services to its foreign and domestic institutional clients who hold equity securities listed on the Athens Exchange, listed Greek State debt, as well as remote settlement and custody services on the Cyprus Stock Exchange. The Bank offers trade settlements, including clearing services as General Clearing Member on the Athens Exchange, safekeeping of securities, corporate action processing, income collection, proxy voting, tax reclamation, 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 of Greece.
The Bank acts as custody provider for 76 domestic institutional clients (5 mutual funds, 14 insurance companies, 54 pension funds, 1 asset management company, 2 investment companies) and 36 foreign institutional clients, including several leading global custodians, as at December 31, 2010. The Bank also offers custodian services to private Greek investors and had approximately 277 thousand active custody accounts as at December 31, 2010.
Regarding the quality of the custody services offered, the Bank has been awarded "Top Rated" and highest ranked for both Cross-Border/Non-Affiliated and Domestic activities in 2009 and 2010 Agent Banks in Major Markets Surveys of Global Custodian, the most reputable magazine in the custody industry.
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.
As of December 31, 2010, NBG Asset Management's total assets under management, in mutual funds, were EUR 1.4 billion compared to EUR 1.9 billion as of December 31, 2009. Its market share in Greece was 17.3% as of December 31, 2010, compared to 17.8% as of December 31, 2009. (Source: Hellenic Fund and Asset Management Associationreport of December 31, 2010).
The total value of mutual funds managed since 2006 is set forth in the table below:
NBG Asset Management offers 26 investment funds under the brand name Delos, two under the NBGAM brand name and eight 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.
Additionally, since 2008, NBG Asset Management has expanded its range of investment services. The company offers a more integrated range of contemporary investment services such as:
As of December 31, 2010, NBG Asset Management had approximately 78 institutional and over 67,000 private investors, totaling EUR 1.7 billion assets under management (asset management and mutual fund operations combined).
During the last quarter of 2010, NBG Asset Management launched the first multiple market Exchange Traded Fund based on the customized Greek and Turkish Index GT-30. This new Exchange Traded Fund is listed in Athens Stock Exchange and offers the opportunity to investors to get exposure to the top thirty large capitalization stocks from Athens and Istanbul stock exchanges (fifteen from each country).
National P&K Securities S.A., renamed to National Securities S.A. on May 20, 2010, 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 Securities S.A. offers a spectrum of investment services to both individual and institutional customers.
As at December 31, 2010, National Securities S.A. had a market share of 27% of trades brokered by total trading volume on the ATHEX, ranking third in terms of total trading volume, according to 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 and Bucharest, NBGI Private Equity Limited ("NBGI Private Equity"), a subsidiary of NBGI International Ltd, manages the private equity funds
described below. In 2010, NBGI Private Equity had invested amounts of approximately EUR 269 million as at December 31, 2010, compared to approximately EUR 287 million at December 31, 2009.
NBG is the sole investor in the funds, with the exception of NBGI Private Equity Fund II LP and NBG Technology LP where external investors also participate.
Main Financial Highlights
NBG Private Equity Fund LP ("UK Fund I") has an established track record, having exited nine of its thirteen investments to realize an overall gross 44.2% internal rate of return and a money multiple of 4.2.
The NBGI SEE Development Capital Fund LP successfully exited an investment in October 2008, realizing EUR 3.7 million in capital gains and dividend income for the fund. NBGI SEE Development Capital Fund has not made further investments.
NBG Technology LP completed two exits, one in 2007 and the other in 2010. The Fund has returned EUR 9.3 million back to the Limited Partners being the sales proceeds from the two exited investments and allocated against previously investor funded General Partner's share. In addition, the Fund has distributed EUR 4.2 million as income to the Limited Partners.
Banking Activities outside of Greece
We operate, as a Group, in 11 countries outside Greece. As at December 31, 2010, our international network comprised 1,185 branches (including foreign subsidiaries and Bank branches in the United Kingdom, Albania, Egypt and Cyprus) and branches of subsidiaries, which offer traditional banking services and financial products and services. The Bank has seven commercial banking subsidiaries in Turkey, Bulgaria, Romania, FYROM, Serbia, Cyprus and South Africa. Further, the Group has a presence in Malta through its subsidiary, NBG Bank (Malta) Ltd. 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 green field 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 Turkey, Bulgaria, Serbia, Romania, FYROM and Albania.
Our Turkish operations include the Finansbank group of companies (except for Finans Pension, which the Group classifies under Group insurance operations) and NBG Bank (Malta) Ltd, which holds a portfolio of Turkish business.
In 2010, Turkish operations contributed EUR 458.8 million in net income to the Group, compared to EUR 412.9 million in 2009. Turkish operations' income before income tax expense was EUR 558.8 million as at December 31, 2010 and EUR 491.9 million as at December 31, 2009. As at December 31, 2010, total gross lending was EUR 14,944.6 million while total deposits (excluding interbank deposits) reached EUR 11,545.2 million, compared to EUR 11,402.2 million and EUR 8,775.9 million, respectively, as at December 31, 2009. Total assets of Turkish operations as at December 31, 2010 were EUR 20.7 billion, accounting for 17.4% of our total assets compared to EUR 16.3 billion and 14.4% as at December 31, 2009.
Retail loans of Turkish operations amounted to TL 16.7 billion as at December 31, 2010, compared to TL 12.4 billion as at December 31, 2009 whereas retail sector deposits amounted to TL 14.0 billion compared to TL 11.9 billion for the same dates.
Corporate and commercial loans of Turkish operations amounted to TL 14.4 billion as at December 31, 2010, compared to TL 12.4 billion as at December 31, 2009, whereas corporate and public sector deposits amounted to TL 8.3 billion compared to TL 5.6 billion for the same dates.
On September 7, 2010, NBG announced, as part of its capital plan, its decision to dispose of a minority interest in Finansbank, through an offering that may comprise both primary and secondary shares. We currently intend to complete this offering when market conditions are favourable; however, our decision to proceed with the offering and its timing are subject to various considerations, including market conditions, offer size and structure and obtaining all necessary regulatory and other approvals. A reduction in our level of ownership in Finansbank although would result in a reduction in the level of Finansbank's contribution to the Group's earnings going forward it would expand its franchise in the attractive Turkish banking market, grow its balance sheet and improve its independent access to the capital markets.
Finansbank's group of companies includes Finans Invest, Finans Leasing, Finans Portfolio Management, Finans Investment Trust, Finans Factoring, IBTech, Finans Pension, and Finans Consumer Finance. Finansbank was the fifth largest private bank in Turkey in terms of total assets, loans and deposits as at December 31, 2010, 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, Finansbank's subsidiaries provide financial leasing, capital market, corporate finance, portfolio management, brokerage and insurance services. As at December 31, 2010, Finansbank operated through a network of 502 branches in 62 cities, making it the fifth largest private bank in Turkey by size of branch network according to statistics published by the Banking Regulatory Supervisory Agency ("BRSA"). As at December 31, 2010, Finansbank and its subsidiaries had 12,797 employees.
Turkish Banking Distribution Channels
As at December 31, 2010, Finansbank maintained a branch network of 502 branches, consisting of 439 full service branches, 16 corporate and commercial branches, one retail branch, 44 satellite and
Easy Credit & Manhattan branches and one branch at the Atatürk International Airport Free Trade Zone in Istanbul, as well as one branch in Bahrain. While all Finansbank's corporate banking branches include a retail banking unit, certain branches are now dedicated only to retail customers and are located primarily in upper-middle income residential areas. Finansbank expects the reach of its branches to become even broader in connection with the significant ongoing expansion of its branch network, which includes a plan to open a total of 50 new branches in 2011 (including the 10 new branches opened in 2011, up to the date of this annual report).
As at December 31, 2010, 75.0% of all of Finansbank's customer transactions were made through alternative distribution channels (internet, phone banking, ATM, IVR and point-of-sale ("POS") terminals). The number of online banking customers exceeded 1.4 million, an increase of 18.7% compared to December 2009. The total number of transactions through Finansbank's internet banking services increased by 34.7% in 2010. Finansbank's ATM network grew by 11.9% in 2010 as the number of ATMs reached 1,574 compared with 1,406 at December 31, 2009.
Finansbank's retail banking activities consist primarily of mortgages, consumer lending, credit and debit card services, deposits and investment management, and insurance products. Income from Finansbank's retail banking activities includes net interest income from loans and advances to retail customers and deposits collected from individuals, as well as fee and commission income received from loan underwriting, asset management services, life insurance and property and casualty insurance products, credit and debit card-related services, settlements and cash-related transactions with or for individuals. Retail banking has been one of the principal drivers of Finansbank's growth during the past three years. As at December 31, 2010, Finansbank had approximately 8.5 million retail banking customers, compared to 3.1 million retail banking customers as at December 31, 2008. The continuous expansion of the retail branch network has allowed Finansbank to organically grow its customer base.
Finansbank Retail Banking continued to record significant loan growth in 2010. Finansbank mortgage portfolio increased 26.9% from TL 4.9 billion as at December 31, 2009 to TL 6.2 billion at the end of 2010. Retail deposits increased by 18.0% during the same period from TL 11.9 billion at the end of 2009 to TL 14.0 billion at the end of 2010. Finansbank's market share in time deposits was 4.4% as at December 31, 2010, according to statistics published by the BRSA.
Mortgage lending market share reached 10.5% in 2010 compared to 10.8% in 2009 according to statistics published by the BRSA.
Finansbank's retail products and services include retail loans, which comprise mortgage loans, credit card loans, personal need loans, auto loans and overdraft and other loans, retail time and demand deposits as well as investment products such as mutual funds and insurance products.
Finansbank's retail banking operations are divided into three main sub-groups: private banking, affluent segment and mass. Private banking serves customers with assets under management exceeding TL 500,000 who are served through dedicated relationship managers in branches and private banking centers and provides investment advisory services, advanced investment products, and fully customized services. Affluent banking, branded as "Xclusive Banking," was launched at the beginning of 2009, and serves customers with assets under management between TL 75,000 and TL 500,000. The services offered to affluent banking customers are based on dedicated relationship managers in branches supported by dedicated agents at the call center, offering a diverse set of banking and non-banking benefits. The mass segment is served through more standardized product and packaged offerings.
Finansbank seeks both to broaden its customer base and to improve profitability per customer with a view to continuing to grow retail banking operations. Finansbank targets a balanced retail lending business mix with higher exposure to higher margin operations such as consumer lending and credit
cards and a more limited presence in less profitable, highly competitive businesses such as car loans. Finansbank also intends to continue to develop its mortgage operations.
Corporate and Commercial Banking (including SME)
The products and services that Finansbank's Corporate and Commercial Banking Department provide include trade finance, corporate and commercial lending, project finance, key account management, corporate syndication and secondary market transactions, deposit taking and the issuance of certificated debt instruments. Finansbank's Corporate and Commercial Banking Department's primary sources of income consist of interest income attributable to corporate and commercial loans and commission income from letters of credit and guarantees.
The Corporate and Commercial Banking Department is the second largest of Finansbank's departments in terms of assets employed. As at December 31, 2010, the Corporate and Commercial Banking Department had a total credit and non-credit customer base of over 62,000 corporate and commercial companies, of which 12,856 companies had credit limits.
With the expansion of its corporate and commercial branch network Finansbank has been able to provide banking services to a larger number and wider range of customers. The corporate branches report directly to the head office, whereas commercial branches are supervised by four regional management offices. Finansbank's corporate and commercial branch expansion strategy in Turkey has been to target areas outside of major cities that Finansbank believes provide room for growth, often following customers of its existing customers, who are also serviced by Finansbank's Retail Banking Department.
The Corporate and Commercial Banking Department is divided into two sub units: Corporate Marketing and Commercial Marketing. Finansbank's strategy for the Corporate Marketing unit is to focus on large-sized companies, such as large scale industrials, multinationals, state economic enterprises and Turkish subsidiaries of foreign corporations, particularly those with trade financing requirements. The Commercial Marketing unit focuses more on customers of high-rated, medium-sized enterprises, including sub-contractors, wholesale companies, distributor channels and local utility companies. To support the development of its corporate and commercial banking units, Finansbank established a new Key Account Management Group as a subdivision of the Corporate and Commercial Banking Department in the last quarter of 2008 to serve large conglomerates in Turkey. The Key Account Management Group currently focuses on 30 prime industrial groups.
Increasing the profitability of the Corporate and Commercial Banking Department remains a primary goal of Finansbank in the competitive Turkish market. In order to increase profitability, Finansbank intends to:
Finansbank expects to pursue these objectives by opening new branches, further targeting new customers, expanding key current customer account portfolios and renewing focus on the trade finance business.
Finansbank was one of the first banks in Turkey to focus on SME banking. Finansbank started its SME banking operations at the beginning of 2003 to support small business enterprises, which Finansbank defines as small- and medium-scale enterprises with an annual turnover of up to TL 10.0 million. As at December 31, 2010, Finansbank had 527,021 SME customers with at least one product. In addition to traditional banking products and services, Finansbank offers an extensive range of products and services to create financial resources for SMEs' specific needs.
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 earns interest income on outstanding credit balances, transaction commissions from merchants, cash withdrawal fees, annual membership fees from cardholders and other service based fees such as insurance fees and payment fees from its credit card business. As at December 31, 2010, the number of credit cards issued by Finansbank exceeded 4.0 million, representing 8.5% of the total Turkish credit card market, according to statistics published by the BRSA, and the number of member merchants was 120,993. Within the Turkish credit card market, Finansbank was the second largest Visa card issuer in terms of the number of cards issued, according to statistics published by the BRSA. The number of CardFinans commercial credit cards in issue was approximately 60,000 as at December 31, 2010, representing 6.3% of the total Turkish credit commercial card market, according to statistics published by the BRSA. The number of POS terminals of CardFinans reached 150,432 as at December 31, 2010, representing a 6.7% market share, according to statistics published by the BRSA.
Finansbank Group's total credit card loan portfolio was TL 6.9 billion as at December 31, 2010 compared to TL 4.7 billion as at December 31, 2009.
The CardFinans SME Business Card addresses the particular needs of SMEs by offering an installment credit facility and a post-installment feature. Finansbank had issued 50,000 credit cards to SMEs as at December 31, 2010. VadeKart was launched in February 2010 with its postdating transaction, transaction installment, postdating statement, express limit and authorized card user group features to strengthen the position of CardFinans in SME business services. Finansbank launched Fix Card in May 2010 which offers installment, discount and MoneyPoint features with no annual fee.
Finansbank Group's net fees and commissions from credit card operations amounted to TL 230.7 million in 2010 compared to TL 254.8 million in 2009.
Finansbank's Private Banking department helps high net worth individuals build and preserve their financial wealth through tailored investment strategies and offers its customers a wide range of investment products and services. The Private Banking department supports all of Finansbank's business lines (Retail, Corporate and Commercial and SME).
As at December 31, 2010, Finansbank's Private Banking department provided investment products and asset management services through eight private banking centers and 21 private banking corners located in Finansbank's branches in all major cities throughout Turkey. As at December 31, 2010, Finansbank Private Banking department had TL 6,352.2 million in assets under management.
The most significant subsidiaries of Finansbank include the following:
Finans Invest was established in December 1996 and began operations in January 1997. As an intermediary institution, Finans Invest provides a wide range of financial services to both individual and institutional investors, including investment counseling and brokerage services, portfolio management, intermediation of derivatives, short selling and credit sale of capital markets instruments, fund investment services and corporate finance and international investment services. Under the Capital Markets Law, the activities of intermediary institutions are subject to respective licenses issued by the Capital Markets Board of Turkey ("CMB") for a specific activity under the name of the intermediary institution. Currently, Finans Invest is duly licensed for all capital markets activities. The company ranked fourth by volume of transactions traded on the ISE with a 4.5% market share in 2010 (according to ISE data). As at December 31, 2010, the total assets of Finans Invest were TL 203.1 million and its net income for the year was TL 15.5 million.
Finans Leasing was established in 1990 and is listed on the ISE. As at December 31, 2010 Finans Leasing ranked third in the leasing sector in Turkey, with a total business volume representing a market share of 9.7%, according to the Turkish Leasing Association. Finans Leasing has a lease portfolio that is diversified across several industries, with its major finance lease receivables distributed as at December 31, 2010 as follows: textile 16.1%, building and construction 15.9%, manufacturing 14.2%, health and social activities 12.2%, metal 7.3%, agriculture, hunting and forestry 5.8%, printing 5.6% and mining and quarrying 5.4%. As at December 31, 2010, the total assets of Finans Leasing amounted to TL 1,607.4 million and its net income for the year was TL 37.0 million.
On August 13, 2010, NBG concluded its tender offer for the acquisition of Finans Leasing. As a result of the tender offer, NBG acquired a further 27.3% of the share capital of Finans Leasing for TL 81.7 million. At the date of this Annual Report, NBG Group owns 90.89% of Finans Leasing.
To take advantage of certain regulatory benefits derivable from the full ownership of a leasing subsidiary, Finansbank may consider acquiring the 29.87% of the share capital of Finans Leasing currently owned by NBG at market prices as stated in the regulations of the Turkish Capital Markets Board ("CMB").
Finans Portfolio Asset Management was established in September 2000 and as at December 31, 2010, it manages seven exchange traded funds, 10 mutual funds, seven principal protected funds, three absolute return funds, five pension funds, two funds of funds and one closed-end fund. Finans Portfolio Asset Management also manages discretionary portfolios for high net worth individuals and selected institutional customers.
As at December 31, 2010, Finans Portfolio Asset Management's total assets amounted to TL 19.5 million and its net income for the year was TL 7.4 million. During 2010, Finansbank and Finans Portfolio Asset Management introduced seven principal protected funds and one exchange-traded fund. Finans Portfolio Asset Management's assets under management were TL 1,372 million as at December 31, 2010, giving it a market share in the mutual fund market of 3.5% according to Rasyonet Computer Software & Consultancy Limited Company's online report.
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 and approximately 90% of its shares are publicly traded. As at December 31, 2010, Finans Investment Trust's total assets amounted to TL 20.5 million and its net income for the year was TL 0.7 million.
Finans Factoring was established in 2009. As at December 31, 2010, the total assets of Finans Factoring amounted to TL 265.4 million and its net income for the year was TL 2.5 million. As at December 31, 2010, Finans Factoring's receivables amounted to TL 221.1 million compared to TL 37.1 million as at December 31, 2009. The major distribution of factoring receivables by industry as at December 31, 2010 was as follows: building and construction 23.0%, tourism 16.2%, textile 9.6%, fabricated structural metal manufacturing 5.2%, chemical 4.4%, food 5.0% and entertainment 3.6%.
Finans Consumer Finance
Finans Consumer Finance was established in 2008. As at December 31, 2010, the total assets of Finans Consumer Finance amounted to TL 3.1 million and its net loss for the year was TL 1.3 million. Finans Consumer Finance's primary focus is to provide loans to consumers at the point of sale. Finans Consumer Finance received its BRSA audit approval in October 2009, and in September 2010 originated its first loan to activate its operation license in the Turkish market among 10 other consumer finance companies. Finans Consumer Finance aims to provide market share support to the Finansbank Group with lower risk customer loans where only the actual purchase of services or goods can be financed at the points of sale with partnership agreements.
For information on Finans Pension, see "Insurance" below.
Ibtech was established in 2005 and is located in Istanbul. As at December 31, 2010, the total assets of Ibtech amounted to TL 21.5 million and the net loss for the year was TL 1.8 million. Ibtech's focus is to design and enhance software such as Core Banking (Core Finans), credit cards, internet banking and to develop applications for the use of Finansbank.
Selected financial information with respect to Finansbank Group as at December 31, 2010 is provided in the table below:
NBG Bank (Malta) Ltd
Finansbank (Malta) Ltd was established on June 30, 2005. Subsequent its disposal from Finansbank to NBG (Malta) Holdings Ltd in 2009, Finansbank (Malta) Ltd was renamed to NBG Bank Malta Ltd effective on March 18, 2010.
NBG Bank Malta Ltd has attracted significant business volumes from Turkish corporates. In last quarter of 2009, NBG Bank Malta Ltd filed an application for an Investment Services License with the Malta Financial Services Authority will enable the bank to provide a full range of financial products and services to meet the constantly changing needs of corporate customers and private individuals.
Selected financial information with respect to NBG Bank Malta Ltd as at December 31, 2010 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. United Bulgarian Bank A.D. in Bulgaria, Banca Romaneasca S.A. in Romania, Stopanska Banka A.D. in FYROM, Vojvodjanska Banka A.D. Novi Sad in Serbia, National Bank of Greece (Cyprus) Ltd in Cyprus and the South African Bank of Athens Ltd in South Africa, along with other subsidiaries, primarily in the leasing sector. Our International operations contributed EUR 887.8 million or 12.8% of total interest and non-interest income to the Group and accounted for EUR 10.7 billion or 9.0% of Group total assets as at and for the year ended December 31, 2010. Total gross loans were EUR 8.7 billion at December 31, 2010, a decrease of 2.6% from EUR 9.0 billion at December 31, 2009, whereas deposits (excluding interbank deposits) were EUR 6.1 billion at December 31, 2010, an increase of 10.1% from EUR 5.5 billion at December 31, 2009.
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, 2010, the Bank had foreign branches in four countries, including one in the United Kingdom, 30 in Albania, one in Cyprus and 17 in Egypt. At December 31, 2010, net loans of the Bank's Albania, Cyprus and Egypt operations were EUR 247 million, EUR 212 million and
EUR 132 million, respectively. The table below provides selected financial information of the Bank's foreign branches as at and for the year ended December 31, 2010:
The table above relates solely to the business of the Bank's foreign branches with the exception of the United Kingdom branch, which is considered part of domestic operations and not to the branches of the Bank's non-Greek subsidiaries.
United Bulgarian Bank A.D.
UBB is a commercial bank with headquarters in Sofia, which provides retail and corporate finance services in Bulgaria. It was acquired in 2000, and as at December 31, 2010 the Bank held a 99.9% interest in it. At December 31, 2010, UBB's distribution network included 249 units: 148 "Type 1" (retail business), 49 "Type 2" (retail and micro business), 18 "Type 3" (retail, micro and SME business), 9 "Type 4" (SME business) and 25 offices and operated over 830 ATMs and over 11.5 thousand POS terminals in Bulgaria.
Selected financial information with respect to UBB as at and for the year ended December 31, 2010, is provided in the table below:
Banca Romaneasca S.A.
Banca Romaneasca is a commercial bank with headquarters in Bucharest, providing a range of retail, SME and corporate banking services in Romania through its head office and through 146 units in Bucharest and other cities in Romania. The Bank acquired Banca Romaneasca in October 2003 and as at December 31, 2010 holds 89.07% of its share capital. EBRD is the second largest shareholder of Banca Romaneasca, with 10.2% of its share capital (for information on the accounting treatment of EBRD's holding, see Note 3 to the U.S. GAAP Financial Statements). A share capital increase of RON 355 million was completed in December 2008, in which, the Bank and EBRD subscribed proportionally.
In order to further enhance the financial services offered by the Group in Romania, a new company, NBG Factoring Romania IFN S.A. has been established during 2010, with Banca Romaneasca holding 99.3% of its share capital.
Selected financial information with respect to Banca Romaneasca as at and for the year ended December 31, 2010, is provided in the table below:
Stopanska Banka A.D.
Stopanska Banka is a commercial bank registered in FYROM and headquartered in Skopje. It provides payment transfers, brokerage, credit and deposit-taking services in FYROM and abroad. The Bank acquired Stopanska Banka in 2000 and as at December 31, 2010, held a 94.6% stake in it, while the remaining 5.4%, is held by other minority shareholders. On August 17, 2010, the Bank increased its shareholding in Stopanska Banka by 21.6%, acquiring the related shareholdings from EBRD and IFC (10.8% each) through the exercise of existing put and call arrangements.
Stopanska Banka operates the largest branch network in FYROM, with a dense nationwide network of ATMs and POS terminals. As at December 31, 2010, the bank had 66 branches which are transforming into modern sales outlets and is also a leader in e-banking within FYROM, promoting internet banking and offering its clients electronic payment facilities. Stopanska Banka aims to continue improving its loan portfolio by targeting high quality customers, in the SME and large company segments.
Selected financial information with respect to Stopanska Banka as at and for the year ended December 31, 2010, is provided in the table below:
Vojvodjanska Banka A.D. Novi Sad
In December 2006, we acquired a 99.4% stake in Vojvodjanska and in October 2007, we became the sole shareholder. In February 2007, the NBG's branch network in Serbia with 24 branches became a subsidiary, NBG Beograd. Following relevant decisions of the shareholders' general assemblies of Vojvodjanska and NBG Beograd, dated January 3, 2008, the latter was absorbed by the former and the merger was completed on February 14, 2008.
As of December 31, 2010, Vojvodjanska's 142 branches served over one million private accounts and 80 thousand company accounts and is ranked ninth in the Serbian market in terms of total assets and third in terms of branch network according to data from the National Bank of Serbia.
Selected financial information with respect to Vojvodjanska as at December 31, 2010, is provided in the table below:
National Bank of Greece (Cyprus) Ltd.
NBG Cyprus Ltd, headquartered in Nicosia, had 17 branches, three satellite branches and one foreign exchange bureau as at December 31, 2010, and in 2010 established a representative office in Moscow. It provides a range of commercial and retail banking services. During 2010, it followed policies of loan portfolio quality improvement, enforcing its risk management policies and of loan growth, introducing relationship initiatives with new and existing customers.
Selected financial information with respect to NBG Cyprus as of and for the year ended December 31, 2010, is provided in the table below:
The South African Bank of Athens Ltd.
SABA, which the Bank founded in 1947, has 11 branches, primarily in urban centers, across South Africa. It offers traditional commercial and retail banking services, with particular emphasis on retail and commercial banking services for the SME market in South Africa.
Selected financial information with respect to SABA as at and for the year ended December 31, 2010, is provided in the table below:
As part of its International operations, the Group offers leasing services through certain of its foreign subsidiaries.
We provide insurance services primarily to individuals and companies through our wholly owned subsidiary EH and Finans Pension.
Ethniki Insurance Group
EH is the leader in the Greek insurance market in terms of gross written premiums according to data published by the Greek Private Insurance Supervisory Committee.
It offers a full range of products such as life, accident and health insurance for individuals and groups, fire, catastrophe, credit, motor, marine hull and cargo insurance, and general third party liability. Through the expertise of its personnel and the professionalism of its sales force, EH provides advanced insurance solutions that can meet the demands of the increasingly competitive Greek insurance market.
EH operates through a network of 2,450 tied agents and 2,729 independent insurance brokers, in addition to selling bancassurance products through the Bank's network.
During 2010, EH reinforced its leading position in the Greek insurance market, despite adverse financial conditions, with a 23.2% market share in life insurance and 18.4% in non-life insurance for the nine-month period ended September 30, 2010 (23.4% and 17.1% respectively for the year ended December 31, 2009), according to data published by the Greek Private Insurance Supervisory Committee. Gross written premiums remained at EUR 1.0 billion in 2010, at the same level as 2009.
In particular EH's property and casualty insurance businesses gross written premiums reached EUR 597.9 million for the year ended December 31, 2010, compared to EUR 530.9 million in 2009; and life insurance gross written premiums at an EH Group level reached EUR 386.6 million for the year ended December 31, 2010 compared to EUR 434.9 million in 2009. Bancassurance premiums for life and fire insurance amounted to EUR 161.8 million and EUR 36.2 million, respectively, in 2010 compared to EUR 214.1 million and EUR 36.7 million respectively for 2009. For more information on our bancassurance business, see "Bancassurance" below.
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 94.96% 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 Pireaus Bank Romania, Romextera, ATE Bank and Credit Europe.
In Bulgaria, EH operates two insurance companies jointly with UBB and ALICO: UBB ALICO Life Insurance Company AD and UBB Chartis Insurance Company AD, for life and non-life insurance, respectively. These companies promote bancassurance products in the Bulgarian market. Additionally in partnership with UBB, EH operates UBB Insurance Broker AD holding 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 in 2007. Finans Pension's operations include providing life insurance and retirement income services to groups and individuals, establishing pension mutual funds and conducting private pensions and annuity insurance businesses. Finans Pension started operating in the life and accident insurance market in 2007 and in the private pension market in 2008. As at December 31, 2010 Finans Pension had established five pension mutual funds. As at December 31, 2010, the total assets of Finans Pension reached TL 109.1 million and its net income for the year in 2010 was TL 9.5 million.
Real Estate Management
The Bank engages in real estate management activities, including warehousing and third-party property management. As at December 31, 2010, the Bank owned 1,407 real estate units, 993 of which were buildings the Bank acquired for its own business purposes or through seizure of collateral on loan foreclosures. The net book value of those assets was EUR 139.6 million as at December 31, 2010.
NBG Pangaea, NBG's recently formed Real Estate Investment Company wholly owned by the Bank, owned 242 properties with a net book value of EUR 170.2 million as at December 31, 2010. The commercial value of the properties contributed was EUR 914.0 million at March 31, 2010. The majority of the properties are currently being leased to the Bank under long term leases.
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 EUR 13.1 million as at December 31, 2010. 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, 2010, proceeds from the disposal of land and buildings by the Bank and by Ethniki Kefalaiou S.A. amounted to EUR 2.5 million and EUR nil respectively compared to EUR 19.3 million and EUR nil respectively for the year ended December 31, 2009.
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,
Pronomiouhos S.A. Genikon Apothikon Hellados. See Item 4.D, "Property, Plant and Equipment" below for general information regarding our real estate holdings and Item 4.A, "History and Development of the NBG GroupHistory and Development of the NBG Group" above 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 and companies 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, 2010.
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 November 2008, Astir Palace completed a share capital increase of EUR 99.7 million. The Bank contributed EUR 99.6 million, raising its participating interest from 78.06% to 85.35%. The share capital proceeds were used to repay loan financing of EUR 84.7 million, while the remaining cash was directed towards servicing Astir Palace's investment program and working capital requirements.
In 2010, Astir Palace invested more than EUR 3 million (compared to EUR 5 million in 2009) in renovations and facility improvement projects.
Astir Palace is currently engaged in the following projects:
Significant Equity Method Participations
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, 2010 :
Equity participations in which the percentage of ownership interest held by the Group is less than 20% are accounted as portfolio investments in accordance with ASC 320 "InvestmentsDebt and Equity Securities", as the Group does not have the ability to influence the operations of the investees. Equity participations in which:
are accounted for using the equity method because the Group can influence the operations of the investees.
UBB ALICO Life Insurance Company AD and UBB Chartis Insurance Company AD are jointly controlled by Group companies UBB and EH and companies of AIG.
NBG Funding Ltd. is a VIE in which the Group is not the primary beneficiary.
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.
The following table shows a breakdown of gross loans to customers and customer deposits in the universal banking sector for the Bank and its five main competitors in Greece as at December 31, 2010. We have compiled these figures based on publicly available information (stand-alone financial statements of the banks shown prepared in accordance with IFRS):
The Macroeconomic Environment in GreeceThe Hellenic Republic's economic crisis
The Greek economy has faced, and continues to face, unprecedented macroeconomic headwinds since the beginning of 2010, originating from sizeable fiscal imbalances, the extent of which has been demonstrated with the release of the significantly revised estimates of the 2009 deficit and debt figures in October 2009, which were compounded by other deep-rooted structural vulnerabilities, a very aggressive international media stance and a weak initial response at an EU level. These developments, in conjunction with the concomitant multi-notch downgrades of the Greek sovereign debt by all major rating agencies starting in 2009 and continuing in 2010 and 2011, translated into rapidly deteriorating financial market conditions for Greek assets (with increased yields on Greece's government bonds), and an effective closing of markets to Greek banks since April 2010. Specifically, in April 2010, the Hellenic Republic's credit rating was lowered by Fitch to BBB-, by Moody's to A3 and by Standard & Poor's to BB+, which is below investment grade. The credit rating of the Hellenic Republic has been subsequently lowered several times by all three credit rating agencies and as of June 16, 2011, had been lowered by Standard & Poor's to CCC with a negative outlook, by Fitch to B+ with credit watch negative, and by Moody's to Caa1 with a negative outlook. See Item 3.D, "Risk FactorsOur borrowing costs and liquidity levels may be negatively affected by further downgrades of the Hellenic Republic's credit rating" for the chronology of the downgrades.
In May 2010, the Greek government agreed to an IMF/eurozone Stabilization and Recovery Program, jointly supported by the IMF and the EU, which provides significant financial support of EUR 110 billion over the period 2010 through 2013 in the form of a cooperative package of IMF and EU funding including a Stand-by Arrangement (the "SBA") with the IMF. The funding is available in tranches and is conditional upon the Hellenic Republic implementing fiscal austerity package to meet certain quarterly deficit reduction targets and reporting to the EC and the IMF on a quarterly basis. The facilities have a term of three to five years and an interest rate of approximately 4.7%. As part of this Program, the Greek government committed to implement measures to decrease government expenses and increase revenues with a view to reducing the general government deficit to below 3% by 2014 from an upwardly revised deficit of 15.5% of GDP in 2009. The Program projected Greek government debt to peak at an upwardly revised percentage of approximate 160% of GDP in 2013-2014 from an upwardly revised 127% of GDP in 2009. The revised targets reflect revisions undertaken at the time of the first review of the Program in the summer of 2010, and primarily reflect the redefinition of the general government deficit and debt, broadening its coverage.
EU leaders, acknowledging the considerable progress in the implementation of the stabilization program, decided at the EU Summit of May 16, 2011, to reduce the interest rate on the EU loans
(amounting to EUR 83 billion) by 100 basis points and to extend their maturity to 7.5 years (from 3.5 years), the latter in line with the intentions of the IMF (announced in late-February 2011). Upon its ratification by EU member states, the decision will smooth out the redemption profile of Greek debt, and reduce sovereign borrowing needs in 2014 and 2015 by about EUR 17 billion annually.
The IMF/eurozone Stabilization and Recovery Program was characterized by the IMF as "ambitious" and focuses on two key challenges:
Fiscal Sustainability Measures
Key measures of the fiscal reform agenda of the IMF/eurozone Stabilization and Recovery Program were implemented during 2010:
The IMF/eurozone Stabilization and Recovery Program includes a set of structural measures and policy guidelines designed to boost the country's competitiveness and improve Greece's potential
growth rates in the medium term with a view to the Hellenic Republic repaying its debt burden. These structural measures include:
Despite strong efforts to reduce debtmeasures equivalent to 7.5% of GDP were taken in 2010 and measures equivalent to 7% of GDP were expected in 2011the IMF/eurozone Stabilization and Recovery Program was not meeting its conditions at the time of the commencement of the fourth review commenced in May 2011. The deficit of general government reached 10.5% of GDP in 2010, about 1% above its target, and tax revenue was significantly below target in the first quarter of 2011. For more detail on the risks and uncertainties relating to a failure to successfully implement the IMF/eurozone Stabilization and Recovery Program, see "Risk FactorsRisks Relating to the Hellenic Republic Economic Crisis".
As a result of the above developments, it appears likely that a new program will be proposed with funding from the IMF and the EU. It is expected that this new program will provide the Hellenic Republic additional time to reach its fiscal targets and implement structural reforms. It is also expected that debt reduction will be accelerated through the implementation of an ambitious privatization and government real estate development program. The conditions of this new program will likely include additional fiscal measures that will apply from 2011, including a medium-term fiscal adjustment program. Approval of the additional fiscal measures for 2011 and the medium-term fiscal adjustment program are conditions for the completion of the fourth review of the existing Program and prior to the release of the fifth tranche of IMF and EU funding support of EUR 12 billion.
The new program may also include private sector participation only on a voluntary basis, renewing maturing Greek government debt with new purchases of Greek government debt. Although the form of such participation has recently been a subject of contention between the official creditors and the ECB, a solution may have been reached that seeks private sector participation on the condition that it does not trigger a technical default according to certain credit rating agencies. It should be noted that a technical default according to certain rating agencies would arise if a voluntary restructuring occurs under coercion and thus any form of voluntary participation runs the risk of triggering a technical default. An agreement between the official creditors on burden sharing between official and existing private sector creditors will have to be reached for the new program to be agreed. The details of the new program are likely to be agreed in late summer or early autumn 2011.
Financial Sector Measures
The IMF/eurozone Stabilization and Recovery Program also contains a third pillar to protect the stability of the banking system by providing capital support if a significant decline in capital buffers occurs. The HFSF, funded by the government out of the resources available from the IMF and EU under the Program, was established under Greek Law 3864/2010 with a view to ensure adequate capitalization of the banking system. If supervisory assessments conclude that a bank's capital buffer might fall below adequate levels to be determined, the shareholders will be invited to immediately bring additional capital or take bridging capital support from the HFSF. The capital support program would provide equity to banks in the form of preference shares that could convert to ordinary shares and exceptionally in the form of ordinary shares in case banks do not meet the minimum required level of capital adequacy requirements set by art. 27 of Greek Law 3601/2007 and all previous efforts to increase its Tier I capital with the participation of existing or new shareholders have been unsuccessful. After five years, or earlier following approval of the Bank of Greece, the preference shares will be repurchased, failing which their return will increase annually by 2%. Should the capital adequacy requirements not be fulfilled or the financial targets set under the restructuring plan not be met, the HFSF will have the power to convert the preference shares into ordinary shares following proposal of the Bank of Greece. When banks are not able to repay the capital support within five years from the issuance of the preference shares, the HFSF would devise a restructuring plan for the bank consistent with EU legislation requirements for state aid and fair competition, in consultation with the Bank of Greece. The HFSF will manage its participations in the banks with a view to safeguarding the value of its holdings, minimizing the risks for the Greek public and ensuring adequate competition in the Greek banking system.
The HFSF will have an initial duration of seven years. Any shares remaining in the HFSF at the time it ceases its activities will be transferred to the Hellenic Republic. The amount of funds earmarked for the HFSF out of the IMF and EU resources will be EUR 10.0 billion. Appointees by the Governor of the Bank of Greece, the General Secretary of the Ministry of Finance and the Director of financial stability of the Bank of Greece will sit on the board, while the appointees by the ECB and the EC will have the right to participate in board meetings as observers. The HFSF will report regularly to the Greek parliament, the EC, the ECB, and the IMF staff. For more information on the HFSF please refer to "Regulation and Supervision of Banks in Greece".
The stress test conducted by CEBS-EU in July 2010, which covered more than 90% of the banking system assets indicated that Greek banks (with one exception) remain adequately capitalized even under the adverse assumptions about the impact of the crisis on the quality of their portfolios and EU revaluation losses in their trading books contemplated in the stress tests. Against this background, the Greek government commissioned an in-depth study on the availability of strategic options and requested a preliminary due diligence analysis of the financial entities in which the Hellenic Republic has a significant stake. When the study and due diligence were completed in November 2010, the Greek government started to devise a program to address the stability and efficiency of the banking entities in which the Hellenic Republic has a significant stake. Restructuring plans for the public sector banks will be agreed with the European Commission.
According to the results of the 2010 stress test, under the adverse case scenario, the estimated Tier I capital adequacy ratio of the Bank would be approximately 9.6% in 2011 compared with 11.3% at the end of 2009. After taking into consideration additional impairments totaling EUR 2 billion arising from Hellenic Republic sovereign risk, the ratio would be 7.4% at the end of 2011, which is above the minimum 6% required by the ECB for the purposes of this exercise. According to management assumptions, which we believe are more realistic regarding Turkey, domestic corporate loans and taking into account the Tier II EUR 450 million note issued in August 2010, the 7.4% ratio could be raised by 200 bps to approximately 9.4%. Specifically, the cost of risk in Turkey in the adverse scenario is assumed not to exceed the level reached in 2009 when Turkey suffered a severe recession,
from which it has substantially recovered, and for the corporate loan book the cost of risk is assumed to be at the level assumed by CEBS for banks not using the advanced IRB approach under Basel II (for the base year, i.e. year 2009, IRB PD is already double than the PDs prescribed by CEBS for the standardized approach). Although the results of the 2010 stress test reaffirmed the Group's adequacy of capital ratios, the Bank completed in October 2010 a EUR 1.8 billion share capital increase which further bolstered its equity position. Currently another stress test is under way, supervised by the EBA (the successor organization to CEBS), with the base year being 2010 and spanning over a stressed period of two years, which is expected to be completed and its results to be made public in the second half of 2011.
Moreover, as liquidity conditions for the Greek banking sector have remained strained in view of the new sovereign downgrade by Fitch in May 2011 and Moody's and Standard & Poor's in June 2011 which put further pressure on collateral valuations, the authorities have committed to the adoption of the legislation enabling a new tranche of government guaranteed bank bonds of EUR 30 billion.
Risk of Implementing the IMF/EU Stabilization Plan
These measures are subject to a range of substantial implementation risks including:
The magnitude of the fiscal adjustment required as part of the IMF/eurozone Stabilization and Recovery Program and persistently high uncertainty will continue to exert a significant negative short-term effect on economic activity in the Hellenic Republic with possibly negative repercussions for the near-term returns of government revenue measures. This is in addition to the negative impact arising from the sharp drop in consumer and business confidence existing already.
An agreement on a new program may fail to materialize. In addition, the fifth tranche under the existing program to be disbursed by early July 2011 is expected to be conditional on, among other things, the following elements which carry risks: (i) the approval by the Greek parliament of additional
fiscal measures for 2011 of approximately EUR 6.5 billion; and (ii) the approval by the Greek parliament of the medium-term fiscal program containing measures of about EUR 22 billion. These elements challenge the unity of the governing socialist party. In this context, Greek political risk has also increased substantially in the past few months, with defections in the governing party resulting in a reorganisation of the cabinet as well as increased social unrest.
Although the fiscal position of the Hellenic Republic will go through a significant adjustment, the strength of the Hellenic Republic's private sector is expected to provide support during this adjustment, including (i) a relatively low loans-to-deposits ratio despite the recent decline in deposits; (ii) the housing market in the Hellenic Republic did not experience the same magnitude of house price increases as EU comparable markets; (iii) the Hellenic Republic has entered the crisis with a relatively well-capitalized banking sector, with average Tier I capital ratios of 10.5% as of June 30, 2010, when compared to average Tier I capital ratios of between 8.8% and 12.8% in other EU countries.
Moreover, we believe the ECB's decision of May 5, 2010 i.e., (i) to re-activate extraordinary liquidity enhancement measures and, more importantly; (ii) to conduct direct interventions in the euro area public and private debt secondary securities markets ("Securities Markets Program"), albeit lately the program appears to be frozen, in conjunction with its decision; (iii) to suspend the minimum credit rating threshold in order for debt instruments issued or guaranteed by the Greek government to be used as collateral in ECB refinancing transactions, is likely to reduce further tensions and provide depth and liquidity to those market segments experiencing the greatest difficulties.
Accordingly, these are extremely uncertain times for the banking sector in the Hellenic Republic and the EU and it is difficult for us to predict or state with any degree of certainty whether the IMF/eurozone Stabilization and Recovery Program and any amendments thereto, will be implemented successfully and, if implemented successfully, whether it will have the effects intended, and how severe an impact on our results of operations and financial condition an implementation of the IMF/eurozone Stabilization and Recovery Program and any amendments thereto, successful or unsuccessful, might have. For more detail on the risks and uncertainties that we face regarding the failure to implement the stabilization plan and otherwise, see Item 3.D, "Risks Relating to the Hellenic Republic Economic Crisis". Information in this section is mainly drawn from the IMF report entitled, "Greece Staff Report on Request for Stand-by Arrangement".
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 2011, according to information from the Bank of Greece, there were 62 credit institutions in Greece: 18 Greek banks, 16 cooperative banks and 27 foreign banks, as well as one specialized credit institution.
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 with 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 Postbank, 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. A
majority stake of Geniki Bank was sold to Société Générale in early 2004, followed by the sale of a majority stake of Emporiki Bank to Crédit Agricole in August 2006. In addition, the Hellenic Republic proceeded with the partial privatizations of the Hellenic Postbank 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. In 2011, Eurobank EFG announced its agreement with Raiffeisen Bank International AG in Poland ("RBPL") to sell a 70% stake of its operations in the country (Polbank EFG) and exchange the remaining 30% stake for a 13% stake in the combined RBPL-Polbank EFG operations. Piraeus Bank acquired a nearly 100% stake in International Commerce Bank JSC in the Ukraine in 2007, and 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: banks' financial statements for 2006 and 2007).
In April 2011, according to data published by the Bank of Greece, there were 27 foreign-owned or incorporated credit institutions that were established in the Greek banking market. These include Citibank, Bank of Cyprus 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 Macroeconomic Environment and the Banking Services Sector in SEE & Turkey(1)
In 2010, the macroeconomic performance in Turkey and SEE, in which the Group has a presence (Albania, Bulgaria, FYROM, Romania, Serbia and Cyprus) improved significantly, in line with the synchronized global recovery and the easing of the global financial crisis. Specifically, in Turkey, real GDP growth surged to 8.9% after a sharp decline of 4.8% in 2009, while in SEE, real GDP growth approached positive territory in 2010, with a small decrease of 0.1%, after recording a significant decrease of 5.2% in 2009. In Turkey, inflation moderated to a historical low of 6.4% in December 2010, supported by tighter fiscal stance and prudent monetary policy, in contrast to SEE, where it accelerated
to 7.3% in December 2010 from 4.0% in December 2009, mainly due to higher administrated prices and an increase in the value-added tax in the case of Romania.
Furthermore, Turkey remains dependent on external financing, and its economy is highly exposed to a turnaround in global activity and investor sentiment. Turkey's current account deficit is expected by Turkstat to reach a record high of 7.9% of GDP in 2011, mainly due to unfavorable international oil and commodity prices and strong domestic demand. In the event that the bulk of the current account deficit continues to hinge on large portfolio inflows and a drawdown of bank and non-bank residents' assets abroad, as was the case in 2010, Turkey's external financing could be vulnerable to sudden shifts in investor sentiment. Moreover, although the governing party maintained its position in the legislative elections held on June 12, 2011, and will be able to establish a new government, the new government's agenda is expected to include controversial reforms, including the drafting of a new constitution. As a result, there can be no assurance that Turkey will not experience volatility in domestic financial markets. Such likelihood would increase if international market turbulence continues and would have a negative impact on Finansbank's business and could adversely affect the Group's business, results of operations or financial condition.
The sharp adjustment in external imbalances experienced in 2009, in the wake of the global economic and financial crisis, continued, albeit at a slower pace, in SEE, while it reversed course in Turkey. Indeed, the current account deficit, the "Achilles heel" of these economies, widened to 6.5% of GDP in 2010 from 2.3% of GDP in 2009 in Turkey and narrowed to 4.6% of GDP in 2010 from 6.1% of GDP in 2009 and 14.7% of GDP in 2008 in SEE. The conflicting trends of the current account in Turkey and SEE resulted mainly from different external financing conditions. However, the quality of financing of the current account deficit deteriorated in 2010, especially in Turkey. Indeed, in SEE, non debt-generating foreign direct investments covered 61.8% of the current account deficit in 2010 against 65.7% in 2009, while in Turkey they covered only 14.7% in 2010 against 49.4% in 2009.
Financial intermediation continued to deepen in SEE and in Turkey in 2010. However, the degree of deepening of financial intermediation was much stronger in Turkey, reflecting, inter alia, an impressive growth performance, favorable liquidity conditions and banks' aggressive lending, in line with rapidly improving asset quality.
In 2010, loans and deposits in SEE recorded low growth rates of 7.8% year-on-year and 10.1% year-on-year, respectively, while the corresponding penetration rates stood at 68.2% and 64.2%. Lending to corporations was the main driver of credit activity in SEE as a whole, growing by 9.9% year-on-year in December 2010 and bringing the loans to corporates-to-GDP ratio to 38.1%.
In 2010, ratios that are reflective of the level of financial intermediation by banking institutions in Turkey increased significantly. In 2010, bank loans and deposits rose by 34.6% year-on-year and 20.3% year-on-year, respectively, while their corresponding penetration rates stood at 43.1% and 52.0% 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 on licensing, operation, supervision and control of credit institutions, Greek Law 3746/2009 on the Greek deposit and investment guarantee fund, Greek Law 3691/2008 on anti-money laundering provisions, Greek Law 3862/2010 on payment services and credit institutions and other relevant laws of Greece, each as amended and in force. Also, in accordance with Greek Law 1266/1982 on organizations exercising monetary, credit and currency policy, the Bank of Greece 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 as Greek law has changed largely to comply with applicable EU directives. In August 2007, the EU directives (2006/48/EC and 2006/49/EC) regarding the adoption of the revised 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. These Acts were amended during 2010, in order to adopt the respective amendments of the EU directives as regards risk management, own funds, capital adequacy and large exposures.
Recently, the Greek government has revised the terms of the Hellenic Republic bank support plan to strengthen Greek banks' capital and liquidity positions. For more information concerning our participation in this plan, see "The Hellenic Republic's Bank Support Plan" below. In addition, in response to the unprecedented economic downturn in the Hellenic Republic, in early May 2010, the Greek government agreed to the IMF/eurozone Stabilization and Recovery Program. For more information, see "The IMF/eurozone Stabilization and Recovery Program" below.
The regulatory framework
Credit institutions operating in Greece are obliged to:
Under Greek Law 3601/2007, the Bank of Greece Governor's Acts and other relevant laws of Greece, the Bank of Greece, in the exercise of its control over credit institutions, has the power to conduct audits and inspect the books and records of credit institutions. If a credit institution breaches any law or a regulation falling within the scope of the supervisory power attributed to the Bank of Greece, the Bank of Greece is empowered to:
In accordance with Greek Law 2832/2000, 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 in case of any breach of any law falling within the regulatory or supervisory power of the Bank of Greece.
The IMF/eurozone Stabilization and Recovery Program
In response to the unprecedented economic downturn in the Hellenic Republic, which accelerated in the first few months of 2010 and continued through 2010 and into 2011, the government of the Hellenic Republic and the Bank of Greece entered into the Memorandum of Economic and Financial Policies dated May 3, 2010 (or the "Memorandum").
Law 3845/2010 (Government Gazette 65/06.05.2010) ratified the Memorandum and empowered the Minister of Finance to sign every memorandum of understanding, agreement or loan agreement, bilateral or multilateral, with the European Commission, the Member States of the euro area, the IMF and the ECB, which is necessary for the implementation of the Memorandum. The aforementioned memoranda and agreements are brought before the Greek Parliament for discussion and consultation and are valid and enforceable from the date of their signing. Further to that, the Memorandum has been updated on August 6, 2010, December 8, 2010, and February 28, 2011, but no Greek law or ministerial decision or other legal act has been voted upon by the Greek Parliament to amend or directly update per se the Memorandum. These updates describe the progress and the policy steps taken by the Greek Government towards meeting the objectives of the Memorandum. Nevertheless, there has been a number of laws and legal acts in general that reflect the updates to the Memorandum and refer to specific measures implementing the Memorandum.
The Memorandum provides for certain stabilizing and other measures to be adopted in the Greek financial sector including measures related to banking supervision. The Memorandum states that financial sector policies need to maintain stability and that, despite its current strong solvency position, the Greek banking system faces challenges. According to the Memorandum, while current capital buffers in the banking system are reassuring, bank supervisors will need to closely monitor liquidity and non-performing loans at individual banks. The Bank of Greece and the Greek government will further strengthen and clarify the key elements of Greece's supervisory and financial crisis framework to assist the banking system through this period of lower growth.
The Memorandum discusses liquidity and the creation of the HFSF. Within the existing euro system framework, national central banks may give support to temporarily illiquid, but solvent credit institutions. If such support is given by the Bank of Greece, it will be fully guaranteed by the Greek state in a manner that is consistent with relevant European Central Bank and European Union requirements. In addition, the Greek government and the Bank of Greece are putting a new safety net in place intended to preserve the sound level of bank equity, and thus improve conditions to support the real economy. Anticipating that banks' profits may decline further, possibly impacting their equity position, the government has established, under Greek Law 3864/2010 and in consultation with the IMF, the European Commission and the ECB, the fully independent HFSF. The Bank of Greece, in its capacity as supervisor of financial institutions, and the HFSF is entitled to the maximum possible exchange of confidential information permitted under community legislation. See "The Hellenic Financial Stability Fund" below.
The Bank of Greece will increase the resources dedicated to, and intensify, banking supervision. This will include an increase in the frequency and speed of data reporting, and the further development of a comprehensive framework for regularly stress-testing financial institutions. Staffing will be
increased both for on-site inspections and off-site review, while also taking into account the new responsibilities of the Bank of Greece with respect to the supervision of insurance organizations. Additional flexibility will be introduced in the management of human resources, and Bank of Greece staff will be granted legal protection for actions performed in good faith.
The Hellenic Financial Stability Fund ("HFSF")
The HFSF was established by Greek Law 3864/2010 as a private law entity, with the objective of helping to maintain the stability of the Greek banking system by providing support to the capital adequacy of both Greek banks and subsidiaries of foreign credit institutions lawfully operating in Greece. Management and supervision of the liquidity support provided under the Hellenic Republic bank support plan in accordance with Greek Law 3723/2008 and the Bank of Greece does not fall under the scope of the HFSF. The HFSF will cease to exist on June 30, 2017.
HFSF's capital: In accordance with Greek Law 3864/2010, the HFSF's capital is EUR 10 billion, consisting of funds that shall be raised by the IMF/eurozone Stabilization and Recovery Program, it shall be gradually paid in by the Greek State and shall be evidenced by certificated instruments which shall not be transferrable until the expiration of the term of the HFSF. After the expiration of the HFSF's term and the completion of the liquidation process, the HFSF's capital and assets will be transferred to the Greek State by operation of law.
Organizational issues: The HFSF is managed by board of directors consisting of seven members, appointed by a decision of the Minister of Finance upon the recommendation of the Bank of Greece. The board of directors is composed of one Chairperson and two Vice-Chairpersons, each of which are executive members of the board, and four non-executive members. The Chairperson, Vice-Chairpersons and two non-executive members will be chosen by the Governor of the Bank of Greece among persons of known reputation and experience in banking, financial matters or accounting. The remaining two non executive members are appointed ex officio by the General Secretary of the Minister of Finance and the Director of Financial Stability of the Bank of Greece. The members of the board of directors are not permitted to directly or indirectly participate in, or be members of the board of directors, executives, or external counsels of, a Greek or foreign credit or financial institution, with the exception of the members that come from the Bank of Greece.
The term of the members of the board of directors is five years, renewable until June 30, 2017. The term of the ex officio members expires when they cease to be the General Secretary of the Minister of Finance and the Director of Financial Stability of the Bank of Greece, respectively.
The non ex officio members may lose their position before the expiration of their term, pursuant to a decision of the Minister of Finance upon recommendation of the Governor of the Bank of Greece, provided that a charge or conviction has impeached the member and would prohibit the appointment of the member in the Greek public sector or on due cause consisting especially of an objective inability to exercise the member's relevant duties, hiding or lying about an incompatible capacity or violating the confidentiality duty.
In addition, one representative from each of the European Commission and the ECB, together with their substitutes, will participate in the meetings of the board of directors without a right to vote. The board of directors will present semi-annual reports to the Greek Parliament, which shall be communicated to the Minister of Finance, the European Commission, the ECB, the Bank of Greece and the IMF. In exercising their powers and carrying out the tasks and duties conferred upon them under the legislation, the members of the Board enjoy full independence. The members of the board of directors of the HFSF shall not seek or take instructions from the Hellenic Republic, or any other state entity, institution, body or undertaking, or be subject to influence of whatever nature.
Provision of Capital Support by HFSF
Activation of the Capital Support Provision Process: This process will be activated with the submission of an application by a credit institution (such institution being in compliance with the requirements for evaluating and maintaining its capital against the level of undertaken risks in accordance with Greek legislation), either (a) pursuant to the relevant recommendation of the Bank of Greece or (b) under the initiative of the credit institution (which may also be supported by the Bank of Greece under the following conditions: (i) if under conservative assumptions of the Bank of Greece it is estimated that there is a reasonable risk of the credit institution being unable to continue to comply with capital adequacy requirements under Greek legislation, and (ii) if the credit institution's efforts to increase its own capital through the participation of its existing or new shareholders have not been successful.
The process of providing capital support may also be activated by a credit institution submitting an application following the Bank of Greece's written and justified recommendation in cases where (a) the credit institution is not compliant with the requirements for evaluating and maintaining its funds relative to the level of risks it has undertaken in accordance with Greek legislation or (b) the credit institution is not compliant with the requirements for maintaining its own funds on a continuous basis in accordance with the capital adequacy requirements of Greek legislation, and, in each case, where the credit institution's efforts to increase its own capital through the participation of its existing or new shareholders have not been successful. In these cases, the Bank of Greece may request the dismissal of the persons who are responsible for the direction of the operations of the credit institution, if the Bank of Greece considers such persons did not undertake all measures and necessary actions within their competence to meet the recommendations of Bank of Greece for the increase of the credit institution's capital adequacy. If the credit institution does not submit an application to the HFSF for provision of capital support despite the recommendation of the Bank of Greece, the Bank of Greece may either appoint an administrator or revoke the credit institution's license in accordance with the Greek legislation.
Applications for the provision of capital support that are submitted pursuant to the Bank of Greece's recommendation must be submitted within one month from receipt of the recommendation and must necessarily be accompanied by:
The HFSF, following consultation with or recommendation from the Bank of Greece, may suggest amendments to the credit institution's business plan, which must be adopted by the credit institution.
If the HFSF considers the amended business plan to be viable, following consultation with or recommendation from the Bank of Greece, it will approve the provision of the capital support, provided that the European community legislation on state aid and the practice followed by the European Commission are observed. The amount of the capital support is decided by the HFSF following recommendation of the Bank of Greece. The HFSF and the applicant credit institution must jointly present a detailed restructuring plan or amend the plan that has been submitted to the European Commission, in accordance with the European Union legislation on state aid and the practice followed by the European Commission. Within six months from the provision of capital support, the restructuring plan shall be submitted for approval by the Minister of Finance to the European Commission. The implementation of the plan must not exceed three years. Extension of the three-year duration of the plan may be given for a maximum of an additional period of two years by a decision of the HFSF following consultation with Bank of Greece, provided that the extension is approved by the European Commission.
Issue of Shares for the Provision of Capital Support: The HFSF provides capital support in most cases through the issue of preference shares. These preference shares are not transferrable to third parties and may not be listed until the HFSF ceases to exist.
Both share capital increases mentioned above shall be subscribed in cash and any pre-emption rights in favor of existing shareholders shall not apply. Any restrictions under the law or the articles of association of the credit institution on the relationship between preference and common shares shall not apply.
The subscription price of the above-mentioned preference shares must reflect their fair or market commercial value, the latter being determined without taking into consideration the support or potential support of the credit institution by the Hellenic Republic, the HFSF or the Bank of Greece outside the framework of euro system actions. In order to calculate the above-mentioned value, the average of two evaluations from two independent auditing companies (conducted under commonly acceptable methods and criteria), will be taken into account. Such accounting companies shall be appointed by the HFSF and the credit institution, respectively. In case of divergence between the two valuations exceeding 10%, the value shall be finally determined by a third independent auditing company, which shall be appointed by a joint decision of the Minister of Finance and the Governor of the Bank of Greece. The evaluations must also comply with the relevant guidelines of the European Commission on similar valuations.
Repurchase of the Preference Shares: The preference shares issued upon the HFSF's provision of capital support shall be repurchased in their entirety by the applicant credit institution within five years, following approval by the Bank of Greece. The repurchase price shall be the higher of the issue price (plus any non-paid but due dividends) and the price at the time the decision to convene the general meeting of shareholders for the repurchase of the preference shares is made. This latter price is calculated pursuant to the valuation procedures described above. Partial repurchase of the preference shares is not permitted. The repurchase of the preference shares is conditional upon the approval of the Bank of Greece and is granted under the condition that the solvency and financial stability of the credit institution is not at risk. In case the five-year period lapses without the credit institution having repurchased the preference shares, a cumulative annual increase of 2% is imposed on the return of the preference shares.
Conversion of the Preference Shares to Ordinary Shares: The above mentioned preference shares are converted to ordinary transferrable shares upon decision of the HFSF following recommendation of the Bank of Greece if: (a) specific objectives of the business plan are not fulfilled including the
objective pertaining to the capital adequacy of the credit institution, or (b) the minimum required ratio for the credit institution's Core Tier I funds or the capital adequacy ratio under Greek legislation is not met.
The conversion price is determined at the time the capital support is provided on the basis of the issue price of the preference shares, as the latter is determined by the HFSF and the applicant credit institution, taking into account the valuations of the auditing companies on the fair or the market value of the shares. However, this determination does not take into account the support or potential support, of the credit institution by the HFSF, the Greek State or the Bank of Greece, with the exception of the euro system actions and the regulatory framework of the European Union and the practices followed by the European Commission in matters relating to state aid, as described above.
Rights of the Preference Shares: The preference shares are issued with voting rights at the General Meeting of the preference shareholders and provide the following privileges:
During the participation of the HFSF in the share capital of a credit institution, the buy back of treasury shares by such credit institution is prohibited without the HFSF's approval.
The Hellenic Republic's Bank Support Plan
In November 2008, the Greek Parliament passed Greek Law 3723/2008 setting forth a support plan for the liquidity of the Greek economy, or the "Hellenic Republic bank support plan" initially at the amount of EUR 28 billion and following increases thereof, at the amount of EUR 98 billion. 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. Recently, the Hellenic Republic bank support plan was revised by Greek Laws 3844/2010, 3845/2010, 3872/2010, 3956/2011, 3965/2011 and ministerial decisions no. 132624/B.527/2010, 29850/B.1465/2010 and 59181/B.2585/24.12.2010, which, respectively, increased the return on the preference shares of the first pillar referred to below, amended the payment of dividends prohibition, increased the total amount that can be provided by the Hellenic Republic under the second pillar referred to below, extended the veto power of the State's representative on the decisions of the Board of Directors, extended the duration of the plan until June 30, 2011 and increased the commission paid to the Hellenic Republic for Hellenic Republic guarantees provided for under the second pillar from July 1, 2010 onwards. In May 2011, the Hellenic Republic, in accordance with Law 3965/2011, approved an additional disbursement of EUR 30 billion in the form of Greek government guaranteed bonds, thereby increasing the second pillar of the Hellenic Republic bank support plan to EUR 85 billion.
The Hellenic Republic bank support plan, as currently applicable, is comprised of the following three pillars.
The First Pillar: up to EUR 5 billion in capital designed to increase Tier I ratios. The capital will take the form of non-transferable voting redeemable preference shares with a 10% fixed return. The shares are to be mandatorily redeemed at the subscription price either within five years after their issuance or earlier with the approval of the Bank of Greece. However, if the preference shares are not redeemed within five years from their issuance and if the participating bank's general meeting of shareholders has not approved their redemption, the Greek Minister of Finance will impose, pursuant to a recommendation by the Bank of Greece, a gradual cumulative increase of 2% per year on the 10% fixed return provided for during the first five years from the issuance of the shares to the Hellenic Republic. The issue price of the preference shares will be the nominal value of the common shares of the last issue of each bank. Pursuant to decision No. 54201/B2884/2008 of the Minister of Finance, as currently in force, the banks will be required to convert the preference shares into common shares or another class of shares if the redemption of the preference shares as described above is impossible, because the Tier I capital of those banks after such redemption would be less than the level set by the Bank of Greece. The conversion ratio will only be determined at the time of conversion and the full dilutive effect of any such conversion will therefore only be known at that time.
The Second Pillar: up to EUR 85 billion in Hellenic Republic guarantees in accordance with Law 3965/2011. These guarantees will guarantee new borrowings (excluding interbank deposits) to be concluded until June 30, 2011 (whether in the form of debt instruments or otherwise) and with a maturity of three months to three years. These guarantees will be granted to banks that meet the minimum capital adequacy requirements set by the Bank of Greece as well as criteria set forth in Decision No. 54201/B.2884 of the Minister of Finance, as currently in force, regarding capital adequacy, market share size and maturity of liabilities and share in the SME and mortgage lending market. The terms under which guarantees will be granted to financial institutions are included in Decision Nos. 2/5121/2009 and 29850/B.1465 of the Minister of Finance.
The Third Pillar: up to EUR 8 billion in debt instruments. These debt instruments will have maturities of less than three years and will be issued by the Public Debt Management Agency by
June 30, 2011 to participating banks meeting the minimum capital adequacy requirements set by the Bank of Greece. These debt instruments bear no interest, are issued at their nominal value in denominations of EUR 1,000,000 and are listed on the ATHEX. They are issued by virtue of bilateral agreements executed between each participating bank and the Hellenic Republic. The debt instruments must be repaid at the applicable termination date of the bilateral agreement (irrespective of the maturity date of the debt instruments) or at the date Greek Law 3723/2008 ceases to apply to a bank. The participating banks must use the debt instruments received only as collateral for refinancing, in connection with fixed facilities from the ECB or for interbank financing purposes. The proceeds of liquidation of such instruments must be used to finance mortgage loans and loans to SMEs at competitive terms.
Participating banks that use either the capital or guarantee facility will have to accept a government-appointed member of the Board of Director as State representative. Such representative will be in addition to the existing members of the Board of Directors and will have veto power on strategic decisions or decisions resulting to a significant change in legal or financial position of the Bank and for which the shareholders approval is required. The same veto power applies to corporate decisions relating to executives and senior management compensation and dividend policy. However, the State appointed representative may only utilize its veto power following a decision of the Minister of 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. Moreover, the State appointed representative has full access to the bank's books, on reports for restructuring and viability, medium term funding needs of the Bank as well as on reports for the level of financing of the Greek economy. In addition, participating banks will be required to limit maximum executive compensation 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 will be limited to up to 35% of distributable profits of the participating bank (at the parent company level). According to the provisions of article 28 of Greek Law 3756/2009 and decision 20708/B/1175/23.4.2009 of the Minister of Economy and Finance, banks participating in the Hellenic Republic bank support plan are allowed to distribute dividends to ordinary shareholders only in the form of shares, but excluding treasury shares, for the financial year ended on December 31, 2008. Also, pursuant to the provisions of article 39 of Greek Law 3844/2010, article 28 of Greek Law 3756/2009 was modified to provide that distributions to ordinary shareholders were restricted to share distributions (excluding treasury shares), for the financial years ended on December 31, 2008 and 2009. These provisions did not apply to the payments of dividends in respect of preference shares issued by credit institutions and traded on foreign organized markets. Additionally, in accordance with article 19 of Greek Law 3965/2011, for the financial year ended December 31, 2010, banks participating in the plan are allowed to distribute dividends only in the form of shares. However, these cannot be treasury shares. See Item 8.A, "Consolidated Statements and Other Financial InformationPolicy on Dividend Distributions".
Furthermore, participating banks are obliged not to pursue aggressive commercial strategies, such prohibited aggressive strategies to include advertising the support they receive from the plan in an attempt to successfully compete 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 during the implementation of such measures the mean growth rate of their assets on a yearly basis will not exceed the highest of the following ratios:
To monitor the implementation of the plan, Greek Law 3723/2008 provided for the establishment of a supervisory council (the "Council"). The Council is chaired by the Minister of Finance. Members will include the Governor of the Bank of Greece, the Deputy Minister of Finance, who is responsible for the Greek General Accounting Office, and the state representative at each of the participating banks. The Council convenes on a monthly basis with a mandate to supervise the correct and effective implementation of the plan and ensure that the resulting liquidity is 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, together 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 initially was February 1, 2009, but was subsequently extended to June 30, 2011.
The Bank agreed to participate in the plan at its inception although it believed that it had adequate liquidity and sound capital ratios. The Bank's main reasons for participating were:
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 EUR 5.00 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 support plan, Eurobank EFG and Alpha Bank increased their share capital by EUR 950 million, Piraeus Bank by EUR 370 million, and ATE Bank by EUR 675 million, the Hellenic Postal Savings Bank by EUR 225 million and Attica Bank by EUR 100 million. Emporiki Bank, a subsidiary of Credit Agricole S.A., has not utilized the facilities of the initial Hellenic Republic bank support plan but has proceeded with a share capital increase of EUR 850 million in 2009.
On May 3, 2010, the Greek parliament passed Greek Law 3844/2010 amending Greek Law 3723/2008 to render preference shares not mandatorily redeemable. However, if the preference shares are not redeemed within five years from their issuance and if the participating bank's general meeting of shareholders has not approved their redemption, the Greek Minister of Finance will impose, pursuant to a recommendation by the Bank of Greece, a gradual cumulative increase of 2% per year on the 10% fixed return provided for during the first five years from the issuance of the shares to the Hellenic Republic. Law 3844/2010 also extends the obligation not to distribute a cash dividend for profits relating to fiscal year 2009.
Under Greek law, interest rates applicable to bank loans are not subject to a legal maximum, but they must comply with certain requirements intended to ensure clarity and transparency, including with regard to their readjustments.
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 banks to grant to customers loans and credit that are secured over real estate and movable assets of the debtor (including cash).
Mortgage lending is extended mostly on the basis of mortgage pre-notations, which are less expensive and easier to record than mortgages and may be converted into full mortgages upon final non appealable court judgment.
Restrictions on the Use of Capital
The compulsory commitments framework of the Bank of Greece has been amended in line with Eurosystem regulations. Effective July 10, 2000, commitment ratios are determined by category of deposits to clients instead of a single ratio of 12% previously in force for commercial banks. The commitment ratio is 2% for all categories of deposits to clients comprising the commitment base, with the exception of the following categories to which a zero ratio applies:
This commitment ratio applies to all credit institutions.
Restrictions on Enforcement of Collateral
According to Greek Law 3814/2010, the forced auctions initiated either by credit institutions or by companies providing credit or by their assignees to satisfy claims not exceeding EUR 200,000 were suspended until and including June 30, 2010. Pursuant to Greek Law 3858/2010, and specifically under article 40, the above suspension has been initially extended until December 31, 2010. Moreover, pursuant to Greek Law 3949/2011 and specifically under article 1, the suspension has been further extended until June 30, 2011.
Guidelines for Capital Requirements
In June 2004 the Basel Committee issued a revised capital adequacy framework and, in November 2005, the Basel Committee issued its final proposals on capital standards, known as "Basel II". Basel II promotes the adoption of certain enhanced risk management practices. It introduces counterparty-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 an 8% own funds to risk-weighted asset ratio, the basic structure of the 1996 Amendment regarding the treatment of market risk and the definition of assets eligible for own capital purposes.
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 directs banks to establish an internal capital adequacy assessment process. This process takes into account market, credit and operational risks as well as other risks, including, but not limited to, liquidity risk, concentration risk, interest rate risk in the bank's investment portfolio, business risk and strategic risk.
The revised framework provides a range of options of escalated sophistication for the determination of the capital requirements for credit and operational risk. Various options allow banks and supervisors to select those approaches that are most appropriate for their own operations and the structure of their capital market. 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 the EU in June 2006 by means of EU Directives 2006/48 and 2006/49. These EU directives were transposed 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 Governor of the Bank of Greece issued ten Governor's Acts relating to the implementation of Basel II, which Governor's Acts took effect on 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:
Approval was granted by the relevant Bank of Greece authority in charge of bank supervision.
The Bank is in compliance with the Basel II regulations and consistently applies all relevant rules, guidelines and Bank of Greece Governor's Acts since January 1, 2008, at a Bank and 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 five 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 which led to the adoption of Directive 2009/111/EC of the European Parliament and of the Council, and Directives 2009/27/EC and 2009/83/EC as regards technical provisions concerning risk management. Greece adopted the new measures as from December 31, 2010.
A number of regulatory initiatives have recently been proposed or are expected to be applied shortly, which would significantly alter the Group's capital requirements. These initiatives include:
The changes relating to remuneration have already come into force and the changes relating to the trading book and re-securitization positions will come into force on December 31, 2011.
The European Commission has published several consultation and other policy documents indicating its intention to implement the Basel III standards throughout the EEA by way of further changes to the Directives 2006/48/EC and 2006/49/EC and/or additional regulations. It is currently anticipated that the initial legislative proposals will be published during 2011. The Commission's intention is that agreement be reached on the final form of legislation by the end of 2011, with implementation by banks being required by January 2013.
Other regulatory changes which may have potential impact on the business of NBG
In Europe, the US and elsewhere, there is increased political and regulatory pressure to introduce recovery and/or resolution planning requirements for banks and other financial institutions as a solution to the issues raised by financial institutions that are considered "Too Big To Fail". In 2011, the European Commission consulted on Technical Details of a Possible EU Framework for Bank Recovery and Resolution Proposal (the "EU Recovery and Resolution Proposal"). The EU Recovery and Resolution Proposal establishes a series of "resolution tools" which may be applied by the relevant authorities in seeking to ensure that the institution in question is able to continue as a going concern. Such tools include business sales, use of a bridge bank, asset separation of powers and possibly a form of "bail-in". If this proposal is implemented, it could have a material adverse effect on NBG and the cost and availability of funding for NBG.
Following the adoption of Basel II guidelines, the Governor of the Bank of Greece issued Act No. 2606/2008 determining the new reporting requirements for credit institutions in Greece. This Act was recently replaced by Act 2640/2011 applicable from December 31, 2010. The requirements include reports on the following:
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, while certain of the above references are submitted on a monthly basis at Bank level.
Banking regulations in Turkey are evolving in parallel to the global changes and international regulatory environment. Turkish regulator has announced the roadmap for Basel II and stated that starting from June 2011, the banks in Turkey will report their results according to both Basel I and Basel II; and after June 2012 only Basel II will be used. We also expect Serbia to fully adopt the Basel II framework from January 1, 2012, according to the announcement from December 3, 2011, issued by the Central Bank of Serbia. Therefore, testing reports are expected to be made as of September 30, 2011. Romania, Bulgaria and Cyprus, in their capacity as EU members, have already adopted the Basel II framework".
Deposit and Investment Guarantee Fund
Pursuant to Greek Law 3746/2009, which replaced Greek Law 2832/2000, the Hellenic Deposit and Investment Guarantee Fund (the "HDIGF") was established for the purposes of providing compensation (1) to persons who have deposited funds in bank accounts with credit institutions in the Hellenic Republic, and (2) to clients regarding the provision of investment services by such credit institutions, when the credit institutions cannot fulfill their obligations to the clients. All credit institutions established in the Hellenic Republic are obliged to participate in the compensation scheme available by virtue of the HDIGF. The HDIGF, which is a private entity, is administered jointly by the Bank of Greece, the Hellenic Bank Association, the Ministry of Finance and the Association of Greek Cooperative Banks.
The HDIGF is funded by annual contributions of participating credit institutions and cooperative banks. The level of each participant's annual contribution is generally determined according to certain percentages applied to the total amount of eligible deposits, as regards the deposit compensation scheme. If accumulated funds are not sufficient to cover the claimants, participants may be required to pay an additional contribution. However, this additional contribution may not exceed an amount equal to 300% of a bank's last annual contribution and is set off against the annual contributions of subsequent years. Following adverse market developments, and based on the resolutions of the meeting of "ECOFIN" on October 7, 2008, the coverage level was set to EUR 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
decision of the Minister of Finance. The proposed level of coverage extended to credit institution clients relating to the provision of investment services was set at EUR 30,000.
Settlement of business and corporate debts
Greek Law 3816/2010, passed in January 2010, allowed the settlement of amounts, which were either due (from January 1, 2005 onwards) or not due by businesses and professionals to credit institutions. To take advantage of the relevant provisions, an application must have been submitted by the debtor to the relevant bank by April 15, 2010.
In particular, the law provides, among other things, that:
Enforcement proceedings have been suspended until July 31, 2010, when an application has been submitted by the debtor.
Greek Law 3816/2010 also allows the settlement of debts from loans which are not yet due and the outstanding balance of which does not exceed EUR 350,000. The settlement arrangement may provide for a grace period of up to one year, with no interest and capital payment with a corresponding extension of the contractual term of the loan and capitalization of the interest at the end of the grace period, or two-year suspension of the capital payment with a corresponding extension of the contractual term of the loan and interest payment during the suspension period or an extension of the contractual term of the loan by three years. Additionally, loans or credits which become due between March 26, 2010 and June 30, 2011 are considered eligible for settlement under the Greek Law 3816/2010 subject to other requirements of the respective law. The law foresees interest payment based on the current rate in a period of five years (with no capital payment for the first year).
Given the fact that the Greek Law 3816/010 had very strict specifications and very limited duration, the Bank has also launched restructuring products with more favorable criteria than those specified in the said law.
One of the most important differences between the Greek Law 3816/2010 products and the Bank products is the fact that the Bank allows the reform of the total amount of the loan and not only the overdue amount. In addition, the Bank did not offer these products for a limited time but such products are still offered. As result, the majority of our restructured corporate portfolio comes from these products and not from the mandatory restructuring products specified by the law.
The Bank's products offer a two year capital freeze period where only interest payment can be received from the customer. The interest rate of the new restructured loan is the same with the one used in the old loan. A customer has the right to replace more than one loan (performing and delayed) with a new restructured loan. These products mainly relate to SBLs portfolio.
Settlement of amounts due by indebted individuals
On August 3, 2010, Greek Law 3869/2010 was put in force (Government's Gazette A, 130/3.8.2010) with respect to the "settlement of amounts due by indebted individuals". The law allows the settlement
of amounts, due to credit institutions by individuals evidencing permanent inability to repay their debts, by arranging the partial repayment of their debts for four years and writing off the remainder of their debts, provided the terms of settlement are agreed. All individuals, both consumers and professionals, are subject to the provisions of Greek Law 3869/2010, with the exception of individuals already subject to mercantile law.
The new regulatory regime allows the settlement of all amounts due to credit institutions (consumer, mortgage and commercial loans), as well as those due to third parties with the exception of debts from intentional torts, administrative fines, monetary sanctions, debts from taxes and charges due to the State or levies to Social Security funds.
Debts must have been contracted more than one year before the application date and relief may be used only once. In order to qualify for relief, the debtor must have proposed a voluntary settlement with creditors without success in the six months preceding the application. Banks must deliver a credit analysis within five working days from request.
The debtor may apply to the local Justice of the Peace Court (Eirinodikeio) and present evidence regarding the relevant property, income, debts and settlement proposal. Creditors' claims that have not been notified in such court are not affected. The debtor undertakes the obligation to pay part of its income to its creditors in monthly disbursements for a period of four years. The amount of the installment is determined by court based on the individual's income and after taking into consideration the life necessities of the debtor and his or her dependents. The court may also absolve the debtor from the obligation by imposing a monthly payment schedule and may even substantially reduce the monthly payment amounts in cases of exceptionally adverse conditions (e.g., unemployment or health problems), upon re-evaluation of the debtor's circumstances on a regular basis (although, not starting earlier than five months from the date of the original payment schedule). The debtor's property is liquidated but the debtor may exclude his main residence from the liquidation estate if the debtor undertakes the obligation to repay debts corresponding to 85% of the fair market value of his or her main residence at a competitive interest rate and with a potential grace period of up to 20 years.
If, following submission of an application by the debtor for debt settlement, any enforcement proceedings against his or her property are initiated or carried out, the court, upon the debtor's petition for injunction, may order the suspension of such enforcement proceedings until the debt settlement decision is released, provided that the court considers that the debtor will be subject to some debt settlement and that the enforcement proceedings will cause substantial harm to the debtor.
Regarding housing loans, the court may order the suspension of enforcement proceedings, if the loan agreement has not terminated or there are no debts due, whether or not any portion of the monthly installment payments have become due from the relevant loan decision date until the court's decision on the debt settlement. The court may take into account the debtor's income.
Due performance by the debtor of the obligations under the settlement plan releases the debtor from any remaining unpaid balance of the claims, including claims of creditors who had not announced their claims. On application by the debtor, the court certifies such release. If the debtor delays performance of the obligations under the settlement plan for more than three months or otherwise disputes the settlement plan, the court may order cancellation of the settlement plan, upon the application of any creditor submitted within four months of the breach. A cancellation has the effect of restoring the claims to the amount prior to ratification of the settlement plan, subject to deduction of any amount paid by the debtor.
The rights of creditors against co-borrowers or guarantors are not affected, unless such co-borrowers or guarantors are also subject to the same insolvency proceedings. Co-borrowers and guarantors have no rights of recourse against the debtor for any amount paid by them. The rights of secured creditors are not affected.
Within the six-month period commencing August 3, 2010 (the date of publication of Greek Law 3869/2010 in the Government Gazette), no enforcement is permitted over the debtor's only residence, as long as the latter does not exceed the specified "first home" tax allowance increased by 50%. Pursuant to Greek Law 3910/2011 and specifically under article 36, this period was extended until June 30, 2011.
Payment Services in the Internal Market
Directive 2007/64/EC setting out the conditions for the provision of payment has come into effect in Greece as of July 13, 2010, by Greek Law 3862/2010. The new law adopts rules on electronic payments that are currently applied uniformly across 30 European countries (i.e. in the countries of the European Union, Iceland, Norway and Liechtenstein), and accordingly ensures that the provision of payment services in Greece is as easy and secure as in the rest of Europe.
This new legislation establishes rules on terms of collaboration transparency, regulates in detail a minimum level of information that must be provided in an accessible form to the users of the payment services and renders the payments faster and more secure. Moreover, it sets out the rights and obligations of those who use or provide such services. It also permits to new entities called "payment institutions" (e.g. companies of money transfers, retailers, telecommunication companies) to provide payment services in parallel to banks as "payment services providers". The new law covers any kind of payment through electronic means, from transfer of credit and direct charge orders to payments through the use of cards (including credit cards), wire transfers and payments through the use of mobile phones and the internet, excluding payments with cash and checks. Payments in every European currency, not only Euros, are covered, under the condition that the payment service providers of both the payer and the payee are located in one of the 30 European countries.
Customers are provided, free of charge, in printed or electronic form, with the framework contract, that describes in detail the terms and conditions of the payment services, which are mandatory under the law and also apply to existing cooperation contracts and agreements between the Bank and its customers, insofar they include payment transactions, and prevail over any contrary agreement. Under the provisions of the new law, customers have the right to advance any objections they may have, within two months of being informed of the framework contract terms. In addition, if the customer does not wish to continue cooperating with the Bank, he is entitled, under the terms of the framework contract, to terminate, in writing, the said cooperation agreement. Furthermore if the customer wishes at some future date, despite having initially accepted the terms to terminate the framework contract for payment transactions, he may terminate it without charge, at any time, unless the parties have agreed on a period of notice, which may not, in any case, exceed one month.
Customers are provided with basic information needed before and after execution of the payment. Accordingly, customers can easily compare the terms and conditions offered and choose the best option for their needs. Charges are not imposed to customers for providing all mandatory required information as well as any information related to the corrective and preventive measures taken to ensure the proper execution of payment orders.
Customers are legally entitled to a refund in the following specific cases of payment transactions:
On June 23, 2010, Ministerial Decision Z1-699, which implemented the Council Directive 2008/48/EC, was put in force (Government's Gazette B, 917/23.06.2010). This Directive facilitates a well-functioning internal market in consumer credit and provides for a harmonized Community framework in a number of areas. The Decision Z1-699 does not apply to certain types of credit agreements, such as credit agreements involving amounts less than EUR 200 or more than EUR 75,000, credit agreements, under the terms of which the credit has to be repaid within three months and only insignificant charges are payable, credit agreements covering the granting of credit secured by real estate, credit agreements by the employer to the employees, lease or financial lease agreements when there is no obligation of the consumer to buy the leasehold.
This Decision contains specific provisions on advertising concerning credit agreements as well as certain items of standard information to be provided to consumers in order to enable them, in particular, to compare different offers. In order to enable them to make their decisions in full knowledge of the facts, consumers receive adequate information in a clear, concise and prominent way by means of a representative example, which they may take away and consider, prior to the conclusion of the credit agreement, on the conditions and cost of the credit and on their obligations, to ensure the fullest possible transparency and comparability of offers. Moreover creditors should exercise responsible practices during all phases of the credit relationship, taking into account the specific features of their credit market. Creditors also bear the responsibility of checking individually the creditworthiness of the consumers. Furthermore, consumers have the right to withdraw within 14 days without penalty and with no obligation to provide justification. In the case of linked credit agreements, a relationship of interdependence exists between the purchase of goods or services and the credit agreement concluded for that purpose. The consumer has the right to discharge his obligations before the date agreed in the credit agreement. In the case of early repayment, either in part or in full, the creditor is entitled to compensation for the costs directly linked to the early repayment, taking into account also any savings thereby made by the creditor.
Two new laws address and introduce important amendments to corporate legislation.
Greek Law 3884/2010, which incorporated into national law Directive 2007/36/EC, facilitates the exercise of shareholders' rights in general meetings of listed companies and accordingly provides for:
In addition to the above, Greek Law 3873/2010, which incorporated into Greek law Directives 2006/46/EC on annual and consolidated accounts and 2007/63/EC on the independent expert's report for the merger or division of public limited liability companies, determines that companies whose securities are traded in a regulated market must include a corporate governance statement in their annual report. Moreover, a corporate governance statement is now mandatory in the annual report of the Board of Directors which contains, among others, information on the corporate governance code and practices of the company, the main features of the company's internal control and risk management systems, information on the General Meetings of shareholders, the Board of Directors and other administrative, management and supervisory bodies of the company.
Furthermore, according to Greek Law 3873/2010, additional information must be included in the notes to the financial statements of companies, such as information on the nature and business purpose of arrangements which are not reflected in the balance sheet, the financial impact of those arrangements and information on transactions which have been entered into with related parties. The notes to the consolidated financial statements must also include a description of certain transactions with affiliated companies, save for intra-group transactions. Companies which prepare consolidated financial statements are also obliged to describe the company's internal control and risk management systems in the annual report of the Board of Directors.
The Board of Directors of the company has the duty to ensure that the annual accounts, the annual report and, when provided separately, the corporate governance statement to be provided pursuant to Article 43a par. 3 section d of Law 2190/1920 are drawn up and published in accordance with the requirements of Law 3873/2010 and, where applicable, in accordance with the international accounting standards adopted in accordance with Regulation (EC) No 1606/2002.
Moreover, according to the new provisions of Law 3873/2010 neither an examination of the draft terms of merger or division of companies nor an expert report shall be required if all the shareholders and the holders of other securities conferring the right to vote of each of the companies involved in the merger or division have so agreed.
Holdings in credit institutions
The Greek parliament has amended Greek Law 3601/2007 regarding disclosure requirements for shareholders of Greek credit institutions and insurance companies. The new Greek Law 3862/2010, effective July 13, 2010, introduces new provisions and approval procedures for certain sectors as well as minor changes to the evaluation procedure by BoG.
In summary, Law 3862/2010 stipulates the disclosure obligations for shareholders wishing to acquire or dispose of significant holdings, as well as the procedure for the pre-approval requirements for investors who wish to acquire shares and reach the threshold limits of 5%, 10%, 20%, and 1/3 or
50% of a credit institution, and 10%, 20%, and 1/3 or 50% of an insurance company registered in Greece. The Bank of Greece's approval process, the relevant timeframes as well as the notification process to/from relevant regulators of other European Union member states are also detailed.
If an investor intends to increase or dispose of shares to reach or fall under one of the threshold limits, he would have to inform BoG in advance of the intended participation, providing full details of the percentage to be acquired or disposed.
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.
The Greek Law 3691/2008, as amended, on the prevention and suppression of money laundering and terrorist funding implemented EU Council Directives 2005/60/EC and 2006/70/EC includes the following main provisions:
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.
Furthermore, the Bank of Greece, in light of the developments in transaction practices, and in the range of services and products offered by supervised institutions, has issued Decision No. 285/6/09.07.2009, which provides an updated indicative typology of unusual or suspicious transactions within the meaning of the Law 3691/2008.
In addition, the Bank of Greece issued Decision No. 290/12/11.11.2009 on the "Framework governing the imposition of administrative sanctions by the Bank of Greece on supervised institutions in accordance with Article 52 of Law 3691/2008, with the aim to specify the degree of importance of the individual obligations of institutions supervised by the Bank of Greece, their managers and staff, by type of obligation and the criteria for specifying the administrative sanctions to be imposed on the obligated persons, in cases of non-compliance with their obligations arising from the legislation in force.
Similarly, the Hellenic Capital Market Commission ("HCMC") pursuant to Law 3691/2008, as well as FATF's 40 Recommendations and 9 Special Recommendations, issued Decision 1/506/8.4.2009 on the prevention of the use of the financial system for the purpose of money laundering and financing terrorism and Circular 41 on the indicative typology of suspicious transactions relating to money laundering or terrorist financing.
In the insurance sector, the Private Insurance Supervisory Committee was dissolved and its competences were taken over by the Bank of Greece by the new Law 3867/2010. However, the previously adopted Rule No. 154/5A/31.08.2009, which aims at the prevention of the use of the financial system in Greece for the purpose of money laundering and financing terrorism in relation to: (1) life insurance activities (with the exception of life insurance activity type IV, i.e., accident, disease), (2) life insurance intermediation activities and (3) provision of investment related services, such as credit or financial products services in the Greek market, undertaken by Greek or foreign companies, remains in force.
Finally, FATF concluded in its interim evaluation of February 2011 that Greece resolved the remaining issues related to three particular recommendations and the effectiveness of supervision. As a result, FATF will conduct an on-site visit to confirm that the process of implementing the required reforms and actions is underway, to address deficiencies and will propose to make Greece again subject to regular (instead of reinforced) follow-up.
Equity Participation by Banks
Credit institutions must follow certain procedures regarding holdings in other companies. Under Greek Law 3601/2007, a credit institution may not have a qualifying holding exceeding 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 these 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.
To calculate these thresholds, the following shares or holdings are not taken into account:
The above thresholds or the time limit referred to in (b) above may be exceeded in exceptional cases and for a period of up to six months 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 own funds which are not taken into account for the calculation of the capital adequacy ratio.
According to the Act of the Governor of Bank of Greece No. 2604/2008, credit institutions must obtain the Bank of Greece's 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, real estate property management companies, asset and liability management companies, paying systems management companies, external credit assessment institutions and financial data collection and processing companies. 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 equivalence of their supervisory regime.
Prior approval by the Bank of Greece 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 3959/2011, as in force.
The Hellenic Capital Market Commission and the ATHEX must be notified once certain ownership thresholds are exceeded with respect to listed companies. See Item 9.C, "MarketsThe Athens Exchange (ATHEX)".
Our medium-term goal has been to become a large regional financial institution, a strategy which we have been implementing through measured, organic expansion combined with carefully considered strategic acquisitions, most notably our acquisition of Finansbank, the fifth largest private sector bank in Turkey. Our focus has been on high-growth countries in the region with traditional ties to Greece and a European orientation. Moreover, the recent international crisis has confirmed the prudence of the Bank's historically conservative approach to risk management as our subsidiaries in Turkey and SEE Europe have all emerged from their respective country's crisis, with the performance of Finansbank, our largest international subsidiary, particularly standing out. The main challenge currently is the Greek sovereign debt crisis, and its impact on the Bank's operations. In this regard, our strong liquidity position and capital base provide a strong advantage.
Our strategy for meeting the challenges of the crisis entails the following five pillars:
On January 18, 2011, NBG submitted a proposal to Alpha Bank A.E. for the merger of the two banks, citing significant economies of scale and synergies; this merger did not materialize.
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, 2010.