NATIONAL BANK OF GREECE SA 6-K 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Foreign Private Issuer
For the month of March 2007
National Bank of Greece S.A.
(Translation of registrants name into English)
86 Eolou Street, 10232 Athens, Greece
(Address of principal executive offices)
[Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F)
Form 20-F x Form 40-F o
[Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes o No x
[If Yes is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ]
NATIONAL BANK OF GREECE S.A.
for the financial year 2006
on the consolidated financial statements of National Bank of Greece
for the financial year 2006
2006 was a favorable year for the international economy, with global growth topping 5.1% mainly due to growth in the emerging economies of China and India, as well as the economies of the US and Japan. Likewise, there have been clear signs of growth in Europe. Within an environment of high oil prices, the monetary authorities around the world (some earlier, some later) proactively pushed up their interest rates in an effort to contain inflationary pressures without putting a brake on growth rates.
In the EU, GDP grew by 2.8% from 1.6% in 2005, while in the euro area growth was in the region of 2.8%, reflecting for the most part domestic consumption rather than net exports. The fiscal position of the member countries whose deficits exceeded the targets have improved thanks to the gradual reduction in the high deficits, thereby strengthening margins for further growth.
In Greece, the economy continued for yet another year to grow at rates well above the European average, reaching 4.2% as compared with 3.7% in 2005. This growth reflected both the increased domestic demand and a recovery in investments and exports of goods and services. The stronger domestic demand was boosted mainly by lower interest rates and rapid growth in household and business credit, with the average consumer price index dropping from 3.5% in 2005 to 3.2% in 2006. In the sphere of public finance, the deficit showed an improvement compared with the previous year, with the General Government deficit falling from 5.2% of GDP in 2005 to 2.6% in 2006, while the corresponding debt declined to 104.1% of GDP.
The favorable macroeconomic outlook for the country, together with the growth dynamic presented by the banking sector in Greece, is reflected in the high valuations of the major Greek banks, their robust capital adequacy and strong profitability. Thanks to the fast growth of the Greek economy and the expansion in household and business credit, Greek banks have moved beyond the domestic market and are broadening their activities in Southeast Europe, becoming key players in the region.
Over the past two years, the NBG Group has strengthened its position, implementing major restructuring while also forging a broader international profile, both in terms of its shareholder base and its business activities. The Bank aspires to become a strong financial group that will lead the banking market in the region of SE Europe, delivering superior value to its shareholders. The historic performance of 2006, with net profit after tax and minority interests reaching almost 1 billion, serves to vindicate the strategic choices of the Bank in Greece and the wider region.
Group net profit after tax and minority interests grew to 990.1 million in 2006, up 36.1% on the previous year. This figure includes 89.8 million profit of Finansbank, at a Group share of 55.7% for the 135 days from the completion of the acquisition of the majority shareholding on 18 August 2006 through to the end of the year. Finansbanks total profits over the same period amounted to 159.6 million. If Finansbank`s share and the one-off 100.6 million tax payment on the Banks reserves are excluded from the results, the Groups profitability in 2006 totals 1,007 million, up 38.4% on 2005. As a result of the Groups strong
profitability, return on equity in 2006 reached 28.7%. This performance puts the Group among the top of Greek and European banks in terms of return on equity.
The spectacular increase in profitability in 2006 reflects the dynamic growth posted across all sources of income and the ongoing reorganization and broadening of the Groups activities, which leads to a gradual decline in operating costs. As a result, the Groups core income grew by around 31.3%.
The main growth driver for the Groups core income has been the steadily strengthening interest income. Group net interest income in 2006 totalled approximately 2.1 billion, up 33.5% on the previous year. The momentum in interest income is reflected in the 10% growth posted in Q3 and Q4, pushing net interest income in 2006:Q4 to the level of 526 million, excluding Finansbank It is notable that, excluding Finansbank, net interest margin rose to a record high of 3.76% at the end of 2006:Q4 compared with 3.50% in Q3 and 3.16% for the whole previous year. This was due to the ongoing improvement in the asset mix and the dynamic growth in the Groups loan book, particularly retail.
Net commission income in 2006 rose to 548.2 million compared with 425.1 million in 2005, up 29.0% y-o-y. Although intense and generalized competition in Greece had an adverse impact on retail commissions, the positive contribution of other fees and commissions, particularly mutual fund commissions, more than offset the difference.
A key strategic objective of the Bank is to strengthen its position in the mutual funds market, particularly high value-added funds. In the face of adverse conditions, the Group managed to increase its market share in mutual funds overall to 29%, taking first place in the domestic market. Particularly encouraging was the increase in market share of equity and bond funds from 10.9% to 12.7% in 2006.
In 2006, insurance business posted a 6.0% improvement, rising to over 106 million. This reflects the structural changes in the Groups insurance operations, principally at Ethniki Insurance, and the more intensive marketing of insurance products to the large customer base of NBG via its extensive branch network.
Total Group lending amounted to 44.1 billion at the end of 2006, up 44.1% y-o-y. Over the same period retail lending posted spectacular growth of 37.0%, meaning that retail credit now accounts for 57.9% of total lending.
Mortgages surged by 29.9%,
with mortgages outstanding exceeding 15.3 billion at the end of the year and
corresponding to 34.8% of total Group lending. This result confirms the
supremacy of NBG in the local mortgage lending market where it enjoys a market
share of 24%. In 2006, disbursements of new mortgage loans exceeded 3.5
billion, of which 1.1 billion were disbursed in Q4, up
Consumer loans outstanding totalled 7.2 billion at the end of the year, up 51.4% y-o-y, playing a key role in the performance of commissions deriving from consumer credit, which grew by 33.0% during the year.
Substantial growth was also posted by Group lending to businesses and professionals, which reached to 21.5 billion at year end. A key role was played by domestic financing for professionals and businesses with turnover below 2.5 million and SMEs with turnover of 2.5-50 million that, after excluding Finansbank, reported impressive growth of 45% and 25% respectively. The corporate loan book topped 9.6 billion, up 10% y-o-y. Further growth in this loan book is planned by leveraging cross selling potential, with an emphasis on profitable categories of Project Finance and Cross Border Trade, tapping the synergies offered by corresponding specialized units at Finansbank.
The ratio of non-performing loans to the total loan book declined to 4.0%, from 4.7% in December 2005. NPLs after provisions for bad and doubtful debt today account for just 0.6% of the total loan book. The sound loan growth of recent years reflects ongoing discipline in implementing strict credit approval rules coupled with the adoption by the Group of state-of-the-art procedures and systems for controlling and managing credit risk.
Total Group deposits in 2006 grew by 22.8% to over 53 billion. Savings and sight deposits grew by 3.2% reaching 31 billion, while time deposits presented growth of over 80%. NBGs large market share of deposits gives it a strong competitive advantage since this facilitates the smooth financing of the Groups expanding activities and investment plans in Greece and the wider region.
Although lending continued to increase at a rapid pace, the fast growth in deposits in 2006 helped maintain the Groups balance-sheet leverage (ratio of loans to deposits) at the low level of 83% approximately.
Group operating costs grew by 19.7% on an annual basis, reflecting mainly the expansion of the Groups business in SE Europe and Turkey as well the increased staff expenditure due to the one-off cost of voluntary early retirement programmes at various Group subsidiaries and the cost of compliance with Basel II rules and the Sarbanes-Oxley Act. The Groups efficiency (cost/income) ratio, excluding Finansbank, stood at 50.3%, improved by 3 percentage points on the previous year, reflecting the emphasis that has been placed on keeping operating costs on a tight rein.
The NBG Group in SE Europe
Despite the considerable cost of expanding Group business in SE Europe, all our units made substantial improvements in their profits. In 2006, Group net profit after tax in SE Europe grew by approximately 57% over the previous years results. The key driver behind growth in the region was business in Bulgaria and Romania via the local subsidiaries United Bulgarian Bank and Banca Romaneasca, as well as expansion into the Serbian market with the acquisition of Vojvodjanska Banka.
At the beginning of the year, the NBG Group completed its acquisition of Alpha Insurance Romania from the Alpha Bank Group, thereby broadening its presence in the insurance market of Romania. The company was renamed NBG Asigurari S.A. and has signed a cooperation agreement with Alpha Bank Romania for the next five years.
Exploiting the strong position enjoyed by United Bulgarian Bank, the Group set up life insurance and general insurance companies in Bulgaria, with Ethniki Insurance teaming up with American International Group Inc. (AIG).
NBG strengthened its position in the Serbian market with the acquisition of Vojvodjanska Banka. Vojvodjanska is the sixth largest Serbian bank in terms of assets, and runs the second largest branch network in the country. Following this acquisition, NBGs market share in the Serbian market stands at around 8% vis-à-vis deposits and 6% vis-à-vis loans, thus ranking it among the top banks in the country.
With the addition of Vojvodanskas 168 units plus the opening of 95 new branches by other SE Europe subsidiaries, the Group now runs a total of 520 fully functional branches, almost the same as the Banks network in Greece. Group lending in the region grew by a robust 44.0% in 2006 to 3.1 billion. Yet again, retail banking led the way, with the total retail loan book expanding at the impressive rate of 52% annually. It is particularly encouraging that over the course of the year the expanding loan book has been accompanied by a relative decline in non-performing debt to a ratio of less than 4%.
Acquisition of Finansbank
For National Bank, the expansion of its activities into Turkey is an integral part of its overall strategy, and has been vindicated by the strong performance of Finansbank, which was consolidated by the NBG Group for the first time. The net profit of the Finansbank Group for the 135 days between the signing of the acquisition agreement and the end of the year totalled 159.6 million. The profit corresponding to NBG on the basis of the consolidation ratio (55.7%) prior to the recent public tender offer to minority shareholders amounted to 89.8 million. Note that 43.4% of the minority shareholders responded positively to the public tender offer, which was completed recently, thus bringing the NBG Groups total stake in Finansbank to 89.4%. This strong performance by Finansbank reflects the dynamic course of its business, with retail banking comprising the principal lever for growth. At the same time, the banks network is expanding fast.
In 2006, 101 new branches opened, 45 of these from August onwards, thus bringing the total number of Finansbank branches to 309 at 31 December 2006.
The Group operates in a fast growing and changing environment and acknowledges its exposure to banking risks as well the need for effective risk management. Risk management and control consist an integral part of the Groups commitment to providing continuous and high quality returns to shareholder.
To this effect, the Group has developed an overall strategic direction, addressing the core issues regarding its fundamental attitude towards risk and risk management, driven by business objectives and targeting the creation of shareholder value.
Particularly, the Group Risk Strategy:
· Lays the foundation on which the Group builds its risk culture, terminology, policies and procedures;
· Describes the Groups risk management governance structure within a framework of three lines of defence (risk-taking units, Group Risk Management unit, Group Internal Audit unit);
· Defines the Groups risk management principles;
· Defines the Groups risk appetite and profile, as well as its risk-bearing capacity.
During 2006, the Group achieved significant progress on the implementation of the Basel II programme. The programme targets both the Groups compliance with the new capital adequacy regulatory requirements and, further, the enhancement of risk and capital management capabilities. The Basel II programme currently consists of 140 projects, which are expected to exceed 200 after the incorporation of Finansbank and Vojvodjanska Banka.
The Group pays particular attention to implement the highest standards of credit risk management and control. Credit risk arises from an obligors (or group of obligors) failure to meet the terms of any contract established with NBG or NBGs subsidiary. The Group employs credit risk rating systems, which are especially designed to meet the specific characteristics of its various loan exposures (e.g. the Moodys Risk Advisor for the corporate loans portfolio, internal rating models for the retail loans portfolio etc.). The objective for using a credit risk rating system is to appropriately classify an obligor to a particular credit rating class and then to estimate the parameters of expected and unexpected loss, with the ultimate goal of protecting the profitability and the capital of the Group. The protection against credit risk is achieved through:
· The application of maximum limits for exposures to a particular obligor, a group of associated obligors, obligors that belong in the same economic sector etc.;
· The use of credit risk mitigation techniques (collaterals, guarantees);
· The incorporation of risk metrics in the pricing of products and services;
· The use of contemporary financial techniques for hedging credit risk.
To effectively measure market risk, which is the risk of loss attributed to adverse changes in market driven factors such as the foreign exchange rates, the interest rates, the equity prices and the prices of derivative products, the Group applies the Value at Risk (VaR) model taking into account the sum of all trading and available for sale (AFS) positions in all currencies. The Group has established a framework of VaR limits in order to control and manage more efficiently the risks to which it is exposed, capturing both the individual risk factors (interest rates, foreign exchange rates, equity price risk) and the total level of market risk exposure.
A particular section of the Basel II programme refers to the development and the implementation of an integrated operational risk management framework, in accordance with the new regulatory requirements and the international best practices. During the year 2006, NBG completed the development of:
· The operational risk strategy, policies and methodologies;
· A pilot implementation of the new framework at NBG level;
· The timeline for the gradual implementation of the framework to all Group activities.
Liquidity and interest rate risk
Furthermore, the Group systematically estimates and manages interest rate risk in the loan book as well as the liquidity risk, through:
· The analysis of repricing and liquidity gaps arising from its balance sheet structure;
· The measurement of balance sheet and net interest income sensitivity to possible and less possible shifts in the yield curves and
· The establishment of relevant limits.
The Group manages actively its capital base by taking advantage of the contemporary means for raising capital, with the objective to sustain its high capital adequacy ratios and, at the same time, to improve the weighted average cost of capital to the benefit of its shareholders. In this light, the Group has issued hybrid capital instruments as well as subordinated debt, eligible for inclusion in the regulatory capital base of the Group. The Total and the Tier I Capital Adequacy Ratios on 31.12.2006 stood at 15.6% and 12.4% respectively, comparing to 15.2% and 12.3% in 2005. The Groups Capital Adequacy Ratios stand at a significantly higher level to the minimum regulatory limits that have been established by the Bank of Greece (8% and 4% for the Total and the Tier I Capital Adequacy Ratio respectively).
NBG has embraced all international and Greek rules for corporate governance at Board level and runs Audit, Human Resources and Corporate Governance Committees. In December 2006, the Banks Board of Directors approved a Code of Conduct for the Bank and its Group. The newly formed Group Compliance Division is responsible for monitoring the implementation of the Code of Conduct. Also in 2006, the Bank activated all the procedures to meet Sarbanes-Oxley Act, as required by the Securities and Exchange Commission (SEC) of US.
Given the positive picture presented by the Groups profitability, the Banks Board of Directors proposes to the Annual General Meeting of Shareholders that 1 dividend per share be distributed, totalling 475 million comparing with 339 million in 2005, up 40% y-o-y. This amount will result from current and prior years results (374.2 million) and taxed reserves (100.8 million). On the basis of the closing price of the share at 31 December 2006, this figure represents a dividend yield of 2.9%.
Recognizing the crucial contribution of the staff in achieving these results and wishing to reward effort and efficiency, the Banks Board of Directors intends to propose to the Annual General Meeting of Shareholders that 32 million of the profit be distributed to the staff of the Bank. A further amount of 19 million will be distributed by the Banks subsidiary companies in Greece and abroad to their staff, raising the total distribution of profit to Group staff to 51 million, or 5% of net Group profit.
In November 2006, the Banks Board of Directors activated its Stock Options Programme for the staff of the Bank and its subsidiaries as approved by the General Meeting of Shareholders last year. In line with the Programme, Management approved the issue of 2,992,620 stock options for officers and staff of the Bank
strictly on the basis of merit. The aim of the Programme is to link, on a long-term basis, pay with Group performance, as well as to enhance the value delivered to the Banks shareholders.
To the Annual General Meeting of Shareholders
Of National Bank of Greece
pursuant to article 11a of Law 3371/2005
Pursuant to article 30 of Law 3461/106 A/30-5-2006 aligning national legislation with European Council Directive 2004/25/EC, article 11a was included in Law 3371/2005, which states that listed companies must submit a supplementary report to the General Meeting of Shareholders providing detailed information on specific issues. This Board of Directors report to the General Meeting of Shareholders contains the additional information required by article 11a of Law 3371/2005.
A) Share capital structure
NBGs share capital amounts to 2,376,436,095 divided into 475,287,219 ordinary registered shares with voting rights, of a par value of 5.00 each NBG shares are listed for trading on the Athens Exchange (ATHEX).
NBG shareholders rights issuing from its share depend on the share capital portion that corresponds to the paid up value of their shares. Each share embodies all the rights and obligations provided for by law and the companys Articles of Association. Specifically:
· The right to participate in and vote at the General Meeting of Shareholders.
· The right to a dividend from the Banks profit for the year ended, or from liquidation, which amounts to 35% of the net profit following allocation of statutory reserves, or 6% of the paid-up capital (whichever is higher). This is annually distributed to shareholders as first dividend, whereas distribution of supplementary dividend is subject to General Meeting resolution. Entitled to a dividend are shareholders whose names appear in the Register of NBGs Shareholders on the date the dividend beneficiaries are determined, and a dividend on each share owned by them is paid within 2 months of the date of the General Meeting of Shareholders that approved the Banks annual financial statements. The dividend payment method and place are announced in the press. After the lapse of five (5) years from the end of the year in which the General Meeting approved the dividend, the right to collect the dividend expires and the corresponding amount is forfeited in favor of the Greek state.
· The preemptive right to each share capital increase in cash and issue of new shares.
· The right to receive a copy of the Banks financial statements and of the chartered auditors report and the Board of Directors report.
· The General Meeting of Shareholders maintains all of its rights during liquidation proceedings (pursuant to Article 38 of the Banks Articles of Association).
Shareholders liability is limited to the nominal value of the shares owned by them.
B) Restrictions on transfers of shares
Transfers of the Banks shares are carried out as prescribed by law and are not subject to any restrictions pursuant to the Banks Articles of Association.
C) Significant direct and indirect holdings as per PD 51/1992
There are no significant direct or indirect holdings as per PD 51/1992, i.e. of a direct or indirect participation percentage higher than 5% of the aggregate number of the Banks shares.
D) Shares with special control rights
There are no shares with special control rights.
E) Restrictions to voting rights
There are no restrictions on voting rights issuing from the shares pursuant to the Banks Articles of Association.
F) NBG Shareholders agreements
To the Banks knowledge there are no shareholders agreements pursuant to which restrictions apply to transfers of, or to the exercise of voting rights issuing from, the Banks shares.
G) Rules regarding the appointment and replacement of Board members and amendments to Articles of Association
The provisions of the Banks Articles of Association regarding the appointment and replacement of members of the Board of Directors and amendments to the Articles of Association are the same as the corresponding provisions of the Companies Act 2190/1920.
H) Board of Directors authority for the issue of new shares or the purchase of own shares
1) Pursuant to the provisions of Companies Act 2190/1920 Article 13 par. 1(b), by General Meeting resolution, subject to the publication requirements provided for under Companies Act 2190/1920 Article 7b, the Board of Directors can increase the Banks share capital through the issue of new shares by resolution adopted on a two-third-majority basis. In that case, pursuant to Article 5 of the Banks Articles of Association the Banks share capital may increase up to the amount of capital paid up as at the date the Board of Directors is authorized to do so by the General Meeting. The said authorization may be renewed, each time for a period of up to 5 years.
2) In accordance with Companies Act 2190/1920 Article 13 par. 9, pursuant to a General Meeting resolution a Stock Options Programme may be launched for the management and the staff in the form of options to acquire shares of the Bank as per the terms of the resolution. The General Meeting resolution determines the maximum number of shares to be issued if the beneficiaries stock options are exercised, which by law cannot exceed 1/10 of the Banks existing shares, as well as the purchase price and the terms of allocation of the shares to the beneficiaries.
Other details not provided for otherwise under the General Meeting resolution are determined by resolution of the Board of Directors, which provides for the issue of the stock option certificates, in December of each year issues the shares to the beneficiaries who have exercised their options, increasing the Banks share capital accordingly and certifying the said increase.
Pursuant to the said provisions, on 22 June 2005 the General Meeting approved a stock options programme for executive members of the Board of Directors, senior management, and the staff of the Group. The programme (as amended by the second repeat General Meeting of 1 June 2006) is of 5-year duration, expiring 2010. The stock options may be granted one-off or in parts, at the discretion of the Board, at any time. The maximum number of shares to be issued on the basis of the said programme is 3.5 million. The options exercise price was determined within the range of 5 and 70% of the average stock market price of the share in the period from January 1 of the year in which the stock options were granted through the first day of their exercise.
In November 2006, the Banks Board of Directors approved the issue of 2,992,620 stock options, and the exercise price was set at 23.8 per share. During the first options exercise period (6-15 December 2006), 310,043 options were exercised and the aggregate amount paid was 7,379,023. Subsequently, at its
meeting of 27 December 2006 the Board decided to increase the Banks share capital by 1,550,215 through the issue of 310,043 new registered voting shares of a par value of 5.00 each, and the amount of 5,828,808.40 was transferred and credited to the share premium account. As expressly provided for under Companies Act 2190/1920 Article 13 par. 9, the said share capital increase does not constitute an amendment to the Articles of Association.
By resolution of the Banks second repeat General Meeting of 1 June 2006, a new stock options programme was approved at Group level. The new programme, of 5-year duration and expiring 2011, provides for the issue of a maximum of 3.5 ordinary registered shares to be allocated to Board members, officers and staff of the Group, at a purchase price within the range between the par value (currently 5) and 70% of the average stock market price of the share from the date after the General Meeting (2 June 2006) until the first day of the exercise of the beneficiaries options. No options under the said programme have yet been exercised.
3) In accordance with Companies Act 2190/1920 Article 16 par. 5-13, pursuant to a General Meeting resolution companies listed on the ATHEX may purchase up to 10% of their own shares (treasury shares) via ATHEX to support the stock market price of their share, subject to the specific terms and procedures provided for under the Article. On 27 April 2006, the Annual General Meeting, utilizing the said option afforded by law, decided to purchase, from 2 May 2006 until 27 April 2007, up to 10% treasury shares via the ATHEX at a purchase price of between 5 and 60.
I) Significant agreements that come into effect, are modified or terminated in the event of a change in control following a public offering
There are no agreements that shall come into effect, be modified or terminated in the event of a change in control of the Bank following a public offering.
J) Agreements with Board members or officers of the Bank
In the case of the executive members of the Board of Directors and the highly ranked officers, the Bank reserves the right for groundless termination of their employment contracts by paying specific levels of compensation. The compensation may reflect the entitled salaries for the remaining period of the contract.
For the Banks Board of Directors
NATIONAL BANK OF GREECE S.A.
Consolidated Financial Statements
31 December 2006
In accordance with
International Financial Reporting Standards
Table of Contents
INDEPENDENT AUDITORS REPORT
To the Shareholders of the NATIONAL BANK OF GREECE S.A.
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of National Bank of Greece S.A. (the Bank) and its subsidiaries (on a consolidated basis the Group), which comprise the consolidated balance sheet as of 31 December 2006, and the consolidated income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.
We did not audit the financial statements of Finansbank Anonim Sirketi (a consolidated subsidiary acquired by the Bank on 18 August 2006) and its subsidiaries for the period from acquisition to 31 December 2006, which statements reflect total assets and total revenues constituting 13.78% and 12.17%, respectively, of the related consolidated totals for the year ended 31 December 2006. Those statements were audited by KPMG Akis Bagimsiz Denetim ve Serbest Muhasebeci Mali Müsavirlik AS, the Turkish member firm of KPMG International, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Finansbank Anonim Sirketi and its subsidiaries for the period from acquisition to 31 December 2006, is based solely on the report of KPMG Akis Bagimsiz Denetim ve Serbest Muhasebeci Mali Müsavirlik AS, the Turkish member firm of KPMG International.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the Greek Auditing Standards which are harmonised with the International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained and the report of KPMG Akis Bagimsiz Denetim ve Serbest Muhasebeci Mali Müsavirlik AS, the Turkish member firm of KPMG International, are sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, based on our audit and the report of KPMG Akis Bagimsiz Denetim ve Serbest Muhasebeci Mali Müsavirlik AS, the Turkish member firm of KPMG International, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2006, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as these were adopted by the European Union.
Report on Other Legal and Regulatory Requirements
The content of the Directors Report is consistent with the above consolidated financial statements.
Athens, 20 March 2007
The Certified Public Accountant Auditor
Nikolaos C. Sofianos
Consolidated Income Statement
Athens, 15 March 2007
The notes on pages 9 to 77 form an integral part of these consolidated financial statements
Consolidated Balance Sheet
Athens, 15 March 2007
The notes on pages 9 to 77 form an integral part of these consolidated financial statements
Consolidated Statement of Changes in Equity
Detailed analysis of the changes in equity is presented in notes 42 to 45 of these consolidated financial statements
The notes on pages 9 to 77 form an integral part of these consolidated financial statements
Consolidated Cash Flow Statement
The notes on pages 9 to 77 form an integral part of these consolidated financial statements
Notes to the Consolidated Financial Statements
NOTE 1: General Information
National Bank of Greece S.A. (hereinafter the Bank) was founded in 1841 and has been listed on the Athens Stock Exchange since 1880. The Bank has further listing in the New York Stock Exchange (since 1999), and in other major European stock exchanges. The Banks headquarters are located at 86 Eolou Street, (Reg. 6062/06/B/86/01), tel.: (+30) 210 334 1000. By resolution of the Board of Directors the Bank can establish branches, agencies and correspondence offices in Greece and abroad. In its 166 years of operation the Bank has expanded on its commercial banking business by entering into related business areas. National Bank of Greece and its subsidiaries (hereinafter the Group) provide a wide range of financial services including retail and commercial banking, asset management, brokerage, investment banking, insurance and real estate on a global level. The Group operates primarily in Greece, but also has operations in UK, SE Europe, Cyprus, Egypt, South Africa and recently in 2006 in Turkey.
The Board of Directors consists of the following members:
Directors are elected by the shareholders at their general meeting for a term of three years and may be re-elected. The term of the above members expires in 2007. On 30 August 2006, the employees representative, Mr. A. Mylonopoulos was elected as a non-executive BoD member in the position vacated by the resignation of Mr. G. Athanasopoulos. On 21 February 2007, Mr A. Stavrou was elected as a non-executive BoD member in the position of the deceased I. Vartholomeos. Furthermore, on 15 March 2007, Mr. G. Mergos was elected as a non-executive BoD member in the position of Mr A. Stavrou.
These consolidated financial statements have been approved for issue by the Banks Board of Directors on 15 March 2007 and are subject to the approval by the Banks shareholders at the Annual General Meeting.
NOTE 2: Summary of significant accounting policies
The consolidated financial statements of the Group (the financial statements) are prepared in accordance with International Financial Reporting Standards and International Accounting Standards (collectively, IFRS), and are stated in Euro, rounded to the nearest thousand (unless otherwise stated). The financial statements have been prepared under the historical cost convention as modified by the revaluation of available for sale investment securities, financial assets and liabilities at fair value through profit and loss and all derivative contracts measured at fair value.
The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Use of available information and application of judgment are inherent in the formation of estimates in the following areas: valuation of OTC derivatives, unlisted securities, retirement benefits obligation, insurance reserves, impairment of loans and receivables, liabilities from open tax years and contingencies from litigation. Actual results in the future could differ from such estimates and the differences may be material to the financial statements.
The Group adopted the requirements of IFRS for the first time for the purpose of preparing financial statements for the year ending 31 December 2005. Newly acquired subsidiaries that prior to their acquisition by the Group had been preparing their financial statements under local accounting principles (GAAPs), prepared their first IFRS financial statements for consolidation purposes by the Group, according to the IFRS 1 First Time Adoption of IFRS.
New standards, amendments and interpretations to existing standards effective in 2006
The following standards and interpretations are mandatory for the accounting periods beginning on or after 1 January 2006:
- IAS 19 (Amendment), Employee Benefits (effective from 1 January 2006). This amendment introduces the option of an alternative recognition approach for actuarial gains and losses. It may impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. The Group has not changed its accounting policy for the recognition of actuarial gains and losses and has not participated in any multi-employer plans.
- IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions (effective from 1 January 2006). The amendment allows the foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item in the consolidated financial statements, provided that: (a) the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction; and (b) the foreign currency risk will affect consolidated profit or loss. This amendment had a limited impact on the consolidated financial statements as of 31 December 2006.
- IAS 39 (Amendment), The Fair Value Option (effective from 1 January 2006). This amendment changes the definition of financial instruments classified at fair value through profit or loss and restricts the ability to designate financial instruments as part of this category. The Group has decided to apply this amendment for the annual period beginning 1 January 2005 (early adoption).
- IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts (effective from 1 January 2006). This amendment requires issued financial guarantees, other than those previously asserted by the entity to be insurance contracts, to be initially recognised at their fair value and subsequently measured at the higher of: (a) the unamortized balance of the related fees received and deferred, and (b) the expenditure required to settle the commitment at the balance sheet date. This amendment did not have a significant impact on the Groups financial position.
- IAS 21 (Amendment) The effect of changes in foreign exchange rates. This amendment requires that when a monetary item forms part of a reporting entitys net investment in a foreign operation and is denominated in a currency other than the functional currency of either the reporting entity or the foreign operation, the exchange differences that arise in the individual financial statements of both companies are reclassified to equity upon consolidation. This amendment did not have a significant impact on the Groups financial position.
- IFRIC 4, Determining whether an Arrangement contains a Lease (effective from 1 January 2006). IFRIC 4 requires the determination of whether an arrangement is or contains a lease to be based on the substance of the arrangement. It requires an assessment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets (the asset); and (b) the arrangement conveys a right to use the asset. This amendment did not have a significant impact on the Groups financial position.
The new standards, amendments and interpretations to existing standards that are mandatory for the Groups accounting periods beginning on or after 1 January 2007 are as follows:
- IFRS 7, Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements Capital Disclosures (effective from 1 January 2007). IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. The amendment to IAS 1 introduces disclosures about the level of an entitys capital and how it manages capital. The Group assessed the impact of IFRS 7 and the amendment to IAS 1 and concluded that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by the amendment of IAS 1. The Group intends to apply IFRS 7 and the amendment to IAS 1 from annual periods beginning 1 January 2007.
- IFRS 8 Operating Segments (effective from 1 January 2009). This standard changes the way the segment information is measured and disclosed and requires identification of operating segments on the basis of internal reports that are regularly reviewed by the entitys chief operating decision maker in order to allocate resources to the segments and to assess performance. The Group has decided to apply this standard for the annual period beginning on 1 January 2009, however there will be no significant impact on the Groups financial reporting.
- IFRIC 8, Scope of IFRS 2 (effective for annual periods beginning on or after 1 May 2006). IFRIC 8 clarifies that IFRS 2 Share based payment will apply to any arrangement when equity instruments are granted or liabilities are incurred by the entity, when the identifiable consideration appears to be less than the fair value of the instruments given. It presumes that such cases are an indication that other consideration has been or will be received. The Group will apply this IFRIC from 2007, and its adoption will have no or insignificant impact on its financial statements.
- IFRIC 9, Reassessment of Embedded Derivatives (effective for annual periods beginning on or after 1 June 2006). IFRIC 9 requires an entity to assess whether a contract contains an embedded derivative at the date the entity first becomes a party to the contract and prohibits reassessment unless there is as change to the contract that significantly modifies the cash flows. The Group will apply this IFRIC from 2007 and its adoption will have no significant impact on its financial statements.
- IFRIC 10, Interim Financial Reporting and Impairment (effective for annual periods beginning on or after 1 November 2006). IFRIC 10 addresses an inconsistency between IAS 34 Interim Financial Reporting and the impairment relating to goodwill in IAS 36 Impairment of Assets and equity instruments classified as available for sale in IAS 39 Financial Instruments: Recognition and Measurement. This interpretation states that the specific requirements of IAS 36 and IAS 39 take precedence over the general requirements of IAS 34 and therefore, any impairment loss recognised for these assets in an interim period may not be reversed in subsequent periods. The Group will apply this IFRIC from 2007.
- IFRIC 11, IFRS 2 Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007). This IFRIC requires arrangements whereby an employee is granted rights to an entitys equity instruments to be accounted for as an equity-settled scheme by the entity even if:
· The entity chooses or is required to buy those equity instruments (e.g. treasury shares) from another party, or
· The shareholder(s) of the entity provide the equity instruments required
The Interpretation also extends to the way in which subsidiaries, in their separate financial statements, account for schemes when their employees receive rights to equity instruments of the parent. In particular, it prescribes that:
· When the parent grants rights to equity instruments to the employees, they will be accounted for as equity settled scheme (as an equity contribution to the parent) when the parent accounts for it this way in the consolidated financial statements. When employees transfer between subsidiaries, each entity recognises compensation expense based on the proportion of the total vesting period for which the employee has worked for that subsidiary, measured at the fair value at the original grant date by the parent.
· When the subsidiary grants rights to equity instruments of its parent to its employees, it will be accounted for as a cash-settled scheme.
The Group will apply this IFRIC from 2008 however its adoption will have no significant impact on the Groups financial statements.
- IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008). The Group will apply this IFRIC from 2008 and is currently evaluating its impact on the Groups financial reporting.
2.3 Group accounts
Business combinations: All acquisitions are accounted for using the purchase method of accounting as set out in IFRS 3 from the date on which the Group effectively obtains control of the acquiree. The Group has incorporated into its income statement the results of operations of the acquiree and has also recognised in the balance sheet the assets and assumed the liabilities and contingent liabilities of the acquiree as well as any goodwill arising on the acquisition. Acquisitions are accounted for at cost, being the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for the control of the acquiree plus any costs directly attributable to the acquisition. For the allocation of the cost of acquisition, all recognised assets and liabilities are measured at their fair values as at the date of acquisition and any minority interests are stated at the minoritys proportion of the fair values of the assets and liabilities recognised in accordance with IFRS 3.
The consolidated financial statements combine the financial statements of the Bank and all its subsidiaries, including certain special purpose entities where appropriate.
Business combinations achieved in stages: When the Group obtains control over a subsidiary in successive share purchases i.e. step acquisition, each significant transaction is accounted for separately and the identifiable assets, liabilities and contingent liabilities acquired are stated at their fair value at the acquisition date which is the date when the control is obtained.
As with an acquisition achieved in a single transaction, minority interest is measured at the minoritys proportion of the net fair value of the identifiable assets, liabilities and contingent liabilities. Any share of the identifiable assets, liabilities and contingent liabilities acquired in previous transactions is revalued. The revaluation is calculated as the difference between the fair value of assets in excess of book values by the share portion previously acquired. This adjustment is recorded directly in equity and does not constitute a change in accounting policy.
Further acquisition after control is obtained: Changes in the parents ownership interest in a subsidiary after control is obtained that do not result in a loss of control are accounted for as transactions between equity holders in their capacity as equity holders. No gain or loss is recognised in income statement on such changes. The carrying amount of the non-controlling interest is adjusted to reflect the change in the parents interest in the subsidiarys net assets. Any difference between the amount by which the non-controlling interest is so adjusted and the fair value of the consideration paid or received, if any, is recognised directly in equity and attributed to equity holders of the parent. (Ref: par 30A Exposure Draft of Proposed Amendments to IAS 27 Consolidated and Separate Financial Statements). Legal mergers between entities under common control are also accounted for using the above method. Effective date of such transactions is considered the balance sheet as at the merger date.
Put options on minority interests
The Group has occasionally entered into arrangements as part of a business combination whereby the Group is committed to acquire the shares held by the minority interest in a subsidiary or whereby a minority interest holder can put its shares to the Group. In such cases, IAS 32 Financial Instruments: Disclosure and Presentation requires, in the consolidated financial statements, the put option to be accounted for as a liability. The recognition of the liability results in accounting as if the puttable instrument has already been exercised. Therefore, no minority interest is recognised for reporting purposes. The liability is measured at fair value, using different valuation techniques based on best estimates available to the management of the Group. The difference (if any), between the fair value of the liability and the legal minority interests share of net assets is recognised as part of the goodwill. Subsequent changes to the valuation of the put option will be recorded as changes to the liability and to goodwill, without any direct impact on the consolidated income statement.
Although there is no clear guidance in IFRS 3 on Business combinations and IAS 32 on Financial Instruments on how such options must be accounted for, and no specific IFRIC guidance has yet issued, the Group applies the provisions of IAS 32.23 while waiting for an interpretation from IASB and IFRIC.
Subsidiary undertakings: Subsidiary undertakings, which are those companies in which the Group directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to exercise control over their financial and operating policies, have been fully consolidated. Subsidiaries are consolidated from the date on which effective control is transferred to the Group and are no longer consolidated from the date that control ceases. All intra-group transactions, balances and unrealised surpluses and deficits on transactions between Group companies are eliminated on consolidation. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group.
Associated undertakings: Investments in associates are accounted for by applying the equity method of accounting. These are undertakings over which the Group has between 20% and 50% of the voting rights, and over which the Group exercises significant influence, but which it does not control. Impairment charges are recognised for other than temporary declines in value.
Under the equity method of accounting, the investment is initially recorded at cost, and is increased or decreased by the proportionate share of the affiliates profits or losses after the date of acquisition. Goodwill arising on the acquisition of an associate is included in the cost of the investment (net of any accumulated impairment loss). Dividends received from the associate during the year reduce the carrying value of the investments. Investments in associates for which significant influence is intended to be temporary because such investments are acquired and held exclusively with a view to their subsequent disposal within twelve months from their acquisition, are recorded as assets held for sale. Unrealised gains and losses on transactions between the Group and its associated undertakings are eliminated to the extent of the Groups interest in the associated undertaking. Where necessary, the accounting policies used by the associate have been changed to ensure consistency with the policies adopted by the Group.
Items included in the financial statements of each entity of the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the functional currency). The financial statements are presented in thousands of Euro (), which is the functional currency of the Bank.
Foreign currency transactions are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Translation differences on debt securities and other monetary financial assets re-measured at fair value are included in foreign exchange gains and losses. Translation differences on non-monetary financial assets are a component of the change in their fair value. Depending on the classification of a non-monetary financial asset, translation differences are either recognised in the income statement (applicable for example for equity securities held for trading), or within shareholders equity, if non-monetary financial assets are classified as available for sale investment securities.
When preparing the financial statements, assets and liabilities of foreign entities are translated at the exchange rates prevailing at the balance sheet date, while income and expense items are translated at average rates for the
period. Differences resulting from the use of closing and average exchange rates and from revaluing a foreign entitys opening net asset balance at closing rate are recognised directly in foreign currency translation reserve within shareholders equity.
When a monetary item forms part of a reporting entitys net investment in a foreign operation and is denominated in a currency other than the functional currency of either the reporting entity or the foreign operation, the exchange differences that arise in the individual financial statements of both companies are reclassified to equity upon consolidation. When a foreign entity is sold, such translation differences are recognised in the income statement as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
In case of regular way purchases and sales of financial assets the Group uses settlement date accounting apart from trading and investment securities and derivative financial instruments, which are recognised at trade date.
Derivative financial instruments including foreign exchange contracts, forward rate agreements, currency and interest rate swaps, interest rate futures, currency and interest rate options (both written and purchased) and other derivative financial instruments are initially recognised in the balance sheet at cost and subsequently are re-measured at their fair value. All derivatives are carried in assets when favourable to the Group and in liabilities when unfavourable to the Group. Fair values are obtained from quoted market prices, dealer price quotations, discounted cash flow models and options pricing models, as appropriate. Where the Group enters into derivative instruments used for trading purposes, realised and unrealised gains and losses are recognised in trading income.
A derivative may be embedded in another financial instrument, known as host contract. In such combinations, the derivative instrument is separated from the host contract and treated as a separate derivative, provided that its risks and economic characteristics are not closely related to those of the host contract, the embedded derivative actually meets the definition of a derivative and the host contract is not carried at fair value with unrealised gains and losses reported in the income statement.
The Group also uses derivative instruments as part of its asset and liability management activities to manage exposures to interest rate, foreign currency and credit risks, including exposures arising from forecast transactions. The Group applies either fair value or cash flow hedge accounting when transactions meet the specified criteria to obtain hedge accounting treatment. The Groups criteria for a derivative instrument to be accounted for as a hedge include:
· at inception of the hedge, there is formal designation and documentation of the hedging instrument, hedged item, hedging objective, strategy and relationship;
· the hedge is documented showing that it is expected to be highly effective in offsetting the risk in the hedged item throughout the hedging period. A hedge is considered to be highly effective when the Group achieves offsetting changes in fair value between 80 percent and 125 percent for the risk being hedged; and
· the hedge is highly effective on an ongoing basis.
For qualifying fair value hedges, the change in fair value of the hedging derivative is recognised in the income statement along with the corresponding change in the fair value of the hedged asset or liability that is attributable to that specific hedged risk. If the hedge relationship is terminated for reasons other than the de-recognition of the hedged item, the difference between the carrying amount of the hedged item at that point and the value at which it would have been carried had the hedge never existed (the unamortised fair value adjustment), is, in the case of interest bearing financial instruments, amortised to the income statement over the remaining term of the original hedge, while for non-interest bearing instruments that amount is immediately recognised in the income statement. If the hedged instrument is derecognised, e.g. sold or repaid, the unamortised fair value adjustment is recognised immediately in the income statement.
Fair value gains or losses associated with the effective portion of a derivative designated as a cash flow hedge are recognised initially in shareholders equity. When the cash flows that the derivative is hedging (including cash flows from transactions that were only forecast when the derivative hedge was effected) materialize, resulting in income or expense, then the associated gain or loss on the hedging derivative is simultaneously transferred from shareholders equity to corresponding income or expense line item.
If a cash flow hedge for a forecast transaction is deemed to be no longer effective, or the hedge relationship is terminated, the cumulative gain or loss on the hedging derivative previously reported in shareholders equity remains in shareholders equity until the committed or forecast transaction occurs, at which point it is transferred from shareholders equity to trading income.
Certain derivative instruments transacted as effective economic hedges under the Groups risk management positions, do not qualify for hedge accounting under the specific rules of IAS 39 and are therefore treated in the same way as derivative instruments held for trading purposes, i.e. fair value gains and losses are recognised in trading income.
The foreign currency risk of a highly probable forecast intragroup transaction is qualified as a hedged item in the consolidated financial statements, provided that: (a) the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction; and (b) the foreign currency risk will affect consolidated profit or loss.
Notwithstanding the above, transactions entered into before the date of transition to IFRS, shall not be retrospectively designated as hedges.
Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to realize the asset and settle the liability simultaneously or on a net basis.
Interest income and expense are recognised in the income statement for all interest bearing instruments on a time proportion basis, taking account of the principal outstanding and using the effective interest rate method based on the actual purchase price. Interest income includes coupons earned on fixed income investment and trading securities and accrued discount and premium on treasury bills and other discounted instruments.
The recognition of income on commercial and mortgage loans ceases when the recovery of principal and/or interest becomes doubtful of collection, such as when overdue by a maximum of 180 days, or when the borrower or securities issuer defaults, if earlier than 180 days. Credit card loans, other non-secured personal credit lines and certain consumer finance loans are placed on non-accrual basis no later than the date upon which they become 90 days delinquent. In all cases, loans must be placed on non-accrual at an earlier date, if collection of principal and/or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual or written off is excluded from interest income until received.
Fees and commissions are generally recognised on an accrual basis over the period the service is provided. Commissions and fees arising from negotiating, or participating in the negotiation of a transaction for a third party, such as acquisition of loans, equity shares or other securities or the purchase or sale of businesses, are recognised upon completion of the underlying transaction.
All financial assets, acquired principally for the purpose of selling in the short term or if so designated by the management, are classified under this category which has the following two sub-categories:
a) Trading securities
Trading securities are securities, which are either acquired for generating a profit from short-term fluctuations in price or dealers margin, or are securities included in a portfolio in which a pattern of short-term profit making exists.
Trading securities are initially recognised at cost and subsequently re-measured at fair value. The determination of fair values of trading securities is based on quoted market prices, dealer price quotation and pricing models, as appropriate. Gains and losses realised on disposal or redemption and unrealised gains and losses from changes in the fair value of trading securities are included in net trading income. Interest earned whilst holding trading securities is reported as interest income. Dividends received are separately reported and included in dividend income. Trading securities may also include securities sold under sale and repurchase agreements.
All purchases and sales of trading securities that require delivery within the time frame established by regulation or market convention (regular way purchases and sales) are recognised at trade date, which is the date that the Group commits to purchase or sell the asset. Otherwise such transactions are treated as derivatives until settlement occurs.
Trading securities held are not reclassified out of the respective category. Respectively, investment securities are not reclassified into the trading securities category while they are held.
b) Financial assets at fair value through profit or loss
Upon initial recognition the Group may designate any financial asset as at fair value through profit or loss except for investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, when either:
(i) It eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or
(ii) A group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to key management personnel, for example the board of directors and chief executive officer.
Interest income on financials assets at fair value through profit and loss is reported as interest income.
c) Financial liabilities at fair value through profit or loss
Financial liabilities designated at fair value through profit and loss are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. Subsequent to initial recognition, financial liabilities at fair value through profit and loss are re-measured at fair value with unrealised gains and losses reported in net trading income. Interest expense on financials liabilities at fair value through profit and loss is reported as interest expense.
Securities sold subject to a linked repurchase agreement (Repos) are retained in the financial statements as trading or investment securities and the counterparty liability is included in amounts due to banks, due to customers or other deposits, as appropriate. Securities purchased under agreement to resell (Reversed Repos) are recorded as due from other banks or loans and advances to customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of Repos (or Reverse Repos) agreement using the effective interest rate method.
Securities borrowed and securities lent are recorded at the amount of cash collateral advanced or received, plus accrued interest. Securities borrowed and securities received as collateral under securities lending transactions are not recognised in the financial statements unless control of the contractual rights that comprise these securities transferred is gained or sold to third parties, in which case the purchase and sale are recorded with the gain or loss included in trading income. The obligation to return them is recorded at fair value as a trading liability.
Respectively, securities lent and securities provided as collateral under securities borrowing transactions are not derecognised from the financial statements unless control of the contractual rights that comprise these securities transferred is relinquished.
The Group monitors the market value of the securities borrowed and lent on a regular basis and provides or requests additional collateral in accordance with the underlying agreements. Fees and interest received or paid are recorded as interest income or interest expense, on an accrual basis.
Investment securities are classified as either available for sale or held to maturity investment securities based on management intention on purchase date. Investment securities are recognised at trade date, which is the date that the Group commits to purchase or sell the asset. All other purchases and sales, which do not fall within market convention are recognised as derivative forward transactions until settlement.
Available for sale investment securities are initially recorded at cost (including transaction costs) and subsequently re-measured at fair value based on quoted bid prices in active markets, dealer price quotations or discounted expected cash flows. Fair values for unquoted equity investments are determined by applying recognised valuation techniques such as price/earnings or price/cash flow ratios, refined to reflect the specific circumstances of the issuer. Unrealised gains and losses arising from changes in the fair value of available for sale investment securities are reported in shareholders equity, net of taxes (where applicable), until such investment is sold, collected or otherwise disposed of, or until such investment is determined to be impaired.
Available for sale investment securities may be sold in response to needs for liquidity or changes in interest rates, foreign exchange rates or equity prices. When an available for sale investment security is disposed of or impaired, the accumulated unrealised gain or loss included in shareholders equity is transferred to the income statement for the period and reported as gains / losses from investment securities. Gains and losses on disposal are determined using the moving average cost method.
Held to maturity investment securities consist of securities with fixed or determinable payments, which the management has the positive intend and ability to hold to maturity. Held to maturity investment securities are carried at amortised cost using the effective interest rate method, less any provision for impairment. Amortised cost is calculated by taking into account any fees, points paid or received, transaction costs and any discount or premium on acquisition.
An investment security is considered impaired if its carrying amount exceeds its recoverable amount and there is objective evidence that the decline in price has reached a level that recovery of the cost value cannot be reasonably expected within the foreseeable future. The amount of the impairment loss for financial assets carried at amortised cost is calculated as the difference between the assets carrying amount and the present value of expected future cash flows discounted at the financial instruments original effective interest rate. For quoted financial assets re-measured to fair value the recoverable amount is the present value of expected future cash flows discounted at the current market rate of interest for a similar financial asset whereas for unquoted financial assets the recoverable amount is determined by applying recognised valuation techniques.
Interest earned while holding investment securities is reported as interest income. Dividends receivable are included separately in dividend income, when a dividend is declared.
Loans originated by the Group include loans where money is provided directly to the borrower, other than those that are originated with the intent to be sold (if any), in which case they are recorded as assets at fair value through profit and loss, available for sale investment securities or as held to maturity, as appropriate.
Loans originated by the Group are recognised when cash is advanced to borrowers. They are initially recorded at cost including any transaction costs, and are subsequently valued at amortised cost using the effective interest rate method.
Interest on loans originated by the Group is included in interest income and is recognised on an accrual basis. Fees and direct costs relating to a loan origination, financing or restructuring and to loan commitments are treated as part of the cost of the transaction and are deferred and amortised to interest income over the life of the loan using the effective interest rate method.
A credit risk provision for loan impairment is established if there is objective evidence that the Group will be unable to collect all amounts due on a claim according to the original contractual terms. A claim means a loan, a commitment such as a letter of credit, guarantee or commitment to extent credit.
A provision for loan impairment is reported as a reduction of the carrying amount of a claim on the balance sheet, whereas for an off-balance sheet item such as a commitment, a provision for impairment loss is reported in other liabilities. Additions to provisions for loans impairment are made through bad and doubtful debts expense.
The Group assesses whether objective evidence of impairment exists for loans that are considered individually significant, i.e. all loans above 1 million, and collectively for loans that are not considered individually significant. A loan is subject to impairment test when interest and/or capital is in arrears for a period over 90 days and/or such qualitative indications exist, at the assessment date, which demonstrate that the borrower will not be able to meet his obligations. Usually such indications include but are not restricted to significant financial difficulty, deterioration of credit rating, probability of bankruptcy or other financial reorganization procedures.
If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the loans carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at a) the loans original effective interest rate, if the loan bears a fixed interest rate, or b) current effective interest rate, if the loan bears a variable interest rate.
The calculation of the present value of the estimated future cash flows of a collateralised loan reflects the cash flows that may result from obtaining and selling the collateral, whether or not foreclosure is probable.
For the purposes of a collective evaluation of impairment, loans are grouped on the basis of similar credit risk characteristics. Loans to corporates are grouped based on days in arrears, product type, economic sector, size of business, collateral type and other relevant credit risk characteristics. Mortgages and retail loans are also grouped based on days in arrears or product type. Those characteristics are relevant to the estimation of future cash flows for pools of loans by being indicative of the debtors ability to pay all amounts due and together with historical loss experience for loans with credit risk characteristics similar to those in the pool form the foundation of the loan loss allowance computation. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects and conditions in the historical period that do not exist currently.
All impaired loans are reviewed and analysed at least annually and any subsequent changes to the amounts and timing of the expected future cash flows compared with the prior estimates result in a change in the provision for loans impairment and are charged or credited to impairment losses on loans and advances. The methodology and assumptions used in estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.
Subject to compliance with tax laws in each jurisdiction, a loan, which is deemed to be uncollectible or forgiven, is written off against the related provision for loans impairment. Subsequent recoveries are credited to impairment losses on loans and advances in the income statement. In the case of loans to borrowers in countries where there is an increased risk of difficulties in servicing external debt, an assessment of the political and economic situation is made, and additional country risk provisions are established if necessary.
Property and equipment include land and buildings, leasehold improvements and transportation and other equipment, held by the Group for use in the supply of services or for administrative purposes. Property and equipment are initially recorded at cost, which includes all costs that are required to bring an asset into working condition.
Subsequent to initial recognition, property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Costs incurred subsequent to the acquisition of an asset, which is classified as property and equipment are capitalised, only when it is probable that they will result in future economic benefits to the Group beyond those originally anticipated for the asset, otherwise they are expensed as incurred.
Depreciation of an item of property and equipment begins when it is available for use and ceases only when the asset is derecognised. Therefore, the depreciation of an item of property and equipment that is retired from active use does not cease unless it is fully depreciated. Property and equipment are depreciated on a straight-line basis over their estimated useful lives as follows:
The Group periodically reviews land and buildings for impairment. Where the carrying amount on an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit.
Foreclosed assets, which consist of properties acquired through foreclosure in full or partial satisfaction of a related loan, are initially measured at cost, which includes transaction costs, and reported under other assets. After initial recognition foreclosed assets are re-measured at the lower of their carrying amount and fair value less estimated costs to sell. Any gains or losses on liquidation of foreclosed assets are included in other operating income.
Investment property includes land and buildings, owned by the Group (or held through a leasing agreement, either finance or operating) with the intention of earning rentals or for capital appreciation or both, and is initially recorded at cost, which includes transaction costs. A property interest that is held by the Group under an operating lease is classified and accounted for as investment property when a) the property would otherwise meet the definition of an investment property or b) the operating lease is accounted for as if it were a finance lease.
Subsequent to initial recognition, investment property is stated at cost less accumulated depreciation and any accumulated impairment losses.
Investment property is depreciated on a straight-line basis over its estimated useful life, which approximates the useful life of similar assets included in property and equipment. Investment property is periodically reviewed for impairment.
Intangible assets include goodwill, computer software and other intangible assets that comprise of separately identifiable intangible items arising from acquisitions.
Goodwill represents the excess of the cost of an acquisition over the fair value of the Groups share of the net assets of the acquired entity at the date of acquisition. Subsequent to initial recognition, goodwill is stated at cost less accumulated impairment losses. Management tests goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired.
Any excess, as at the date of the exchange transaction, of the acquirers interest in the fair values of the identifiable assets and liabilities acquired over the cost of the acquisition, should be recognised as negative goodwill. Once it has been established that negative goodwill exists, the Group a) reassess the identification and measurement of the acquirees identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination and b) recognizes immediately in the income statement any profit or loss remaining after the reassessment.
Computer software includes costs that are directly associated with identifiable and unique software products controlled by the Group that are anticipated to generate future economic benefits exceeding costs beyond one year. Expenditure, which enhances or extends the performance of computer software programs beyond their original specifications is recognised as a capital improvement and added to the original cost of the software.
Computer software development costs recognised as assets, are amortised using the straight-line method over their useful lives, not exceeding a period of 10 years.
Expenditure on starting up an operation or branch, training personnel, advertising and promotion and relocating or reorganizing part or the entire Group is recognised as an expense when it is incurred.
At each balance sheet date, management reviews intangible assets and assesses whether there is any indication of impairment. If such indications exist an analysis is performed to assess whether the carrying amount of intangible assets is fully recoverable. A write-down is made if the carrying amount exceeds the recoverable amount.
The Group classifies its insurance related products into insurance contracts and investment contracts depending on the level of insurance risk inherent in the products in accordance with IFRS 4 (Insurance contracts). As permitted by IFRS 4, the Group accounts for its insurance contracts in accordance with Greek accounting principles. Accordingly, overseas insurance liabilities are measured in accordance with the accounting and legal requirements in the countries concerned and as permitted by IFRS 4.
Assets and liabilities relating to investment contracts are classified and measured as appropriate under IAS 39, Financial Instruments: Recognition and Measurement. The Group assesses whether its recognised insurance liabilities are adequate by applying a liability adequacy test (LAT), which meets the minimum requirements set forth in IFRS 4, at the end of each reporting period. Additional liabilities resulting from the LAT increase the carrying amount of insurance liabilities as determined in accordance with local laws and regulations and are charged off to the income statement. As at 1 January 2005, additional liabilities resulting from the first application of the LAT were charged off to equity.
a. A Group company is the lessee
Leases where the Group has substantially all the risks and rewards of ownership of the asset are classified as finance leases. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased property or the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The outstanding rental obligations, net of finance charges, are included in other liabilities. The interest element of the finance cost is charged to the income statement over the lease period. All assets acquired under finance leases are depreciated over the shorter of the useful life of the asset or the lease term.
Leases where a significant portion of the risks and rewards of ownership of the asset are retained by the lessor, are classified as operating leases. The total payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.
The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement. It requires an assessment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets (the asset); and (b) the arrangement conveys a right to use the asset.
b. A Group Company is the lessor
Finance leases: When assets are leased out under a finance lease, the present value of the minimum lease payments is recognised as a receivable. Lease income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. Finance lease receivables are included in loans and advances to customers.
Operating leases: Assets leased out under operating leases are included in the balance sheet based on the nature of the asset. They are depreciated over their useful lives on a basis consistent with similar owned property. Rental income (net of any incentives given to lessees) is recognised on a straight-line basis over the lease term.
For the purposes of the cash flow statement, cash and cash equivalents include cash on hand, unrestricted balances held with central banks, amounts due from other banks and highly liquid financial assets with original maturities of less than three months from the date of acquisition such as treasury bills and other eligible bills, investment and trading securities which are subject to insignificant risk of changes to fair value and are used by the Group in the management of its short-term commitments.
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.
2.23 Financial guarantee contracts
A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.
A financial guarantee contract, other than those assessed as insurance contracts, is recognised initially at their fair value and subsequently measured at the higher of: (a) the unamortized balance of the related fees received and deferred, and (b) the expenditure required to settle the commitment at the balance sheet date.
Group companies operate various retirement benefit plans in accordance with local conditions and practices in their respective countries. Such plans are classified as pension plans or other post-retirement benefit plans.
2.24.1 Pension plans
a. Defined benefit plans
A defined benefit plan is a pension plan that defines an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service or compensation. For defined benefit plans, the pension liability is the present value of the defined benefit obligation at the balance sheet date minus the fair value of the plan assets, including any adjustments for unrecognised actuarial gains/losses and past service costs. The Group follows the corridor approach of IAS 19 Employee Benefits according to which a certain amount of actuarial gains and losses remains unrecognised and is amortised over the average remaining service lives of the employees participating in the plan.
The defined benefit obligation is calculated by independent actuaries on an annual basis using the projected unit credit method. The present value of the defined obligation is determined by the estimated future cash outflows using interest rates of government securities, which have terms to maturity approximating the terms of the related liability. Pension costs are charged or credited to the income statement over the service lives of the related employees.
b. Defined contribution plans
A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees benefits relating to employee service in the current and prior periods. Group contributions to defined contribution plans are charged to the income statement in the year to which they relate and are included in staff costs.
Group employees participate in plans, which provide for various health benefits including post-retirement healthcare benefits. Such plans are all defined contribution and Group contributions are charged to the income statement in the year to which they relate and are included in staff costs.
The Bank has a Group-wide stock option plan for the executive members of the Board of Directors, management and staff of the Group. The fair value of the employee services received in exchange for the grant of the options is measured by reference to the fair value of the options at the date on which they are granted and is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair
value of the share options granted. Fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the expected volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option.
When the options are exercised and new shares are issued, the proceeds received net of any transaction costs are credited to share capital (par value) and the surplus to share premium.
Income tax payable on profits, based on the applicable tax laws in each jurisdiction, is recognised as an expense in the period in which profits arise.
Deferred income tax is fully provided, using the liability method, on all temporary differences arising between the carrying amounts of assets and liabilities in the consolidated balance sheet and their amounts as measured for tax purposes.
The principal temporary differences arise from insurance reserves, provisions for pensions and revaluation of certain assets. Deferred tax assets relating to the unused tax losses carried forward are recognised to the extent that it is probable that sufficient taxable profits will be available against which these losses can be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on laws that have been enacted at the balance sheet date.
Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference can be controlled by the Group and it is probable that the difference will not reverse in the foreseeable future.
Deferred tax asset is recognised for all deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint ventures, to the extent that, it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised.
Deferred tax, related to fair value changes of available for sale investment securities and cash flow hedges, which are charged or credited directly to shareholders equity, is also credited or charged directly to shareholders equity where applicable and is subsequently recognised in the income statement together with the deferred gain or loss.
Borrowings are initially recognised at cost, which is the fair value of the consideration received (issue proceeds), net of transaction costs incurred. Subsequent measurement is at amortised cost and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest rate method.
2.27 Share capital and treasury shares
Share issue costs: Incremental external costs directly attributable to the issue of new shares, other than on a business combination, are deducted from equity net of any related income tax benefit.
Dividends on ordinary shares: Dividends on ordinary shares are recognised as a liability in the period in which they are approved by the Banks Shareholders at the Annual General Meeting.
Treasury shares: NBG shares held by the Group are classified as treasury shares and the consideration paid including any attributable incremental external costs, net of income taxes, is deducted from total shareholders equity until they are cancelled, reissued or resold. Treasury shares do not reduce the number of shares issued but affect the number of outstanding shares used in the calculation of earnings per share. Treasury shares held by the Bank are not eligible to receive cash dividends. Any difference between acquisition cost and ultimate proceeds from subsequent resale (or reissue) of treasury shares is included in shareholders equity and is therefore not to be considered a gain or loss to be included in the income statement.
The Group is organised on a worldwide basis into six business segments and provides products or services that are subject to risks and returns that are different from those of other business segments. This organizational structure is the basis upon which the Group reports its primary segment information.
A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments.
2.29 Assets and liabilities held for sale and discontinued operations
Assets (or disposal groups) are classified as held for sale if their carrying amount is recovered principally through a sale transaction rather than through continuing use. Immediately before classification as held for sale, the measurement of the assets (and all assets and liabilities in a disposal group) is effected in accordance with the applicable IFRSs. Upon initial classification as assets held for sale, they are measured at their lower of carrying amount and fair value less costs to sell and are classified separately from other assets in the balance sheet. Offsetting of assets and liabilities is not permitted.
Impairment losses on initial classification as held for sale are included in profit or loss, even when there is a revaluation. The same applies to gains and losses on subsequent remeasurement.
A discontinued operation is a component of the Groups business that represents a separate major line of business or geographical area of operations that has been disposed of or is classified as held for sale or is a subsidiary acquired exclusively with a view to resale. Classification as discontinued operations occurs upon disposal or when the operations meet the criteria to be classified as held for sale. Discontinued operations are presented on the face of the income statement.
Related parties include entities, which the Bank has the ability to exercise significant influence in making financial and operating decisions. Related parties include, directors, their close relatives, companies owned or controlled by them and companies over which they can influence the financial and operating policies. All banking transactions entered into with related parties are made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated parties and do not involve more than a normal amount of risk.
The Group provides fiduciary and trust services to individuals and other institutions, whereby it holds and manages assets or invests funds received in various financial instruments at the direction of the customer. The Group receives fee income for providing these services. Trust assets are not assets of the Group and are not recognised in the financial statements. The Group is not exposed to any credit risk relating to such placements, as it does not guarantee these investments.
A basic earnings per share (EPS) ratio is calculated by dividing the net profit or loss for the period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
A diluted earnings per share ratio is computed using the same method as for basic EPS, but the determinants are adjusted to reflect the potential dilution that could occur if convertible debt securities, options, warrants or other contracts to issue ordinary shares were converted or exercised into ordinary shares.
NOTE 3: Critical accounting policies, estimates & judgments
3.1 Critical accounting policies and estimates
The preparation of financial statements in accordance with International Financial Reporting Standards (IFRS) requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expense in the Groups Consolidated Financial Statements and accompanying notes. The Group believes that the judgments, estimates and assumptions used in the preparation of the Consolidated Financial Statements are appropriate given the factual circumstances as of 31 December 2006.
Various elements of the Groups accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, the Group has identified nine accounting policies which, due to the judgments, estimates and assumptions inherent in those policies, and the sensitivity of the financial statements to those judgments, estimates and assumptions, are critical to an understanding of the financial statements.
Recognition and measurement of financial instruments at fair value
Assets and liabilities that are trading instruments are recorded at fair value on the balance sheet date, with changes in fair value reflected in net trading income. For exchange traded financial instruments, fair value is based on quoted market prices for the specific instrument. Where no active market exists, or where quoted prices are not otherwise available, the Group determines fair value using a variety of valuation techniques. These include present value methods, models based on observable input parameters, and models where some of the input parameters are unobservable.
Valuation models are used primarily to value derivatives transacted in the over-the-counter market. All valuation models are validated before they are used as a basis for financial reporting, and periodically reviewed thereafter, by qualified personnel independent of the area that created the model. Wherever possible, the Group compares valuations derived from models with quoted prices of similar financial instruments, and with actual values when realised, in order to further validate and calibrate its models. A variety of factors are incorporated into the Groups models, including actual or estimated market prices and rates, such as time value and volatility, and market depth and liquidity.
The Group applies its models consistently from one period to the next, ensuring comparability and continuity of valuations over time, but estimating fair value inherently involves a significant degree of judgment. Management therefore establishes valuation adjustments to cover the risks associated with the estimation of unobservable input parameters and the assumptions within the models themselves.
Although a significant degree of judgment is, in some cases, required in establishing fair values, management believes the fair values recorded in the balance sheet and the changes in fair values recorded in the income statement are prudent and reflective of the underlying economics, based on the controls and procedural safeguards we employ.
Fair value option
The Group adopted revised IAS 32 and revised IAS 39 at 1 January 2005. The Group has applied the exception provided in IFRS 1 not to restate the comparative prior year. Revised IAS 39 permits an entity to designate any financial asset or financial liability as held at fair value and to recognize fair value changes in profit and loss. The Group applies the fair value option primarily to debt instruments since this option presents more relevant information by eliminating or significantly reducing measurement inconsistency (an accounting mismatch) that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on a different basis.
Recognition of deferred Day 1 Profit and Loss
The Group has entered into transactions, some of which will mature after more than ten years, where it determines fair value using valuation models for which not all inputs are market observable prices or rates. The Group initially recognize a financial instrument at the transaction price, which is the best indicator of fair value, although the value obtained from the relevant valuation model may differ. Such a difference between the transaction price and the model value is commonly referred to as Day 1 profit and loss. In accordance with applicable accounting literature, the Group does not recognize that initial difference, usually a gain, immediately in profit and loss. While applicable accounting literature prohibits immediate recognition of Day 1 profit and
loss, it does not address when it is appropriate to recognize Day 1 profit in the income statement. It also does not address subsequent measurement of these instruments.
Decisions regarding recognizing deferred Day 1 profit and loss are based on the principle of prudence and are made after careful consideration of facts and circumstances to ensure the Group does not prematurely release a portion of the deferred profit to income. For each transaction, the Group determines individually the appropriate method of recognizing the Day 1 profit and loss amount in the income statement. Deferred Day 1 profit and loss is amortised over the life of the transaction, deferred until fair value can be determined using market observable inputs, or realised through settlement. In all instances, any unrecognised Day 1 profit and loss is immediately released to income if fair value of the financial instrument in question can be determined either by using market observable model inputs or by reference to a quoted price for the same product in an active market.
After entering into a transaction, the Group measures the financial instrument at fair value, adjusted for the deferred Day 1 profit and loss. Subsequent changes in fair value are recognised immediately in the income statement without reversal of deferred Day 1 profits and losses.
Goodwill and Equity method investments
The Group regularly reviews goodwill and equity method investments for possible impairment indications. If the impairment indicators are identified, the Group makes an assessment about whether the carrying amount of such assets remains fully recoverable. When making this assessment the Group compares the carrying value to market value, if available, or a fair value determined by a qualified evaluator or pricing model. Determination of a fair value by a qualified evaluator or pricing model requires management to make assumptions and use estimates.
The Group believes that the assumptions and estimates used are reasonable and supportable in the existing market environment and commensurate with the risk profile of the assets valued. However, different ones could be used which would lead to different results.
Allowance for loan losses
The amount of the allowance set aside for loan losses is based upon managements ongoing assessments of the probable estimated losses inherent in the loan portfolio. Assessments are conducted by members of management responsible for various types of loans employing a methodology and guidelines which are continually monitored and improved. This methodology has two primary components: specific allowances and collective allowances. The Group assesses whether objective evidence of impairment exists for loans that are considered individually significant, i.e. all loans above 1 million, and collectively for loans that are not considered individually significant.
A loan is subject to impairment test when interest and/or capital is in arrears for a period over 90 days and/or such qualitative indications exist, at the assessment date, which demonstrate that the borrower will not be able to meet his obligations. Usually such indications include but are not restricted to significant financial difficulty, deterioration of credit rating, probability of bankruptcy or other financial reorganization procedures.
The specific counterparty component applies to claims evaluated individually for impairment and is based upon managements best estimate of the present value of the cash flows which are expected to be received. In estimating these cash flows, management makes judgments about a counterpartys financial situation and the net realizable value of any underlying collateral or guarantees in our favour. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable are independently reviewed. In assessing the need for collective loan loss allowances, management considers factors such as credit quality, portfolio size, concentrations, and economic factors. In order to estimate the required allowance, assumptions are made both to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowances and provisions we make depends on how well we estimate future cash flows for specific counterparty allowances and provisions and the model assumptions and parameters used in determining collective allowances. While this necessarily involves judgment, management believes that the allowances and provisions are reasonable and supportable.
Allowances for loan losses made by our foreign subsidiaries are estimated by the subsidiary using similar criteria as the Bank uses in Greece. As the process for determining the adequacy of the allowance requires subjective and complex judgment by management about the effect of matters that are inherently uncertain, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in changes in the allowance for loan losses.
Insurance reserves for life insurance operations (long-duration contracts) are estimated using approved actuarial methods that include assumptions about future investment yields, mortality, expenses, options and guarantees, morbidity and terminations. Insurance reserves for property and casualty insurance operations (short-duration contracts) are determined using loss estimates, which rely on actuarial observations of loss experience for similar historic events. Assumptions and observations of loss experience are periodically adjusted, with the support of qualified actuaries, in order to reflect current conditions. Any additional future losses anticipated from the revision of assumptions and estimations is charged to the income statement.
We continue to monitor potential for changes in loss estimates in order to ensure that our recorded reserves in each reporting period reflect current conditions.
Net periodic benefit cost
The net periodic benefit cost is actuarially determined using assumed discount rates, assumed rates of compensation increase and the expected return on plan assets. These assumptions are ultimately determined by reviewing the Groups salary increases each year. The expected long-term return on plan assets represents managements expectation of the average rate of earnings on the funds invested to provide for the benefits included in the projected benefit obligation. To determine the expected long-term rate of return assumption the Group and its advisors make forward-looking assumptions in the context of historical returns and volatilities for each asset class as well as correlations among asset classes. The expected long-term rate of return assumption is annually adjusted based on revised expectations of future investment performance of the overall capital markets, as well as changes to local regulations affecting investment strategy.
Useful lives of depreciable assets
The Groups management determines the estimated useful lives and related depreciation charges for its property and other equipment. The Groups estimate is based on the projected operating life cycle of its buildings and the other depreciable assets such as furniture and other equipment, motor vehicles, hardware and other equipment. Such estimates are not expected to change significantly, however, management modifies depreciation charge rates wherever useful lives turn out to be different than previously estimated and it writes down or writes off technically obsolete assets.
Stock Options granted to employees
The Group grants options over shares in NBG to its employees under a stock option program. Employee services received, which are charged to the P&L, and the corresponding increase in equity, are measured by reference to the fair value of the equity instruments as at the date of grant, excluding the impact of non-market vesting conditions. Fair value of stock options is estimated by using the Black Scholes model on the date of grant based on the assumptions described in note 12, which include among others the exercise price, the dividend yield, the risk free interest rate and share price volatility.
3.2 Critical accounting judgments
Impairment of available-for-sale financial assets
The Group follows the guidance of IAS 39 on determining when an investment is other than temporarily impaired. This determination requires judgment and the Group evaluates the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow.
The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
Put options on minority interests
Put options as part of a business combination under IAS 32 Financial Instruments: Disclosure and Presentation are accounted for as a liability. The liability is recognised as if the puttable instrument has already been exercised, therefore, no minority interest is recognised for reporting purposes, and subsequently is measured at fair value, using different valuation techniques based on best estimates available to the management. The difference (if any), between the fair value of the liability and the legal minority interests share of net assets is recognised as part of the goodwill. Subsequent changes to the valuation of the put option will be recorded as changes to the liability and to goodwill, without any direct impact on the consolidated income statement. Since there is no clear guidance in IFRS 3 on Business combinations and IAS 32 on Financial Instruments on how such options must be accounted for and no specific IFRIC guidance has yet issued, the Group applies the provisions of IAS 32.23 while waiting for an interpretation from IASB and IFRIC.
NOTE 4: Financial risk management
The credit risk process is conducted separately by the Bank and each of its subsidiaries. The Group has implemented systematic controls and monitoring of credit risk and market risk and has formed a Risk Management Council to establish consistent risk management policies throughout the Group. Each of the credit risk procedures established by the subsidiaries is coordinated by the Group Risk Management Division.
The Bank. The credit risk process for the Bank is managed centrally by the Group Risk Management Division, which works closely with centralised underwriting units responsible for particular type of loans. Under the Banks facility risk rating system, corporate exposures are grouped into eight risk classes. Low risk borrowers are often offered more favourable terms, while loans to high-risk borrowers generally require third party guarantees and additional collateral. The bank also uses a number of obligor rating systems, assigning a borrower rating to each counterparty, whether large, medium corporate or small business. This rating is based primarily upon quantitative criteria (mostly liquidity, profitability, capital structure and debt service ratios) as well as qualitative factors such as management quality, reputation with customers and employees and company standing. In addition, all Banks rating systems consider the borrowers industry risk and its relative position within its peer group. As the Banks prepares for compliance with Basel II IRB methods, corporate borrower ratings are mapped to probabilities of default and will take precedence over the existing eight-grade facility rating, to be replaced in the near future by specific expected loss estimates per obligor.
The Banks credit exposure to each borrower is subject to a detailed risk review at least annually, or semi-annually in case of high-risk borrowers, with all outstanding facilities being reviewed. Interim reviews are also undertaken throughout the year and on an ongoing basis, either following a late payment, or if there are issues which may affect the borrowers course of business, or changes relevant to the borrowers creditworthiness. In case of term loans, exposures to borrowers engaged in start-up projects and those posing special risks as a result of company or industry difficulties or otherwise, are generally subject to more frequent reviews. These reviews are undertaken by the loan officers responsible for the customer and are monitored by the Groups Risk Management Division. Credit reviews include consideration of the customers historical and projected business performance, balance sheet strength and cash flow generation capability, as well as relevant industry trends. These matters are considered in relation to the size, structure and maturity of the Banks exposure to its client, in conjunction with the nature of any security held. When the Bank determines, as a result of this process, that a borrower poses a risk, it takes appropriate action to limit its exposure as well as to downgrade all outstanding facilities of the borrower. For example, the Bank may increase its collateral level, reset the interest rate at a higher level or decrease its facility line. In addition, credit officers responsible for the customer will intensify the monitoring of its other exposures. When the review process results in the migration of the facility into a higher risk class, either the outstanding facility is restructured or future lending and renewals of existing lines are rejected. With respect to the facility risk rating categorization, a coefficient Expected Loss analysis is applied to all commercial and corporate loans and its results are taken into consideration during the formulation of the Banks provisioning policy.
Since the beginning of the year, the Bank has implemented and currently enforces both Obligor limits and Sector limits. These are based on relative risk analyses of the existing commercial portfolio and are reviewed annually. Trends in the loan portfolio, including business development, asset quality and provisions for bad and doubtful debts, are reported regularly to the Board of Directors. The Bank also maintains an internal watch list of commercial loans, whose principal and interest payments are in arrears for up to three months, and have not yet been classified as non-performing loans. Credit officers responsible for customers on this watch list must take action in order to prevent the relevant loans from becoming non-performing and must report monthly on their progress.
With respect to mortgage loans, the underwriting process is centralised under the Mortgage Credit Division. All mortgage applications are rated using a bespoke application scorecard. Centralised underwriting ensures segregation of duties and uniform enforcement of underwriting standards. Loan security is typically in the form of a Mortgage Pre-notation on a property for 120% of the loan amount. Maximum loan amount usually does not exceed the 75% of the market value, but this may infrequently evolve up to 100% according to various factors and specific circumstances, which deal with the applicants credit profile, type of ownership, location of the asset, type of the financed property etc.
For Personal Loans and Credit cards, the credit approval process is carried out through the use of bespoke credit scorecards. The Group Risk Management Division carries out among other reports, vintage analyses by period of disbursement, issuing channel, and product type for various delinquency definitions, thus continuously ensuring strict monitoring of the scorecards efficiency and separation power. Exposures are pooled by application score and delinquency bucket to produce estimates of default probabilities.
The credit granting processes and procedures are centralised. The rational behind this organizational structure is three-fold:
· To ensure correct application of credit policy
· To effectively channel the applications through the business pipeline, thus speeding up the decision making process, while ensuring accuracy and consistency
· To effectively monitor the client information input process
Finally, through the development of portfolio models, Risk Management is able to calculate, evaluate and monitor expected and unexpected losses for all portfolio asset classes and segments.
The recently established Retail Banking Collection Division carries the responsibility of monitoring and collecting past due amounts of the entire retail portfolio. The Divisions objectives are mainly focused on reducing loan portfolio delinquency rates, facilitating early awareness of defaulted loans, ensuring proactive remedial management of defaulted loans and reducing costs, minimizing losses and increasing the retail business portfolio overall profitability.
The Banks subsidiaries
Finansbank. The Credit Risk Management Committee is responsible for managing credit risk at Finansbank. Total amount of credits granted to a group is subject to certain credit risk limits. According to the decision taken by the Board of Directors, the maximum amount of the loan to be granted to a group (cash and non-cash) is limited with the calculation of certain percentages of the shareholders equity based on the rating of the group. Furthermore, concentration risk is monitored on monthly basis in terms of industry, rating, top 20 group and top 50 corporate customers.
Loan limits of the loan customers are revised periodically in line with the Banks procedures. The Bank analyses the credibility of the loans within the framework of its loan policies and obtains collaterals for loans and other receivables to reduce credit risk. Evaluation of restructured and rescheduled loans is based in the Banks current rating system.
United Bulgarian Bank (UBB). Outstanding business loans to large corporations are reviewed monthly by the responsible credit officers and by UBBs Credit Portfolio Review Committee, which is responsible for reviewing general categories of risk and implementing risk guidelines. Loans to small to medium sized enterprises (SMEs) are also reviewed on a monthly basis. All loans are reclassified monthly according to a risk assessment based on a four-point risk-rating system. In addition, UBBs auditors carry out a separate review of loans representing approximately 70% of the loan portfolio on an annual basis. The review is focused on the largest and most recently granted loans and a random sample of other loans. Interim reviews are undertaken during semi-annual audit reviews. Reports related to the status of loans are submitted regularly to the Credit Committee by UBBs Credit Portfolio Review Committee. At least once a year, UBBs executive management presents a full report on the quality of UBBs loan portfolio to its Board of Directors.
Stopanska Banka. Stopanska applies a five-point risk rating system for classifying loans. Loans are rated from A to E, with E being the riskiest (i.e. non performing). Loans are classified depending mainly on the length of time they have been in arrears. Loans in class A have been in arrears for less than 30 days, while those in class E have been in arrears for over 365 days.
NBG Cyprus. NBG Cyprus has adopted the Banks risk rating system. A special Credit Provisions Committee presents a report annually to NBG Cyprus Executive Credit Committee on the quality of the banks credit portfolio.
Banca Romaneasca. Banca Romaneasca applies a five-point credit rating system. The credit category assigned to a loan is determined by three factors: risk rating, debt service and initiation of legal proceedings and is re-assessed on a monthly basis. A debtors financial performance and risk rating are measured by a combination of quantitative and qualitative criteria, such as the debtors quantitative financial performance as well as his general
background. Banca Romaneasca evaluates these factors and, after receiving the clients annual and semi-annual financial statements, re-assesses risk rating twice a year (in April and August). The initiation of legal proceedings results in automatically classifying the loan in the lowest credit category regardless its risk rating and debt service factors.
The South African Bank of Athens (SABA). SABA focuses on working capital facilities and asset based finance for small-to-medium sized enterprises and all facilities are reviewed on an annual basis in light of the most recent financial statements for such corporate clients. During this review period SABA analyses the clients entire business and looks for opportunities to add value by either providing business advice or restructuring/ increasing facilities.
Geographical concentration of the Groups loan portfolio and credit commitments is summarised in the following table.
Geographical concentration of loan portfolio (net) and credit commitments
The Bank takes on exposure to market risk. Market risk is the risk of loss attributed to adverse changes in the market value and the liquidity level of the Banks portfolio due to unfavourable movements in interest rates, foreign exchange rates and equity prices / indices.
Since 2003, the Bank applies the Value at Risk- (VaR) model, in order to estimate the worst expected loss for 1-day holding period and a confidence interval of 99%. The Bank currently implements the VaR model taking into account the positions of both trading and available for sale (AFS) portfolios, through the most advanced software developed by the company Algorithmics. It should be noted that the Bank of Greece, as well as internal and external advisors, have certified the aforementioned methodology.
The Bank has established a framework of VaR limits in order to control and manage more efficiently the risks to which it is exposed. These limits have been determined upon the worldwide best practices; they refer not only to specific types of market risk - such as interest rate risk, foreign exchange risk and equity risk - but also to the overall market risk of the Bank s trading and available for sale portfolios. In 2006, the Total VaR estimate (with 1-day holding period and 99% confidence interval) of the Banks portfolio varied from 1.5 million to 10.6 million, with an average estimate of 5 million.
The Bank conducts a back-testing program on the positions of the trading portfolio on a daily basis, in order to evaluate and assess the accuracy of the VaR model. Back-testing compares the one-day VaR calculated by the internal model, with the change in the value of the portfolio due to the actual movements of the relevant risk factors. During 2006, there were only 3 cases out of 251 days where the actual change in the value of the portfolio exceeded the VaR estimates. Supplementary to the VaR model, the Bank conducts stress testing on a weekly basis, on both the trading and the available for sale portfolios, based on specific scenarios. The aim of stress testing is to evaluate the gains or losses that may occur under extreme market conditions.
For 2006, interest rate risk remained the most significant risk to which the Bank was exposed, due to the worldwide fluctuations of interest rates. The principal source of interest rate risk exposure arises from the Banks bond portfolio, which mainly consists of Greek government bonds, for which the Bank is the principal market maker, in both the primary and the secondary markets. Its relatively large inventory facilitates its market-making activity and the distribution of Greek government bonds to retail and institutional investors in Greece and abroad. The Bank enters into futures contracts on medium-and long-term German government bonds in order to provide an economic hedge of fixed interest rate exposure arising from its position in fixed-rate Greek government bonds.
As a result of this economic hedging activity, fixed rate exposure is converted into a credit-spread exposure over the yield of medium-and long-term German government bonds, which is characterised by moderate moves resulting in lower volatility. As a secondary means of hedging the trading portfolio of Greek government bonds, the Bank also uses the swap market to convert part of the fixed rate exposure to a floating rate exposure in order to reduce earnings volatility in periods of volatile interest rates. The Bank is also active in the interbank deposit market.
Finansbank. The major funding sources of Finansbank are customer deposits and funds borrowed from abroad. The customer deposits are with fixed rates and have an average maturity of 1 month. Funds borrowed from abroad are generally with floating rates and are repriced at an average period of three and six months. The Bank diverts its placements to assets with high return, low risk and sufficient collaterals.
Besides customer deposits, the Bank funds its long term fixed interest rate YTL loan portfolio with long term (up to 10 years) floating interest rate foreign currency funds obtained from international markets. The Bank changes the foreign currency liquidity obtained from the international markets to YTL liquidity with long term swap transactions (fixed YTL interest rate and floating FC interest rate). Therefore, the Bank not only funds its long term fixed interest rate loans with YTL but also hedges economically itself against fair value risk.
Both swaps contracts and fixed rate long-term loans, mainly mortgages, are fair valued in order to reduce measurement inconsistency.
Interest sensitivity of Groups assets and liabilities is summarised as follows:
At 31 December 2006