NATIONAL BANK OF GREECE SA 6-K 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to rule 13a-16 or 15d-16 of
The Securities Exchange Act of 1934
For the month of March 2009
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)
[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.
[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.
Group and Bank
Annual Financial Report
31 December 2008
Table of Contents
Certification of Chairman and Chief Executive Officer, Vice Chairman and Deputy Chief Executive Officer, and a member of the Board of Directors pursuant to Article 4 of Law 3556/07.
We, the members of the Board of Directors of National Bank of Greece S.A. certify that to the best of our knowledge:
(1) The financial statements for the annual period ended 31 December 2008 have been prepared in accordance with International Financial Reporting Standards in force and present a true and fair view of the assets, liabilities equity and results of operation of National Bank of Greece and of the companies included in the consolidation.
(2) The Board of Directors annual report fairly presents the evolution, the performance and the position of the Bank and the Group and of the companies included in the consolidation, including the description of the main risks and uncertainties they face.
Athens, 30 March 2009
Board of Directors Report
on the consolidated financial statements of National Bank of Greece
for the financial year 2008
During 2008, global economic activity slowed considerably, to 3,2%, from 5,2% in 2007, following a period of exceptionally strong growth, on the back of the rapidly deteriorating global financial crisis. The collapse of large US investment banks in September 2008, combined with liquidity shortages in the global financial system, triggered an abrupt halt in economic activity in the final quarter of 2008. This resulted in the US economy enduring a recession throughout 2008, growing by 1,1%, down from 2,0% in 2007. Similarly, euro area economic growth slowed to 0,7% in 2008, from 2,6% in 2007, while the Japanese economy contracted by 0,7% in 2008, compared to growth of 2,4% in 2007. Emerging economies slowed also, albeit by less, growing by 6,3% in 2008, from 8,3% in 2007, with the Chinese economy expanding by 9,0% in 2008, from 13,0% in 2007.
As a result, most central banks eased monetary policies in the course of 2008, and additionally implemented various liquidity-promoting measures. Specifically, the US Fed cut its intervention rate by 425 bps, during 2008, from 4,25% to the lower limit of effectively 0%. On the contrary, the ECB moved more conservatively, and after raising its policy rate by 25 bps to 4,25% in July 2008, it finally cut short-term rates by 175 bps, to 2,5% by year-end.
The severe economic slowdown resulting from the international financial crisis is the Greek economys most severe challenge since EMU entry. The economy has lost steam, with GDP growth slowing to around 2,9% y-o-y in 2008, from 4,0% in 2007, although it remained considerably more resilient compared with most other euro area countries. Relatively solid growth in consumer spending (+2,3% y-o-y) and the positive contribution to GDP from shrinking imports were the main drivers of economic activity, counterbalancing the drag on growth from shrinking investment spending and decelerating export growth. Weakening demand prospects - especially from abroad - declining capacity utilization, and the effective tightening of credit conditions, in conjunction with the downward pressures on profit margins, started to scale back significantly firms investment plans, whereas the adjustment of the housing market to the still large supply overhang continued for a second consecutive year.
The Greek labor market remained resilient in 2008 with the unemployment rate declining to 7,8% from 8,3% in 2007 as healthy employment creation in retail trade and personal and business services counterbalanced the negative impact from declining employment in the construction and manufacturing sectors. Employment creation is expected to weaken in 2009, but the predominance of full-time employment, the high share of employment in the public sector (22%) and of self-employment (20,7%) are expected to confine the increase in the average unemployment rate to 8,7% in 2009.
The decrease in international oil prices, coupled with weakening domestic demand and the decline in the pricing power of Greek enterprises, resulted in a faster-than-initially expected fading of headline inflationary pressures in H2:2008 - from Julys peak of 4,9% y-o-y - which slowly fed into a still high core inflation. The declining trend in inflation is expected to continue in 2009 with favorable base effects bringing average annual inflation to a 40-year low of 1,9% y-o-y from 4,2% in 2008.
The spread of Greek sovereign bond over German bonds widened since September 2008, reflecting a widespread reassessment of country risk by investors and rating agencies, especially for countries with more intransigent imbalances and deteriorating growth outlook. The high level of scheduled sovereign issuance in the euro area during 2009 (circa 1.000 billion in total versus circa 50 billion for Greece), in conjunction with significant liquidity differentials among euro area sovereign debt markets, hampers the normalization of sovereign spreads against the Bund.
Expected development (risks and uncertainties)
Overall business activity will decline marginally in 2009 (in contrast to the euro area where a large contraction in economic activity is expected during the same year circa 3%) as the positive contribution from private consumption, accelerating public investment activity and dropping imports will broadly offset shrinking fixed capital formation and declining exports. It is expected that favorable terms of trade effects due to declining energy and commodity prices and solid real wage increases in the private sector (by an estimated 3,3%) will keep private consumption in positive territory in 2009, ameliorating the impact from deteriorating labor market prospects and the freezing of salary increases in the public sector. Declining domestic, and especially foreign demand, and an ongoing correction in residential investment are expected to keep fixed investment growth in negative territory in 2009, bringing the investment-to-GDP ratio significantly below its 10-year average of 25% of GDP (to a still high 21% in 2009). Net exports will continue to support activity as the continuing drop in the import bill (which is about 3-times higher than exports) will outweigh the contraction of export receipts resulting from the rapidly deteriorating outlook for the two major exporting industries of the Greek economy, tourism and shipping, which will feel the repercussions of the unfolding international economic crisis. As a result, the current account deficit is expected to decrease by about four percentage points to 10,8% of GDP in 2009.
Despite the significant deterioration in the international macroeconomic and financial environment, the Greek banking sector remains robust, with high profitability and capital adequacy levels. However, during the last quarter of 2008, the rapid change in liquidity conditions, as well as cost of funding, has led to a deceleration in the high credit expansion growth rates in comparison to recent years. On the other hand, the provisions of Law 3723/2008 for the reinforcement of liquidity in the Greek economy will contribute to the preservation of healthy credit expansion by strengthening the credit role of banks, so as to support Greek households and enterprises.
In 2009, the macroeconomic picture in Southeastern Europe 5 (SEE-5) (Albania, Bulgaria, FYROM, Romania, and Serbia) and Turkey is expected to deteriorate, in line with the synchronised global recession and the deepening of the financial crisis. In particular, the real GDP growth rate is expected to turn negative in SEE-5 and Turkey (around -2%) due to lower external demand, slowing domestic demand and the scarce and more expensive external financing.
The ongoing economic crisis is, however, expected to have a positive impact on these economies. The current account deficit, the Achilles heel of the SEE-5 and Turkey during previous years, will narrow significantly in 2009 on the back of the weakening domestic demand, the softening international oil and commodity prices and the curtailed credit to governments, banks and corporates (by about 40-50%). Specifically, the current account deficit is expected to be almost halved compared with the 2008 level in both the SEE-5 and Turkey (to 8.3 per cent of GDP and 2.7 per cent, respectively).
The bulk of the external gap should be covered by International Financial Institutions (IFIs). Romania and Serbia have just agreed new Stand-by agreements with the IMF, and Turkey is about to seal a new agreement with the IMF. The IMF-supported programmes should bolster investor confidence and promote macroeconomic stability.
More importantly, these countries should be able to meet IMF requirements in view of the strong political consensus for the need of IMF financing and the lack of upcoming elections.
NBG Group, with a robust capital base and satisfactory liquidity levels of more than 12 billion, is in an advantageous position to confront the repercussions of turbulence in international markets. The high profitability of 2008 allowed a further strengthening of the Group against the financial crisis. Efforts are focused on sustaining earning power, strong liquidity and capital, as well as applying conservative risk management.
In the months ahead we shall step up our efforts to enhance yet further our robust capital base, maintain satisfactory levels of liquidity and keep prudent credit criteria in place so as to sustain the first-class quality of the Groups loan book in the event that the global situation takes a further downturn.
At the same time, we continue to supply a steady flow of financing to healthy businesses and households, while taking new initiatives to support specific segments of the economy, as well as the more vulnerable members of our community who have been hit hardest by the unfolding crisis.
Group attributable profit in 2008 totaled 1.546 million, down 5% from the previous year.
This performance is the result of rational growth in banking business in Greece and the markets of Turkey and SE Europe, despite the adverse international climate. These positive results were achieved despite a highly adverse environment, particularly in the last quarter of the year, leading the Group to double the level of its quarterly provisions, thereby weighing correspondingly on Q4 profitability. In fact, in view of the deepening international crisis, the Group increased its provisions against credit risk by 60% to 513,3 million for the year as a whole, and 221,3 million for Q4 alone.
Despite the rapid deterioration in the economic outlook for the economies of the region, as well as the Groups expansion of credit in 2008, the quality of the loan book remained strong. The Groups conservative and consistent provisions policy throughout the growth phase of the economic cycle resulted in achieving a sufficient level of provisions, before taking into account the value of each type of collateral.
Moreover, the Groups systematic risk management policy has resulted in a loan book that is concentrated on low-risk segments, such as mortgage loans and lending to large corporations and the wider public sector. At the same time, it was the Banks strategy to diversify its business lending widely across all segments of the economy. As a result its corporate portfolio is not concentrated in sectors that may be adversely impacted by the global economic crisis, such as shipping, where the Groups exposure is limited to 1,7 billion.
The Groups profits before provisions and taxes, which in 2008 amounted to 2,5 billion, allow NBG to absorb a substantial level of provisions, if this is made necessary by any further deterioration of macroeconomic fundamentals, as the crisis feeds through to the real economy.
Financing in Greece and the wider region continues at a steady pace
Total Group lending in 2008 amounted to 66,1 billion (compared with 56,3 billion in 2007), up approximately 18% y-o-y, confirming the Groups support for the growth dynamic of Greece and the countries of the region in spite of the adverse impact of the credit crisis and the recessionary pressures in most of the area. These amounts, as well as the ones analyzed below, do not include financial instruments of 8,6 billion, which were acquired or reclassified in 2008, after the IAS 39 Amendment of 13 October 2008.
It must be noted that even in Q4 2008 the Group managed to post 4% credit growth quarter-on-quarter in Greece, 3% in Turkey and 2% in SE Europe.
Greece: growth in financing to the Greek economy
Despite the global situation, the Bank has leveraged its strong liquidity and increased its rate of financing to Greek businesses and households. Total lending in Greece at the end of 2008 amounted to 46 billion, equivalent to annual growth of approximately 19% (+7,2 billion compared to 2007, of which 1,8 billion derived from the last quarter).
This performance is considered quite positive in the light of the current climate, underscoring NBGs commitment to uninterrupted financing of the Greek economy despite the dramatic downturn in credit markets since September of last year. A key component of these results was the growth of lending to the business sector (+26%), surpassing for the first time growth in retail banking (+15%), and reflecting NBGs commanding position in the financing of Greek businesses.
Retail banking continued to post dynamic growth, even in the present circumstances. Retail lending in 2008 totalled 29,6 billion, up 15% y-o-y. Growth in the retail loan balance in the last quarter of the year was in the order of 967 million, up 3% q-o-q.
· Mortgages grew by 14% y-o-y to approximately 19 billion. Disbursements of new mortgages in 2008 amounted to 3,5 billion, thereby maintaining NBGs supremacy in this segment of the domestic market.
· In Q4, new mortgages amounted to 800 million, corresponding to 1/3 of all new mortgages in Greece. This development is particularly significant given that in the past the corresponding share of the Bank was around 1/4.
· In 2008, outstanding consumer loan and credit card balances grew by 18% to 6,7 billion, while disbursements of new consumer loans surpassed 1,9 billion, up 10% y-o-y.
· Lending to professionals and SMEs grew by 13% to over 4 billion. In Q4 alone, NBG posted growth of 6% in this market segment.
Net growth in lending to medium-size and large corporations amounted to 3,4 billion (up 0,8 billion in Q4), representing annual expansion in the corporate portfolio of 26%.
The steady flow of finance to the Greek economy continues in 2009
Financing to Greek businesses and households continues to grow in line with our credit expansion target during the first months of 2009.
· Net growth in retail lending surpassed 400 million in the first two months of the year. The business lending balance showed similar performance, amounting to 380 million.
· Despite the negative seasonality of the first two months of the year, this growth corresponds to annual growth in the order of 10%.
· New mortgage disbursements also showed resilience, exceeding 600 million.
· Disbursement of loans to SMEs via the Credit Guarantee Fund for Small Enterprises is progressing rapidly, and has already surpassed 550 million.
Deposit growth is funding credit expansion
Group deposits grew by 12% to 67,7 billion at the end of 2008. As a result, Group net lending as a whole is more than covered by deposits, with the loan-to-deposit ratio standing at 95% at the end of 2008.
The Banks strong liquidity and, above all, its stability comprise a substantial competitive advantage, particularly in the current environment, which limits the ability to raise liquidity from the global money and capital markets.
Customer deposits in Greece grew by 14% y-o-y to 55,3 billion. It is notable that NBG attracted 7,6 billion in new deposits and since December 2007 increased its market share in savings deposits by two percentage points to 34,1%, despite fierce competition. This performance underscores the confidence that Greek households have in NBG.
The strong deposit base of the Group, combined with the Banks reserves of liquidity amounting to 12 billion, as well as the low level of refinancing of obligations that mature in 2009 (1,8 billion), will allow the Group to maintain a steady flow of funding in 2009, so as to
support healthy entrepreneurship, finance the housing and consumer needs of households, and thereby help the community to overcome the adverse impact of the international economic crisis.
Rational growth mitigates the impact of shrinking margins
Group interest income stood at 3,6 billion, up 17% compared to 2007 in line with the growth in the loan portfolio. This strong result was achieved despite the adverse impact of the global credit crunch, and reflects the rational growth of the loan book in Greece and abroad, coupled with efficient management of the cost of raising capital.
Despite the increase of interbank interest rates worldwide, particularly in Q4 2008, the fierce competition in attracting deposits that had a negative effect on deposit margins and the cost of money in general , the Bank adhered to a prudent pricing policy for its deposit products, thereby keeping Group net interest margin unchanged at 4,25%.
Efforts to contain costs continue unabated
Growth in the Groups operating costs was contained at +4%, despite the growth in the branch network in SE Europe and Turkey in 2008 (+137 branches or +13%) and investment in the operational integration of the Groups international subsidiaries.
This performance is particularly positive if one takes into consideration the inflationary pressures in the wider region during 2008; and it is the result of the Groups efforts to keep costs under control. Accordingly, the cost/income ratio improved yet further to 48,5% (compared with 50,2% in 2007).
Fully aware of the particularly adverse conditions in which the banking sector has entered, the NBG Group continues its cost cutting policy unabated, aiming at a radical restructuring of its cost profile.
Finansbank: maintaining profit despite the adverse economic environment
The profit before tax of Finansbank was 530 million (TRY 1 billion) in 2008, remaining at the same level with 2007 (TRY980 million), despite the adverse financial environment.
This performance reflects a 32% increase in profit before provisions compared with 2007. In particular, net interest income grew by 25% to 874 million (TRY1.656 million). Commissions income also grew by 25% to 292 million (TRY553 million).
At the end of 2008, Finansbanks lending after provisions totalled TRY22,3 billion (10,4 billion), up 27% on an annual basis.
The slower growth rate of the Turkish economy in Q4 2008 led to a deceleration in the dynamic growth curve of Finansbanks lending (just 3% in Q4). This slowdown reflects the general adjustment in the pricing of credit risk and credit criteria applied by the Group in Turkey.
Retail lending remained at the spearhead of Finansbanks growth trajectory and has continued to grow at an impressive 41%. In 2008, retail loans totalled TRY10,0 billion (4,7 billion), while mortgage and consumer lending also presented a strong dynamic, growing 35% and 46% respectively y-o-y.
Business lending grew by 17% on an annual basis to TRY12,8 billion (5,9 billion).
The adverse economic climate that prevailed during the last quarter impacted the quality of the loan book, which remains better than the average for the Turkish market.
Finansbanks deposits outstanding posted positive performance, growing 23% y-o-y as a result of the Banks strategy to broaden its deposit base, particularly in the local currency, which at the end of the year totalled TRY10,5 billion (4,9 billion) compared with TRY6,2 billion (2,9 billion) in 2007, up 70%.
Growth in Finansbanks deposit base in local currency led the loan-to-deposit ratio to reach 140%, a positive development considering the fact that the excess lending level is financed by medium-term borrowing from international markets (non-Group) with maturities extending up to 2013.
The combination of customer deposits and medium-term borrowing has made Finansbank virtually self-financing, meaning that its cross-border borrowing from the Group remained unchanged throughout the course of the year. It is notable that in Q4, Finansbank refinanced in the global markets a $470 million syndicated loan, attracting the participation of 20 international banks.
The scheduled expansion of Finansbanks branch network was completed, with the addition of 48 new branches over the course of the past 12 months. Accordingly, Finansbank now has a network of 458 branches located throughout Turkey.
SE Europe: disciplined growth generates profitability in a period of crisis
Profit before tax from operations in SE Europe grew by a 16% y-o-y to 220 million. All the countries of the region posted strong profitability, underscoring the effectiveness of our strategy for disciplined organic growth and control of costs, while the cost/income ratio is around 50%.
Total lending in SE Europe stood at 9,4 billion (including 1 billion from Cypriot operations), up 38% y-o-y and 2% q-o-q. Retail loans grew by 33% to 3,6 billion y-o-y while business credit grew by 42% to 5,7 billion. These figures include 700 million to Greek and West European businesses operating in the region.
The quality of the loan book in SE Europe remains particularly satisfactory, while 80% of total lending in the region is secured with collateral. With the addition of 89 new units in 2008, the planned expansion of the Groups network in SE Europe has reached completion, as it now includes over 746 branches and 9.596 employees (+12% on the previous year).
NBG supports Greek businesses and households
Via a host of initiatives and actions, NBG has demonstrated in practice its ongoing commitment to work responsibly and constructively within the community in which it conducts business. In recent months NBG has announced, and set in motion, a full package of measures aiming at providing relief for more vulnerable social groups, with special provisions for their obligations vis-à-vis the Bank.
· NBG has frozen for 6 months all foreclosure proceedings on loans up to 300.000 relating to customers primary residences,
· For those who are unemployed, we have postponed for 12 months payment on mortgage loans, and provided the opportunity for interest-free settlement of outstanding dues on credit cards within 24 months.
· For SMEs, we have increased credit limits by up to 25%, a move that benefits 20.000 business customers, and have set up a special financing programme for new firms totalling 100 million. Within 2009, we have already made three successive cuts in interest rates.
· In the context of its participation in the Credit Guarantee Fund for Small Enterprises, NBG has approved and forwarded to the Fund almost 6.000 applications for a total of 765 million, amounting to 35% share in the Fund (just before the end of the first quarter of 2009).
· In order to further support Small Enterprises operations, NBG launched a new open credit facility, based on the terms of which, the principal repayment is at the discretion of the borrower, who is obliged to regular repayments of interest only.
· NBG launched a countrywide employment program, for unemployed University degree holders, up to 30 years old. Under the programs terms, there will be 6-month time intervals where 300 persons will be employed by the Bank at each interval, receiving full compensation. The Bank intends to run this program for at least 1 year and as long as the current financial crisis prevails.
Significant events for the year 2008
1. Following the resolution of Banks Annual General Meeting of the Shareholders held on 15 May 2008, cash dividend of 0,40 was approved, as well as a share capital increase by 95,3 million , through the issue of 19.067.838 new shares with a nominal value of 5 per share to existing shareholders without payment, instead of an additional 1 dividend for the year 2007, at a ratio of four new shares for every one hundred shares owned.
2. Following the resolution of Banks Annual General Meeting of the Shareholders held on 15 May 2008, the issue of redeemable preference shares of up to 1,5 billion was approved. Following the above resolution, on 6 June 2008, the Board of Directors of the Bank issued 25.000.000 Non-cumulative Non-voting Redeemable Preference Shares, which were offered in the form of American Depositary Shares in the United States, at a price of USD 25 per preference share (equivalent to 16,11). The total proceeds of the offering amounted to USD 625 million or 402,7 million. The annual dividend rate is set to USD 2,25 per Preference Share. The American Depositary Shares are evidenced by American Depositary Receipts and are listed on the New York Stock Exchange. These funds were exclusively used to enhance the capital adequacy of the Bank and its Group.
3. On 26 June 2008, the Board of Directors of the Bank approved the share capital increase by 1,9 million through the issue of 387.970 ordinary shares derived from the exercise of stock options under Program B.
4. On 19 August 2008, the Bank accepted the proposal of FIBA Holdings AS (the sellers) to acquire the remaining shares of Finansbank held by the sellers (9,68%), as provided for in the shareholders agreement between the Bank and the sellers. The exercise price was determined in accordance with the agreement and amounted to USD 697 million. On 26 September 2008, the NBG Finance (Dollar) Plc acquired the above shares from FIBA Holdings A.S.
5. On 21 April 2008 onwards, the Bank acquired 8.604.000 shares in the Greek Postal Savings Bank (PSB) via the Athens Exchange (ATHEX). Together with the 816.000 PSB shares already owned by NBG, NBGs total shareholding in PSB amounts to 6,62%.
6. Following the restructuring of its business activities, the Bank disposed of its 30% associate, Siemens Enterprise Communications S.A. and its 20,23% associate, Hellenic Countryside S.A., while it started consolidating special purpose entities, used for funding and investment activities.
Post Balance sheet significant events
The Banks Board of Directors decided and the Extraordinary General Meeting of the Shareholders approved on 22 January 2009, the Banks participation in the Support plan for the strengthening of the liquidity of the Greek economy. The Bank will proceed with a 350 million share capital increase, through the issue of 70 million redeemable preference shares of a par value of 5 each, to be covered by the Greek State. Furthermore, the Bank will issue a 500 million bond guaranteed by the Greek State. Finally, on 27 February 2009, the Greek State appointed Mr. Alexandros Makridis, economist, to represent it as an additional member of the Banks Board of Directors.
The Group operates in a fast growing and changing environment and acknowledges its exposure to banking risks as well as the need for effective risk management. Risk management and control form an integral part of the Groups commitment to providing continuous and high quality returns to its shareholders.
To this effect, the risk management function was enhanced in 2007, and the Group risk governance rules were reformed. As a result, smooth communication and the consistent management of risk issues across all Group activities are now achieved.
Since January 1st, 2008, National Bank of Greece is following the Internal Ratings Approach for the calculation of capital charges arising from credit risk in its corporate and mortgage portfolios, which make up more than 71% of its total loan portfolio. At the same time, the implementation of the Basel II programme at Group level progresses steadily, targeting both the gradual compliance with the new capital adequacy regulatory requirements and the further enhancement of risk and capital management capacity. The largest part of current Basel II projects concern NBG financial sector subsidiaries, and is being implemented without material deviation from the relevant time-schedule.
The Group pays particular attention to implementing 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 an NBG subsidiary. The Group employs for all facilities credit risk rating and measurement systems, specifically designed to meet the particular characteristics of its various loan exposures (e.g. NBG Corporate Risk Rating Model for the corporate portfolio, internally developed application and behavioural scorecards for the retail portfolio, etc.). The objective of such credit risk rating systems is to appropriately classify an obligor to a particular credit rating class and estimate the parameters of expected and unexpected loss, with the ultimate goal of protecting the profitability and the capital base of the Group. Active credit risk management is achieved through:
· The application of appropriate 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 (such as collateral and guarantees);
· The risk adjusted pricing of products and services;
· The participation of Risk Management in the credit decision process.
To effectively measure market risk, the risk of loss attributed to adverse changes in market driven factors such as foreign exchange rates, interest rates, equity prices and prices of derivative products, the Group applies Value at Risk (VaR) models to all Trading and Available For Sale (AFS) positions in all currencies. The Group established a framework of VaR limits in order to control and efficiently manage the assumed market risks, capturing both individual risk factors (interest rates, foreign exchange rates, equity price risk) and the total level of market risk exposure.
To assess the robustness of its internal market risk models, the Group applies appropriate back-testing techniques while, in order to measure the impact of exceptional market events, the Group implements a stress testing programme on a weekly and monthly basis.
During 2008 the Bank implemented the second cycle of its operational risk management framework, in accordance with the established policies and methodologies and within the scheduled time frame. Additionally, the Bank implemented the operational risk management framework to five major subsidiary financial institutions abroad, as well as to the three most significant Greek subsidiaries.
The Group level operational risk management framework comprises of:
· The alignment of the Operational Risk Strategy as well as the Operational Risk Policy & Methodologies
· The Risk and Control Self Assessment process, through which the inherent operational risks in each activity were identified and assessed by the competent risk owners
· The determination of Action Plans aiming at the mitigation of the major operational risks identified
· The Loss Data Collection due to operational risk events throughout Group activities and the update of the respective database.
The Group wide expansion of the operational risk framework is aiming at:
· The integration of the management of operational risk throughout Group activities
· The gradual adoption of the Standardised Approach for the operational risk capital calculation at Group level, in accordance with the relevant regulatory requirements
· The selection of a number of Key Risk Indicators aiming at the prompt determination of potential operational risk events
· The generation of an Operational Risk reporting framework, aiming to facilitate the operational risk management decision-making process at all Group hierarchy levels.
Interest rate risk in the banking book and liquidity risk
The Group systematically measures and manages the interest rate risk arising from its banking book items as well as liquidity risk, through:
· The analysis of repricing and liquidity gaps arising from its balance sheet structure;
· The measurement of economic value of equity and net interest income sensitivity under normal and exceptional changes in interest rates;
· The broadening and diversification of its liquidity sources;
· The maintenance of adequate stock of liquid assets;
· The establishment of relevant limits.
In order to strengthen its liquidity, the Group issued in 2008, asset backed securities based on Corporate bond loans and Credit Card and Consumer loans, at a total amount of approximately 3,6 billion.
Furthermore, the Bank has created a program for the issuance of covered bonds based on residential mortgage loans at a total amount of 10 billion, out of which an amount of 2 billion has already been issued.
In order to provide a hedge for the fixed interest rate exposure arising from our position in fixed rate Greek government bonds, we enter into future contracts relating to short, medium and long-term German government bonds.
Furthermore, we also engage in hedging certain designated fixed rate loans on a portfolio basis with the use of pay fixed receive floating interest rate swaps.
Despite continued expansion in credit in Q4 2008 and depreciation in the value of the currencies of the countries where we operate, the Tier I capital adequacy ratio was estimated at 10% and the Total capital adequacy ratio at 10,3%. Thanks to our strong profitability and measures taken by the Group (such as the issue of $625 million preference shares in June 2008), our regulatory capital indices remains at healthy levels despite the significant increase of weighted assets by 18%.
If the 350 million in new funds deriving from NBGs participation in the liquidity support programme for the Greek economy are taken into account, the Tier I capital adequacy ratio stands at around 10,6% and the Total capital adequacy ratio at 10,9%.
The combination of high liquidity and a strong capital base provides the Group with the foundations on which to build further its growth in Greece and abroad even against the headwinds of a worsening economic environment.
The Banks Annual General Meeting of the Shareholders held on 17 April 2008, approved an own shares buy-back program, providing for the purchase, by the Bank, of up to 10% of its total shares outstanding from 25 May 2008 through 24 May 2009, at a minimum price of 5 and a maximum of 60 per share.
During 2008, the Bank and its subsidiaries acquired 11.756.276 Banks Shares at the amount of 279,2 million and sold 5.802.272 Banks Shares at the amount of 155,6 million. On 31 December 2008, the Bank held 6.456.504 own shares at an acquisition cost of 145,3 million, representing 1,3% of the issued share capital. No Group company holds any of the Banks shares.
Following the Banks decision to participate in the support plan for the strengthening of the liquidity of the Greek economy and pursuant to the provisions of Law 3723/2008 and article 28 of Law Dematerialized Securities System, provisions on Capital Markets, taxation issues and other provisions, the Bank is not allowed to repurchase its own shares, for as long as it participates in this program.
Related party transactions
Based on the existing regulatory framework, we must include any transaction between the Group and the Bank with all related parties as defined in IAS 24, which took place during the fiscal year and substantially affected the Banks financial performance. Managements total compensation, receivables and payables must be reported separately. All related party transactions with the Bank and the Group companies are conducted within usual business practice at arms length and are approved by the authorized Bank members.
Group and Bank transactions with Board of Directors members and Management for 2008
Intercompany transactions as of 31.12.2008 - Bank (amounts in 000)
NBG uses NBG Finance Plc, NBG Finance (Dollar) Plc and NBG Finance (Sterling) Plc for financing activities (3,5 billion). The Bank offers liquidity to its subsidiaries in the Southeastern Europe and Turkey of approximately 5 billion.
The Board of Directors Audit Committee reviews the appointment of the external auditors, as well as their relationship with the Group, including monitoring the Groups use of the auditors for non-audit services and the balance of audit and non-audit fees paid to the auditors.
Corporate social responsibility
NBG views Corporate Social Responsibility (CRS), in its wider social context, as a core value and abiding principles throughout its history. NBGs Responsibility Corporate Social Action programme embodies the key CSR principles, both in its business plan and in its everyday modus operandi, lending real and generous support to a wide range of cultural, educational and humanitarian initiatives, as well as to the community at large.
NBGs commitment to environmental protection is reflected through its Environmental Policy Statement. To this effect, NBG developed and has applied since 2004 an Environmental Management System in accordance with the ISO 14001 requirements.
In particular NBG has supported the areas destroyed by the wildfires of summer 2007 with the amount of approximately 35 million during 2007 2008.
NBG has adopted a corporate governance framework that satisfies international and Greek legal, institutional and compliance requirements at the Board of Directors level and has established Audit, Human Resources and Remuneration, Corporate Governance and Nomination, and Risk Management Committees which operate according to their charters approved by the Board of Directors. In early 2008, the Groups compliance with the Sarbanes-Oxley Act for 2007 was attested to, as required by the Securities and Exchange Commission (SEC) of the United States and all necessary actions have been taken for compliance in fiscal year 2008 as well.
The parent Banks net profit for 2008 was 480,3 million.
The Bank has distributed the amount of 32,7 million as interim dividend for the 25.000.000 Non-cumulative Non-voting Redeemable Preference Shares according to the terms of those shares and a Board of Directors resolution in November 2008. The General Assembly of the Banks Shareholders will be asked to approve the above mentioned interim dividend and the distribution of a $2,25 dividend for the 25.000.000 Preference Shares in the current year.
The Bank will not distribute any cash dividend for ordinary shares for year 2008, following its participation in the support plan for the strengthening of the liquidity of the Greek economy and the provisions of Law 3723/2008 and art.28 of Law «Dematerialized Securities System, provisions on Capital Markets, taxation issues and other provisions.
For the Banks Board of Directors
Chairman and CEO
To the Annual General Meeting of Shareholders
Of National Bank of Greece
pursuant to article 4 of Law 3556/2007
Pursuant to article 4 of Law 3556/2007, listed companies must submit a supplementary report to the General Meeting of Shareholders providing detailed information on specific issues. This Board of Directors supplementary report to the General Meeting of Shareholders contains the required additional information.
A) Share capital structure
NBGs share capital amounts to 2.490.771.345 divided into (a) 496.654.269 ordinary registered shares with voting rights, of a par value of 5,00 (b) into 25.000.000 Non-cumulative Non-voting Redeemable Preference Shares as stated at point (xlvii) of par. 2 of article 4 of the Banks Articles of Association, of a par value of 0,30.
The Bank will increase its share capital through the issue of 70.000.000 redeemable preferred shares pursuant to Law 3723/2008, of a par value of 5,00, following its participation in the Program for the liquidity increase of the Greek economy.
NBG ordinary shares are listed for trading on the Athens Exchange (ATHEX).
The rights of the shareholders of NBG, arising from each share, are proportional to the percentage of the share capital to which the paid-in share value corresponds. Each share carries the rights stipulated by law and the Articles of Associations, and in particular:
Related to ordinary shares (consisting 99,7% of the Banks capital)
· 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 and profits from sale of shares which have been held for at least ten years and represent a shareholding larger than 20% of the paid up share capital of a subsidiary company of the Bank, since the said distributable part of profits is larger than that resulting from implementation of Companies Act 2190/1920, art. 25, par. 2(b) currently in force. In addition to the above, the net profit remaining from measurement of financial instruments at their fair value after deducting any losses resulting from such measurement is not taken into account for the calculation of the statutory dividend which is required by legislation currently in force. This is annually distributed to shareholders as a statutory dividend, whereas the distribution of a supplementary dividend is subject to General Meeting resolution. Shareholders entitled to a dividend are those 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 pre-emptive 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 certified public accountants 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);
· Pursuant to Law 3723/2008 and article 28 of the Law Dematerialized Securities System, provisions on Capital Markets, taxation issues and other provisions, for the period the bank is participating in the Program for the liquidity increase of the Greek economy, only stock dividend is allowed. These shares cannot be repurchased ones. Dividend to preferred shares issued abroad, are excluded from this regulation.
Related to preferred shares (consisting 0,30% of the Banks capital)
· The privileges of the Preference Shares are (i) the right to collect, before the ordinary securities and, if existing, other classes of preference shares of the Bank ranking or expressed to rank junior to the Preference Shares, a euro denominated annual dividend (which may be expressed as being equal to a USD amount) that may be payable by the Bank in USD, (the Preferred Dividend); in particular for the financial year 1.1.2008 to 31.12.2008 the aggregate amount of the Preferred Dividend may be increased by up to 3/4; (ii) the right to collect the Preferred Dividend also from the payment of dividend amounts described under article 45 par. 2b of the Companies Act and until full exhaustion of such amounts; and (iii) the right to collect before the ordinary securities and other Junior Obligations of the Bank an amount denominated in Euro equal to the sum of the nominal value and any premium paid, which may be determined by reference to a fixed US dollar amount, which may be payable in US dollars by the Bank, from the liquidation proceeds of the Bank, including above par reserves formed after the issuance of the Preference Shares (Liquidation Preference).
· The Preference Shares do not entitle their holders to cumulative dividends and are not convertible into common shares. The Preference Shares are issued without voting rights, subject to those cases where voting rights exist by operation of mandatory provisions of law.
· The approval of the payment of Preferred Dividends on the Preference Shares, in accordance with par. 5 hereof, will be declared on an annual basis at the absolute discretion of the Annual General Meeting of the Bank out of Distributable Funds under 44a of the Companies Act. Subject to the provisions relating to paragraphs 8 to 9 of point (xlvii) of paragraph 2 of article 4 of the Banks Articles of Association, the Bank will not be permitted to pay any Preferred Dividend on the Preference Shares if such Preferred Dividend together with any dividends previously paid and/or approved for payment in respect of Preferred Dividend Parity Obligations in the then current financial year would exceed the Distributable Funds under 44a or if the Bank of Greece has requested in writing the non-payment of dividend (including the amounts of dividend distributed under article 45 par. 2b of the Companies Act to the common and preferred shareholders of the Bank.
· The Preference Shares will be redeemable by the Bank in accordance with the provisions of article 17b of the Companies Act. The Bank is entitled to redemption at the First Call Date, as well as on any date thereafter following an invitation to all the Preferred Shareholders. The redemption is effected by payment to each Preferred Shareholder of an amount equal to the Redemption Amount. Such redemption will be subject to the prior consent of the Bank of Greece.
The non-cumulative non-voting Redeemable Preference Shares were offered in the form of American Depositary Shares in the United States. The American Depositary Shares are evidenced by American Depositary Receipts and are listed in the New York Stock Exchange.
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 Law 3556/2007
There are no significant direct or indirect holdings as per Law 3556/2007, 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.
Following the Banks participation in the support plan for the strengthening of the liquidity of the Greek economy in 2009, the issuance of shares pursuant to Law 3723/2008 and the appointment of an additional member to the Banks Board of Directors by the Greek state, the latter through its representative has the right to veto any decision related to dividend distribution and to the compensation of the President, the Managing Director and the other Board of Directors members and the general managers and the deputy general managers.
E) Restrictions to voting rights
There are no restrictions on voting rights issuing from the ordinary shares pursuant to the Banks Articles of Association.
Pursuant to the Banks Articles of Association, the holders of preference shares have no voting rights, except for the cases where this is strictly provided by the Law.
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.
Following the Banks participation in the support plan for the strengthening of the liquidity of the Greek economy, the Greek State appoints an additional member to the Banks Board of Directors, as its representative, for the whole period the Bank participates into this plan.
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, 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.
On 15 May 2008, the 2nd Repeat General Meeting authorized the Board of Directors to increase the Banks share capital up to the amount that corresponds to 50% of the paid up share capital (which amounted to 2.385.992.305 at that date) instead of 100% as provided by the Company Law. The increase shall take place within a three year period as of the date of the said General Meeting (instead of the five year period provided by the Company Law). The capital increase will be effected through the issuance of common shares with preemptive rights to the existing shareholders. Pursuant to par. 1, article 13 of Law 2190/1920, the Board of Directors will determine the terms and conditions of the capital increase.
It is noted that in case the Board of Directors proceed with the said share capital increase, the Board of Directors will duly submit a report pursuant to Law 3016/2002. The report shall include in details the terms of the increase, the number and type of shares issued, the par value of the share, the subscription price per share and the duration of the share capital increase. In case the issue is not fully covered, the Board of Directors will accordingly amend the Articles of Association of the Bank so as to reflect the paid up capital following this increase.
2) In accordance with Companies Act 2190/1920 Article 13 par. 13, pursuant to a General Meeting resolution a Stock Options Program 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 Law 3723/2008 and article 28 of Law «Dematerialized Securities System, provisions on Capital Markets, taxation issues and other provisions, the Bank cannot buy its own shares, for the whole period it participates into the Program for the liquidity increase of the Greek economy.
On 22 June 2005, at the repeat General Meeting of the Shareholders, a stock options program (the Program A) was approved for the executive members of the Board of Directors (BoD), management and staff of the Group. The Program shall last for five years and expires in 2010. The Banks BoD may decide to grant the options one-off or in parts at any time at its discretion. The maximum number of shares to issue under the Program shall be 3,5 million. The strike price shall be within the range of 5 per share to 70% of the average market price thereof within the time period from 1 January of the year the options are granted until the date they can be exercised.
On 1 June 2006, at the repeat General Meeting of the Shareholders, a second stock options program (the Program B) was approved for the executive members of the BoD, management and staff of the Group. The program shall last for five years and expires in 2011. The maximum number of shares to issue under this Program shall be 3,5 million. The strike price shall be within a range of 5 per share to 70% of the average market price thereof within the time period from the date following the date of the General Meeting (i.e. June 1, 2006) until the date the options can be exercised.
On 28 June 2007, at the repeat General Meeting of the Shareholders, a third stock options program (the Program C) was approved for the executive members of the BoD, management and staff of the Group. The Program shall last for eight years and expires in 2015. The maximum number of shares to be issued under this Program is 12 million. The strike price shall be within a range of 5 per share to 85% of the average market price thereof from 1 January until 31 October of the year the options are granted. The options are to be granted until 2010, and the maximum number of options that may be granted each year to the beneficiaries as a whole cannot exceed 1% of the total number of the Banks ordinary shares.
On 29 November 2006, the BoD approved the issue of 2.992.620 share options under the Program A. The exercise price was set at 23,80 per share. The vesting conditions were as follows: 15% of the options vested immediately, 35% of the options vested in 2007 and 50% of the options vested in 2008. During the third option exercise period (1-10 December 2008), no options were exercised.
On 1 November 2007, the BoD of the Bank approved the issue of a further 496.500 shares under Program A with the same vesting conditions and the same exercise price. During the second option exercise period (1-10 December 2008), no options were exercised.
On 1 November 2007, the BoD of the Bank also approved the issue of 3.014.100 shares under Program B. The exercise price was set at 23,00 per share. The vesting conditions were as follows: 15% of the options vested immediately, 15% of the options vested in 2008, 30% of the options vest after 1,5 years subject to achievement of minimum target EPS for the year 2008 or after 2,5 years subject to achievement of minimum target EPS for the year 2009 and the remaining 40% vest after 2,5 years subject to achievement of minimum target EPS for the year 2009. During the second option exercise period (1-10 June 2008), 387.970 options were exercised and the aggregate amount paid was 8,6 million.
During 2008, 229.850 stock options were cancelled.
3) In accordance Companies Act 2190/1920 Article 16 par. 5-9, pursuant to a General Meeting resolution, companies listed on the ATHEX may purchase up to 10% of their own shares (treasury shares) via ASE. On 17 April 2008, the Annual General Meeting of the Banks shareholders, utilizing the said option afforded by law, approved a scheme to purchase up to 10% of the Banks own shares, from 25 May 2008 until 24 May 2009, at a purchase price of between 5 and 60.
During the year ended 31.12.2008, the Bank and its subsidiaries purchased as part of their investment activity 11.756.276 shares of the Bank of a nominal value of 279,2 million representing 2,37% of the issued share capital and sold 5.802.272 shares of the Bank of a nominal value of 155,6 million representing 1,17% of the issued share capital. As at 31.12.2008 the Bank held 6.456.504 own shares of a nominal value of 145,3 million representing 1,3% of its share capital. As of the same date, no other entity of the Group holds any Banks shares.
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
Chairman and CEO
INDEPENDENT AUDITORS REPORT
To the Shareholders of NATIONAL BANK OF GREECE S.A.
Report on the Financial Statements
We have audited the accompanying financial statements of NATIONAL BANK OF GREECE S.A. (the Bank) and the consolidated financial statements of the Bank and its subsidiaries (the Group), which comprise the stand alone and the consolidated balance sheet as of 31 December 2008, and the 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.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as these were adopted by the European Union. 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 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 standards 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 risk of material misstatement of the financial statements, whether due to fraud or error. In making this risk assessment, 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 is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the accompanying stand alone and consolidated financial statements present fairly, in all material respects, the financial position of the Bank and that of the Group as of 31 December 2008, and 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 Requirements
We have agreed and confirmed the content and consistency of the Board of Directors Report to the accompanying Financial Statements according to the provisions of the article 43a, 107 and 37 of the Greek Company Law 2190/1920.
Athens, 30 March 2009
The Certified Public Accountant
Nikolaos C. Sofianos
RN SOEL: 12231
Hadjipavlou Sofianos & Cambanis S.A.
Assurance & Advisory Services
250-254 Kifissias Avenue
GR 152 31 Halandri
Reg. No. SOEL: E120
Athens, 30 March 2009
The Notes on pages 24 to 102 form an integral part of these financial statements
Athens, 30 March 2009
The Notes on pages 24 to 102 form an integral part of these financial statements
Detailed analysis of the changes in equity is presented in Notes 38 to 41 of these financial statements.
The Notes on pages 24 to 102 form an integral part of these financial statements