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National Bank of Greece SA (NYSE:NBG)

Q2 2014 Results Earnings Conference Call

August 25, 2014, 12:00 PM ET

Executives

Paula Hadjisotiriou - Deputy CEO

Paul Mylonas – Deputy CEO

Gregory Papagrigoris - Head of IR

George Angelides – Head of Finance

Nikos Christodoulou - Group Chief Information Officer

Analysts

Alex Tsirigotis - Mediobanca

Rohit Nigam - JPMorgan

Richard Hayden - Tipp Hill Capital

Alex Boulougouris - Wood & Co.

Kiri Vijayarajah - Barclays

Olga Veselova - Bank of America

Marta Romero - KBW

Alexander Lue - Baupost Group

Nikos Koskoletos - Eurobank Equities

Jaime Hernandez - Nomura

Jacob Kruse - Autonomous Research

George Lanis – GKL Global Analytics

Operator

Good afternoon, ladies and gentlemen. This is the Chorus Call conference operator. Welcome and thank you for joining National Bank of Greece Second Quarter 2014 Financial Results Conference Call.

As a reminder, all participants are in listen-only mode and the conference call is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

At this time, I'd like to turn the conference over to Ms. Paula Hadjisotiriou, Deputy CEO and Mr. Paul Mylonas, Deputy CEO. Madam, gentlemen, please go ahead.

Paula Hadjisotiriou

Good afternoon, everyone and good morning to those of you joining from the U.S. Welcome to NBG's 2014 second quarter results call.

I am joined by Paul Mylonas, Deputy CEO, Nikos Christodoulou and George Angelides from Finance, and Greg Papagrigoris from IR. After the presentation, we will turn to the Q&A.

So let's start with an overview. As the country grows stronger, older, and wiser and I will come back to that in a minute, so does the NBG Group. Our performance has become increasingly stronger every quarter over the past two years.

In Q2, this trend continued and was underpinned by the sharp decline in new 90-plus formation, driving a further reduction in provisions. This encouraging trend, coupled with a drastic curtailment of domestic operating costs and the expansion of net interest margin in our key regions, again generated key provision income in excess of the cost of risk.

In addition, Finansbank's profitability is recovering very strongly, demonstrating the resilience of its business model and boding well for its performance in the second half of the year, when conditions look set to improve substantially.

NBG's improving business trend and profitability and the current robust capital position are positive indicators of a satisfactory performance in the comprehensive assessment of the ECB due to be completed in the autumn.

In addition, the Group's five-year restructuring plan was formally approved by the European Commission DG competition on July 27. The bank undertakes to optimize its infrastructure in Greece, maintain strong risk management and corporate governance practices, and divest a set of certain non-core activities in Greece and abroad and also of a minority stake in Finansbank, maintaining the majority and control.

Turning now to the key highlights of the second quarter on Slide three; CET1 ratio jumps to 16.2% in Q2, up almost 6 percentage points, aided by the €2.5 billion capital increase, addition off balance sheet [DTI] (ph) recognition and organic profitability.

Q2 Group profit after tax remained again in the black reaching €965 million, most importantly excluding one-offs, profit after tax reached €71 million, the seventh consecutive profitable quarter. Not surprisingly for the fourth quarter since Q2 in 2013, NBG managed to cover cost of risk with pre-provision income, producing an operating profit of €48 million.

Four key elements to note; number one, Group core income up 2% Q-on-Q, reflecting fee income growth of 6% and NII growth of 1%, while Group net interest margin expanded by 8 bps Q-on-Q to reach 325, reflecting the positive spread dynamics in Greece and Turkey.

Number two, impressive Group cost containment of 12% year-on-year in the first half of 2014, led by domestic cost cutting, down 16%.

Number three, reduced Group loan provision charges, down by 5% Q-on-Q and 17% year-on-year, follow on abating new formation levels in Greece, Turkey, and SE, and Group cost of risk in Q2 drops to 223 bps, well below the NIM of 325.

And number four, Finansbank's profitability, which continues recovering in Q2 and tops TRY 246 million that is up 28% from Q1's 192 million and that was double the [trust] (ph) levels of Q4, which were only TRY 95 million.

And all of this as NBG's best-in-class liquidity position and low loan deposit ratios are maintained and net ECB exposures over assets crumbles to low-single-digit levels.

NBG's unique liquidity position is set to fund the recovery of the Greek economy with almost 1.5 billion of new lines approved and €0.4 billion already dispersed in Q2.

Coming now back to Greece on Slide five and six, in Q2 the economy exits recession recording the first positive sign, it's up 0.5% Q-on-Q in seasonally adjusted terms and this marks the effective end of recession following 18 consecutive quarters of sharp contraction.

Competitiveness gains increase with the unit labor cost coming down to 2001 levels and the labor market showing signs of recovery. It's important to note that the fiscal consolidation and external adjustment continue unabated as evidenced by the twin surpluses.

Specifically, Greece remains on course to over-perform for a second consecutive year compared with its annual fiscal targets as improving revenue trends supplement notable spending restraint; moreover, supported by a very strong tourism season. Economy is heading towards a second consecutive current account surplus in 60 years.

This abundance of positive evidence from the real economy indicating that the real Greek economy is recovering and on track to meet its program targets, is also confirmed by the markets. Indeed, the Greek 10-year government bond spread over Bunds is at four years’ low, and Greek banks have successfully issued a plethora of corporate bonds.

Altogether, these developments have supported a much more confident view on the recognition of our off balance-sheet deferred tax asset, and enabled us to record a further €994 million this time.

Turning now to three key aspects of our business on Slide 9, first on asset quality, domestic 90-plus formation levels reduced further in Q2 to €262 million, 16% lower than Q1, continuing a consistent decelerating trend for seven quarters in a row.

Q2 formation levels constitute just one fourth of the peak in mid 2012, and domestic provision charges are reduced by 5% Q-on-Q yielding a cost of risk of 264 bps, which is less than the 277 bps of Greek NIM for the first time in a very long time.

Secondly, on the liquidity front, best-in-class loan deposit ratio of 94% for the Group and at a unique 83% for the domestic business provides ample room to lever up the balance sheet. And ECB exposure is slashed by €7 billion Q-on-Q, settling at €11 billion. Net of the EFSF bonds is comprised of just 4.4% of the Group assets.

Thirdly on capital, Q2 CET1 at 16.2%, it’s 570 bps up this quarter as a result of the recently completed €2.5 billion capital increase, the DTA recognition, and the positive operating profitability. On a fully loaded CRD IV basis, including the remaining part of the Board approved capital actions and Finansbank's IRB, pro forma CET1 stands at 11.4%.

Back to the results on Slide 10, NIM in Greece reached 274 bps, continued to trend up for the third quarter in a row as it bounces back from the Q3 in 2013 lows of 251 bps. This performance is due to further impressive de-escalation of time deposit spreads as we will see later on.

In Turkey, NIM is recovering also reaching 532 bps in Q2, which is still below the historic medium term average of mid-to-high 500s. Here, Q2 NIM expansion reflects persistently high asset yields and an improving funding mix.

In the second half of 2014, on top of the above mentioned drivers, there has factually been a significant further reduction in the cost of funding, due to improving spreads that will have a positive impact on our NIM.

In Southeastern Europe, also NIM has increased -- sorry, NII has increased by 1% Q-on-Q, but NIM is lower at 345 bps. As a result of the positive spread dynamics in our core geographies, Group NIM in Q2 expanded by 8 bps to 325.

Costs on Slide 11 display a remarkable performance across the regions. In Greece, first half personnel costs are cut by a great 18% year-on-year, driven by the success of the Q4 large scale VRS, which reduced FTs by 2500. G&A are cut by equally [expensive]ph 12% year-on-year despite more advertising; and since the beginning of the crisis, domestic personnel cost have been slashed by a cumulative 39%.

As a result, H1 domestic expenses have edged down by 16% year-on-year and that produces a cost income ratio of 55% compared to 79% just a year ago.

In Turkey, cost growth on a stable currency basis has decelerated to 12% year-on-year reflecting the reduction of more than 2,000 FTs in Q2. Current cost containment efforts aim at normalizing OpEx growth to levels closer to inflation while at the same time core revenue growth will pick up -- will be picking up aided by the maturing of Finansbank's relatively young branch network.

In Southeastern Europe, costs also display sustained improvement. They are down 4% year-on-year in the first half. All-in-all, at the Group level, cost to income stands at 55% for the first half, which is 4 percentage points down from last year.

Asset quality trends on Slide 12 are encouraging as we continue to witness very positive signs in Greece with the business (inaudible) successive drops in 90-days-plus in formation levels.

Q2 of €262 is an impressive 15% reduction Q-on-Q and restrains 90 days plus ratio to 29.3%. As a result, domestic cost of risk is as we have said only 264 and it falls below our Greek NIM of 274.

Equally impressive is the picture of the Group -- is a picture at the Group level. Formation at 308 million dropped 20% Q-on-Q and 46% year-on-year. This is a result of encouraging developments in the domestic business, but is also a function of normalizing formation levels in the other regions manifested in the reduction of the 90-plus ratios in Q2.

Turning to Slide 13, developments in liquidity remain favorable as our ECB exposure is reduced massively in Q2, down €7 billion as we have said, and that is a result of, among others, the capital raising, the new five-year bond, repayment of the Greek Government bonds [issued] ph in May, and new market (inaudible).

Adjusting for €6.5 billion of the EFSF note pledged to the ECB, our net Euro system exposure stands currently at just 4.4% of Group assets. As regards deposit growth by region, in Greece, deposit up by 13% year-on-year and customer deposits up 2% Q-on-Q, yielding an improving loan deposit ratio now at an advantageous 83%.

In Turkey, deposit growth of 7% year-on-year is driven by low cost current accounts. They are up by 17% year-on-year. In Southeastern Europe, deposit increased marginally while the loan book has stopped contracting, sustaining a balanced funding profile.

Regarding our 16.2% CET1 ratio on Slide 14 on a fully loaded CRD IV basis including the Board approved capital access and Finansbank’s IRB, pro forma CET1 stands at 11.4% well above the European bank median of 10.5%.

As you know Greece State preference shares are excluded from the full amount of ratio what maybe has not been clear is that this calculation does not include a minority offering on Finansbank.

Now, some interesting details by regions, starting from Greece on Slide 16. The first half pre-provision earnings recovered sharply. They reached 419 million relative to 160 in the first half of 2013, as a result of core income growing by 12%, aided by lower funding cost, recovering fee income, and drastic cost containment benefiting from the FTEs reduction of 2500.

The credit risk charges for the first half of the year are also reduced by 18% year-on-year and that reflects the abating formation levels, but still maintaining domestic coverage at 56%.

Turning to Slide 17, it is evident that we have started to lever up our corporate book as business volumes are up by a net 200 million month-on-month in June, reversing the slightly negative seasonality trend for the first month of the year.

NBG’s corporate volume should be expected to pick up substantially in the first -- in the second half of 2014 in line with the gradual improvements in confidence levels and economic conditions as NBG, based on a strong liquidity position, will keep supporting the country’s economic recovery.

This €3 billion of new disbursement, of which about half has already been approved for disbursement is aimed at financing high growth value adding and export oriented corporate businesses, and is taking place -- is taking the form of installment loans mostly rather than credit lines in Q2 and mainly in June, more than 400 million credit was disbursed.

Turning to Slide 18, domestic NIM during Q2 benefited from the repricing of our time deposits by a solid 26 bps, down to a spread of only 203 bps. It’s important to highlight that these last six months, we have [saved] a cumulative 61 bps from our time deposits. Furthermore, the current front to back book spreads has fallen 20 bps points to secure additional short-term funding cost benefit.

Given the short repricing duration of the book, it's fairly large size and the magnitude of the (inaudible) spread reduction, NII should benefit substantially in the second half and beyond.

On the asset side, corporate lending spreads have stabilized at 409 bps broadly equal to new production rates. The stabilization of the corporate spread at levels north of 400 bps is positive in light of delivering our potential of our corporate book and the positive spread differential to the deleveraging of the mortgage book, which carves only about half of the spread of our corporate book.

Moving now to Turkey, that’s Slide 20. Recovery has accelerated in Q2. Profit as we have said, 246 million Lira, up by 28% Q-on-Q, and this is driven by the normalizing provision charges, down 13% and the recovering core pre-provision income, up 18%, benefiting from core income recovery of 2% Q-on-Q, [up 2%]ph and cost containment reflecting the reduction of the number of FTs by about 300.

On Slide 21, NIMs progress on the recovery path in Turkey. Q2 is up by 12 bps up to 532. The expansion reflects resilient asset deals despite monetary easing and an improving funding mix. This is benefiting from a growing share of low cost for demand deposits.

In the second half, we expect a further reduction in the cost of funding due to improving yields impacting positively our NIM with expansion combining with the strong credit growth environment of Turkey should result to further accelerate recovery of our NII.

The impressive shift in Finansbank’s business model towards the SME and Commercial segments on Slide 22 is manifested in the mix of the loan book, which now for the first time since 2008 has a higher exposure to the business relative to the retail segment.

Retail loans compressed at a rate of 5% year-on-year, while corporate lending showed explosive growth at 34%. On the liability side, lower cost demand deposits grew by 17% whereas the overall deposit pool growth intentionally decelerated growing only 7% year-on-year due to funding cost optimizations.

On the next slide, highlighting asset’s quality trends, the 90 plus ratio has edged down by 50 bps during Q2 to 5.5% aided by the sale of NPLs as well by abating underlying formation.

Trends in Q3 are also positive with both corporate and retail formation remaining at low levels. Provisioning charges have also been reduced substantially to a cost of risk of 156 basis points down by more than TRY 70 million since Q4, a reflection of improving formation trends.

And finance cost capitalization levels on Slide 24 remain robust. CAD reaches 16.5% well above peers and Core Tier 1 settles at 12.5%. Given the high growth -- relatively high credit growth environment in Turkey and declining interest rates, (inaudible) remains important in supporting financial expansion.

Finally on Slide 26, let me summarize Southeastern Europe’s recent performance. Our SEE operations remain profitable, well capitalized and self funded. Q2 profit after tax came at €15 million, that’s up 8% Q-on-Q on the back of recovery in core income and further normalization of provisions.

Aided by Q2, first half pre-provision income recovered sharply, growing 32% year-on-year, reflecting core income growth by 9% and cost containment of 6% whereas credit risk charges reduced by 20%. All-in-all, last year's 7 million results for the first half blossomed in 2014 into €30 million.

With that, I would like to conclude the introductory remarks and open the call to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from line of Tsirigotis Alex of Mediobanca. Please go ahead.

Alex Tsirigotis - Mediobanca

Yes. It’s Alex Tsirigotis from Mediobanca. A couple of questions from my side if I may, first of all on the current NPLs that you have, are you able to share with us the percentage, which were originally restructured and have now flown into NPLs?

Secondly, with regard to the Finansbank, can you give us an update of how this stake sale is proceeding and would you be open to offer a majority stake or do you see Finansbank remaining as fundamental part of NBG, which your investment case depends on? Thank you.

Paula Hadjisotiriou

Finansbank is one of our core regions, and it is also an outstanding bank. We remain very committed to Finansbank, and we were quite reluctant to let go over the minority stake that we do have to let go because this is what we have agreed with DG Competition, and we will be honoring our commitment to the DG Competition. We have no plans whatsoever of doing anything other than that.

I think the first question was a bit more complicated, and I don’t know whether you want to take it offline with Greg who maybe can give you some of the statistic to help your model.

Greg Papagrigoris

We’ll follow more the restructure that are performing rather than the structured ones. The ones that get into the non-performing, we need to go back and find out when they went in there. So it’s not that [rather than]ph number but we can get it for you when we get offline.

Alex Tsirigotis - Mediobanca

Okay. Thank you, guys.

Operator

The next question comes from line of Mr. Nigam Rohit of JPMorgan. Please go ahead sir.

Rohit Nigam - JPMorgan

Hello, good evening. Just couple of questions from my side please, the first one is on your NII increase. We saw a decline quarter-over-quarter and on some parts of the loans spreads that we saw some pressure as well. So we were just wondering what do you see as the trends going forward for NII and margins increase? That is the first question.

The second question is on the DDAs, I am just wondering, is it more or less broadly done in terms of recognition or do you think there is still some scope for additional recognition going down the line.

And the third question is bit of -- I was just wondering, your fully loaded Basel III is 11.4, but if I remember in the previous quarter presentation you gave adjusted for everything a number of 11.6. So we’re just wondering what is leading to this 20 basis decline despite the profits quarter-over-quarter? There are three questions please.

Paula Hadjisotiriou

Let me take one thing at a time. NII, we have the NII spreads as you know that we have the most, 18, I am corrected. There are two things that are happening at the same time and both tend to be positive and that will give the general outlook of what we expect going forward.

On the one hand we have the gradual change in the mix of the loan portfolio where there are minor changes in spreads especially on the retail side, but the important part of the portfolio right now and what is helping the RIG economy right now is the business side and that’s where we are supporting and that's where we are maintaining this spreads and that is (inaudible).

Actually what may not have been quite clear is the fact that we had a net increase in loans in June in Greece despite old repayments and that's the first month that we managed to do that and we're quite proud of that and we expect to do much more. So we have an increase there. We have a change of the mix replacing lower with highest spreads and that’s a move in the right direction.

The other thing which is moving in the right direction comes from the deposits. The deposit spreads -- the time deposit spreads are coming down and they continue to come down and we are actively moving to get them down and we will get them down as soon as we can and we continue to get them down as fast as possible.

As we say, we’ve got spreads right now. The ready to fund book is more than 20 bps lower than the back book. That will slowly flow into the back book and that is going to be making a significant difference.

I think that gives a general trend of Greece. NIM has been increasing and will continue to increase and in order to support the business here, but it’s also support of the business is what we want to support because that's what we're going to get profits from.

The second question had to do with what's happening with DTA. DTA is a -- we seem to have a bit of an odd one out when it comes to DTA and we do have large amounts of DTA given that as far as PCI was concerned, we had by far the largest hit from the exchange of the Greek Government bonds.

Now DTA, we are doing our calculations. We’re being quite conservative and we think that at this point where we are right now and we want to stay as conservative as we believe that we need to be in the current and foreseeable circumstances.

So I don’t expect anything to change unless the government actually improves everything that it's doing in tax collection at an even faster rate than what they’re doing right now. So maybe we should be all keeping our fingers crossed.

But the general thing is that we’re happy where we’re right now under the circumstances and sorry what was the third question?

Rohit Nigam - JPMorgan

Question inaudible.

Paula Hadjisotiriou

I think that the fully loaded -- there were some minor corrections that we keep doing. As you know the Basel (inaudible) is a bit of a trial and error in there still and a lot of (inaudible) coming profit has come into the calculations, but a lot of that profit is also coming from DTA to be correct and DTA is not accepted under the Basel 3 CRD IV rules. So in essence if anything it’s even increasing that risk weighted asset, so it changes a bit the calculation.

Rohit Nigam - JPMorgan

Okay. So just one last point on that then, so essentially the NII levels of 414, which you see for Greece, you basically see that these NII levels can increase in the following quarters maybe not very substantially, but still on an increasing trends, right?

Paula Hadjisotiriou

Yes.

Rohit Nigam - JPMorgan

Okay. Thank you.

Operator

The next question comes from the line of Mr. Hayden Richard of Tipp Hill Capital. Please go ahead.

Richard Hayden - Tipp Hill Capital

Thank you very much. Could you update us on asset dispositions in terms of timing and expected proceeds?

Paula Hadjisotiriou

Asset dispositions, we have to conclude certain asset dispositions as per the requirements of the DG competition and we have a lot of time to do that. I think that’s probably what the only thing I can say.

Richard Hayden - Tipp Hill Capital

Nothing more specific? For example private equity?

Paula Hadjisotiriou

-- are you private equity guy?

Richard Hayden - Tipp Hill Capital

No.

Paula Hadjisotiriou

The private equity has commenced and it’s proceeding, but it's a proper lengthy process and quite complicated as I’m sure you know. It’s not an easy disposal because it’s a very complicated thing about all the various investment funds et cetera.

Paul Mylonas

I think that the point to say on disposals is that under the DG competition rules all disposals have to be done in an auction process and therefore I’m sure we’ll get market prices for what we offer. I don’t think that we could say anything that will enlighten you more than that unfortunately.

Richard Hayden - Tipp Hill Capital

Where would you earmark those proceeds if they were to develop?

Paula Hadjisotiriou

I’m not sure I’m following -- the proceeds, what do you mean?

Richard Hayden - Tipp Hill Capital

How would you use the proceeds from the asset dispositions?

Paul Mylonas

Well, as you know again from the DG competition restructuring plan there is a ban on dividends unless we outperform the business deal restructuring plan. If we outperform, then we can request to give dividends. So I mean what profits working into good what can you do with profits? You are going to give a dividend or you can keep them for as capital. Again I’m not sure if I’m missing something on your question.

Richard Hayden - Tipp Hill Capital

No. I’m just interested on the allocation of capital going forward.

Paul Mylonas

Okay -- well, again the allocation of capital in the sense of where we’ll be doing business is a slightly different question, okay? And there clearly capital is going to be allocated clearly on Finansbank. It’s going to be earning profits and the capital from Finansbank will be used to grow Finansbank while the growth in Greece will require more capital than it has in the past, so that’s the other thing.

Now the big question and the billion-dollar question for Greece is how much release there will be from provisions or not and that’s the final question on the use of capital.

Richard Hayden - Tipp Hill Capital

Okay. Thank you.

Operator

Your next question comes from the line of Mr. Boulougouris Alex of Wood & Co. Please go ahead sir.

Alex Boulougouris - Wood & Co.

Yes, hello. Coming back a bit on loan growth in Greece, you said that zone figures were a bit better, but when do you expect the deliberating phase to stop and to see some meaningful loan growth in your books, that’s the first question.

The second is on the amount of restructured loans in the second quarter, if you could you give us the figure and also maybe your view on this press reports of our DTA recognition and a law that is supposedly being passed -- will pass from the Greek government to turn the DTA into a tax credit, if you have any comment on that. Thank you.

Paula Hadjisotiriou

The issue of loan growth, as we say we’re granting loans and there are a lot of regular repayments from our clients, especially on the retail side. So the major effort is to ensure that the new loans we’re granting are actually more than the regular repayments that we’re getting and we’ve manage to achieve that in June. So I’m very proud of that and we’ll continue doing that.

We expect to have an increase by the end of the year, a small one. That is what we’re aiming for by granting all the loans that we’ve approved and that we aim to approve.

As we say we have ear-marked about €3 billion and we’re working through those mainly installment loans so they shouldn’t be disappearing far too quickly but there are a lot of regular repayments.

So that is what we’re working on and that is what the business division is concentrating on to ensure that they can identify well thought through business plans by entrepreneurs with the track record so that we have find bankable projects or businesses that we want to lend to, which are adequately capitalized as well.

It’s going to be much more marked. It’ll be more intensive or whatever the right word is in 2015, but we hope to be able to actually get a small plus this year as well.

Now as I’m sure you’re following you know that Italy and Spain and Portugal have legislation, which enables all or part of their DTAs to become DTCs and be proper capital eligible for this year, D-IV. Efforts are also taking place in Greece from what we also read in the newspapers.

It makes sense because there isn’t -- there shouldn’t be a negative difference for Greece so that it puts us on a level playing field with the other countries given that especially that Greece has half and as much more than all the other countries. We'll wait to see. We’ll be very happy to see it of course.

Paul Mylonas

On the restructurings, the numbers I have handy, suggest about a number of around 250 to 300 of restructurings in the quarter.

Alex Boulougouris - Wood & Co.

Okay. Thank you very much.

Operator

Your next question comes from the line of Vijayarajah Kiri of Barclays. Please go ahead sir.

Kiri Vijayarajah - Barclays

Hi, it’s actually Kiri Vijayarajah from Barclays. Just a question on cost. If I look at your domestic business where it's actually set on the charts you show year-over-year trends all look pretty good, but when I look at it quarter-on-quarter it looks like costs have started grading in Greece.

So is it fair to say that along the cost savings you sort of talked about and are now kind of “in the numbers” and it's now more steady state from here? I think it's more broadly? Are you kind of happy with the size of your platform in Greece?

And secondly also sticking with Greece with a follow-up question on the NII contraction you showed in Greece. If I look at Slide 18, it looks like the biggest move is really in the bond portfolio you show there in Greece. Falling contribution there turned NII from bonds down from 55 to 45; if you could just elaborate on that, I guess -- there's falling yields going on but that drop does look quite sharp and obviously looking forward is there more of that in the pipeline as Europe yields continue to fall and maybe you're de-risking or shrinking the bond portfolio. Thank you.

Paula Hadjisotiriou

The first question has to do with costs. We have them on Page 11. Yes, following the dramatic decrease from last year, we haven’t seen a significant dramatic decrease between Q2 and Q1 obviously. In Q1 we actually absorb again reorganizing ourselves because we’re operating 2500 people less and that happened from one day to the other.

And I think it’s very impressive on the part of NBG that it is managing to do the same things as with having lost about 10% of its people. That shows how organized the organization is so that they can handle that. That doesn’t mean that we’re going to stay there of course and we’ll have our refinements going forward, although as we proceed from one to the other, you’ll not be seeing that.

Now you’re correct to point out that we have a small increase when it comes to the G&As that we actually explained, that were some advertising. The famous €3 billion campaign to say that we as the bank want to support the Greek economy and we have ear marked this amount and there is a bit of an increase also in depreciation that has to do with increase of investments by our property subsidiary, which is doing extremely well. Thank you.

Now I think you also asked something about NII. Yes there is a difference also on the part of bonds et cetera, bonds and treasury bills. As we have said, there was a repayment of the Greek Government bonds of 1.4 billion. They were the bonds maturing in May 2014. They were repaid and there were some replacements of treasury bills at slightly lower spreads.

Our aim in life is not to be investing that much in bonds. It’s more to be giving loans to our clients and we hope to be able to use all the surplus liquidity for loans as opposed to bonds at a much better spread as well.

Kiri Vijayarajah - Barclays

Okay, understood. Thank you.

Operator

Your next question comes from the line of Mrs. Veselova Olga of Bank of America. Please go ahead.

Olga Veselova - Bank of America

Thank you very much. I have several questions. One is really a small clarification. Would you remind us what happens if you don’t follow the requirement to dispose 40% stake in Finansbank by end of the next year. Can you meet this requirement?

Paul Mylonas

No, that’s a commitment by the Greek Government to Europe. I guess what the penalty is, is I’m not quite sure but it’s pretty awful. None of us will be around to survive it.

Paula Hadjisotiriou

But having said that we have to put it into perspective because DG competition is not an unreasonable bunch of people out there who just want to kill us. Obviously we know that we have a commitment and we have to move in that direction. If we have taken the steps that we need to have taken by then and the circumstances happen to be such that we’re talking about something that would be massively capital destroying.

They wouldn’t want to us to proceed into something within the timeframe. I think then we will be able to talk to them and that with some reasonable discussion on the subject. Now but then Paul wants to resign in the process. No, obviously -- no we’ll understand this is a commitment and we’re working towards it and we believe that the markets are favorable towards such a solution.

Paul Mylonas

It's unlikely there will be -- I don't foresee any delays and what happens I guess if you want to be technical about it is that the commission anytime the Greek Government doesn’t meet its commitments on any aspect in few times gets huge fines and that’s why the government I am sure will not be very happy and we'll avoid fines will be incurred so we’ll avoid them.

Olga Veselova - Bank of America

I see. Thank you for this. My second question is about your restructured loans. Sorry if I miss it somewhere, but what is the volume of restructured loans right now and what is the level of coverage of this loan?

George Angelides

The level, I presume you want to know the performing ones because as the previous gentlemen asked, we don’t really distinguish between nonperforming restructured and nonperforming regular. And there we have on the retail side about 4.5 billion and on the corporate side about a bit over 2 million of performing, where performing is defined as below 90 days.

Olga Veselova - Bank of America

Great. And what is the coverage of this restructured performing loans.

George Angelides

I don’t have that handy. We will have to get offline please.

Olga Veselova - Bank of America

Sure. My other question is about your 11.4% fully loaded Basel III ratio, does this ratio include [pre-F] (ph), does this include your capital action and when do you think you will implement IRB approaching Finansbank?

Paula Hadjisotiriou

The numbers, the numbers yes they do include IRB of Finans. The probability that we are changing regulators right now and we seem to have been caught halfway between the two.

So all our calculations and all our models will be resubmitted to the SSM, which is taking over and they will be reviewing it. I am not sure of the speed with which the SSM will be able to view these things. They will take a bit longer because they are starting from zero knowledge basis, but I don’t see that it will take much longer than somehow mid 2015.

Olga Veselova - Bank of America

Okay. And does this ratio include the preferred shares and other capital actions?

Paula Hadjisotiriou

The 11.4 we have taken out the preferred shares because in 2018 they are no longer eligible to be called as Core Tier 1, common equity Tier 1, CET 1. The smaller capital actions, which were agreed with the Bank of Greece are included, but the major capital actions such as Finans are not included.

Olga Veselova - Bank of America

That’s great thank you. And some clarifying question, when if you publish, when you will publish the restructuring plan and the list of assets, which you are looking to dispose.

Paula Hadjisotiriou

The publication is currently is the discussion document that we are working with the DG Competition to finalize making sure that things, which are considered confidential etcetera are not included in the public document of the restructuring plan.

This also involves the Bank of Greece and it's coordinated by the Ministry of Finance. It's an ongoing thing. We have sent some comments and we are waiting back from DG Competition, I assume that it will be happening quite soon I would guess.

Olga Veselova - Bank of America

Thank you. And my very last question is also a small clarification. When ECB will make the stress test, will they test your South and Eastern Europe exposure and Turkish exposure separately and provide some capital assessment for non-Greek corporations and then they will add them to the Greek potential capital needs?

Petros Nikolaos Christodoulou

Of course. The test is for the Group.

Paula Hadjisotiriou

It’s a group test.

Olga Veselova - Bank of America

All right. Thank you.

Operator

The next question comes from the line of Romero Marta of KBW. Please go ahead.

Romero Marta - KBW

Hello. Good afternoon. I have a few follow-up questions regarding capital after disposals and asset quality. Starting with capital and going back to your fully loaded [inaudible] one-off 11.4%. Please quantify the impact of the Bank of Greece approved capital actions on the IRB model on Finansbank?

Paula Hadjisotiriou

Can you get all the details from Greg please, just so we don’t labor the point.

Romero Marta - KBW

Okay. My second question was regarding Finansbank. Can you confirm that finally under the DG Comp restructuring plan you will be forced to sell 40%. Just correct me if I am wrong, but I thought that following the capital increase you made you are expecting to get away with only disposal of just about 20%. Is that correct?

Paula Hadjisotiriou

The form of commitment as we have said is for a significant minority disposal. It will probably be in two stages and as I think we've talked about the legal side of the commitments to DG Competition.

Obviously as times goes by and depending on our performance on say the first tranche and anything else that we do, we will try and discuss everything with DG Competition who monitors what we do very closely and hopefully with good behavior maybe we will be able to reopen a number of things that goes without saying, but the legal side of the commitments is there and that exists.

Romero Marta - KBW

Okay. Thank you. Moving to asset quality, it will be very helpful if you could help us understand your expectations of all your current outstanding nonperforming exposure based on the feedback you may have from the ECB. Could you help us with that?

Paul Mylonas

I am not sure I understood the question. Could you clarify that?

Romero Marta - KBW

Well as you know there is the [inaudible] ECB will take into consideration nonperforming exposures as opposed to only nonperforming loans including [for] [ph] bond exposure and so on. So could you give us the data of overall NPLs in [inaudible] loans as of June 2014?

Paul Mylonas

Of course. Let me guess I think that Greg can you give details, but in my previous comments to a question that I gave you the restructured, which is what you’re basically going to add to your NPLs and get the numbers that you are looking for.

So the NPLs are in the documents, the restructured, the performing restructured, I gave a little while ago, broad brush, and you can get more detail, but you add those two numbers and those are the non-performing exposure that you want.

Romero Marta - KBW

Okay. Thank you. And lastly on Turkey and cost trends you are seeing a very good quarter there, could you give us a little bit of color on trends you expect for the rest of the year and going forward?

Paul Mylonas

Yes, we are very pleased with the rebound that Finansbank has managed in difficult circumstances. The NII is looking very good and is being helped by the reduction in interest rates coming both from the easing by the central bank as well as the liquidity inflows into the economy, which has led to a sharp drop in interbank rates.

So that’s going to help us offset the hike -- the impact on NIM from the hike in interest rate in the end of the -- in the first quarter. So NIM trends are picking up very strongly. I think not to give too much forward guidance here but we see decent double-digit growth of NII in the next quarter based on what I am seeing now.

Cost should be close to flat and provision should also be coming down. So you noticed in Q2 the reduction in the headcount that will continue in the following quarters. So all the key driver lines are looking good. NII is picking up strongly. Cost will be flattish and provisions will be coming down. So all that should lead to a very good Q3 and Q4.

Romero Marta - KBW

Okay. Thank you very much.

Paul Mylonas

Our crystal ball ends there.

Romero Marta - KBW

Thank you.

Operator

(Operator Instructions) The next question comes from Lue Alex of Baupost. Please go ahead.

Alexander Lue - Baupost Group

Hi. I had two questions. One about the decrease in total deposits in Turkey, and then two, could you give comments on the NPL ratio in Turkey, ex the sale of the NPL portfolios so being sort of what trends are you seeing there?

George Angelides

Yes on the deposits the Finansbank as you know issued a very successful bond, 500 million and therefore they didn't feel the need especially [the panel] [ph] interest rates are very high to have that additional liquidity cost.

So combined also with some liquidity management where they took some more money from the central bank at the lower bonds rate that led to a drop in deposits at a time when deposits were quite expensive. That’s a sort of opportunistic decline. I don’t think that’s a trend, okay.

Moving to your second question about the NPL sales, I think that if you adjusted the path for the sale, you would see a slight pickup versus the previous quarter rather than the climax. So there I think that we are seeing positive trends on all books with the exception of credit cards where the two factors one is the [dominant] [ph] factor where the actual amount of credit cards outstanding is declining quite rapidly as a matter of fact.

And the second is the change in legislation which has forced a higher amount of repayments, which led to a pickup in nonperforming loans, which should work its way out. So I hope that answers the questions.

Alexander Lue - Baupost Group

Yes. Thanks.

Operator

The next question comes from the line of Koskoletos Nikos of Eurobank Equities. Please go ahead.

Nikos Koskoletos - Eurobank Equities

Yes. Hi just a very quick one clarification. You mentioned that the DTA that you recognized in the quarter was 994, is that correct?

Paula Hadjisotiriou

Yes.

Nikos Koskoletos - Eurobank Equities

So 994 would assume that maybe another 900 is what is left. 800, 900 is what is left off balance sheet. Will that be correct to be assumed?

Paula Hadjisotiriou

Off balance sheet we have I think the $1.2 billion that we have off balance sheet.

Nikos Koskoletos - Eurobank Equities

That remains. Okay. Thank you.

Operator

The next question comes from the line of Mr. Hernandez Jaime of Nomura. Please go ahead.

Jaime Hernandez - Nomura

Hi good afternoon. I have got two specific questions on Finansbank. I am getting a little bit confused on the stake and the timings. So of course if it's possible I mean if it's probably [inaudible], can you please confirm or clarify what is the size of the stake of the commitment and what is the timing of the disposal? Thank you.

Paula Hadjisotiriou

We are looking at a 40% eventual disposal by the end of 2016.

Jaime Hernandez - Nomura

That’s really helpful. Thank you.

Operator

(Operator Instruction). The next question comes from the line of Mr. Nigam Rohit of JPMorgan. Please go ahead.

Rohit Nigam - JPMorgan

Hi. A very quick follow-up question on this Finansbank [inaudible]. Is it -- would you say prefer a sort of sale of stake in Finansbank or more so let's say a Finansbank does capital increase and you decide not to invest, try not to participate there by reducing your stake, which will give money to Finansbank to grow, but in the first case might not necessarily do that. So if there is no requirement on that front, right, you can do either ways or you can do a combination?

Paul Mylonas

You are right. We can do any of those options.

Rohit Nigam - JPMorgan

Okay. Thank you.

Operator

The next question comes from the line Mr. Kruse Jacob of Autonomous Research. Please go ahead.

Jacob Kruse - Autonomous Research

Hi it's Jacob of Auto, just had a quick question. You say in the release that you expect to have sufficient levels of capital to address the challenges of the stress test. Can you qualify or quantify that in any way or just outline what your thinking is around that in terms of assets or capital? Thank you.

Paul Mylonas

Clearly this is an ongoing exercise. They sit back with ECB on many fronts, even the first part of the AQR is still not completed, and definitely the second part is [inaudible].

I think what is a positive news for us is that the base on the dynamic balance sheet which implies that the profits and the benefits from the asset dispositions under the structural plan will be seen as mitigating capital actions, so that’s very positive for us. So that is additional capital over and above the current levels that you have seen in the Q2 results.

Jacob Kruse - Autonomous Research

Okay. But you haven’t received any kind of – or you don’t have a sort of preview or idea of the outcome of the AQR stress…?

Paul Mylonas

No, and I don’t think that there is any bank in Europe that is in that position, no.

Jacob Kruse - Autonomous Research

Okay. Great. Thank you.

Operator

(Operator Instructions) The next question is from Mr. Lanis George of GKL Global Analytics. Please go ahead.

George Lanis – GKL Global Analytics

Thank you, good afternoon. Just one question, assuming everything goes along the plan, GDP expansion both 2014 and 2015 and onwards and all your capital plans there on as well. Why would you expect to have zero cost of risk and when would you expect to have some provision write backs? Thank you.

Paul Mylonas

That’s the billion dollar question. I don’t think anyone can give you anything precise here. Clearly, there are the banks in Greece and NBG in particular have a large amount of provisions, we have a large amount of capital, okay, and we think that with the recovery of the economy, number one, the change in the bankruptcy laws which you will see in the next few months both corporate and the household bankruptcy laws -- the corporate would become far more credit friendly as will the household one, will give us weapons to be able to restructure quickly and therefore get release of provisions from our loans. This should increase tremendously the ability of banks to basically be able to release provisions.

Now, there’s a change in the macro from recession to a growth and now which is happening this quarter. There is the law -- the corporate bankruptcy law and the household bankruptcy law have not yet been defined and we’re hoping to see the terms of these things. So without a clear picture on both those funds, I don’t think that anyone can give you anything precise, but we are very optimistic that in this environment we will be able to claw back some of these provisions.

Operator

We have a follow up question from the line of Mrs. Veselova Olga of Bank of America. Please go ahead.

Olga Veselova - Bank of America

Thank you very much for taking these follow up questions. One is about dynamic or static approach to the assessment of capital, potential capital needs. You mentioned that the test will be based on dynamic approach. Has this been decided or this is assumption that is yet to be decided.

And if we talk about this approach as dynamic versus static, should we think about the difference as the €1 billion capital which you disclosed as additional capital needs when you raised equity earlier this year?

Paula Hadjisotiriou

The process that the ECB runs is based on firstly the static balance sheet approach, which applies to all European banks. It’s a very uniform rule. That will also apply to us.

What the ECB is also working on and they’re also looking at our restructuring plan what we call the dynamic balance sheet approach so effectively they are also stressing our restructuring plan along the lines of the stress that is applied to the static balance sheet approach, and that is also going to arrive at another result.

Obviously the differences between the restructuring plan, the dynamic and the static is that you have a much friendlier balance sheet and you also can incorporate some of the capital actions that are taking place. We at this point don't know more details than that -- that we’re waiting to have more clarity from the ECB.

Olga Veselova - Bank of America

So you say some of the capital actions but probably is -- it is possible it will be less than €1 billion, which you disclose.

George Angelides

It would be all the capital actions that are in the restructuring plans. All.

Olga Veselova - Bank of America

All capital action. Right. Okay. Thank you so much. And my second question is really an update about your progress with moving assets to restructuring business units. I remember we discussed it briefly at a previous call. So what is volume of assets which have moved there now and what number of people have you assigned to work on these problem assets?

George Angelides

We have created a corporate special asset unit that has about 5.5 billion of assets now. The people are last count I saw it was about 140 and it’s increasing. We had a unit for the retail. It’s called the retail collection unit. That was much bigger, had about 450 people working for it not including the outsourced people, outsourced lawyers…

Paula Hadjisotiriou

And the corporate side doesn’t include the outsourced.

George Angelides

And there the number is much bigger. It is almost all the retail number from the loans, which is almost 10 billion.

Olga Veselova - Bank of America

Thank you so much. Thank you.

Operator

Madam, gentlemen, you may now proceed with your closing statement.

Paula Hadjisotiriou

So the Q2 developments, ladies and gentlemen, allow us to be optimistic about the continuation of the positive course of our operations. Among [the way] [ph] to focus channeling liquidity to healthy and promising good businesses remains key. In this effort we are backed by healthy liquidity that gives substance for our superior position and underscores our already enhancing shareholder value and contributing to economic growth.

I would like to thank you for your attention.

Operator

Ladies and gentlemen, the conference is now over. You may disconnect your telephone. Thanks for calling. Goodbye.

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Source: National Bank of Greece (NBG) Q2 2014 Results - Earnings Call Transcript
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