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National Bank of Greece SA (NYSE:NBG)

Q2 2007 Earnings Call

August 30, 2007, 11:00 AM ET

Executives

Paul Mylonas, Ph. D. - Chief Economist and Chief of Strategy, Head of IR

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Petros Christodoulou - General Manager, Private Banking and Group Treasury

Analysts

Kimon Kalamboussis - Citigroup

Antonio Ramirez - Keefe, Bruyette & Woods

Tania Gold - Dresdner Kleinwort

Presentation

Operator

Good afternoon ladies and gentlemen. This is the Chorus Call conference operator. Welcome and thank you for joining National Bank of Greece First Half 2007 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Anthimos Thomopoulos, CFO and Mr. Paul Mylonas, Chief Economist and Head of Strategy of National Bank of Greece. Mr. Mylonas, please go ahead.

Paul Mylonas, Ph. D. - Chief Economist and Chief of Strategy, Head of Investor Relations

Good afternoon and good morning to our people joining from North America. Thank you for joining the conference call for the second quarter results. As usual, we'll start off with the introductory statement by Mr. Thomopoulos and then we'll have our Q&A. I am here also with Mr. Christodoulou who is Head of Global Markets as well. So without further delay, Anthimos, you want to start?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Good afternoon. Thank you for joining us. Let me start going through the Group overall performance in page 3. We had an excellent second quarter and a very strong first half.

As you can see in slide 3, cash profit attributable to the stakeholders reached the record level of close to €900 million, €898 million. This is up 64% on the first half of 2006. In order to put it in another way, the profit generated in the first half of '07 is came in very close to the full year profit of '06. Clearly, the bottom line has been boosted by the one-off gain from the sale of our cement affiliate, the local subsidiary AGET, we have booked 180 million attributable profit from that transaction as was last year where we have booked 180 million from the sale of our North Atlantic... North America subsidiary Atlantic Bank of New York. However excluding this one-off item, return to shareholder is very high.

I think we are getting pretty close to the levels of return on equity as before the right share for last year. I think by and large, this performance is attributable to very healthy top line growth. Core income is up 2% quarter-on-quarter, and especially on the NII line. At the current levels of 422 basis, this is 3 basis higher than last quarter. Our mean is recording a new record high.

In slide 4, top line growth, it clearly reflects broad Atlantic growth across all geographies and across all books. In Greece, Group lending is up 21%. Initially, we are growing at 3 times rate, 6% in Turkey despite the fiscal position there and the tight monetary conditions. We grew 34% year-on-year.

In retail in particular, we are growing much faster, 52% year-on-year. In Greece, where the market is clearly a lot more saturated than the rest of the region retail lending had another strong half. We are growing at a brisk pace of 10% year-on-year. Growth as we saw in the left hand side of the slide has been achieved without shedding asset quality. As a matter of fact, we have the lowest NPL ratio in recent history and provision coverage is maintained at previous high levels of 55% and a charge... we have done with a charge, we have kept it steady at 72 basis.

Turning to our key geographies and the highlights of Finansbank, we had a good strong loan growth despite turbulent conditions in markets. Total loans growth was 54% year-on-year and 7% in the second quarter. The rate... this rate is outpacing clearly the market, but results in continuous market share gains. In Q3, we see... we continue to see higher introduction and we expect this trend of outperforming the market to continue.

Deposit gathering is maintaining momentum. We are up 9% year-on-year. In the first half of the year, we have grown 20%. This is very supportive of our balanced business line execution in Turkey and supports the already strong liquidity position of the Bank.

Together, with resilient margins and of course, as I mentioned, pretty rapid volume growth throughout the first half, profitability reached the level of 244 million and that is very much in line or in fact exceeding our expectations and our plans and it bodes well for a pretty strong '07. Cost to income despite very aggressive expansion is kept up previous strong levels. However, we expect that to model on rise in the future as we carry on expanding and fully implement our business plan.

And establishment Europe strong expansion both sides of balance sheet you can see loans are up 6% year-on-year, deposits 45%, core income as a result of expanding 24% year-on-year that is before Vojvodjanska so like-for-like more significantly unlike most of our competitors have a profitability measured in terms of core profit is up 29%. We are making round about 40 million per quarter of core profit divisions the best signal for the rest of the year.

These profitability, this core profit absorbs... is after observing the cost of the expanding footprint as you can see we've added more than 100 units over the last year. We have now measure our footprint in terms of per branches at round about 560, 570 units, which incidentally is equal to the size of our branch network in Greece.

If you look at in overall aggregate view of our regional presence in slide 7 it is important to stress that we now operate in South Eastern European market of 43 million people, four times the size of Greece. We have financed the litigation [ph] is still at clearly very early stages of development. Loans to debt 48%, was almost half as much as in our domestic market. But clearly per capita GDP to way below Greece and the rest of Europe. So, again, I understand that if you have the [indiscernible] in Turkey, the root growth in the region is clearly enormous.

And as we turn page 8, we are determined to realize the full plan of our investment in the region. We are determined to complete the integration plan as soon as possible. For this purpose as you know, we have established an integration office and integration program. We have... we got... this office is directly related to the good projected to come in. As many as 50 products have been identified, more than 200 people across all subsidiaries have been more delightful of that purpose.

If you would take each initiative by return, Finansbank integration said to be completed by year-end much of the benefits promised are well on their to be realized. Specifically, we have set up our life insurance and pension company. We have appointed to select the management team and it is new venture. We have launched our new trade finance business targeting Turkish clientele. We have already book new business trends initiatives.

We are in very close collaboration with our Finansbank colleagues in launching new products, especially in retail lending. We are also making significant progress in rolling out our integrated global operator models. In the last quarter, we have established global supply arrangements in broad range of categories that we mentioned here POS that maybe as an example. These are already yielding savings we have issued recently our initiative to consolidate the card processing throughout the group we have issued an RFI forecast processing along the international vendors, which is said to be completed by end of the year first quarter of '08.

The 10% of consolidations are well underway, but blueprint is already enough to bear the constant rate assessment is completed. We plan to start infrastructure within the fourth quarter. Most significantly our Model Bank, the initiative that basically calls for the rise in modernizing the core banking platform for our all [indiscernible] subsidiaries is now progressing rapidly. We have stopped early Competence Center in Bulgaria, which is now in process of completing the new functional standards for all of our subsidiaries that operate in South Eastern Europe.

Turning to the, our domestic business, the backbone of our operations. As you can tell in page 10, domestic PAT came in just over 600 million, 598. Excluding the sale of the AGET subsidiary, this was up 35% year-on-year. Predominantly, on the back of those strong in NII growth, which is reflective of similar goal in our loan book. Lean has been maintained despite competitive pensions of 350 basis for the third consecutive quarter.

Our expansions have grown by 9% year-on-year and this is clearly not in line with the underlying trend. It's heavily impacted by one-offs, both on the payroll side and PNH. Most of these one-offs will cease to exist or will subside going forward. I would like to point, though, that one of those integration costs will be somewhat a more permanent fixture and they will complete Finansbank's integration and investors [ph] transformation and we will start reporting separately those costs from as soon as next quarter. This could make for example but in the second quarter of '07 we have incurred integration cost of approximately 67 million and we expect those costs to run at essentially the pace for the remainder of the year. Double this cost on the G&A line again, we have the regular relating to SOX. We booked another 2 million for the SOX audit and on top of that we had one-offs to for lay offs in our hotel business, another couple of million that put together amount to 10 to 11 million worth of one-offs before the exception as we had in the payroll line. However, costs to income remains unaffected and in fact have declined below 50%.

On slide 11, we try to illustrate out two competitive advantage as far as NII is concerned. On the asset side, spread tightening has been confined to be just 3 basis in the corporate and 11 basis in retail, and that has been more than mitigated by the expanding deposit spread. In terms of NII, however, this moderate decline has been offset by strong lending growth in all segments. If you look the situation on the deposit spread, we are now up almost 300 basis worth of spread, which is together with the fact that spread applies to much larger based core deposits compared to our retail lending. Our data is amplifies the positive impact of our core deposit franchise.

Turning the performance of our underlying businesses and taken in terms of retail lending, clearly, for one more quarter we let the retail lending remains the key thing for our domestic operations. Growth as I said we get 10% year-on-year. And this translates to just short of 4 billion net additions in the period.

In terms of absolute levels of growth, small businesses in the list will grow at 34% year-on-year, and we increase substantially the number of customers. In terms of our core units, core business, the mortgage business, lending seems to be... it is tried to be another buoyant year. The book has advanced 20% year-on-year with just over 15 billion in terms of outstanding as of the end of June.

New production for the six month period came in October 1.9 billion. This is 21% growth compared to the first six months of '06. In terms of production, the second quarter of '07 is second only to the very strong season and very strong last quarter of '06. And more significantly, market share in production is on an upward trend as you can see and we are now command more than one quarter of the total new production in Greece. Throughput is healthy, 30% up year-on-year, which is pretty strong positive indicator for the performance of the business in the second half of '07.

In consumer lending, we make a [ph] favorable picture. Business is up 15% as particularly we are purposely grow much lower than the market. However, key products where we have decided to focus like overdraft business and revolving credit is up almost 4% year-on-year. We have issued more than 120,000 credit cards. We focus more and more on transactors these days and because as you know the market in terms of outstanding credit cards are more or less... is more or less stagnant.

We have... we are registered more customer, more licensee, close to 4000 in the first half of the year, specifically for supporting our target to increase the spend of our average customer. And as you can tell, the overall asset quality of the book is impeccable, NPOL ratio is actually 50 basis to just over 2%.

Now on the corporate side of the business in page 15, we had a phenomenal half year. We are growing the business at a pace of 19% year-on-year. In the last quarter, the SME lending, where we have been strong in products, a strong 30% year-on-year that means our determination to obtain a leading position in this market segment where we have been lagging for sometime now. That has a possible effect on corporate lending fees as you can understand mostly on the origination business.

On funds under management in page 14, we continue to command the number one position for the fourth consecutive quarter. In fact, we've had added 6.5, 4 percentage points of market share since last year, June last year, 1.4 percentage points since the beginning of the year. Excluding money market, looking at specifically on the retail fronts, we have also consolidated our position. We have gained 2 full percentage points of market share since the beginning of the year.

The steadily improving mix helps also the fee income. We now book 88 basis for Europe as opposed to 85 a quarter ago. As far as the core deposit business, we have strengthened our dominance. Our market share has increased 3 full percentage points to [indiscernible] competition. Since the beginning of the year, we are now just shy of the 32% of market share. All in all, we are managing almost 53 billion of clients' money in various form of liquid deposits.

Turning the page to Finansbank, trying to avoid repeating myself, volume growth, as you can tell is phenomenal. Retail loan is up 52% year-on-year, primarily lending growth driven by mortgage origination. Mortgage business, what is really important is we have gained since until June '07 almost 2.5 full percentage points of market share. As a matter of fact, as of August, recent data suggest that we are above the 10% market share, which is again the first double-digit market share that we obtain in Turkey. We hope to get this position in more product lines. Clearly, we promised that in the beginning of the year, and we have achieved that three months before the end.

Consumer lending again a record growth hope 47% year-on-year, growing 5% quarter-on-quarter, through a number of complaints that we have launched in late Q2, we'll expect this growth pattern to continue in Q3, early indicators as far as [Indiscernible] growth is concerned changes like there is a quantum lead it deeply at the end of Q2 or Q3 were almost tippling [ph] the production of that the segment, which is relatively small, but this time more important is as it stand goes by.

Decline market provisions business for lending has maintained momentum. It has posted the 25% year-on-year. We have gained 20 basis are return in the second quarter alone. As we've said in beginning profitability has continued to strong in the second quarter acquiring almost 5% up quarter-on-quarter, but this is mostly attributable to very resuming to low strong margins. We have the margin widening during the second quarter. However, we do not expect that to continue as we are moving in a more competitive environment and more competitive period. However, this is a very strong signal of being able to combine first class growth with resilient margin and disciplined pricing. Expenses are perfectly in line with our branch opening schedule. We have added further 24 units in Q2, 43 new branches since the beginning of the year. As of the end of August, we've got 371 branches in Turkey. We are on track to obtain the, or exceed the 400 branches target for the end of the year. Credit quality, as always, impeccable, around the 2% mark, the best in the market.

I think we have said it all in terms of dynamic growth in our branch network. The only point only I want to make here in page 18 is that we are growing faster than almost any other Turkish bank. And it is important to note that it is sales-driven growth. We have... if you look at our employment schedule here, we now employ a quarter more sales staff than we did a year ago and also I would like to point out that we have yet to see the full benefit of our aggressive branch opening program. To date, 20% of our branches are less than one year old, and it will take some time for these branches to mature and we expect that to fit in the bottom line... the loan growth in the bottom line of Finansbank, particularly that coincides with better and more stagnant macroeconomic conditions.

Turning to Southeastern Europe, with reference to Europe varied on very sound [indiscernible] very few single digits in the region are profitable. Profitable because of very strong top line growth. Core profit is up 30% year-on-year. It seems that core profit growth is accelerating quarter-on-quarter and it is mostly attributable to create robust NII performance.

Total loan book as we said expends at very impressive rate 56% year-on-year. Retail is clearly ahead 67%, but I think corporate in this particular part of the world is expanding at also a very strong pace, 56%. Asset qualities seems to be unaffected almost improving in respect to. I don't want to spend too much time on this particular subsidiary in the region. I just want to note that in Bulgaria that you will be proud of this footprint this presence we have managed to make enrolls with market share. We have increased the market share by 2.2 percentage points very important. Clearly, we are very profitable franchise in the first half we booked 50 million of core profit again a very positive indication about overall profitability of Bulgaria and SME in particular going in the second half of the year.

In Romaneasca we have a very different view of whereas the enjoys market share of 18% retail and 11% in corporate has already close to 190 braches in operation. In Romaneasca, we are building franchise has offered a safe opportunity to acquire check. We have spread up the process of opening branches. We closed the first half with 88 branches. We are now at 96 branches. We are very much on track to achieve the target of 135 branches by the end of the year. It is... we are growing and we are growing at a healthy stage but, we have a long way to go before we are seeing the desired market share. We obviously have the benefit of counting on the positive feedback of a very young person coming to a pretty strong, almost 50% of our network is less than one year of all. The important thing is that despite this rapid growth we are containing costs, and we are making money throughout we are growing with that pace.

I don't have to tell you all about our cost of process [ph]. We are the banking system in country, 40% of the market share, making money, 12 million in the first half. Serbia, again, it is transformational story. We were best and clearly have changed the retired, a lift... step change that presence in the country. We are in the transformational phase. We should be start to seeing the results by the first or second quarter of '08. The bet there is to expeditiously strengthening transform the bank, combine the bank we just in present there and have the single unifies kind of offering to the Serbian market.

Last slide page 27, in terms of capital adequacy comfortably above the 7.5% Upper Tier I benchmark. We post the half year at 8.7% of upper Tier I. Having absorb the Finansbank acquisition in the first quarter and that in the second quarter we decided not to refinance the 700 million subordinated debt in Q4 repayment in July... in June '07. As you can recall we had financed ourselves in... over financed ourselves in the hybrid market in the year, and earlier in the second quarter coming up with the 1.5 billion senior debt which has provide us ample liquidity. At these levels of coverage, we feel comfortable that we will execute our business plan without having to absorb to the markets for equity financing anytime soon.

Thank you very much. Paul?

Paul Mylonas, Ph. D. - Chief Economist and Chief of Strategy, Head of Investor Relations

We are now ready for the Q&A.

Question And Answer

Operator

Excuse me. This is the conference operator. We shall now begin the question and answer session. [Operator Instructions]. The first question is from Mr. Kalamboussis Kimon of Citi. Please go ahead, sir.

Kimon Kalamboussis - Citigroup

Hi, this is Kalamboussis from Citi. Two questions if I may. First on the Greek mortgages, how is the current competitive environment please and what are the front book spreads please? And second question, in light of the current credit market turmoil, do you plan to tighten your credit criteria in the different geographies please? Thanks.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Now, for the mortgage business, the mortgage business has gone through a very competitive phase as we all know. It seems that the competition seems to subside, and we are gravitating towards level which has a lot more pulling down to expect. We are now, as of the end of the second quarter, we were booking new production at levels around 132 to 136 basis, which is what we feel comfortable about as you can tell from the evolution of the spread confession in the mortgage business, we have seen a deterioration from high double-digits in the third and the fourth quarter of '06. We kept them down to 4 basis and 8 basis of mortgage compression quarter-on-quarter. Some of it, over the peers, have had a worst quarter, but the change that if you look at most of the peer group, it seems to be recovered and announced in similar type of pressure in the mortgage business. For me, this is a clear indication that the worst is behind us.

To give you a bit of heads up on the mortgage business, I have to tell you that if you take stock of what has happened in the mortgage spread in the first half of the year through December, the ECH has cut almost his higher 75 basis. We have reciprocated the buyout with a 3 to 4 months delay with 50 basis of widening within the half-year. And more significantly the last 25 basis have been test at the expiry of the quarter followed by another re-pricing our bad book in mid July where we priced almost to 45% over our bad book.

So that's suggest that if you don't see another rate case which is not necessarily good news for this band. But took it more especially if you don't see a new rate hike we have already recouped the 50 basis out of the 75 and following the July repricing, we have now recouped the third one as well.

Paul Mylonas, Ph. D. - Chief Economist and Chief of Strategy, Head of Investor Relations

Just to add to what Anthimos was saying is that we have also repriced one of our most popular products is one plus three which has a fixed period for one year and a fixed rate three with the fixed period for the three years increasing for 2, 5 25 from for 70? Yes, 470. So in terms of yield to cover has increased the spread of the new production by close to 15 to 17% basis, something like that. So we have two re-prices first in Q2.

Kimon Kalamboussis - Citigroup

Thank you very much, that's very helpful. On tightening credit criteria please?

Paul Mylonas, Ph. D. - Chief Economist and Chief of Strategy, Head of Investor Relations

I think that it is too early to say something on that but we have had pretty tight credit criteria in all our markets as you can tell from our NPL ratios. The current market turbulence is not foreseen to have major impacts on the countries in which we operate. 0 Certainly countries of Southeast Europe are doing quite well are quite well linked to European economy and you are not going to see much change in the interest rate or the exchange rate and you actually haven't seen it in the last couple of months. Where you are sort of peek in other countries in Turkey you didn't see a bit of a peak in interest rates and they have almost come back to where they where before. Export is doing quite well which is one of the main drives of the economy and we are 6% of book is through the corporate sector which are mostly export oriented. So overall I don't think that there will be necessary too tightened, but clearly that's a decision to made by the people on the ground.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

We are not going to miss out on the opportunity if may add more, if the key competitors find themselves close to raise the prices because they are pitching up a different steady comments in the liquidity in the wholesale liquidity and they are close to raise prices to keep in phase because its customer and your finding cost we are not going to miss out on this opportunity. We anticipate more of this happening in Greece than in Southeastern Europe, if I might say.

Kimon Kalamboussis - Citigroup

Thank you very much. That's very helpful indeed. Thanks.

Operator

The following question is Mr. Ramirez Antonio of KBW. Please go ahead sir.

Antonio Ramirez - Keefe, Bruyette & Woods

Yes, I would like to insist on the early test comments that you have done I mean cant you tell what's your view I mean on the Greek market what's going on in terms of liquidity. What's role you are playing so are you providing the liquidity to the interbank market. And also I mean what you said, I mean clearly you have now a very important competitive advantage. So in a context where some of your competitor which have a much weaker deposit base could be growing some of their appetite for growth or maybe in prices, you have suggested that you are likely to be aggressive and commercially that's my understanding. So could you elaborate a little more on that and also if you can provide us some color on what's the situation in terms of the liquidity for a whole market and what's your role in that situation. Thank you very much.

Petros Christodoulou - General Manager, Private Banking and Group Treasury

Hi, this is Petros Christodoulou covering the Treasury side. You'll appreciate the circumstances like these, we are having our own deposit liquidity as opposed to relying on wholesale funding is eventually differentiating us vis-à-vis the competition to as you correctly said to a greater extent. We have had not some domestics, but we have had a lot of international banks coming to take short-term financing from us. Within the very tight limit that we have had, we have given very short-term placements up to two weeks. We had our... of course we want to maintain our lines in our domestic market. The big differentiation going forward is going to be exactly in the future in that we are relying on our own funds to grow whereas other people who have had, who have relied on their wholesale markets over the past one or two years, will find themselves unable to grow at least not at the same pace.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Or at the same cost.

Petros Christodoulou - General Manager, Private Banking and Group Treasury

Yes.

Antonio Ramirez - Keefe, Bruyette & Woods

And in terms of if I can complement the question, in terms of the asset side, obviously your current excess liquidity is invested in the largest earnings in your fixed income security portfolio. So I know that portfolio has very little exposure to the type of assets that have been created problems for some international banks. But can you just reassure us and then provide some details on what are your exposures. And also if in the current context we cant expect any kind of mark-to-market losses looking into Q3?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

In reality, we had no exposure whatsoever in troubled assets type of conduits or CDOs or anything like that and we do not... we have not suffered bloodshed in terms of mark-to-market closures. So we have not been affected at all. The beyond the terms I want to elaborate in what's wholesale or one part to just say that we expect the position to be more or less the same in almost every other Greek bank no good bank that we know have any much CDO investments in troubled markets. And what we know. However what we said is that it is a clear differences if you have 8 to 9% loans to deposit and have been 9 to 12% of your balance of the wholesale market which again will then mostly spend on how much how long for the current conditions will be the maintained. People that may have to go to markets to fund existing defined wholesale debt coming for up for refinancing incremental growth may had to pay sticker prices and this may help induce a little bit of discipline on the asset side of the commercial business in Greece. We are not going to have that pressure, and we are going to have the pre-option to grow the market serve and/or price adjustments if that happens.

Antonio Ramirez - Keefe, Bruyette & Woods

Okay. Thank you very much.

Operator

The following question is from Fernando Paul [ph] of J. P Morgan. Please go ahead sir.

Unidentified Analyst

Yes, hi. Anthimos, just on the integration/restructuring costs, you mentioned some of them are recurring and some of them are non-recurring, and I think you said a figure of 67 million for the first half and just wanted to check this will be you expect that 67 million to be also recurring in the second half but potentially some of it not recurring in 2008 could you just give us roughly the magnitude of the non-recurring part?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Sorry for misleading you. It was 6 to 7; it's something between 6 and 7 million.

Unidentified Analyst

Sorry, 6 to 7 million, not 67?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Exact --

Unidentified Analyst

I thought it was a big number. Okay. So thanks however.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Thanks for the question. That helped us clarify this.

Unidentified Analyst

Okay, fine. Then --

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Look, this is what it means. This is people traveling in the regions, it's consulting costs, it's new stuff requirement for our competition in this area. The group, the best of 7 million will be to carry.

Unidentified Analyst

Okay, no, this is clear.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

And when we talk of carrying, you carry in terms of this year or next year. We hope to be over and done with Finansbank integration by the end of the year and that should not make us more than 2008 to fully transform. So this is a part of time horizon that I would factor those integrations for.

Unidentified Analyst

Okay, that's a very small number. So I just misunderstood that figure. But now in Southeastern Europe, the deposit growth, roughly 7% is significant lagging the loan growth in the asset side and for just wondering do you expect to inject further equity into several of these businesses. And when these things the deposit growth will accelerate or is it partially intentional from your side to keep the deposit growth below the loan growth for the time being.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

I will ask Petros to elaborate on, but my own comment is that the largest franchise in our presence are in clearly Bulgaria and in terms of size of Romania which are Europe countries. So I don't... we don't see much pressure in growing leverage deposits or roll deposits for that matter and we all feel comfortable to with the current level growth and deposits. So this is what we've --

Petros Christodoulou - General Manager, Private Banking and Group Treasury

What we are trying to do is we are trying to optimize obviously the balance between the wholesale funding between the groups are funding surplus at the current level and the local language opportunities. Given idea for example in Turkey, we have chosen to of course we have increased the local deposit base in lira and much more so in foreign currency but we have chosen to if you like not to chase up the deposit cost very high and that's why we've seen the name from Turkey widening into our advantage.

Unidentified Analyst

Okay. And are you then also to some extent following that strategy in Greece your deposit growth was about 4% but that includes time deposits. Have you intentionally tried some of the deposits to lose them because they were to expense and what did you expect now to pay up little bit more for deposit in Greece as new entrants in some of the mid-sized banks are building up aggressively?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Commercially, the way we approach it is to defend firstly the deposit franchise, the savings accounts. And this is our first course of duration. And in that front, we are scoring well. If you can sell the despite new product offerings, really aggressively tried by competition we have managed to grow our already very high markets by 4 percentage points which is the solid base of our very existence in this country.

Now in the higher cost deposits, we had a different strategy. There we are fending off client relationships. We will participate in the market, but we'll not change the market, we don't it need to grow our term deposits by 40% as some of our competitors. We don't want to cannibalize our taken client base, but offering a levels close to your rival, but we will defend market client relation. That we are not going to let the client click competition. And we have a straight approach and its base of number of defenses, from time that from outright bond sales to modern market fronts people are telling us why are you keeping such a high money market franchise. And sometimes have had to the realize that this is part of the line of defense to make sure that we do not lose clients to competition and together with the highly priced big expensive time deposit lose, the overall business and their customers. That's basically for the commercial quarter, but let's see [ph].

Petros Christodoulou - General Manager, Private Banking and Group Treasury

One other thing is that if you consider that in Greece there is an element of deposit base that is very sort of price sensitive. Very little of that price sensitive deposit base resides with us because so far we have not provided the market with... we have never actually with the most aggressive interest rates, this is mainly the domain of a great deal of our competitors and they are chasing these deposit base. These price sensitive deposit base, if you like amongst them, we would not participate in that. We have a very stable deposit base which stick with us for the overall service and at the end of the day these balances a transactional balances that we offer that people are maintaining with us to carry on their business. Over and above if you like the interest rate. So they are not exactly that much interest rate dependant.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

But no change of strategy though.

Unidentified Analyst

Okay. So if we put it all together assuming now at least for the next 6, 12 months, pretty flattish ECP outlook. It is probably correct to say that the net interest margins in Greece for the National Bank of Greece have picked up at the moment, looking at the re-pricing of the mortgages mostly completed and the new business normalizing. Should I differ to say that it will be very difficult from these levels to continue to expand net interest margin in Greece?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

First, the level of margin in Greece is very high, is the highest in the market. It's approaching the margin market levels of 350 basis. So even if we don't look at the market dynamics, that is very... the room for improvement is limited to it. However, I am not as skeptical about the outlook for the margin in Greece. Firstly, I have said before I explained under what conditions actual spreads makes far urging up our yield competition finding it's of in difficulties to maintain the current pressure levels. We have yet to see in the second quarter the impact of the repricing we did, as I mentioned before, in the first half of first month of... in the first month of Q3. Clearly, this affects the mortgage business, which despite its size is a relatively small part of our total NII. But, yet, again, just good 13% of our better NII income, which has not been... has not reflected full the repricing actions we took in July. It will very much depend on how much difference you will see on the sides. So clearly, if you are asking whether I see the potential for improvement of our deposit spread in the absence of further rate hikes, the answer is clearly no; it's not going to improve.

Petros Christodoulou - General Manager, Private Banking and Group Treasury

And let me just add to what Anthimos was saying. Paul, don't forget that our loan to deposit ratio is quite low and there is a very positive asset mix effect on our NIM.

Unidentified Analyst

Certainly. And just a final question on a slightly different topic. Finansbank market share, basically, you gain in mortgages, I guess, but intentional lower cost of funding, hence very sensible way to expand market share at the moment. Now in terms of the retail loans, it looks like we may have lost a bit and was that loss intentional or was it a risk issue, risk aversion from your side?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

No. This is a blended number if you look at the consumer, if you look at the consumer market share. We have two things, creating very, very strong performance on personal needs. I have eluded to that in my opening remarks. Very strong performance in auto loans. However, we are facing up really competitive positions in credit cards. I do not know whether we have readily available numbers, but qualitatively, the picture is that we are losing market share in outstandings in credit cards and we are gaining... as expected, I would add... and we are gaining market share on the actual consumer business, auto loans and all that. So no, it has not been intentional, it has not been driven by getting profit [ph] about the prospects of asset quality in the market. Therefore, we are doing what we should be doing in credit cards and till that the market share has gone down by almost 1% in the period that VaR has been mitigated by the growth in the other segments, auto loans and personal need. And given the relative size of the two books, credit has been much larger. You can appreciate that the market shares in personal and in auto loans is much higher.

Unidentified Analyst

Okay, thanks a lot.

Operator

The next question is from Deone Adriane [ph] of UBS. Please go ahead.

Unidentified Analyst

Yes, hello, it's actually Alex Kutes [ph] from UBS on Adriane's line. I just have three questions. One is if you can please remind us what the €30 million authorization of goodwill charges is on your P&L? Is this related to Finansbank and Eurodante [ph] and the other items with option financing. So that's the first question for you.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Looking at our P&L here.

Unidentified Analyst

It is what you call the non-cash I think.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

I will explain. This is 20 million in total.

Unidentified Analyst

Yes, yes, exactly.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

And this 13 million, the amortization of the intangibles, the purchase intangibles, and the 7 million is the financing cost for the production. Let me explain... let me take this opportunity to elaborate on this point. As you know, under current IFRS standards, when you acquire a company, you need to try and recognize acquired intangibles. And as amortize that over a period of time like customer relationships and roll out of the programs and of that. These are clearly non-cash, but it's not that they are not in cash like any other depreciation item. The difference is that you don't have to replenish those intangible assets like you have to replenish a software program or a building or a car or a plant and machinery. So, clearly, we are of the opinion and I believe this is most of the investors community... the investment community agree with that, but these non-cash charges should be shown separately because this definitely would not impact cash dividends coming out ever, not given because they were not going to be replenished.

On the put call, we have recognized the liability for clearing out the remaining 10% of the principal of the vendor or Finansbank and obviously we accrue this eventual liability over the period to August 2009 and this is the financing charge of that liability. Again, we don't believe this is a financial charge because we had the opportunity to acquire 100% of the bank from the very instance that we had been shown in goodwill, again a non-charge business. So I don't know whether it sounds too technical in terms of accounting terms, but we on solid grounds to believe that these are clearly non-cash and non-cash that will not be repeated, will never result in cash flow. So you can treat that as the way you like. The way that we elude to that it should not impact the EPS of the bank.

Unidentified Analyst

Great, thank you. And I noticed that their balance in goodwill is up Q on Q, did you make any other acquisitions during this period? Is it the K&K acquisition on it's up by about €80 million?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

I think it's P&K.

Unidentified Analyst

Okay. Thanks. The next question is in the second quarter trading gains seems very high even excluding the disposal of leasing you meant. Seemed to be about 50 million higher than the first quarter. Is this from a disposal of bonds or equities and do you have a feeling of what the trading gains will be in the next couple of quarters?

Petros Christodoulou - General Manager, Private Banking and Group Treasury

Hi this is Petros Christodoulou again. Indeed, in the second quarter, we had a good run on the trading side. We have, as you correctly said, we have sold some of our fixed income portfolio as it's very tight heading into June. And the same for our equity portfolio. In the meantime, if you are asking what the futures maybe like in the last... in the next quarter, it is very difficult to look forward, to look ahead and --

Unidentified Company Representative

And even he did know, he wouldn't be able to tell you. That's a forward-looking statement.

Unidentified Analyst

Okay, thanks, that's fair enough. And the final question is --

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

That is not come to rest... but we'll know about, right. It is for something adverse, we would have told you.

Unidentified Analyst

Yes. Okay, thanks.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Not as such --

Unidentified Analyst

Even if it's forward-looking?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

I have commented that we have not been impacted. There has been nothing from the current turmoil and we are in the fortunate position not to be able to comment for the forward levels... the levels of trading income going forward.

Unidentified Analyst

Okay. Thanks. And the final question is with regards deposits, you had as said earlier Paul I think on this, but, and the question is market share is now up to 32% you say in core deposits, which is quite impressive. But within third quarter, we have seen some of the Greek banks actually competing on price very aggressively to gain savings deposit market share. So have you have you experienced any outflows within the last couple of months from this fact?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

The answer is no. As a matter of fact, what has happened in the third quarter is because people did not really reprice savings account, we have seen very little competition on the core deposit business. There is lots of expense as Petros alluded before, there has been lots of competition on the higher length on the price scale of customer liquidity but not for saving accounts. The only offensive that we seen on the customer deposit side, the saving deposit side is launched early in the year. So we've had a few months of competitive situation in the market and along for the current turmoil that started in February '07 and has led to [indiscernible] basically. In the period that we were experiencing this offensive, we managed to grow our market share by 3 full percentage points.

Unidentified Analyst

Okay, that's great. Thank you. And can I also have a final bonus question?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Of course.

Unidentified Analyst

Thank you. The final question is associates still seem high in your P&L despite the disposal of Hercules. Of course, this was made towards end of the second quarter. But where does the balance come from? What are the associates contribute to this profit?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

This is not... it is a good way to gather this, but the best part of it is the subsidiary of LARCO where we... the affiliate of LARCO where they had a strong second quarter.

Unidentified Analyst

Okay.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Okay.

Unidentified Analyst

All right. Thank you very much.

Operator

[Operator Instructions]. The next question is from Ms. Gold Tania of Dresdner. Please go ahead madam.

Tania Gold - Dresdner Kleinwort

Hi. I just had a quick question on costs. I am just taking you back to something you said earlier. You were talking about the 6 to 7 million integration costs, 2 million of stocks and 2 million lay off to give the 10 to 11 million of one off. But you said that was before exceptionals in payroll if I heard you correctly. And I wondered if you'd given us or if you haven't, could you give us the number of the exceptionals in payroll please?

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

That was what I just said, what I said, yes indeed. And the lay offs were subsidiaries, the ones I mentioned. I don't have a readymade, a 100 figure for you for the exceptionals in payroll. It would come under various sorts of new subscriptions, you optimize their headcount in the bank. However, I would give you a indication on how we see the underlying trend with the wage bill evolving going forward. If you clear the exceptionals from the picture, we are looking at an underlying trend of 6 to 7% year-on-year growth on our basic wage bill. And that would... the number that effectively would manifest itself as we move forward in the next two quarters of the year.

Tania Gold - Dresdner Kleinwort

Thank you very much.

Operator

The next question is from Mr. Vincent Dominico [ph] of Goldman Sachs. Please go ahead sir.

Unidentified Analyst

Hello. I have couple of question. One is a follow up on the cost, the costs increase that clearly remains above your targets if I remember what is 9% year-on-year. Considering all the adjustment for the one off, is it fair to assume next year we will see very low numbers in terms of growth to go back to your target of 3, 4% over the next three years? I am talking about the Greek division. And the other one is on the fees, on the commission that there have been quite flat or stable over the last three quarters with some loan growth compared to the net interest income compared to the volumes. Do you expect an improvement there going forward, so some pick up in the fees? Thank you.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

Let's go back to the first question, it's important. If you look at the year-on-year development of our OpEx line in the domestic business, from the numbers that we show in the segment reporting here in the presentation, OpEx, G&As, depreciation and personnel has gone up 9% which is round about €57 million. Growth of net additions in our OpEx line. As I said in the first half we had about 10 to 11 million relating from the personnel is counted correctly as exceptional in the G&A line. And on top of that we had to add another 10 million of amortization cost in the... our stock option plans, and the bonus shares we gave these... in the first half of '06 which we did not have in the '07, which we did not have in first half of '06, that totals to 21 million.

Okay. So if you then take a remaining 36 million of net growth over the base of last year, you will come up with something like 6% growth on our domestic business before taking into account other assets and liabilities [ph] that had gone through the [indiscernible]. This is how we will come down to the medium term trends which we believe we will achieve 4% to 5% in our OpEx line.

Unidentified Analyst

Okay thank you.

Anthimos Thomopoulos - Chief Financial and Chief Operations Officer

On the fee lines again on the domestic business, we saw a moderate... not moderate almost flat if I am not mistaken, it's just 1% growth, in the domestic, we had about 200 million, 203 million worth of net fees last year, 205 this year. Correcting some of the accountants here we had a 4 million worth of... or five million worth of reclassification between on the base year and something that has been accounted as fee income. And this is the warehouse fees in 2006 is now shown under the other income line. That means that the base year '06 had been five-year lower and that would have given you a 4% fee growth which is basically which means but if you knock off the non-core warehouse business which is obviously if you know after we sold, the growth on our banking fees overall would have been 4%.

However, I would point to the fact that I would not expect dramatic change and dramatic growth on the fees in the domestic front. In reality, the business in domestic is very competitive. Most of the retail commissions have not been polished. We are price focus in that other commissions aren't amortized as you know in the interest line and the current other as far as the rules. So that would be a... two force is driving the fee income, a reduction in retail business which will give you a negative trend and the slight remarkable fee income from core spending fees, asset management and so forth. So far we have managed to balance out a given positive trend to the line and I expect, I hope to be positive going forward but not dramatically so.

Unidentified Analyst

Thank you.

Operator

[Operator Instructions]. Gentlemen, there are no more questions registered this time. You may now proceed with your closing statements.

Paul Mylonas, Ph. D. - Chief Economist and Chief of Strategy, Head of Investor Relations

Thank you all for joining all this Q2 conference call. The IR team would be stand by tonight and tomorrow for taking your calls, once you have more time to look at the presentations and the press release. Thank you all for joining us and we'll be talking to you soon.

Operator

Ladies and gentlemen the conference call is now over. You may disconnect your telephone. Thank you for calling good bye.

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Source: National Bank of Greece SA Q2 2007 Earnings Call Transcript
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