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National Bank of Greece SA (NYSE:NBG)

Q3 2007 Earnings Call

November 29, 2007, 11:00 AM ET

Executives

Paul Mylonas - Chief Economist and Head of Strategy

Anthimos C. Thomopoulos - CFO and COO

Petros Christodoulou - General Manager, Private Banking and Group Treasury

Analysts

Ramirez Antonio - Keefe, Bruyette & Woods

Quint Stuart - Aberdeen Assets Management

Presentation

Operator

Good afternoon ladies and gentlemen. This is the Chorus Call conference operator. Welcome and thank you for joining National Bank of Greece Third Quarter 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. Gentlemen please go ahead.

Paul Mylonas - Chief Economist and Head of Strategy

Good afternoon and good morning to everyone. Thank you for joining us for the third quarter results presentation. I am here with Anthimos, and we are being joined on the call from... by the top management team from Finansbank, Dr. Aras; and the CEO, Mr. Turhan Berk [ph]. And we also have joining us, not in Athens, Beatrice Shodolu [ph] and Head of Global Markets for us.

As usual Anthimos will make the introductory remarks, and then we'll go to your questions. So, let's start with the opening remarks, Anthimos.

Anthimos C. Thomopoulos - Chief Financial Officer and Chief Operating Officer

Thanks Paul. Good afternoon and good morning from me as well. Thank you for joining the presentation, and going straight to the presentation... you must have in front of you... we're very pleased to announce a very strong quarter, amid very challenging times.

As you SEE an attributable [ph] path in the nine months, we went over, reached over 1.3 billion, this is 66% higher than the same period of last year. If we knock off the various non-good carrying items, as you know in the second quarter we had the sale of our cement subsidiary that added 118 million. And during the third quarter we had costs relating to the one-off contributions to the fire relief funds. Growth is still very impressive. It is indeed 87% year-on-year, closer to 126 billion.

I think we need to focus on the third quarter, because it has been a remarkable quarter. Top-line growth, very strong, 5% quarter-on-quarter; costs, very good; OpEx was down 2% quarter-on-quarter for the group. And throughout Paul had helped us lift the bottom-line to a record 472 million, close to 0.5 billion. This is 18% higher than the second quarter.

Return is back where it was before the capital increase. In the third quarter we went over 30% momentarily. This is almost four full percentage points higher than the second quarter. And this is mostly due to very strong top-line growth. NII has been growing briskly, which is thanks to very strong lending growth, but I guess also because of the very privileged construction of our balance sheet.

Heading to the development of our lending business across the various countries and various subsidiaries, we are happy to report very strong growth across all businesses. Lending increases up 21% which is over $37 billion worth of net loans in Greece, this is very much inline with how the market is being growing in the country. In Turkey NSC, we are outpacing the market. We are growing at a pace of 35% in Finansbank, markedly higher than the overall market and 74% in Southeastern Europe which is obviously... bordering explosive rates of growth.

Retail is of course the spearhead of the development. And the evolution of our lending books, Turkey is 47% up year-on-year, that's pretty close to what the overall market has been 76%. Asset quality has not been tainted, overall NPL ratios maintaining the downward trend were 60 basis lower than the year ago at around about 360 basis, and at the same time coverage has gone up, that's an impressive thing, is gone up from 79% to 86%. So, the underlying trend of NPL generation is really healthy.

Turning to Finansbank, in slide 5, in the third quarter we have another record. Core profit went up to TRY 214 million, we are reporting TRY so that we don't factor in the favorable effect of the Lira devaluation in the quarter. The market share has gone up another 70 basis year-on-year to 6.2. Don't forget that we're still in the third quarter. So, we are reporting growth before whatever positive impact one should expect from the recent rate cuts. Basically, one could probably describe the third quarter in Turkey as the darkest moment in a very challenging 2007 just before dawn, still it has been a very strong quarter. Quality unaffected. Tri-deposits, this is the newest product for this quarter, has skyrocketed 56% year-on-year. And we're gaining market share. We are going to get back to why tri-deposits are growing at that pace, when we talk about the margins of Finansbank later on.

The network expansion continues, we have added over 70 branches in the nine months and we're going to close the year with over 100 new branches and close to 10,000 employees. If I'm not mistaken we must have added about more than 1,200 people in the year, still with 100 new branches and 1,200 people, we are doing pretty well in terms of Costa Rican which is just below 49%.

So, things are looking up, 2008 is going to be the year in which we're going to see the bulk of our expansion program being completed. So, we're almost there before we start reaping benefits from the expansion on both the income side, but also on the way cost is going to be developing across 2008.

In Southeastern Europe, both sides of the balance sheet are growing, lending as I said phenomenally fast. It is important to note, the growth rate in the last quarter we just. In the third quarter we grew lending side by 14%. Deposits are doing pretty well. Core income is expanding 48% year-on-year. Core profitability is coming up as well, it's... remarkably the quarterly growth in core profitability has been the highest in the year. Again, let's not forget, because this is a seasonally slow quarterly of the year. If you are spreading currency but we have managed to grow core profit from 41 million to 52 million in the region.

It's again like Finansbank despite very aggressive branch openings, we've added 108... 110 or 107 branches in the region in the year, still cost to income decline from 55% to 49% in the last quarter.

So, we are positive that we can maintain profitable growth in the forthcoming years until we grow our presence to the desired levels. In page 7, this is become a familiar picture. We're trying to put together our regional presence and highlight where we stand in terms of footprint and how much of opportunity lies ahead of us. Just noting here that we now have more branches in Italy than Greece, and I guess this is a formidable force. It is more than narrative though, because one has to consider that this is a very large region in terms of population its four times the size of Greece. GDP is getting closer to the GDP of Greece, and obviously this is with a per capita income which is one quarter of what it is in Greece. So, financial deviation being less than half of the domestic market, so the growth potential in the region is phenomenal adding on the well understood, I guess, growth potential of Turkey.

We have committed to reports to you on the progress of our integration program. For us it's very important because we see it as a differentiating factor of NBG's investment gains vis-à-vis its peers. We have an opportunity that other people don't, and the opportunity here is to being... to be able to deliver a net savings of over 140 million by 2009. So, we are happy to announce that the integration program at the Finansbank is over. We have now achieved the organization and policy alignment overall core functions. All the joint initiatives that we have launched have been launched and they are already delivering. Join efforts in life insurance, in pension companies, in investment banking, corporate finance, shipping, large corporates, retail everything is up and running.

So, this weekend we are going to have the last meeting of the integration taskforce, and the force will redirected to see through the transformation program for Vojvodjanska, which is going to take the best of our efforts for the very first two quarters probably the third quarter of '08. Going into a little bit more detail into for the regions, and in page 10, we are giving you a bit more flavor about our domestic business, profit after tax in the nine months excluding almost 19 million of positive one-offs is up 50%, this came in at 820 million.

This has been largely achieved thanks to strong NII which is up 20% year-on-year and 4% in the third quarter alone, which in turn is supported by very strong loan growth and expanded margins on the liability side as well. Domestically, it has been stable for three consecutive quarters, and stop this quarter by four basis and we are now at 354 basis, this is obviously the highest in the market and its strange approach in major market spreads in a euro-zone country.

Operating expenses year-on-year are up by a moderate 7%, which obviously takes into account a number of exceptionals we had throughout the first three quarters... first two quarters of the year in the payroll line. Quarterly basis OpEx has declined, as we have guided you, by 4%, thanks to 7% lower payroll and a moderate 3% increase in G&A including everything, depreciation.

Cost to income has declined to 48%, this is 5 percentage points lower than the nine months period of 2006, and again, I need to point out that, what I said in the previous page that the integration is uniformity; of course, the group is bound to deliver results in the years to come, however, this does not come without cost. We have to invest almost 8 million in integration in various integration costs. Such costs will persist throughout the current year and for the best part of '08. And the majority of the benefit, obviously, will accrue in 2008, '09 and beyond. And clearly the benefit is going to be a multiple of the investment we are currently making.

Now, going to page 11, where we give you a... as much as detail as possible on how the NII has faired in the third quarter. We have managed as you can see through contents tied in on the loan book to just 12 basis, and obviously, on the liability side core deposit spread has picked up almost the full market rate increase 27 basis. You can practically see the same picture in terms of yields to get rid of the impact of the dislocations within LIBOR and SUV, basically to get rid of the... find a way the LIBOR has behaved over the third quarter. Clearly what happens here is total loan yield has gone up by 12 basis. And on the other side the total deposit cost in absolute terms and unit terms has gone up by just 6 basis.

And this effectively has added more than 30 million of NII on a quarterly basis as you tell from the bars on the decomposition of domestic NII. Now, the only drag to our NII, as you know, comes from our security books, securities book, and generally our fair value assets. In the current environment, where short-term rates have gone through the roof optically, bond book produces a negative spread.

As we have said in the past, this is nothing but accounting noise, really, in reality given our heading policy, these assets are synthetic floaters which means that net of hedges, they are broadly speaking at the LIBOR plus position, and hence they move in tandem with the LIBOR. So, the negative spread that we show on the NII line is obviously more than adapt through the trading line. So, even these drags has more than mitigated by very healthy performance of our loans and deposit spreads. However, it is important to note that there is a substantial element of NII, which is currently taking into the trading line. We estimate, for instance, that in, as regards, if you take just the fair value assets of our balance which is just below 50% of the total securities book that we carry, on that part of the balance sheet alone we must have had a substitution of about 12 million to 15 million of NII which is being taken into the trading line.

So, overall a very healthy picture; very strong NII headline performance; and the lots of economic substance, lots of NII that goes through the trading line. We are looking in ways to try and mitigate, do something about this accounting knowledge with the opportunity of the enhanced disclosure we think that IFRS 7 will bring about. We are working with accountants to find a solution within the confines of IFRS 39 to eliminate this noise from NII line.

Now, going back to the lending expansion and looking for the specific books, mortgage has been the backbone of our domestic business. Growth in the mortgage lending in terms of balances was 8%, 19% year-on-year. It is even more encouraging that the new production, the nine months was offset 15% year-on-year, so again we had another record year. And in the last quarter it is important about the dynamics of the market in the wake of the turmoil, we originated almost 1 billion, but we work, we accounted for 28% of the total market.

So, we have picked up two percentage points of market share in the third quarter alone. In consumer lending, has a growth, 16%, 17%. We are now up 5.2 billion. The operational metrics are very important in this case. New cards have almost doubled in the nine months period. New overdrafts were up almost 50%. Term loans went up 23%. So the drivers of eventual outstanding growth are doing very well.

Asset quality, again, not an issue, we are looking at NPL ratio of just 3.3% in our hotel business which is a full 90 basis below what it was a year ago.

Corporate, in page 13, surprisingly, a very strong year, we are looking at the growth rates very close to what we have in the retail business. Barring any negative spillovers from the current turmoil, I would have said that we are probably experiencing a turnaround on the growth rates of the commercial and corporate lending.

I think the numbers are self evident. Let me point out that until there is again another problem with the NPL ratio going down 70 basis year-on-year, and let me particularly point to growth in SMEs where we have a 26% growth, we are trying to catch up with the top player in that part of the business.

As regards liquidity, in page 14, total liquidity is up 22%, so we are up to 46 billion. This is focusing higher than what it was in the beginning of the year. Core deposits was still gaining market share, clearly the market is not growing the core deposits, however, we are steady, stable and unaffected by what it was a month or so or couple of months of turmoil.

Side deposits, very important because that's a measure of how much of, how successful we are in cost management, it's up 22%, and year-on-year this is, our market share has gone up 350 basis since the beginning of the year.

Funds, very good picture. I think in a way we are assisted by the fact that our major competitors seems to... seem to be retreating from the market. We have improved market share by 5.5 percentage points. In the non-market money, funds we have added another 5% once year-on-year end and 1.5% in the quarter. These are large moves and they help us claim that we are number one position in that part of the businesses, the coming on a salable and we are very happy getting to that point after a long period they have been in the second position.

Now, turning to Finansbank, in page 16, let me try to shed a bit more light of what we discussed in my opening remarks. Growth empower [ph], mortgages in particular are up 16% year-on-year. Market is faster than the market. We have gained close to 2 full percentage points of market share since September '06. We are 10.2% of the market. We are number four in the market, this is where we want to take Finansbank in almost every other market share. We want to -- this is -- it is France -- very encouraging the fact that we have obtained the number four position in probably the most critical part of the business. And what is more encouraging and more challenging is that the top one, two, three players are within reach in the region of 12% to 15%. And therefore our management team in Finansbank have to have another challenge to go through. Consumer lending, again, we have gained 70 basis, so in almost every other business we are doing better than the market.

Temporary turns in business loans is in the second best position, so and we are doing a lot to recover the, not the second best, another 20 basis of market shares that we seem we have shed in the third quarter.

In terms of profitability, turning to page 17, we had another strong quarter, core income is up 4% quarter-on-quarter in Finansbank. This is mostly driven by 4% growth in NII and a 5% increase in net fees. Margin is now at 683 basis, this is more than lower than it was in the six-month period. And this is primarily because we have decided to step up the effort on the retail funding side and retail deposits. And the results have been remarkable. TRY deposits, as we said, are up 56% year-on-year, total deposits are up by 39%. Compared to the year-end price, TRY deposits have gone up 45% and total deposits close to 20.

So, the loan to deposit ratio is down to 126 from 103, and is going down further down to closer to 110 in the fourth quarter. This effort is just not only a basis for future cross-selling, something that we have signaled long time ago that after the acquisition we would do a lot to try and take the funding strategy of Finansbank towards retail deposit.

More significantly it gives us access to a more stable liquidity pool. And I guess the recent turmoil in the wholesale markets has more than dedicated us. And in reality what has happened in the third quarter is partly reflecting our fast reaction to what we were seeing as a... developing as a fully blown liquidity price. So, we are happy to be in the position we are in Finansbank with an increasing share of our funding taken up by retail, TRY, and foreign currency deposits. And we are also very happy, if you consider the wholesale funding situation of Finansbank. And we will give you some detail on the bottom left of the graphs, where you can tell that Finansbank is amply funded with term, talk to its leader. In essence and you can follow this, it is in the graph the long-term USD wholesale borrowing has been shopped over that is in the grey shaded area has been shopped over to current TRY, and you can tell from the graph that we have not enough term Lira to see us through the planning horizon going all the way up to 2012, 2013. And if you do a quick comparison with the balance sheet of Finansbank you'll see that the level of term price that we have locked more or less matches the assets... the installment assets or the term assets that we are originated, be it mortgages or car auto loans or... and so forth.

So Finansbank is amply liquid, term funded, no interest rate for liquidity mismatches and has now tapped in a big way... the liquidity that retail liquidity, so a very prudent standpoint vis-à-vis developments in the country. This is clearly de-risking the execution of our business plan and allow us to pursue a aggressive growth plan for in the country.

I don't have to spend too much time on the footprint expansion of Finansbank. Just a short comment on the operational capability of the FIN there. Over the year we have been adding almost two branches per week. But what is more important, it needs to be elaborated, more than one quarter about or close to one quarter of our branch network is less than a year old, and this by itself creates a vast potential for growth in the coming years.

If you add on that opportunity, the fact that our sales force has increased by almost 20%. This says a lot about the pent up capacity, engineering capacity we have in the, in Finansbank. So if that capacity recoils in a, what seems to be more sequent macro environment in 2008, we will probably read much better results, extremely good results that we have been looking so far.

Southeastern Europe, on page 20, the point I want to make and highlight is that we think expanding the footprint, doing all the investments required while maintaining handsome bottom-line profitability. This is on the back of very strong, extraordinary top-line growth with core income surging 48% year-on-year and 14% on the third quarter alone.

No need to refer back to asset quality. No issues there so far. As a matter of fact we have declined in NPL ratio more significantly at the same time improving coverage to 83%. So, just 5% in NPL and 33% of coverage.

I don't want to spend too much time on each of these countries specifically, every one of them is doing well in its chosen market. Just a few words for UBB, which is obviously the cherished piece of our Southeastern European concise, just note we have a core profit approximately 6 million in the nine months of '07. This is 40% up than last year. We are... core income is expanding 34% year-on-year, 70% in the third quarter alone, NPL is at the impressive just 1.2% to 1.7%. So, we have a very healthy picture overall, coupled with very strong performance in the marketplace with market share gains across the Board, 1.6 basis... 160 basis in the day lending, 30 basis in corporate bank lending and so forth.

In Banca Romaneasca, Romania, Romaneasca is probably the bank that we are trying to speed up its expansion as much as possible. 46 branches are expected to be in operation, new... 40 new branches in operation by the end of the year. That will bring the total of branches to 122, almost half of which are less than a year old. So, for us this is a very strong indication of the potential of the team in Romania. The fact that we have managed to increase the footprint by almost one-third in a year, and still be constantly profitable with core profit in the nine months of closing to 8 million, and very close to another 3 million or 4 million in the last quarter, so it is important to be able to claim that we can grow Romaneasca profitably and stay in the game to see better days in Romania.

Stopanska, and a success story we are going back to profitability big time, and we are talking about sizeable amounts of money, a very strong presence and still growing despite competition. But we are 40% of the market there. So there is not lot to report here.

Serbia is on transformation track. Vojvodjanska is project and which I think we need to refer as well underway. Restructuring, of course, for the first six months that we have been doing that have indeed overwhelmed the core income expansion. So, we are posting a moderate loss. This picture will reverse dramatically in the next year, and in the years to come when we have all the planning in place. With the planned rollouts in 2008, we will be able to recover the additional return on the investment we made in the country.

With the merger with our existing bank is going to be completed by 31st January '07. The new system and processes will be in the place by the end of second quarter of '08. Vojvodjanska has been chosen to be the first implementation of our modern bank that will be rolled out in the rest of SEE, an advance version of the systems and processes that we have currently in these countries.

I fast forward to capital adequacy just to note that up at yearend comfortably higher than the 7.5% benchmark that we have set for ourselves after the completion of Finansbank acquisition. Overall capital adequacy has gone down to 10.2 total ratio because we have decided to not to redeem the 750 million, not to reissue the 750 million of subordinate debt that came up for payment at the end of June.

So that includes, 10 to 20 basis between June '07 and September '07, in top of the run reflects also the recent acquisition of the minority's stakes in our insurance subsidiary that has... that accounts for 60 basis of... 16 basis of... after tier I.

And with that I'm over, I'm finished. And thank you very much for your patience.

I think we're ready for the Q&A.

Question And Answer

Operator

Excuse me, this is the conference operator. We will now begin the question-and-answer session. [Operator Instructions]. Your first question is from Mr. Ramirez Antonio of KBW. Please go ahead sir.

Ramirez Antonio - Keefe, Bruyette & Woods

Hello, good afternoon. I would like you to give us a little more details in terms of the balance sheet evolution and the management of balance sheet of Finansbank. We saw in the quarter a very substantial increase in deposits. We have seen as well a quite remarkable decline in the margins are under 22 weeks versus the second quarter, I think you mentioned a part of that is due to a more aggressive stance in terms of deposit gathering. And then you were mentioning on the wholesale funding and basically you were suggesting that there is very little mismatch in terms of temporary gap between us at some liabilities, and also you were mentioning that most of the foreign currency wholesale funding is swapped into local currency. So, I was wondering if you can give us a little more details in terms of, you said there is little mismatch, but I would assume there is some mismatch, and also in terms of how you are renewing these foreign currency in wholesale funding, and how you are swapping again this into Lira. And how that plays all this broader strategy in the context where the currency has appreciated and the interest rate in the local currency are going down?

Anthimos C. Thomopoulos - Chief Financial Officer and Chief Operating Officer

Thank you, Antonio. That was very elegant summary of funding policy, new loan policy in Finansbank, indeed, this is what we are exactly doing. Now, let me just get back to this diagram and tell you to test a point that the first dollar borrowing that accounts for a financing would be December '08. And this is the one year syndication that we close the earlier demand, and we mentioned that in the presentation as a very attractive 57 basis over LIBOR, after the all in cost. So this is the... if one wish to measure very much of that wholesale borrowing will come to whole finance that's basically for the type of liquidity we have in the, at natural bank [ph] where this is not a lot.

Now, as you go to liquidity policy, as I said this is term dollar which is swapped and swapped over to price. And as a matter of fact we swapped all of the clash, excess dollar liquidity that we have managed to collect from our retail networks. So, there is no liquidity mismatch and on top of that there is neither as I said mismatch because we are borrowing price. And we lend out in price and assets. And I think I would to ask, to invite Petros to give us a bit more flavor about the GAAP in that we ran in the balance sheet and how we are positioned ourselves vis-à-vis a rate cut regime in the country. Petros?

Petros Christodoulou - General Manager, Private Banking and Group Treasury

Yes, thank you, Anthimos. This is Petros Christodoulou. There is two items to look at when looking at the balance sheet of Finansbank. The first thing is the liquidity situation, and there we have demonstrated that the bank is fully provided and fully covered liquidity wise, and we had a very powerful showing on the 19th of November. The reason of that we managed to raise $425 million in a one-year syndicated club loan that had a big participation. And actually came at an all-in spread of mid-50s over LIBOR. This was a spread that was inside the one-year CBS of Turkey, the sovereign. Talking about the interest rate exposure, what we have done is we have, if you like, hedged the interest rate exposure going out to three to five years. That means that we have left interest spread between the mortgages and the installment loans and funding. So we have locked in the net interest margin between them too. At the same time, one has to be sensitive to maintain and increase the market share in retail deposits, and that's why you've seen this year, it was a cognizant decision to go out and expand this market share. We appreciate that these things happen, that this thing brings long term benefit at the cost of -- if you like short term costs. And that has an immediate effect in narrowing the short term need.

Ramirez Antonio - Keefe, Bruyette & Woods

Okay, thank you very much. So, to summarize what... how you would, let's say, summarize the potential impact on the volatility in the currency or on further declines in interest rates?

Unidentified Company Representative

Let me...

Petros Christodoulou - General Manager, Private Banking and Group Treasury

Looking at further declines in interest rates, what we have done is we are maintaining a relent position in the zero to three years which is, if you like, over-borrowed in years three to five. So, at the same time, as we are arriving at the curve, the inverted curve, that gives us a point to carry. As we carry positively, as well as we, the overboard position of swaps slides up the curve which is inverted by few hundred base points between let's say the five years and the one year.

Unidentified Company Representative

So, we are more... we are positioned ourselves more directly for a yield big cap or a mark-to-market gain, the way you look at it, if indeed the rates go down faster down what the curve predicts.

Ramirez Antonio - Keefe, Bruyette & Woods

Okay.

Unidentified Company Representative

But not in a big manner and not like some other big banks did back in 2006, no, but we are... we are positioned for a little bit over lend. Now as regards currency exposure per se, there is no currency exposure at all basically. The open currency position Finansbank is very little that means that we have not benefited from the rally but we have not... we are not exposing the banking to meaningful P&L shrinks out of currency motives.

Ramirez Antonio - Keefe, Bruyette & Woods

Okay. Thank you very much, and I think that's it with me. In fact, I prefer to see you managing the bank that way. So, I think this is good new for me. Thank you.

Unidentified Company Representative

Yeah, this is critical because we keep saying that this is a very conservative stance, the bank has been. We all subscribe to the idea spoken, deliver more on that, but indeed the rate cuts in Turkey are common and they are going to be aggressive probably or faster than the market predicts but still this is a very high quality problem for us. We re not in the bank for in that respect, we believe that we had a lot of lot to gain out of the real business that will boom and such an unsurety, at this stage we want to make sure that the bank is not exposured from liquidity, interest rate or currency mismatches.

Ramirez Antonio - Keefe, Bruyette & Woods

Okay, thanks.

Operator

[Operator Instructions]. The next question is from Mr. Quint Stuart of Aberdeen Assets Management. Please go ahead sir.

Quint Stuart - Aberdeen Assets Management

Yes. Hi. Congratulations on the quarter first of all. Could I ask you... could you talk a little bit about just some of the recent rumblings in some of the Greek papers about consolidations within the Greek banks and switching to Greece to the market for a moment, if you could talk a little bit given your strong market share gains particularly in mortgage, if you could talk a little bit about how you're doing that without having to reach or compromise for credit quality and again. Now is that your non-performing asset ratios are going down, very good. Just how you are able to do that, what you are gaining market share from and also your outlook on the health of the real estate market given what we have seen some countries like Spain, where is Spain or Ireland what makes Greece different in your mind, right now?

Unidentified Company Representative

Thanks, the consolidation question I think we have to refer back to the announcement that we make a week or so ago, where we simply said the obvious that we are not in discussions with other banks or particularly....where the rumor was that we are in discussions with other bank, we officially denied that, that's it basically, we are not in discussions with anybody, we are not contemplating a merger an acquisition in the country with anybody. So the question is theoretical, people feel that they need to strategize on the Sunday paper.

But this is not...that we have ourselves, the bank in Greece as a comfortable market share have a very long....very tough job to do in consolidating its recent acquisitions, got lot of options and opportunity outside Greece and in Greece. And the management team in NBG is focused on that. So, this is it basically, and I don't have to say more. I will have said that --

Unidentified Company Representative

Yes, on your second question on the real estate market. I just would like to say that Greek real estate market has not seen price inflation anywhere near the levels of the countries you mentioned, most of the increase in price in real estate market occurred around the time of our entry into the common currency or at EMU. At which point you'll remember that interest rates declined by 10 percentage points. And that was a permanent decline and clearly at that point, real estate values increased reflecting the lower discount rate.

At that jump around beginning the turn to century, there was a bit of a tapering off, for a couple of years there was no increase in prices, and now in the past, I'd say 18 months, real estate prices have increased by, in the order of 10%, perhaps a bit more in normal terms.

Now, what's driving prices and what will keep driving prices. Clearly the economy has been growing at 4% real terms. Jobs are being created, the employment is going up by almost 2% per year. Interest rates are low in real terms, and on top of that, you have to add two other things, one is the huge inflow of immigrants into the country that occurred, at the time of the fall their in curtain [ph] about a million and they are now over a decade into the country, and are now starting to build up those are cremated and are now buying in the lower, the cheaper areas in cities, the urban cities.

And on top of that you also have the family increase, which is lower in size and the conversion to that of other European countries. We now have 2.7 adults per family and 2.3 in the average in Europe and it's declining. And the last point, I'd make is that there is huge owned stock of the permit's build at the end of World War II, they are small 70 to 80 square meters and there's huge demand for upgrading those departments.

So, all those of the three factors over and above your standard increase in disposable income and lower we are going to say which is I think is going to drive real estate price.

Unidentified Company Representative

And one last point, I would like to make is, you haven't even taken into account the what I call the Florida impact, affect which is at, soon I think, there you are going to see lot of Europeans coming to buy houses in the area and that's not even started to blip on mortgages.

Unidentified Company Representative

Just a bit more color on the type of bid, of market we have in Greece, just to make sure that we will understand, that there is more no such think as a prime mortgages in Greece. We don't even, we haven't even invented home equity finance. And LTVs are generally below 100% for the system will very, very rarely reach over 100%. And for this bank the norm is 75% to 80% LTV. And this should take a snapshot of the book, given the property revaluations and the repayment. We are well below 60% or 55% in that as a result. We are a very at plain vanilla, early type, early stage development at that market as regards mortgages.

Unidentified Company Representative

As you can tell, we are very bullish on this market. And I just wanted to add one last point, which I had forgotten is that, the government is currently introduced legislation which will drop the transfer tax, for first time buyers, more of a highest in Europe at 11% down towards 1%. So, that's going to also have a very significant boost to the market.

Quint Stuart - Aberdeen Assets Management

Thank you very much.

Unidentified Company Representative

Thank you.

Operator

The next question is from Mr. Derek Kwan [ph]. Please go ahead, sir.

Unidentified Analyst

I have three questions. Firstly on M&A, and then maybe given the strong core capital position you have at the moment or a capital position well above the stated target, I was just wondering if you could update us on the situation regarding the Ukraine you have the recent press reports regarding your intentions there, and maybe if you can just give us, an update on that. Secondly, on net interest margin and interest rates, if you can just give us your outlook for 2008 in terms of the interest rate environment and how you see both the margin at the group level and domestically indeed progressing in that environment. And finally, on trading and other income or maybe just generally for the P&L, if you could maybe just specifically identify those items which you think are of a one-off nature, in this quarter? Thank you.

Unidentified Company Representative

On your first question on the Ukraine. Clearly we have told you that we are interested in the Ukraine. We find it very interesting economy, a very interesting banking sector. We think that it's reforming economy and it's heading, it has a European orientation, and has a very good environment to expand, it falls within our backyard of the... of where the REIT business has been expanding, it fits in with our other international holdings in Southeast and Europe very much so, very similar. And we're looking basically at a small bolt-on and there are several that are possibly up for sale, you know the names. And we'll be looking at them and see which one fits us and go on from there.

Regarding your second question on interest rates, I will start with Greece and the European interest rate outlook. There I think we are clearly in a position with the ECB, we will prefer not to reduce rates. Its hand maybe force by what's happening in the rest of world, what the Fed will do and what happens to a exchange rate, the euro/dollar exchange rate, which it's appreciation has in effect been, as if the ECB has raise rates, it's a tightening of monetary policy. And if the world slows and it effects will start to falter, that could force the ECB hands.

But the ECB will prefer not to lower rates, so it's a wait and see. Even if they, do I don't foresee in the worst case scenario more than 25% to 50% basis, so. On the other countries, clearly, Turkey is going to be going against the rest of the world. They are going to be lowering rates by a lot, they have very high interest rates. I think they have turned the corner, with the election results being very positive for the economy. The fiscal situation is improving, good budget has been put to the floor, and all of that should lead to interest rates moving to the range of 14% by the end of '08 and further down in the years in the outer years.

Southeast Europe, I mean most of the rates are in Bulgaria which is the biggest one of our subs there. They have got a currency board, it's paid to the euros. So that's we will go where the euro goes. In Romania and Serbia, they have a challenge, which is that their capital inflow, which are leading to an appreciation of exchange rates. They will prefer to have tighter monetary policy given the very rapid expansion of their economies and the rather wide current accounts that they have. But if they'll increase interest rates sort of leads to the opposite side, because it attracts capital and leads to more clear to the economy.

So they are in a tough position in the way, they are dealing with, as you know, which is not good for banks, that they are increasing required reserves and put in other restriction on credit expansion. So I presume that rates will stay low in those countries for those reasons.

Unidentified Company Representative

Thanking your question about the trade and now that coming in the third quarter. Total number I guess is around about 160 million, of which 64 million is in other income, which is basically made up of earnings our from private equity, real estate sales and the hotel and warehouse business we have, which is non-banking. So, probably half of that 64 is in private equity and the balance is on the non core real estate, hotels and warehouses.

On the trading line as such, we had the exceptional of the sale, we had in the we had in the Hellenic exchanges that was say round about 40 million, and the balance is made up of two things, basically, trading proper and a NII substitution which is about, varies between 15 million to 20 million per quarter. In this quarter, it was closer to 15, so that's the growth breakdown of our trade and other income.

Unidentified Analyst

Thank you.

Operator

The next question is from Mr. Curtis Alexander of UBS. Please go ahead sir.

Unidentified Analyst

Yes, hello congratulations on a very good set of results and as always a very good presentation. I have three questions please. The first one is, it appears that MPL and Finansbank are slightly up. Could you please comment on the asset quality dynamics in Turkey and particularly for Finansbank's portfolio. Also it seems that provisions are up 36% on the quarter, immediately from a low base. Second question is when do you estimate that where Vojvodjanska restructuring will be complete in terms of portfolio cleaning... clean up and return basically turning the bank into a sustainable profitable organization? And the third question is what is the amount from the sale of Hellenic Telecom shares, you just mentioned 40 million from currency exchange? Thank you.

Unidentified Company Representative

Sorry, could you... okay. Well let's take them by one by one --

Unidentified Analyst

Yes, go ahead, yes, first one was NPLs and --

Unidentified Company Representative

Don't worry, I have... let's go through them. NPLs, yes, indeed, we had a slight increase in the third quarter. We had two events this year. First event, we indeed had a few couple of corporate loans that went or past 90 days. But also in August, in last August we had the final exchange of NPLs that we, or in terms of loans, that we had contracted with the principal. So that also has lead into a reduction of certain loans, loans balance and that has mathematically has increased the MPL ratio. So, that's not the trend, it is not happening in the retail business, it is an event that has to do with specific cases on the corporate side. And I have to tell you that those loans that have been recorded as NPLs on the corporate site are fully provided already. So, we were anticipating the corporate event and we were providing against those loans, although they were current. Now, on the provisions, sorry, please?

Unidentified Analyst

Just, excuse me, just you mentioned that the loans went the 90 days past due, is that your inbuilt definition for 13, or also was a group level?

Unidentified Company Representative

No, it's advice from Dr. Aras or Turkey, Turkey it's particularly stringent, it's 90 days plus 2 regardless of collateral and so forth, that is everything, and thus in Greece, it's kind of 80 days plus 2, market practices and the definition.

Unidentified Analyst

So, it's the Bank of Greece definition.

Unidentified Company Representative

Correct.

Unidentified Company Representative

Not...I am talking about the corporate of course, with banks always --

Unidentified Analyst

Consumer is 90 days.

Unidentified Company Representative

Absolutely, yes. Now, so there is not a trend. Now, in terms of provisions, provisions in Finansbank have been very low, and I am talking about charge offs, the run rate in the year has been extremely low because Finansbank has had a very stringent and very prudent and conservative provision in policy basically they had a 90 days plus two definition but then they had a 100% provision on those NPLs. So, regardless of them, or regardless of recoveries, regardless of collaterals, regardless of how many of those that went delinquent, 90 days plus two will back to being current, we will help provide the 100%. So indeed we have been beneficiaries of the very prudent provisioning policy and the loan lost or losses that Finansbank has amassed over the years.

So, this is slightly picking up as we move into the year, and that will obviously going to be higher in next year. Still nothing alarming and nothing to do that different infield generation pattern which is the key, I guess, metric to monitor in order to see whether there is a deterioration in credit. If anything, we are moving out of a very tight and very challenging monetary environment into what seems to be more lax and more accommodative, therefore we don't foresee any particular concern in terms of vast quality in Finansbank. There will be this technical big capital on this run rate but this is very much factored into our projections for Finansbank's profitability in the coming years.

As regards Vojvodjanska, there is no question about being cleaned up, there's no such thing the bank is clean provided 90%, so only the percent of the overall, the gross loans are 90% provided, so it's a clean shop; there is nothing to get worried, there is lot of work to be done in order to bring the infrastructure, the commercial offering, and the business of overall business of Vojvodjanska to scratch, but nothing to be done on the... except you know for the portfolio. That's why whenever we refer to Vojvodjanska transformation we talk about revamping the processes, centralizing the key critical aspects of the business cycle like underwriting and risk management. We're talking about installing new systems, about remodeling their branches; but obviously, we don't... consensus is about provisions and write-offs which always has been done in the past.

Unidentified Company Representative

And as I said in the beginning, we aim at a different bank by the end of 2008 and milestones are the rollout of the new model system by... in the beginning of the third quarter and the other milestone, obviously is the merger at the beginning of the year. And we hope to have a substantial number of our branches that are remodeled by the end of 2008. These are the key milestones to watch for. Now, I didn't really cut your other question, but I think beyond the stake that we sold in --

Unidentified Analyst

The third was quarter was Helen exchange --

Unidentified Company Representative

Helen exchange. We have no other -- take it as I said, that was around about 40 million.

Unidentified Analyst

Okay, thank you very much.

Unidentified Company Representative

Thanks.

Operator

The next question is form Mr. Ortini Luka of Lime Investments [ph]. Please go ahead, sir. The next question is from Mr. Aholis Alexanders from Pedro [ph]. Please go ahead sir.

Unidentified Analyst

Yes, hello everybody. Had just a few questions... I am... for Mr. Mylonas, mostly economic questions. Are you holding the toll of overheating economies in imagine Europe, particularly, in Bulgaria and Romania, because of the high current account deficit and increasing inflation that may have an impact on credit growth and possibly your assumptions for growth from the region in the following years. That's the first question. And the second question, if possibly, there seems to be a lot of competition in Greece in time deposits. And very attractive offers from many banks, particularly, the less liquid banks. Are you planning to follow on this competition or it's something that you don't mind to lose markets in that segment? Thank you.

Paul Mylonas - Chief Economist and Head of Strategy

Okay. Regarding the overheating in the Southeast Europe. Clearly there is a little bit of concern. There are background noise but I'll try to speak over it, there the economies are going very fast and the current accounts have increased to levels which would be worrisome if one did look a bit more carefully at the composition. Foreign direct investment and long-term lending by parent companies to their subs banking system, the majority but also other industrials, is covering a 100% of the current account deposits in Bulgaria and Romania, and you are also seeing inflows over and above those which is leading to huge, pretty huge foreign exchange reserve build up.

So it looks... and the other question is to look at is exports and you are seeing exports growing... export volumes growing at very brisk rates, which suggests that they are not losing competitiveness despite the... they are pretty hard currency stands. So, net-net, things are looking okay for now. Clearly the long-term challenge is for this foreign direct investments coming into the country to be able to lead to further exports and to lead the country growth rates forward going into the future, which is not a problem for the next couple of years.

And the last point I'd like to make is that you're seeing some slowdown in credit demand from extremely high levels, part of it's basically, part of it's due to I think the economy's coming down to more logical growth rates in terms of credit.

Unidentified Analyst

Okay. Thank you.

Unidentified Company Representative

If I was to add something on that, because, obviously, we all are very cognizant of the issues about the economies in the SEE and particularly Bulgaria and Romania. The point I want to make is that we have long ago adopted a very conservative stance, in our stress scenarios, even extreme events like double-digit devaluations in either countries will not impact us in any meaningful number and will, the range of outcomes will be either relatively more directly negative to neutral. So P&L-wise we are carrying more significant open currency positions in many of those countries. We have managed to run a credit book where it could extend which is in euros, corporate borrowers tend to be not surely hedged with the euro exports and that's very little exposure on euro retail launch and overall even on the second order impacts of a potential catastrophe of tail events in those countries. We are very much, the impact is very much confined. So, regardless of the position that one takes, the position that the Bank has taken in terms of balanced structure in those countries is very, very conservative.

Unidentified Analyst

Okay. Thank you for that. And the question on Greek bank deposit, is it --

Unidentified Company Representative

Yes, going back to that. We are very much on top of the development in local liquidity, and we are monitoring our relative position and the point I want to report is that until, even up until today, the Bank has suffered no loss of liquidity whatsoever in the domestic market. As a matter of fact, the total liquidity has increased moderately. That means that we have decided to compete on the term deposits, are we not? This is a fiercely competitive area. Indeed we have seen very competitive offers. However, for us it is important to make sure that we maintain the overall customer relationships. That means that we have to have a decent offering for term deposits as well. We are growing much slower on the market, in that segment of the market, however, we are not absent, for the reasons I will explain.

For us it is important to maintain a positioning in the natural habitat of retail liquidity to country. And despite our comfortable liquidity position that means that we have to compete. We... typically, we will close partially that we will never march the offering for some of the more stressed banks, still we are comfortable that we are experiencing no losses in any digital number in none of the components of our retail liquidity bids, saving sides or time deposits. So, overall very comfortable so far.

Unidentified Analyst

Thank you very much.

Operator

Mr. Olcimi Luca of One Investments [ph] is on the line. Please go ahead sir.

Unidentified Analyst

Yes. Good afternoon. Sorry for before but I lost the line. The question I have is on the financing structure of Finansbank. Essentially the question is pretty straightforward. Outside the equity of Finansbank, does National Bank in other ways supply, finances or guarantees or credit, I would say, directly or indirectly, to Finans, and, if yes, what is the dimension of this credit. Since your loan of capital, they have a different loan to deposit than you guys. So would imagine some kind of I'll say financing of your subsidiary in Turkey would make some sense, but I would want to understand the magnitude of that.

Unidentified Company Representative

It does make sense but the way that Finansbank is spread over the year did not give us much opportunity to tap on the group resources to funding its activities. So, and rather the Finansbank has been more or less capable of financing itself, funding itself, either on the retail or the wholesale market. And Petros has mentioned that what we have managed to do both in the wholesale recently or in the beginning of the last quarter of '06 but also on the retail side. So, we were not given opportunity to lead direct France to Finansbank and meaningful matter over the year. Petros, I don't know whether you can give us a little more flavor on that?

Petros Christodoulou - General Manager, Private Banking and Group Treasury

Yes. The observation is very correct, when you have two partners one being liquidity rich and the other one organically growing so much, they justify the expectation as to expect some flow of liquidity from one to the other, and it has been the case that we have stood by to provide this liquidity should the need arise, but it has not reason in that this year, as I mentioned before. Strategically Finansbank chosen, chose to raise the retail deposits penetration. So, in a way and to a very large extent they have self-financed their organic asset growth.

If you want to get a level of magnitude of how much liquidity has been offered to Finansbank at various times during the year by the parent, this has been in the region of 300 million to 600 million euros and at the moment it's probably at the low end of that.

Unidentified Analyst

Okay. On top of that, is National Bank of Greece one way or the other guarantee the balance sheet of Finansbank?

Unidentified Company Representative

No, no.

Unidentified Analyst

Or any strategic interaction or underwriting it, just putting, because you've got such a good name that your credit standing is better than Finansbank credit standing, and so that would appear something that you could have done and --

Unidentified Company Representative

No, we haven't... let me... I was trying to intervene but we haven't guaranteed any transaction with Finansbank. If we were to guarantee one, that would be one the books of FG [ph]. We have not issued a guarantee when they come out in the market they come out under their own name and we do that opportunistically. And as Petros has mentioned, we could not possibly shy away from the fact that Finansbank would raise money inside Turkey serious, and without the guarantee of National Bank of Greece. So that's it.

Unidentified Analyst

Okay. And just a very simple question on Greece, if I may. Just looking at 2008 spreads on domestic mortgage, what kind of variation on 2007 you would want us to pencil in our forecast.

Unidentified Company Representative

Let me try to give you a bit of... let's start with trying to size up how important that is for National Bank of Greece. For us just no more than 12% of our total net interest income comes out of mortgages. So it is an important matter, issue but not do or die that will think for National Bank of Greece. Now, in terms of spread evolution in the mortgages, I think if you track the announcements of every bank in Greece over the last three or four quarters, you should felt that every quarter everybody is reporting less and less of a contraction.

So up until the end of third quarter we've been experiencing a decline in trend of compression. It is before, of course, the current turmoil in the wholesale liquidity markets. During the fourth quarter we have been seeing evidence of people trying to push their prices up. For starters, everybody is now caught in mortgages of the LIBOR [ph] to mitigate the impact of the your LIBOR [ph] disconnect. On top of that, looking into the offers that we have seen, we have seen more sensible pricing, figures are now come up, come with the club back close, so that consumers will have to pay back the monetary, the benefit of the fees if they decide to refinance, there is more transparency on the price that the consumer will be paying post to the period. All these lead to a more disciplined pricing on mortgages.

All-in-all I would thus say that we must have seen the worst in terms of spread compression in mortgages. I don't see how with the current balance sheet structure of the major banks in Greece, how this competitive pressures will continue in the future. So, to cut a long story short, I don't see much compression on mortgage spreads going forward.

Unidentified Analyst

Thank you very much indeed.

Operator

[Operator Instructions]. We have a follow-up question from Mr. Quint Stuart of Aberdeen Assets Management. Please go ahead, sir.

Quint Stuart - Aberdeen Assets Management

Yes, hi again. On the corporate side, corporate loans had increased, could you discuss a little bit about what's going... and it's actually both in the corporate and the SME loans. What's... you mentioned the turnaround on your lending, and if you could a little bit about what's driving that and how sustainable do you see that in the near term?

Unidentified Company Representative

Clearly, you know that the economy in Greece has been growing very, very rapidly. And the back port of the economy is the SME sector. And after several years of growth, it's not surprising at all that these companies are reaching a size where they can access banks and borrow more. So, I think it's a simple development.

Quint Stuart - Aberdeen Assets Management

Thank you.

Operator

Gentlemen, there are no more questions registered at this time. You may now proceed with your closing statements.

Unidentified Company Representative

Okay everyone, Thank you very much for joining us for our third quarter results presentation. It was quite a long one. As always, the IR team is standing by, waiting for follow-up questions, both tonight and tomorrow. And again, thank you all for joining us. And good afternoon and good night.

Unidentified Company Representative

Thanks very much Steve.

Operator

Ladies and gentlemen the conference call is now over. You may disconnect your telephones. Thank you for calling. Goodbye.

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Source: National Bank of Greece SA Q3 2007 Earnings Call Transcript
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