REG - Bank of Cyprus Hldgs - 1H2022 Group Financial Results
31/08/2022 07:01
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RNS Number : 7193X Bank of Cyprus Holdings PLC 31 August 2022
Announcement
Group Financial Results for the six months ended 30 June 2022
Nicosia, 31 August 2022
This announcement contains inside information for the purposes of Article 7 of
the Market Abuse Regulation (EU) 596/2014 and as the same has been retained in
UK law as amended by the Market Abuse (Amendment) (EU Exit) Regulations (SI
2019/310).
Key Highlights for the six months ended 30 June 2022
Resilient economic outlook
· 6.1%(1) GDP growth in 2Q2022; expected to grow by over 5%(1) in
2022, outperforming wider Euro area
· Strong new lending of €1.2 bn, up 30% yoy and ahead of
pre-pandemic levels
· 4% growth in net performing loan book(2) in 1H2022
Strong underlying profitability
· Profit after tax before non-recurring items of €59 mn, up 20%
yoy underpinned by higher revenue and lower impairments
· Underlying ROTE(3) of 7.3%
· Profit after tax of €50 mn for 1H2022 vs €1 mn for 1H2021
Efficiency actions completed ahead of schedule
· Cost to income ratio(4) at 58% for 1H2022, broadly flat yoy
· Successful completion of Voluntary Staff Exit Plan (VEP) in
3Q2022 at one-off cost of c.€99 mn
· Full time employees reduced by c.16%; estimated annual saving of
c.€37 mn (19%) of staff costs
· Branch footprint reduced by 25% year to date
Robust capital and liquidity
· CET1 ratio of 14.2%(5,6) and Total Capital ratio of 19.3%(5,6)
· Deposits at €18.5 bn up 4% qoq
· Significant surplus liquidity of €6.7 bn; well positioned to
benefit from further interest rate increases
Mid-single digit NPE ratio(7)
· NPE ratio reduced to 5.7%(7) (2.4%(7,8) net) vs 6.5%(7,8) at
March 2022
· Coverage at 59%(7); cost of risk at 43 bps
1. Source: Cyprus Statistical Service, Ministry of Finance
2. Non-legacy loan book which includes Corporate, Large and
International corporate, International business unit, Wealth and Markets, SME
and Retail
3. Underlying ROTE is calculated as Profit after Tax and before
non-recurring items divided by (Shareholders' equity minus Intangible assets)
4. Excluding special levy on deposits and other levies/contributions
5. Allowing for IFRS 9 and temporary treatment for certain FVOCI
instruments transitional arrangements
6. Pro forma for HFS and the completion of VEP
7. Pro forma for HFS
8. Calculated as NPEs net of provisions over net loans
Group Chief Executive Statement
"Bank of Cyprus Group's performance in the first half of 2022 confirms the
sustainability of our business model, with well-diversified and increasing
revenues combined with tight cost control, delivering a healthy 20% increase
in profit after tax, before non-recurring items, of €59 mn and a
corresponding return on tangible equity of 7.3%. The business momentum, the
actions we have taken, the improved interest rate environment and our
significant gearing to increasing interest rates give us confidence in
accelerating the delivery of our target of double digit ROTE earlier, in 2023.
Despite concerns regarding the outlook for global and European economic
growth, the Cypriot economy continued to grow strongly in the second quarter
with GDP increasing by 6.1%, significantly outperforming the wider Euro area.
The strong tourism season is expected to support growth this year, with GDP in
Cyprus projected to exceed 5% in real terms in 2022, according to the Ministry
of Finance. As the largest financial group in Cyprus, we continued to support
the economy by extending a record €1.2 bn of new loans in the first six
months of 2022, an increase of 30% on the prior year, whilst maintaining
strict lending criteria. As a result, our net performing loan book grew by 4%
during the first six months of 2022 to €9.7 bn.
During the first six months of the year, we generated total income of €299
mn and a positive operating result of €109 mn, up by 7% on the previous
year. The second quarter of 2022 reflected the beginning of recovery in our
net interest income due to the improving interest rate environment.
Additionally, the quarter was marked by a strong performance in net fee and
commission income and stable insurance income whilst operating expenses
(excluding levies and contributions) remain well contained despite
inflationary pressures. Our cost to income ratio stood at 58%, broadly flat
yoy, reflecting our ongoing efforts to contain costs. Our cost of risk at 43
bps remained well within our normalised target range. The reported result was
a net profit of €50 mn for the first six months of the year.
In July, we completed a Voluntary Staff Exit Plan (VEP) through which c.550
applicants were approved to leave at a total one-off cost of c.€99 mn to be
recorded in the third quarter. The estimated annual saving of €37 mn
represents 19% of total staff costs. Simultaneously we have reduced the number
of branches by 20 to 60 year-to-date, a reduction of 25%. Through these two
successful initiatives, the Group has delivered ahead of schedule on its
objective of right-sizing the Bank, which is key for the improvement of
operating efficiency.
The Bank's capital position remains robust and comfortably in excess of our
regulatory requirements, after absorbing in full the cost of the VEP. As at 30
June 2022, our Total Capital ratio was 19.3% and our CET1 ratio was 14.2%, on
both a transitional and pro forma basis. Our liquidity position also remains
strong, as such we continue to operate with c.€6.7 bn of surplus liquidity,
being well positioned to benefit from further interest rate increases.
Deposits on our balance sheet increased by 4% in the quarter to €18.5 bn.
Balance sheet normalisation continued in the second quarter with a further
€74 mn of organic NPE reduction, reducing our NPE ratio to 5.7%, pro forma
for NPE sales. We remain on track to achieve our target NPE ratio of c.5% by
the end of this year and less than 3% by the end of 2025.
2022 is expected to be a transitional year for Bank of Cyprus, marking the
final restructuring actions to transform the Group into a strong, stable and
profitable organisation for banking and broader financial products and
services in Cyprus. Our dynamic strategy which leverages our strong customer
base, our market leading position, and our investment in our digital
infrastructure and digital offering to clients is proving successful.
Our progress is being noticed. In an announcement on 19 August 2022 the Board
expressed its confidence in our strategy and our prospects with unanimous and
unequivocal rejection of three unsolicited, conditional, non-binding proposals
by US private equity firm Lone star to acquire the entire issued, and to be
issued, share capital of the Bank since 5 May 2022.
We remain focused on creating shareholder value and with today's upgraded
guidance we now expect to achieve a ROTE of over 10% in 2023. This lays the
foundations for a meaningful return to dividend distributions which we expect
from 2023 onwards, subject to regulatory approvals and market conditions.
Panicos Nicolaou
A. Group Financial Results - Statutory Basis
Interim Consolidated Income Statement for the six months ended 30 June 2022
Six months ended
30 June
2022 2021
(restated)
€000 €000
Turnover 414,996 390,624
Interest income 181,470 179,272
Income similar to interest income 9,518 17,626
Interest expense (37,541) (28,670)
Expense similar to interest expense (7,752) (16,015)
Net interest income 145,695 152,213
Fee and commission income 98,086 87,610
Fee and commission expense (4,447) (3,753)
Net foreign exchange gains 11,898 6,550
Net losses on financial instruments (2,060) (13,196)
Net gains on derecognition of financial assets measured at amortised cost 1,648 1,053
Income from assets under insurance and reinsurance contracts 29,859 103,824
Expenses from liabilities under insurance and reinsurance contracts 3,010 (72,756)
Net losses from revaluation and disposal of investment properties (1,372) (1,381)
Net gains on disposal of stock of property 8,242 7,372
Other income 8,927 5,854
Total operating income 299,486 273,390
Staff costs (103,135) (100,866)
Special levy on deposits and other levies/contributions (16,507) (15,255)
Other operating expenses (80,393) (95,588)
Operating profit before credit losses and impairment 99,451 61,681
Credit losses on financial assets (24,965) (52,163)
Impairment net of reversals of non-financial assets (12,157) (7,398)
Profit before tax 62,329 2,120
Income tax (11,579) (968)
Profit after tax for the period 50,750 1,152
Attributable to:
Owners of the Company 50,088 739
Non-controlling interests 662 413
Profit for the period 50,750 1,152
Basic and diluted profit per share attributable to the owners of the Company 11.2 0.2
(€ cent)
A. Group Financial Results - Statutory Basis (continued)
Interim Consolidated Balance Sheet as at 30 June 2022
30 June 31 December 2021
2022 (restated)
Assets €000 €000
Cash and balances with central banks 9,904,549 9,230,883
Loans and advances to banks 312,308 291,632
Derivative financial assets 38,150 6,653
Investments at FVTPL 181,318 199,194
Investments at FVOCI 529,872 748,695
Investments at amortised cost 1,391,487 1,191,274
Loans and advances to customers 10,144,099 9,836,405
Life insurance business assets attributable to policyholders 533,696 551,797
Prepayments, accrued income and other assets 621,955 616,219
Stock of property 1,054,034 1,111,604
Deferred tax assets 265,430 265,481
Investment properties 102,040 117,745
Property and equipment 245,693 252,130
Intangible assets 171,403 184,034
Non-current assets and disposal groups held for sale 347,698 358,951
Total assets 25,843,732 24,962,697
Liabilities
Deposits by banks 492,022 457,039
Funding from central banks 2,954,808 2,969,600
Derivative financial liabilities 9,485 32,452
Customer deposits 18,450,216 17,530,883
Insurance liabilities 689,798 736,201
Accruals, deferred income, other liabilities and other provisions 394,117 361,977
Pending litigation, claims, regulatory and other matters 104,793 104,108
Debt securities in issue 298,899 302,555
Subordinated liabilities 311,738 340,220
Deferred tax liabilities 45,235 46,435
Total liabilities 23,751,111 22,881,470
Equity
Share capital 44,620 44,620
Share premium 594,358 594,358
Revaluation and other reserves 182,329 213,192
Retained earnings 1,028,218 986,623
Equity attributable to the owners of the Company 1,849,525 1,838,793
Other equity instruments 220,000 220,000
Non‑controlling interests 23,096 22,434
Total equity 2,092,621 2,081,227
Total liabilities and equity 25,843,732 24,962,697
B. Group Financial Results - Underlying Basis
Interim Condensed Consolidated Income Statement
€ mn 1H2022 1H2021 2Q2022 1Q2022 qoq +% yoy +%
(restated)(1)
Net interest income 145 152 74 71 4% -4%
Net fee and commission income 94 84 50 44 14% 12%
Net foreign exchange gains and net gains/(losses) on financial instruments 11 9 5 6 -3% 23%
Insurance income net of claims and commissions 33 31 17 16 1% 6%
Net gains/(losses) from revaluation and disposal of investment properties and 7 6 2 5 -59% 15%
on disposal of stock of properties
Other income 9 6 5 4 19% 52%
Total income 299 288 153 146 5% 4%
Staff costs (100) (101) (50) (50) 1% -1%
Other operating expenses (73) (70) (37) (36) 2% 5%
Special levy on deposits and other levies/contributions (17) (15) (7) (10) -33% 8%
Total expenses (190) (186) (94) (96) -2% 2%
Operating profit before credit losses and impairments 109 102 59 50 18% 7%
Loan credit losses (23) (35) (11) (12) -6% -34%
Impairments of other financial and non-financial assets (13) (11) (8) (5) 58% 17%
Provisions for litigation, claims, regulatory and other matters (1) (4) (1) (0) 66% -86%
Total loan credit losses, impairments and provisions (37) (50) (20) (17) 14% -27%
Profit before tax and non-recurring items 72 52 39 33 20% 41%
Tax (12) (1) (6) (6) 10% -
Profit attributable to non-controlling interests (1) (0) (1) 0 - 60%
Profit after tax and before non-recurring items (attributable to the owners of 59 51 32 27 18% 20%
the Company)
Advisory and other restructuring costs - organic (5) (18) (4) (1) 219% -70%
Profit after tax - organic (attributable to the owners of the Company) 54 33 28 26 8% 70%
Provisions/net (loss)/profit relating to NPE sales(2) 0 (16) 1 (1) -172% -97%
Restructuring and other costs relating to NPE sales(2) (1) (16) 0 (1) 49% -92%
Restructuring costs - Voluntary Staff Exit Plan (VEP) (3) - - (3) -100% -
Profit after tax (attributable to the owners of the Company) 50 1 29 21 35% -
B. Group Financial Results - Underlying Basis (continued)
Interim Condensed Consolidated Income Statement - Key Performance Ratios
Key Performance Ratios(3) 1H2022 1H2021 2Q2022 1Q2022 qoq +% yoy +%
Net Interest Margin (annualised) 1.32% 1.56% 1.33% 1.32% 1 bps -24 bps
Cost to income ratio 63% 64% 61% 66% -5 p.p. -1 p.p.
Cost to income ratio excluding special levy on deposits and other 58% 59% 57% 59% -2 p.p. -1 p.p.
levies/contributions
Operating profit return on average assets (annualised) 0.9% 0.9% 0.9% 0.8% 0.1 p.p. -
Basic earnings per share attributable to the owners of the Company (€ cent) 11.23 0.17 6.45 4.78 1.67 11.06
Basic earnings after tax and before non-recurring items per share attributable 13.51 11.24 7.31 6.20 1.11 2.27
to the owners of the Company (€ cent)
Return on tangible equity (ROTE) after tax and before non-recurring items 7.3% 6.1% 7.8% 6.7% 1.1 p.p. 1.2 p.p.
(annualised)
1. Comparative information was restated following a reclassification of
approximately €1 million loss relating to disposal/dissolution of
subsidiaries and associates from 'Net foreign exchange gains and net
gains/(losses) on financial instruments' to 'Other income'. More information
is provided in Note 3.1 of the Consolidated Condensed Interim Financial
Statements.
2. 'Provisions/net loss relating to NPE sales' refer to the net loss on
transactions completed during the year/period and the net loan credit losses
on transactions under consideration, whilst 'Restructuring and other costs
relating to NPE sales' refer mainly to the costs relating to these trades. For
further details please refer to Section B.3.4.
3. Including the NPE portfolios classified as "Non-current assets and disposal
groups held for sale", where relevant.
p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1
percentage point
Commentary on Underlying Basis
The financial information presented in this Section provides an overview of
the Group financial results for the six months ended 30 June 2022 on the
'underlying basis', which the management believes best fits the true
measurement of the performance and position of the Group, as this presents
separately the exceptional and one-off items.
Reconciliations between the statutory basis and the underlying basis are
included in Section B.1 'Reconciliation of the Interim Condensed Consolidated
Income Statement for the six months ended 30 June 2022 between statutory and
underlying basis' and in 'Definitions and Explanations on Alternative
Performance Measures Disclosures of the Interim Financial Report 2022', to
facilitate the comparability of the underlying basis to the statutory
information.
Please note the following in relation to the disclosure of pro forma figures
and ratios throughout this announcement.
References to pro forma figures and ratios as at 30 June 2022 refer to Project
Helix 3, Project Sinope and to VEP (as explained below). All relevant figures
are based on 30 June 2022, unless otherwise stated. The completion of Project
Helix 3 remains subject to customary regulatory and other approvals and is
currently expected to occur in 2H2022. Project Sinope was completed in August
2022. As at 30 June 2022, the portfolios of loans, as well as the real estate
properties included in Project Helix 3 and Project Sinope, were classified as
disposal groups held for sale. VEP refers to the Voluntary Staff Exit Plan
that the Group completed in July 2022, through which c.550 applicants were
approved to leave at a total cost of c.€99 mn, expected to be recorded in
the 3Q2022 income statement.
Where numbers are provided on a pro forma basis, this is stated and referred
to as 'Pro forma for held for sale and Voluntary Staff Exit Plan' or 'Pro
forma for HFS and VEP', unless otherwise stated.
Project Helix 3 refers to the agreement the Group reached in November 2021
with funds affiliated with PIMCO, for the sale of a portfolio of NPEs with
gross book value of €568 mn, as well as real estate properties with book
value of c.€120 mn, as at 30 September 2021.
Project Sinope refers to the agreement the Group reached in December 2021 for
the sale of a portfolio of NPEs with gross book value of €12 mn, as well as
properties in Romania with carrying value €0.6 mn, as at 31 December 2021.
Project Sinope was completed in August 2022.
Further details on the NPE trades are provided in Section B.2.5 'Loan
portfolio quality'.
B. Group Financial Results - Underlying Basis (continued)
Consolidated Condensed Interim Balance Sheet
€ mn 30.6.2022 31.12.2021 +%
Cash and balances with central banks 9,905 9,231 7%
Loans and advances to banks 312 292 7%
Debt securities, treasury bills and equity investments 2,102 2,139 -2%
Net loans and advances to customers 10,144 9,836 3%
Stock of property 1,054 1,112 -5%
Investment properties 102 118 -13%
Other assets 1,877 1,876 0%
Non-current assets and disposal groups held for sale 348 359 -3%
Total assets 25,844 24,963 4%
Deposits by banks 492 457 8%
Funding from central banks 2,955 2,970 0%
Customer deposits 18,450 17,531 5%
Debt securities in issue 299 303 -1%
Subordinated liabilities 312 340 -8%
Other liabilities 1,243 1,281 -3%
Total liabilities 23,751 22,882 4%
Shareholders' equity 1,850 1,839 1%
Other equity instruments 220 220 -
Total equity excluding non-controlling interests 2,070 2,059 1%
Non-controlling interests 23 22 3%
Total equity 2,093 2,081 1%
Total liabilities and equity 25,844 24,963 4%
Key Balance Sheet figures and ratios 30.06.2022 30.06.2022 31.12.2021 +(2)
(pro forma)(1) (as reported)(2) (as reported)(2)
Gross loans (€ mn) 10,477 11,047 10,856 2%
Allowance for expected loan credit losses (€ mn) 355 677 792 -14%
Customer deposits (€ mn) 18,450 18,450 17,531 5%
Loans to deposits ratio (net) 55% 56% 57% -1 p.p.
NPE ratio 5.7% 10.6% 12.4% -1.8 p.p.
NPE coverage ratio 59% 58% 59% -1 p.p.
Leverage ratio 7.4% 7.4% 7.6% -20 bps
Capital ratios and risk weighted assets 31.06.2022 31.06.2022 31.12.2021 +(2)
(pro forma)(1) (as reported)(2) (as reported)(2)
Common Equity Tier 1 (CET1) ratio (transitional)(3) 14.2% 14.6% 15.1% -50 bps
Total capital ratio 19.3% 19.5% 20.0% -50 bps
Risk weighted assets (€ mn) 10,260 10,600 10,694 -1%
1. Pro forma for HFS and VEP (please refer to 'Commentary on Underlying
Basis'). 2. Including the NPE portfolios classified as "Non-current assets and
disposal groups held for sale", where relevant. 3. The CET1 fully loaded ratio
as at 30 June 2022 amounts to 13.9% and 13.4% pro forma for HFS and completion
of VEP (compared to 13.9% and 14.5% pro forma for HFS as at 31 March 2022 and
to 13.7% and 14.3% pro forma for HFS as at 31 December 2021). p.p. =
percentage points, bps = basis points, 100 basis points (bps) = 1 p.p.
B. Group Financial Results-Underlying Basis (continued)
B.1 Reconciliation of the Interim Condensed Consolidated Income
Statement for the six months ended 30 June 2022 between statutory and
underlying basis
€ million Underlying basis NPE Other Statutory
basis
Sales
Net interest income 145 - - 145
Net fee and commission income 94 - - 94
Net foreign exchange gains and net gains/(losses) on financial instruments 11 - (1) 10
Net gains/(losses) on derecognition of financial assets measured at amortised - - 2 2
cost
Insurance income net of claims and commissions 33 - - 33
Net gains/(losses) from revaluation and disposal of investment properties and 7 - - 7
on disposal of stock of properties
Other income 9 - - 9
Total income 299 - 1 300
Total expenses (190) (1) (9) (200)
Operating profit before credit losses and impairments 109 (1) (8) 100
Loan credit losses (23) - 23 -
Impairments of other financial and non-financial assets (13) - 13 -
Provision for litigation, claims, regulatory and other matters (1) - 1 -
Credit losses on financial assets and impairment net of reversals of - - (37) (37)
non-financial assets
Profit before tax and non-recurring items 72 (1) (8) 63
Tax (12) - - (12)
Profit attributable to non-controlling interest (1) - - (1)
Profit after tax and before non-recurring items (attributable to the owners of 59 (1) (8) 50
the Company)
Advisory and other restructuring costs-organic (5) - 5 0
Profit after tax - organic* (attributable to the owners of the Company) 54 (1) (3) 50
Provisions/net (loss)/profit relating to NPE sales 0 - - 0
Restructuring and other costs relating to NPE sales (1) 1 - 0
Restructuring costs - Voluntary Staff Exit Plan (VEP) (3) - 3 0
Profit after tax (attributable to the owners of the Company) 50 - - 50
*This is the profit after tax (attributable to the owners of the Company),
before the provisions/net (loss)/profit relating to NPE sales, related
restructuring and other costs, and restructuring costs related to a Voluntary
Staff Exit Plan (VEP) of a subsidiary.
The reclassification differences between the statutory basis and the
underlying basis mainly relate to the impact from 'non-recurring items' and
are explained as follows:
NPE sales
· Total expenses include restructuring costs of
€1 million relating to the agreements for the sale of portfolios of NPEs and
are presented within 'Restructuring and other costs relating to NPE sales '
under the underlying basis.
Other reclassifications
· Net losses on loans and advances to customers at
FVPL of €2 million included in 'Loan credit losses' under the underlying
basis are included in 'Net losses on financial instruments' under the
statutory basis. Their classification under the underlying basis is done to
align their presentation with the loan credit losses on loans and advances to
customers at amortised cost.
Group Financial Results-Underlying Basis (continued)
B.1 Reconciliation of the Interim Condensed Consolidated Income
Statement for the six months ended 30 June 2022 between statutory and
underlying basis (continued)
· 'Net gains/(losses) on derecognition of financial
assets measured at amortised cost' of c.€2 million under the statutory basis
comprise of the below items which are reclassified accordingly under the
underlying basis as follows:
· €3 million net gains on derecognition of loans and advances
to customers included in 'Loan credit losses' under the underlying basis as to
align to the presentation of the loan credit losses arising from loans and
advances to customers.
· Net losses on derecognition of debt securities measured at
amortised cost of approximately €1 million included in 'Net foreign exchange
gains and net losses on financial instruments' under the underlying basis in
order to align their presentation with the gains/(losses) arising on financial
instruments.
· 'Provision for litigation, claims, regulatory and
other matters' amounting to €1 million included in 'Other operating
expenses' under the statutory basis, is separately presented under the
underlying basis, since it mainly relates to cases that arose outside the
normal activities of the Group.
· Advisory and other restructuring costs of
approximately €5 million included in 'Other operating expenses' under the
statutory basis are separately presented under the underlying basis since they
comprise mainly fees to external advisors in relation to the transformation
programme and other strategic projects of the Group.
· Total expenses under the statutory basis include
restructuring costs relating to the voluntary staff exit plan (VEP) of JCC
Payment Systems Ltd of €3 million and are separately presented under the
underlying basis, since they represent one-off items.
· 'Credit losses on financial assets and impairment
net of reversals of non-financial assets' under the statutory basis include i)
credit losses to cover credit risk on loan and advances to customers of €24
million, which are included in 'Loan credit losses' under the underlying basis
and ii) credit losses of other financial instruments of €1 million and
impairment net of reversals of non-financial assets of €12 million which are
included in 'Impairments of other financial and non-financial assets' under
the underlying basis as to be presented separately from loan credit losses.
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis
B.2.1 Capital Base
Total equity excluding non-controlling interests totalled €2,070 mn as at 30
June 2022 compared to €2,069 mn at 31 March 2022 and to €2,059 mn at 31
December 2021. Shareholders' equity totalled €1,850 mn as at 30 June 2022
compared to €1,849 mn at 31 March 2022 and to €1,839 mn at 31 December
2021.
The Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at
14.6% as at 30 June 2022 and 14.2% pro forma for held for sale portfolios and
Voluntary Staff Exit Plan (collectively referred to as 'pro forma for HFS and
VEP') compared to 14.6% as at 31 March 2022 and 15.2% pro forma for held for
sale portfolios (referred to as 'pro forma for HFS') and to 15.1% as at 31
December 2021 (and 15.8% pro forma for HFS). During 2Q2022, the CET1 ratio was
positively affected mainly by the pre-provision income, and negatively
affected mainly by provisions and impairments, the payment of AT1 interest and
the movement in the fair value through Other Comprehensive Income Reserves.
Throughout this announcement, the capital ratios (and pro forma capital
ratios) as at 30 June 2022 include reviewed profits for 1H2022, unless
otherwise stated.
The Group has elected to apply the EU transitional arrangements for regulatory
capital purposes (EU Regulation 2017/2395) where the impact on the impairment
amount from the initial application of IFRS 9 on the capital ratios is
phased-in gradually, with the impact being fully phased-in (100%) by 1 January
2023. The phasing-in for 2022, of the impairment amount from the initial
application of IFRS 9 had a negative impact of c.60 bps on the CET1 ratio on 1
January 2022. In addition, a prudential charge in relation to the onsite
inspection on the value of the Group's foreclosed assets is being deducted
from own funds since June 2021, the impact of which is 36 bps on Group's CET1
ratio as at 30 June 2022.
The CET1 ratio on a fully loaded basis amounted to 13.9% as at 30 June 2022
and 13.4% pro forma for HFS and VEP compared to 13.9% as at 31 March 2022 (and
14.5% pro forma for HFS), and to 13.7% as at 31 December 2021 (and 14.3% pro
forma for HFS).
The Total Capital ratio stood at 19.5% as at 30 June 2022 and 19.3% pro forma
for HFS and VEP compared to 19.6% as at 31 March 2022 (and 20.3% pro forma for
HFS), and to 20.0% as at 31 December 2021 (and 20.8% pro forma for HFS).
The Group's capital ratios are above the Supervisory Review and Evaluation
Process (SREP) requirements.
In the context of the annual SREP conducted by the European Central Bank (ECB)
in 2021 and based on the final 2021 SREP Decision received in February 2022,
the Pillar II requirement has been set at 3.26%, compared to the previous
level of 3.00%. The additional Pillar II requirement add-on of 0.26% relates
to ECB's prudential provisioning expectations as per the 2018 ECB Addendum and
subsequent ECB announcements and press release in July 2018 and August 2019.
This component of the Pillar II requirement add-on takes into consideration
Project Helix 3.
The Bank has been designated as an Other Systemically Important Institution
(O-SII) by the Central Bank of Cyprus (CBC) in accordance with the provisions
of the Macroprudential Oversight of Institutions Law of 2015, and since
November 2021 the O-SII buffer has been set to 1.50%. This buffer is being
phased-in gradually, having started from 1 January 2019 at 0.50%. Currently
the O-SII buffer stands at 1.25% and will be fully phased-in on 1 January
2023.
As a result, the Group's minimum phased-in CET1 capital ratio has been set at
10.08% compared to the previous level of 9.69% (comprising a 4.50% Pillar I
requirement, a 1.83% Pillar II requirement, the Capital Conservation Buffer of
2.50% and the O-SII Buffer of 1.25%) and the Group's Total Capital requirement
was set at 15.01% compared to the previous level of 14.50% (comprising an
8.00% Pillar I requirement, of which up to 1.50% can be in the form of AT1
capital and up to 2.00% in the form of T2 capital, a 3.26% Pillar II
requirement, the Capital Conservation Buffer of 2.50% and the O-SII Buffer of
1.25%). The ECB has also provided revised lower non-public guidance for an
additional Pillar II CET1 buffer (P2G). Pillar II add-on capital requirements
derive from the SREP, which is a point in time assessment, and are therefore
subject to change over time. The new SREP requirements became effective as
from 1 March 2022.
Own funds held for the purposes of P2G cannot be used to meet any other
capital requirements (Pillar I, Pillar II requirements or the combined buffer
requirement), and therefore cannot be used twice.
Based on the SREP decision of prior years, the Company (Bank of Cyprus
Holdings PLC) and the Bank are under a regulatory prohibition for equity
dividend distribution and hence no dividends were declared or paid during
2021. Following the final 2021 SREP Decision received in February 2022, the
Company and the Bank still remain under equity dividend distribution
prohibition for 2022. This prohibition does not apply if the distribution is
made via the issuance of new ordinary shares to the shareholders, which are
eligible as CET1 capital. No prohibition applies to the payment of coupons on
any AT1 capital instruments issued by the Company or the Bank. Following the
final 2021 SREP Decision, the previous restriction on variable pay was lifted.
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
B.2.1 Capital Base (continued)
The Group participated in the 2022 ECB supervisory Climate Risk Stress Test
and participated in the 2021 ECB SREP Stress Test. For further information
please refer to the 'Additional Risk and Capital Management Disclosures' of
the 'Interim Financial Report 2022' and the 'Annual Financial Report 2021'.
Voluntary Staff Exit Plan
In July 2022, the Group completed a Voluntary Staff Exit Plan with an
estimated cost of c.€99 mn which will be recognised in the consolidated
income statement in the third quarter, resulting in a negative impact of c.95
bps both on the Group's CET1 and Total Capital ratios.
For further information please refer to Section "B.3.2 Total expenses".
Project Helix 3
In November 2021, the Group reached agreement for the sale of a portfolio of
NPEs with gross book value of €568 mn as at 30 September 2021, as well as
real estate properties with book value of c.€120 mn as at 30 September 2021,
known as Project Helix 3. Further details are provided in Section B.2.5 'Loan
portfolio quality'.
Project Helix 3 is expected to have a positive capital impact of c.60 bps on
the Group's CET1 ratio on the basis of 30 June 2022 figures.
Pro forma calculations are based on 30 June 2022 financial results, unless
otherwise stated, and assume completion of the transaction, which remains
subject to customary regulatory and other approvals.
Tier 2 Capital Notes
In April 2021, the Company issued €300 mn unsecured and subordinated Tier 2
Capital Notes (the 'New T2 Notes').
The Company and the Bank entered into an agreement pursuant to which the
Company on-lent to the Bank the entire €300 mn proceeds of the issue of the
New T2 Notes (the 'Tier 2 Loan') on terms substantially identical to the terms
and conditions of the New T2 Notes. The Tier 2 Loan constitutes an unsecured
and subordinated obligation of the Bank.
The New T2 Notes were priced at par with a fixed coupon of 6.625% per annum,
payable annually in arrears and resettable on 23 October 2026. The maturity
date for the New T2 Notes is 23 October 2031. The Company will have the option
to redeem the New T2 Notes early on any day during the six-month period from
23 April 2026 to 23 October 2026, subject to applicable regulatory consents.
At the same time, the Bank invited the holders of its €250 mn Fixed Rate
Reset Tier 2 Capital Notes due January 2027 (the 'Old T2 Notes') to tender
their Old T2 Notes for purchase by the Bank at a price of 105.50%, after which
Old T2 Notes of €43 mn remained outstanding. On 19 January 2022, the Bank
exercised its option and redeemed the outstanding €43 mn Old T2 Notes.
The Group continues to monitor opportunities for the optimisation of its
capital position, including Additional Tier 1 capital.
Legislative amendments for the conversion of DTA to DTC
Legislative amendments allowing for the conversion of specific deferred tax
assets (DTA) into deferred tax credits (DTC) became effective in March 2019.
The law amendments cover the utilisation of income tax losses transferred from
Laiki Bank to the Bank in March 2013. The introduction of Capital Requirements
Directive (CRD) IV in January 2014 and its subsequent phasing-in led to a more
capital-intensive treatment of this DTA for the Bank. With this legislation,
institutions are allowed to treat such DTAs as 'not relying on profitability',
according to CRD IV and as a result not deducted from CET1, hence improving a
credit institution's capital position.
In response to concerns raised by the European Commission with regard to the
provision of state aid arising out of the treatment of such tax losses, the
Cyprus Government has proceeded with the adoption of modifications to the Law,
including requirements for an additional annual fee over and above the 1.5%
annual guarantee fee already provided for in the Law, to maintain the
conversion of such DTAs into tax credits. In May 2022 the Cyprus Parliament
voted these amendments which became effective since then. As prescribed by the
amendments in the Law, the annual fee is to be determined by the Cyprus
Government on an annual basis, providing however that such fee to be charged
is set at a minimum fee of 1.5% of the annual instalment and can range up to a
maximum amount of €10 mn per year, and also allowing for a higher amount to
be charged in the year the amendments are effective (i.e. in 2022).
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
Legislative amendments for the conversion of DTA to DTC (continued)
The Group since prior years, in anticipation of modifications in the Law,
acknowledged that such increased annual fee may be required to be recorded on
an annual basis until expiration of such losses in 2028. The Group estimates
that such fees could range up to €5.3 mn per year (for each tax year in
scope i.e. since 2018) although the Group understands that such fee may
fluctuate annually as to be determined by the Ministry of Finance. An amount
of €5.3 mn was recorded in FY2021, bringing the total amount provided by the
Group for such increased fee to c.€21 mn for the years 2018-2021. In 3Q2022
the Group has been levied an amount within the provisions level maintained.
B.2.2 Regulations and Directives
B.2.2.1 The 2021 Banking Package (CRR III and CRD VI and BRRD)
In October 2021, the European Commission adopted legislative proposals for
further amendments to Capital Requirements Regulation (CRR), CRD IV and the
BRRD (the "2021 Banking Package"). Amongst other things, the 2021 Banking
Package would implement certain elements of Basel III that have not yet been
transposed into EU law. The 2021 Banking Package is subject to amendment in
the course of the EU's legislative process; and its scope and terms may change
prior to its implementation. In addition, in the case of the proposed
amendments to CRD IV and the BRRD, their terms and effect will depend, in
part, on how they are transposed in each member state. As a general matter, it
is likely to be several years until the 2021 Banking Package begins to be
implemented (currently expected in 2025); and certain measures are expected to
be subject to transitional arrangements or to be phased in over time.
B.2.2.2 Bank Recovery and Resolution Directive (BRRD)
Minimum Requirement for Own Funds and Eligible Liabilities (MREL)
The Bank Recovery and Resolution Directive (BRRD) requires that from January
2016 EU member states shall apply the BRRD's provisions requiring EU credit
institutions and certain investment firms to maintain a minimum requirement
for own funds and eligible liabilities (MREL), subject to the provisions of
the Commission Delegated Regulation (EU) 2016/1450. On 27 June 2019, as part
of the reform package for strengthening the resilience and resolvability of
European banks, the BRRD ΙΙ came into effect and was required to be
transposed into national law. BRRD II was transposed and implemented in Cyprus
law in early May 2021. In addition, certain provisions on MREL have been
introduced in CRR ΙΙ which also came into force on 27 June 2019 as part of
the reform package and took immediate effect.
In December 2021, the Bank received notification from the Single Resolution
Board (SRB) of the final decision for the binding minimum requirement for own
funds and eligible liabilities (MREL) for the Bank, determined as the
preferred resolution point of entry. As per the decision, the final MREL
requirement was set at 23.74% of risk weighted assets and 5.91% of Leverage
Ratio Exposure (LRE) (as defined in the CRR) and must be met by 31 December
2025. Furthermore, an interim requirement to be met by 1 January 2022 was set
at 14.94% of risk weighted assets and 5.91% of LRE. The own funds used by the
Bank to meet the Combined Buffer Requirement (CBR) will not be eligible to
meet its MREL requirements expressed in terms of risk-weighted assets. The
Bank must comply with the MREL requirement at the consolidated level,
comprising the Bank and its subsidiaries.
In June 2021, the Bank executed its inaugural MREL transaction issuing €300
mn of senior preferred notes (the "SP Notes"). The SP Notes were priced at par
with a fixed coupon of 2.50% per annum, payable annually in arrears and
resettable on 24 June 2026. The maturity date of the SP Notes is 24 June 2027
and the Bank may, at its discretion, redeem the SP Notes on 24 June 2026,
subject to meeting certain conditions as specified in the Terms and
Conditions, including applicable regulatory consents. The SP Notes comply with
the criteria for MREL and contribute towards the Bank's MREL requirements.
The MREL ratio of the Bank as at 30 June 2022, calculated according to the
SRB's eligibility criteria currently in effect and based on the Bank's
internal estimate, stood at 18.61% of risk weighted assets (RWA) and at 9.28%
of LRE. Pro forma for HFS and VEP, the MREL ratio of the Bank as at 30 June
2022, calculated on the same basis, stood at 18.47% of risk weighted assets.
The MREL ratio expressed as a percentage of risk weighted assets does not
include capital used to meet the CBR amount, which stands at 3.75% since 1
January 2022 and is expected to increase to 4.0% on 1 January 2023. Throughout
this announcement, the MREL ratios (and MREL ratios pro forma for HFS) as at
30 June 2022 include unaudited/unreviewed profits for 1H2022, unless otherwise
stated.
The successful Tier 2 capital refinancing in April 2021 and the inaugural
issuance of MREL-compliant senior notes in June 2021 mark the foundation for
the Bank's plan to meet applicable MREL requirements. The interim MREL
requirement as at 1 January 2022 was satisfied, and the Bank will continue to
evaluate opportunities to advance the build-up of its MREL liabilities.
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
B.2.3 Funding and Liquidity
Funding
Funding from Central Banks
At 30 June 2022, the Bank's funding from central banks amounted to €2,955
mn, which relates to ECB funding, comprising solely of funding through the
Targeted Longer-Term Refinancing Operations (TLTRO) III, compared to €2,962
mn at 31 March 2022 and to €2,970 mn as at 31 December 2021.
The Bank borrowed an overall amount of €3 bn under TLTRO III by June 2021,
despite its comfortable liquidity position, given the favourable borrowing
terms, in combination with the relaxation of collateral requirements. The
participation in TLTRO III is expected to be maintained to maturity, subject
to no change in terms and conditions.
The Bank exceeded the benchmark net lending threshold in the period 1 March
2020 - 31 March 2021 and qualified for the beneficial rate of -1% for the
period from June 2020 to June 2021. The NII benefit from its TLTRO III
borrowing for the period from June 2020 to June 2021 stood at c.€7 mn and
was recognised over the respective period in the income statement.
In addition, the Bank has exceeded the benchmark net lending threshold in the
period 1 October 2020 - 31 December 2021 and qualified for a beneficial rate
for the period from June 2021 to June 2022. The NII benefit from its TLTRO III
borrowing for the period from June 2021 to June 2022 stood at c.€15 mn and
was recognised over the respective period in the income statement.
Deposits
Customer deposits totalled €18,450 mn at 30 June 2022 (compared to €17,660
mn at 31 March 2022 and to €17,531 mn at 31 December 2021) and increased by
4% in the second quarter.
The Bank's deposit market share in Cyprus reached 36.8% as at 30 June 2022,
compared to 35.8% as at 31 March 2022 and to 34.8% as at 31 December 2021.
Customer deposits accounted for 71% of total assets and 78% of total
liabilities at 30 June 2022 (1 p.p. up since 31 December 2021).
The net Loans to Deposits (L/D) ratio stood at 56% as at 30 June 2022
(compared to 58% as at 31 March 2022 and to 57% as at 31 December 2021 on the
same basis). Pro forma for HFS, the L/D ratio as at 30 June 2022 stood at 55%.
Subordinated liabilities
At 30 June 2022, the Group's subordinated liabilities (including accrued
interest) amounted to €312 mn (compared to €307 mn at 31 March 2022 and
€340 mn at 31 December 2021) and relates to unsecured subordinated Tier 2
Capital Notes.
For further information please refer to Section B.2.1 'Capital Base'.
Debt securities in issue
At 30 June 2022, the Group's debt securities in issue (including accrued
interest) amounted to €299 mn (compared to €304 mn at 31 March 2022 and
€303 mn at 31 December 2021) and relates to senior preferred notes.
For further information please refer to Section B.2.2.2 'Bank Recovery and
Resolution Directive (BRRD) / Minimum Requirement for Own Funds and Eligible
Liabilities (MREL)'.
Liquidity
At 30 June 2022, the Group Liquidity Coverage Ratio (LCR) stood at 299%
(compared to 296% at 31 March 2022 and to 298% at 31 December 2021), well
above the minimum regulatory requirement of 100%. The LCR surplus as at 30
June 2022 amounted to €6.7 bn (compared to €6.4 bn at 31 March 2022 and
€6.3 bn at 31 December 2021), well positioned to benefit from further
interest rates increases. The increase in 2Q2022 is mainly driven by the
increase in customer deposits.
At 30 June 2022, the Group Net Stable Funding Ratio (NSFR) stood at 160%
(compared to 145% at 31 March 2022 and 147% at 31 December 2021), well above
the minimum regulatory requirement of 100%, enforced in June 2021 as per CRR
II.
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
B.2.4 Loans
Group gross loans (inclusive of those classified as held for sale) totalled
€11,047 mn at 30 June 2022, compared to €10,964 mn at 31 March 2022 and
€10,856 mn at 31 December 2021, increased by 2% since the beginning of the
year.
New lending granted in Cyprus reached €537 mn for 2Q2022 (compared to €622
mn for 1Q2022) and totalled €1,159 mn for 1H2022 (compared to €894 mn for
1H2021) up by 30% yoy, reaching higher levels than the equivalent period
pre-pandemic (1H2019), whilst maintaining strict lending criteria. The yoy
increase is driven by increase in lending activity across all sectors, with
corporate being the main driver. New lending in 2Q2022 comprised €238 mn of
corporate loans, €196 mn of retail loans (of which €145 mn were housing
loans), €55 mn of SME loans and €48 mn of shipping and international
loans.
At 30 June 2022, the Group net loans and advances to customers (excluding
those classified as held for sale) totalled €10,144 mn (compared to
€10,004 mn at 31 March 2022 and €9,836 mn at 31 December 2021).
In addition, at 30 June 2022 net loans and advances to customers of €247 mn
were classified as held for sale in line with IFRS 5 of which €241 mn
related to Project Helix 3 and €6 mn to Project Sinope (see below), compared
to €248 mn as at 31 March 2022 of which €241 mn related to Project Helix 3
and €7 mn to Project Sinope.
The Bank is the single largest credit provider in Cyprus with a market share
of 41.2% at 30 June 2022, compared to 41.9% at 31 March 2022 and 38.8% at 31
December 2021. The increase in 1H2022 is due to a reduction in loans in the
banking system.
B.2.5 Loan portfolio quality
The Group has continued to make steady progress across all asset quality
metrics. As the balance sheet de-risking is largely complete, the Group's
priorities include maintaining high quality new lending and preventing asset
quality deterioration following the deteriorating macroeconomic landscape.
The loan credit losses for 2Q2022 totalled €11 mn (excluding 'Provisions/net
(loss)/profit relating to NPE sales'), compared to €12 mn for 1Q2022 and
totalled €23 mn for 1H2022, compared to €35 mn for 1H2021. Further details
regarding loan credit losses are provided in Section B.3.3 'Profit before tax
and non-recurring items'.
While defaults have been limited, the additional monitoring and provisioning
for sectors vulnerable to the deteriorated macroeconomic environment remain in
place to ensure that potential difficulties in the repayment ability are
identified at an early stage, and appropriate solutions are provided to viable
customers.
The Group will continue to monitor the situation, so that any changes arising
from the uncertainty on the macroeconomic outlook and geopolitical
developments, are timely captured.
Non-performing exposures reduction
Non-performing exposures (NPEs) as defined by the European Banking Authority
(EBA) were reduced by €79 mn, or 6% in 2Q2022 (comprising net organic NPE
reductions of €74 mn and further net NPE reductions of €5 mn relating to
the NPE sales lockbox (inflows minus outflows)), compared to a reduction of
€96 mn in 1Q2022 to €1,168 mn at 30 June 2022 (compared to €1,247 mn at
31 March 2022). Pro forma for HFS, NPEs are reduced by a further €568 mn to
€600 mn on the basis of 30 June 2022 figures.
The NPEs account for 10.6% of gross loans as at 30 June 2022, compared to
11.4% at 31 March 2022 and 12.4% as at 31 December 2021, on the same basis,
i.e. including the NPE portfolios classified as 'Non-current assets and
disposal groups held for sale'. Pro forma for HFS, the NPE ratio is reduced to
5.7% on the basis of 30 June 2022 figures.
The NPE coverage ratio stands at 58% at 30 June 2022, compared to 59% as at 31
March 2022 on the same basis, i.e. including the NPE portfolios classified as
'Non-current assets and disposal groups held for sale'. When taking into
account tangible collateral at fair value, NPEs are fully covered. Pro forma
for HFS, NPE coverage ratio is 59% on the basis of 30 June 2022 figures.
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
B.2.5 Loan portfolio quality (continued)
Project Helix 3
In November 2021, the Group reached agreement for the sale of a portfolio of
NPEs with gross book value of €568 mn as at 30 September 2021, as well as
real estate properties with book value of c.€120 mn as at 30 September 2021,
to funds affiliated with Pacific Investment Management Company LLC (PIMCO),
known as Project Helix 3. This portfolio of loans had a contractual balance of
€993 mn as at the reference date of 31 May 2021 and comprises c.20,000
loans, mainly to retail clients. As at 30 June 2022, 31 March 2022 and 31
December 2021, this portfolio of loans, as well as the real estate properties
included in Helix 3, were classified as a disposal group held for sale. At
completion, currently expected to occur in 2H2022, the Bank will receive gross
cash consideration of c.€385 mn.
This portfolio of loans (as well as the real estate properties included in
Helix 3) will be transferred to a licensed Cypriot Credit Acquiring Company
(the "CyCAC") by the Bank. The shares of the CyCAC will then be acquired by
certain funds affiliated with Pacific Investment Management Company LLC
(PIMCO), the purchaser of the portfolio.
Following a transitional period where servicing will be retained by the Bank,
it is intended that the servicing of the portfolio of loans and the real
estate properties included in Helix 3 will be carried out by a third party
servicer selected and appointed by the purchaser.
Project Helix 3 represents a milestone in the delivery of one of the Group's
core strategic priorities of improving asset quality through the reduction of
NPEs. Pro forma for HFS, the Group's NPE ratio is in mid-single digit. Helix 3
reduced the stock of NPEs by 50% to €600 mn pro forma on the basis of 30
June 2022 figures, and its NPE ratio by 5 p.p., to 5.7% pro forma on the basis
of 30 June 2022 figures.
All relevant figures and pro forma calculations are based on 30 June 2022
financial results, unless otherwise stated, and assume completion of the
transaction, which remains subject to customary regulatory and other
approvals.
Project Sinope
In December 2021, the Bank entered into an agreement for the sale of a
portfolio of NPEs, with a contractual balance of €146 mn and a gross book
value of €12 mn as at 31 December 2021, as well as properties in Romania
with carrying value €0.6 mn as at 31 December 2021 (known as 'Project
Sinope'). The portfolio has been classified as held for sale since 31 December
2021. Project Sinope was completed in August 2022.
Overall, since the peak in 2014 and pro forma for HFS, the stock of NPEs has
been reduced by €14.4 bn or 96% to €0.6 bn and the NPE ratio by over 57
percentage points, from 63% to 5.7%.
The Group has already achieved a mid-single digit NPE ratio and is on track to
achieve a target NPE ratio of c.5% by the end of 2022 and less than 3% by the
end of 2025.
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
B.2.6 Real Estate Management Unit (REMU)
The Real Estate Management Unit (REMU) is focused on the disposal of
on-boarded properties resulting from debt for asset swaps. Cumulative sales
since the beginning of 2017 amount to €1.46 bn and exceed properties
on-boarded in the same period of €1.35 bn.
During the six months ended 30 June 2022 the Group completed disposals of
€87 mn (compared to €76 mn in 1H2021), resulting in a profit on disposal
of c.€8 mn for 1H2022 (compared to a profit on disposal of €7 mn for
1H2021). Asset disposals are across all property classes, with over 60% of
sales by value in 1H2022 relating to land.
As at 30 June 2022 the carrying value of assets held by REMU transferred to
"non-current assets and disposal groups held for sale" amounted to €90 mn
(compared to €94 mn at 31 March 2022). They relate to Project Helix 3 and
Project Sinope and comprise stock of property of €85 mn and investment
property of €5 mn as at 30 June 2022 (compared to stock of property of €89
mn and investment properties of €5 mn as at 31 March 2022).
During the six months ended 30 June 2022, the Group executed sale-purchase
agreements (SPAs) for disposals of 373 properties with contract value of
c.€99 mn, compared to SPAs for disposals of 387 properties (with contract
value of €85 mn) for 1H2021.
In addition, the Group had a strong pipeline of €81 mn by contract value as
at 30 June 2022, of which €41 mn related to SPAs signed (compared to a
pipeline of €85 mn as at 30 June 2021, of which €48 mn related to SPAs
signed).
REMU on-boarded €26 mn of assets in 1H2022 (compared to additions of €21
mn in 1H2021), via the execution of debt for asset swaps and repossessed
properties.
As at 30 June 2022, assets held by REMU (excluding assets classified as held
for sale) had a carrying value of €1,146 mn (comprising properties of
€1,054 mn classified as 'Stock of property' and €92 mn as 'Investment
properties'), compared to €1,215 mn as at 31 December 2021 (comprising
properties of €1,112 mn classified as 'Stock of property' and €103 mn as
'Investment properties').
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
B.2.6 Real Estate Management Unit (REMU) (continued)
Assets held by REMU
Assets held by REMU (Group) 1H2022 1H2021 2Q2022 1Q2022 qoq +% yoy +%
€ mn
Opening balance 1,215 1,473 1,174 1,215 -3% -17%
On-boarded assets 26 21 18 8 118% 20%
Sales (87) (76) (43) (44) -2% 15%
Net impairment loss (8) (9) (3) (5) -25% -6%
Transfer to non-current assets and disposal groups held for sale - (5) - - - -100%
Closing balance 1,146 1,404 1,146 1,174 -2% -18%
Analysis by type and country Cyprus Greece Romania Total
30 June 2022 (€ mn)
Residential properties 77 21 0 98
Offices and other commercial properties 207 15 0 222
Manufacturing and industrial properties 53 24 0 77
Hotels 24 0 0 24
Land (fields and plots) 474 5 0 479
Golf courses and golf-related property 246 0 0 246
Total 1,081 65 0 1,146
Cyprus Greece Romania Total
31 December 2021 (€ mn)
Residential properties 82 23 0 105
Offices and other commercial properties 208 23 0 231
Manufacturing and industrial properties 54 24 0 78
Hotels 25 - - 25
Land (fields and plots) 524 5 1 530
Golf courses and golf-related property 246 - - 246
Total 1,139 75 1 1,215
B. Group Financial Results - Underlying Basis (continued)
B.3. Income Statement Analysis
B.3.1 Total income
€ mn 1H2022 1H2021 2Q2022 1Q2022 qoq +% yoy +%
(restated)(1)
Net interest income 145 152 74 71 4% -4%
Net fee and commission income 94 84 50 44 14% 12%
Net foreign exchange gains and net gains/(losses) on financial instruments 11 9 5 6 -3% 23%
Insurance income net of claims and commissions 33 31 17 16 1% 6%
Net gains/(losses) from revaluation and disposal of investment properties and 7 6 2 5 -59% 15%
on disposal of stock of properties
Other income 9 6 5 4 19% 52%
Non-interest income 154 136 79 75 6% 13%
Total income 299 288 153 146 5% 4%
Net Interest Margin (annualised)(2) 1.32% 1.56% 1.33% 1.32% 1 bps -24 bps
Average interest earning assets 22,235 19,652 22,436 21,942 2% 13%
(€ mn)(1)
1. Comparative information was restated following a reclassification of
approximately €1 million loss relating to disposal/dissolution of
subsidiaries and associates from 'Net foreign exchange gains and net
gains/(losses) on financial instruments' to 'Other income'. More information
is provided in Note 3.1 of the Consolidated Condensed Interim Financial
Statements.
2. Including the NPE portfolios classified as "Non-current assets and disposal
groups held for sale", where relevant.
p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1
percentage point
Net interest income (NII) for 1H2022 amounted to €145 mn, compared to €152
mn in 1H2021, down 4% yoy reflecting the foregone NII on the Helix 2 portfolio
(c.€15 mn in 1H2021). Net interest income (NII) for 2Q2022 amounted to €74
mn, compared to €71 mn for 1Q2022, driven by the growth in the performing
(non-legacy) loan book, loan yields improvement in line with rising interest
rates and the effect of two additional calendar days in the second quarter.
Quarterly average interest earning assets (AIEA) for 1H2022 amounted to
€22,235 mn, up by 13% yoy driven by the increase in liquid assets following
the increase in deposits by €1.6 bn yoy. Quarterly average interest earning
assets for 2Q2022 increased by 2%.
Net interest margin (NIM) for 1H2022 amounted to 1.32% (compared to 1.56% for
1H2021) negatively impacted by the corresponding decrease in NII and the
increase in average interest earning assets. Net interest margin (NIM) for
2Q2022 stood at 1.33% flat qoq.
Non-interest income for 1H2022 amounted to €154 mn (compared to €136 mn
for 1H2021, up by 13% yoy), comprising net fee and commission income of €94
mn, net foreign exchange gains and net gains/(losses) on financial instruments
of €11 mn, net insurance income of €33 mn, net gains/(losses) from
revaluation and disposal of investment properties and on disposal of stock of
properties of €7 mn and other income of €9 mn. The yoy increase is mainly
due to higher net fee and commission income, following the introduction of a
revised price list and extension of liquidity fees to a wider customer group
in 1Q2022.
Non-interest income for 2Q2022 amounted to €79 mn (compared to €75 mn for
1Q2022, up by 6% qoq), comprising net fee and commission income of €50 mn,
net foreign exchange gains and net gains/(losses) on financial instruments of
€5 mn, net insurance income of €17 mn, net gains/(losses) from revaluation
and disposal of investment properties and on disposal of stock of properties
of €2 mn and other income of €5 mn. The qoq increase relates to higher net
fee and commission income partially offset by lower net gains/(losses) from
revaluation and disposal of investment properties and on disposal of stock of
properties.
Net fee and commission income for 1H2022 amounted to €94 mn, (compared to
€84 mn for 1H2021, up 12% yoy), driven mainly by the introduction of a
revised price list in February 2022 and the extension of liquidity fees to a
wider customer group in March 2022. Net fee and commission income for 2Q2022
amounted to €50 mn, up 14% qoq (compared to €44 mn for 1Q2022), due to
higher volume of transaction fees, the full impact of the introduction of the
revised price list and extension of liquidity fees as well as higher credit
card commissions due to seasonality.
B. Group Financial Results - Underlying Basis (continued)
B.3. Income Statement Analysis (continued)
B.3.1 Total income (continued)
Net foreign exchange gains and net gains/(losses) on financial instruments of
€11 mn for 1H2022 (comprising net foreign exchange gains of €12 mn and net
losses on financial instruments of €1 mn), compared to €9 mn for 1H2021
(comprising net foreign exchange gains of €7 mn and net gains on financial
instruments of €2 mn) and increased by 23% yoy. The increase yoy is mainly
due to the lower net foreign exchange gains in 1H2021, impacted by the
lockdown and the higher interest rates compared to previous years.
Net foreign exchange gains and net gains/(losses) on financial instruments
amounted to €5 mn for 2Q2022, broadly flat qoq.
Net insurance income amounted to €33 mn for 1H2022, compared to €31 mn for
1H2021. The increase of 6% yoy is mainly due to increased new business and the
positive changes in valuation assumptions, partially offset by higher
insurance claims. Net insurance income amounted to €17 mn for 2Q2022,
broadly flat qoq.
Net gains/(losses) from revaluation and disposal of investment properties and
on disposal of stock of properties for 1H2022 amounted to €7 mn (comprising
net gains on disposal of stock of properties of c.€8 mn, and net losses from
revaluation of investment properties of c.€1 mn), compared to €6 mn in
1H2021 which was impacted by the lockdown.
Net gains/(losses) from revaluation and disposal of investment properties and
on disposal of stock of properties for 2Q2022 amounted to €2 mn, compared to
€5 mn for 1Q2022. REMU profit remains volatile.
Total income for 1H2022 amounted to €299 mn, compared to €288 mn for
1H2021 (up 4% yoy), mainly driven by the changes in the non-interest income as
explained above. Total income for 2Q2022 stood at €153 mn, compared to
€146 mn for 1Q2022, up by 5% qoq, driven by 14% increase in net fee and
commission income and 4% increase in net interest income.
B. Group Financial Results - Underlying Basis (continued)
B.3. Income Statement Analysis (continued)
B.3.2 Total expenses
€ mn 1H2022 1H2021 2Q2022 1Q2022 qoq +% yoy +%
(restated)(1)
Staff costs (100) (101) (50) (50) 1% -1%
Other operating expenses (73) (70) (37) (36) 2% 5%
Total operating expenses (173) (171) (87) (86) 2% 2%
Special levy on deposits and other levies/contributions (17) (15) (7) (10) -33% 8%
Total expenses (190) (186) (94) (96) -2% 2%
Cost to income ratio(2) 63% 64% 61% 66% -5 p.p. -1 p.p.
Cost to income ratio excluding special levy on deposits and other 58% 59% 57% 59% -2 p.p. -1 p.p.
levies/contributions(2)
1. Comparative information was restated following a reclassification of
approximately €1 million loss relating to disposal/dissolution of
subsidiaries and associates from 'Net foreign exchange gains and net
gains/(losses) on financial instruments' to 'Other income'. More information
is provided in Note 3.1 of the Consolidated Condensed Interim Financial
Statements.
2. Including the NPE portfolios classified as "Non-current assets and disposal
groups held for sale", where relevant.
p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1
percentage point
Total expenses for 1H2022 were €190 mn (compared to €186 mn for 1H2021),
up by 2% yoy, 53% of which related to staff costs (€100 mn), 38% to other
operating expenses (€73 mn) and 9% to special levy on deposits and other
levies/contributions (€17 mn). The yoy increase of 2% is driven by the 5%
yoy increase in other operating expenses and 8% yoy increase in special levy
on deposits and other levies/contributions. Total expenses for 2Q2022 were
€94 mn, compared to €96 mn for 1Q2022, down by 2% qoq. The qoq decrease is
driven by the 33% qoq decrease in special levy on deposits and other
levies/contributions.
Total operating expenses for 2Q2022 were €87 mn (compared to €86 mn for
1Q2022) up 2% and totalled €173 mn for 1H2022, compared to €171 mn for
1H2021 (up by 2% yoy).
Staff costs for 1H2022 were €100 mn, compared to €101 mn for 1H2021,
broadly flat yoy, resulting from the combined impact of the Voluntary Staff
Exit Plans that took place in the previous quarters, the renewal of the
collective agreement, and despite rising inflation. Staff costs for 2Q2022
amounted to €50 mn flat qoq.
The Group employed 3,422 persons as at 30 June 2022 compared to 3,395 persons
as at 31 March 2022 and 3,438 persons as at 31 December 2021.
In July 2022 the Group completed a Voluntary Staff Exit Plan, through which
c.550 applicants were approved to leave at a total cost of c.€99 mn,
expected to be recorded in the consolidated income statement in the third
quarter. Following the completion of the VEP, the overall number of employees
is reduced by c.16%, with an estimated annual saving of c.€37 mn or c.19% of
staff costs.
In addition, in January 2022 the Group through one of its subsidiaries
completed a Voluntary Staff Exit Plan (VEP), through which a small number of
its employees were approved to leave at a total cost of €3 mn, recorded in
the consolidated income statement in 1Q2022 as a non-recurring item in the
underlying basis.
In July 2021, the Bank reached agreement with the Cyprus Union of Bank
Employees for the renewal of the collective agreement for the years 2021 and
2022. The agreement related to certain changes including the introduction of a
new pay grading structure linked to the value of each position of employment,
and of a performance-related pay component as part of the annual salary
increase, both of which have been long-standing objectives of the Bank and are
in line with market best-practice. The expected impact of the renewal was an
increase in staff costs for 2021 and 2022 by 3-4% per annum, in line with the
impact of renewals in previous years.
Other operating expenses for 1H2022 were €73 mn, compared to €70 mn in
1H2021 (up 5% yoy) reflecting the pandemic-related lockdown in 1Q2021. Other
operating expenses for 2Q2022 amounted to €37 mn, compared to €36 mn for
1Q2022, up by 2% qoq driven by seasonally higher marketing expenses.
Special levy on deposits and other levies/contributions for 1H2022 amounted to
€17 mn (compared to €15 mn for 1H2021) up 8% yoy, driven by the increase
in deposits of over €1.6 bn yoy. Special levy on deposits and other
levies/contributions for 2Q2022 were €7 mn down by 33% qoq, due to the €3
mn contribution of the Bank to the Deposit Guarantee Fund (DGF) which relates
to 1H2022 and was recorded in 1Q2022, in line with IFRSs.
B. Group Financial Results - Underlying Basis (continued)
B.3. Income Statement Analysis (continued)
B.3.2 Total expenses (continued)
The cost to income ratio excluding special levy on deposits and other
levies/contributions for 1H2022 was 58%, compared to 59% for 1H2021. The cost
to income ratio excluding special levy on deposits and other
levies/contributions for 2Q2022 was 57%, compared to 59% for 1Q2022. The qoq
decrease of 2 p.p. is driven by the qoq increase in total income.
The cost to income ratio excluding special levy on deposits and other
levies/contributions for 2022 is revised downwards to around current levels
from initial expectations of mid-60s, reflecting mainly the rising revenue on
improving interest rate environment and management's ongoing efforts to
contain costs. In 2023 the cost to income ratio excluding special levy on
deposits and other levies/contributions is expected to decrease further to
c.50%, as efficiency actions on staff and branch reduction unlock meaningful
savings in 2023.
B. Group Financial Results - Underlying Basis (continued)
B.3. Income Statement Analysis (continued)
B.3.3 Profit before tax and non-recurring items
€ mn 1H2022 1H2021 2Q2022 1Q2022 qoq+% yoy +%
(restated)(1)
Operating profit before credit losses and impairments 109 102 59 50 18% 7%
Loan credit losses (23) (35) (11) (12) -6% -34%
Impairments of other financial and non-financial assets (13) (11) (8) (5) 58% 17%
Provisions for litigation, claims, regulatory and other matters (1) (4) (1) (0) 66% -86%
Total loan credit losses, impairments and provisions (37) (50) (20) (17) 14% -27%
Profit before tax and non-recurring items 72 52 39 33 20% 41%
Cost of risk(2) 0.43% 0.61% 0.41% 0.44% -3 bps -18 bps
1. Comparative information was restated following a reclassification of
approximately €1 million loss relating to disposal/dissolution of
subsidiaries and associates from 'Net foreign exchange gains and net
gains/(losses) on financial instruments' to 'Other income'. More information
is provided in Note 3.1 of the Consolidated Condensed Interim Financial
Statements.
2. Including the NPE portfolios classified as "Non-current assets and disposal
groups held for sale", where relevant.
p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1
percentage point
Operating profit before credit losses and impairments for 1H2022 was €109
mn, compared to €102 mn for 1H2021 (up by 7% yoy). Operating profit before
credit losses and impairments for 2Q2022 amounted to €59 mn, compared to
€50 mn for 1Q2022, up by 18% qoq driven by the increase in total income qoq.
Loan credit losses for 1H2022 totalled €23 mn, compared to €35 mn for
1H2021 (down by 34% yoy), as 1H2021 loan credit losses included COVID-19
charges. Loan credit losses for 2Q2022 amounted to €11 mn compared to €12
mn for 1Q2022, down 6% qoq.
Cost of risk for 1H2022 was 43 bps, compared to a cost of risk of 61 bps for
1H2021, down by 18 bps as 1H2021 cost of risk included 21 bps credit losses
related to COVID-19. Cost of risk for 2Q2022 accounted for 41 bps, broadly
flat qoq and includes 18 bps (c.€5 mn) reflecting management overlays on
sectors (such as tourism, private individuals, transportation, construction
and real estate) that may be impacted by the ongoing geopolitical uncertainty
and soaring energy prices resulting to pressure on domestic economy and a
release of 5 bps due to the improved 2022 macroeconomic outlook for the
Cypriot economy compared to the previous quarter projections.
At 30 June 2022, the allowance for expected loan credit losses, including
residual fair value adjustment on initial recognition and credit losses on
off-balance sheet exposures (please refer to Section F. 'Definitions &
Explanations' for definition) totalled €677 mn (compared to €734 mn at 31
March 2022 and €792 mn at 31 December 2021) and accounted for 6.1% of gross
loans including portfolios held for sale (compared to 6.7% and 7.3% of gross
loans including portfolios held for sale at 31 March 2022 and 31 December 2021
respectively).
Impairments of other financial and non-financial assets for 1H2022 amounted to
€13 mn, compared to €11 mn for 1H2021. Impairments of other financial and
non-financial assets for 2Q2022 amounted to €8 mn, compared to €5 mn for
1Q2022, up by 58% qoq, impacted mainly by higher impairment charges on net
legacy overseas exposures.
Provisions for litigation, claims, regulatory and other matters for 1H2022
amounted to €1 mn, compared to €4 mn for 1H2021. Provisions for
litigation, claims, regulatory and other matters for 2Q2022 were broadly flat
qoq.
Profit before tax and non-recurring items for 1H2022 totalled €72 mn,
compared to €52 mn for 1H2021 (up by 41% yoy). Profit before tax and
non-recurring items for 2Q2022 amounted to €39 mn compared to €33 mn for
1Q2022 (up by 20% qoq).
B. Group Financial Results - Underlying Basis (continued)
B.3. Income Statement Analysis (continued)
B.3.4 Profit after tax (attributable to the owners of the Company)
€ mn 1H2022 1H2021 2Q2022 1Q2022 qoq +% yoy +%
(restated)(1)
Profit before tax and non-recurring items 72 52 39 33 20% 41%
Tax (12) (1) (6) (6) 10% -
Profit attributable to non-controlling interests (1) (0) (1) 0 - 60%
Profit after tax and before non-recurring items (attributable to the owners of 59 51 32 27 18% 20%
the Company)
Advisory and other restructuring costs - organic (5) (18) (4) (1) 219% -70%
Profit after tax - organic (attributable to the owners of the Company) 54 33 28 26 8% 70%
Provisions/net (loss)/profit relating to NPE sales(2) 0 (16) 1 (1) -172% -97%
Restructuring and other costs relating to NPE sales(2) (1) (16) 0 (1) 49% -92%
Restructuring costs - Voluntary Staff Exit Plan (VEP) (3) - - (3) -100% -
Profit after tax (attributable to the owners of the Company) 50 1 29 21 35% -
1. Comparative information was restated following a reclassification of
approximately €1 million loss relating to disposal/dissolution of
subsidiaries and associates from 'Net foreign exchange gains and net
gains/(losses) on financial instruments' to 'Other income'. More information
is provided in Note 3.1 of the Consolidated Condensed Interim Financial
Statements.
2. Including the NPE portfolios classified as "Non-current assets and disposal
groups held for sale", where relevant.
The tax charge for 2Q2022 is €6 mn, at the same levels as for 1Q2022 and
totalled to €12 mn for 1H2022, compared to €1 mn for 1H2021.
Profit after tax and before non-recurring items (attributable to the owners of
the Company) for 1H2022 is €59 mn, compared to €51 mn for 1H2021. Return
on Tangible Equity (ROTE) before non-recurring items calculated using 'profit
after tax and before non-recurring items (attributable to the owners of the
Company)' amounts to 7.3% for 1H2022, compared to 6.1% for 1H2021. Profit
after tax and before non-recurring items (attributable to the owners of the
Company) for 2Q2022 amounted to €32 mn, reflecting a ROTE before
non-recurring items of 7.8%, compared to €27 mn for 1Q2022 (and a ROTE of
6.7%).
Advisory and other restructuring costs - organic for 1H2022 amounted to €5
mn, compared to €18 mn for 1H2021, down by 70% mainly due to ad-hoc cost
related to the tender offer for Existing Tier 2 Capital Notes amounting to
€12 mn in 1H2021. Advisory and other restructuring costs - organic for
2Q2022 amounted to €4 mn, compared to €1 mn for 1Q2022 and relate to the
transformation programme and other strategic projects of the Group.
Profit after tax arising from the organic operations (attributable to the
owners of the Company) for 1H2022 amounted to €54 mn, compared to €33 mn
for 1H2021. Profit after tax arising from the organic operations
(attributable to the owners of the Company) for 2Q2022 is €28 mn, compared
to €26 mn for 1Q2022, up 8% qoq.
Provisions/net (loss)/profit relating to NPE sales for 1H2022 amounted to less
than €1 mn relating to Helix 3, compared to €16 mn for 1H2021 (relating to
Helix 2). Provisions/net (loss)/profit relating to NPE sales for 2Q2022 was a
net profit of €1 mn, compared to a net loss of €1 mn in 1Q2022.
Restructuring and other costs relating to NPE sales for 1H2022 was €1 mn,
compared to €16 mn for 1H2021 (relating to the agreements for the sale of
portfolios of NPEs). Restructuring and other costs relating to NPE sales for
2Q2022 was minimal, compared to €1 mn for 1Q2022.
Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) amounted
to €3 mn for 1H2022, compared to Nil for 1H2021. For further details please
refer to Section B.3.2 'Total expenses'.
Profit after tax attributable to the owners of the Company for 1H2022 was
€50 mn, compared to €1 mn for 1H2021. Profit after tax attributable to the
owners of the Company for 2Q2022 amounted to €29 mn, compared to €21 mn
for 1Q2022.
C. Operating Environment
Real GDP increased by 6.1% in the second quarter 2022 on a seasonally adjusted
basis, compared to 6% in the first quarter 2022, which was revised upwards
from an initial estimate of 5.6%. Economic growth in the first six months of
2022 was 6.1% compared to 5.6% in 2021, facilitated mainly by the
faster-than-expected recovery of tourism and the continuing expansion of
exports of other services. The economic fallout of the war in Ukraine and
Western sanctions on Russia was offset by strong economic activity broadly in
the economy, but significant headwinds remain, as a result of higher
inflation, the ongoing energy crisis and monetary tightening.
Tourism in Cyprus and in Europe in general, is expected to be stronger than in
2021. Governments have rolled back COVID-19-related travel restrictions and as
a result entering countries does not require pre-departure tests. Airlines
have increased capacity in anticipation of firmer passenger demand.
Tourism-dependent economies like Cyprus are expected to benefit from a
recovery in arrivals in 2022, although significant uncertainty remains
regarding demand for tourism in 2023.
Tourist arrivals in the first seven months of 2022 reached 1.7 million people
or 77% of the corresponding arrivals in 2019, recovering towards pre-pandemic
levels. Likewise, receipts in the first six months of the year reached 83% of
corresponding receipts in 2019. The prospects for the sector remain positive
for the remainder of the tourist season, based on data on planned
international flights and surveys on reservations for tourist accommodation,
despite a sizeable loss of tourism from Russia (c.20% of 2019 levels).
Other short-term indicators are relatively mixed on the supply side and
stronger on the demand side. Thus, retail sales in volume terms recovered
strongly in May-June 2022, driven by non-food items except of automotive fuel,
after a slump in March-April 2022. Total car registrations were down in
January-July 2022, which may reflect global supply constraints in car
manufacturing and export. In the construction sector the volume of building
permits in the first five months of 2022 were down driven by drops in April
and March after positive first three months.
Consumer inflation has been accelerating from the third quarter of 2021
onward, as a result mainly of supply chain disruptions, the resulting higher
energy and food prices, and other shortages in commodities and industrial
goods. The harmonised index of consumer prices increased by 7.4% in the Euro
area on average in January-July, from one year earlier, rising by 8.9% in July
alone according to the Eurostat. Respectively in Cyprus, the harmonised index
of consumer prices increased by 7.7% in January-July and by 10.6% in July.
Energy prices increased by 35% in Cyprus in January-July 2022. The overall
index excluding energy increased by 4.9% and by 4.3% when food is also
excluded. The all-services index was up 4.4% in the period. Thus, core
inflation is considerably lower than headline inflation, but still higher than
in previous periods.
Higher and more persistent inflation has driven the ECB to adopt a more
aggressive monetary stance. In their last meeting of the policy setting
governing council in July 2022, the ECB raised its main refinancing operations
rate, by 50 basis points, the first interest rate increase in eleven years,
and also approved a new policy tool, the Transmission Protection Instrument
(TPI). This is a country specific bond purchasing instrument, designed to
counter undue pressures on individual member countries' bond yields, that are
not justified by their economic fundamentals and to prevent marked interest
rate divergences in the euro area. By approving the new instrument, the ECB
has signalled its resolve to intervene as necessary to keep market dynamics
from disrupting its policy transmission mechanism.
Rising inflation and interest rates do not pose any immediate threats to
financial stability in the Eurozone provided highly indebted countries ensure
debt sustainability in the medium term, which presupposes a series of reforms
and restructuring. The debt-to-GDP ratio drops for a period of time, as
inflation and nominal GDP rise in tandem.
The recovery in 2021 underpinned a significant increase in general government
revenue and a relative drop in government spending. As a result, the budget
deficit narrowed to 1.6% of GDP from a deficit of 5.7% of GDP in 2020 when the
government implemented measures to support the economy amidst a deep recession
induced from the COVID-19 pandemic. The public debt to GDP ratio dropped to
103.6% in 2021 from a bloated 115% in 2020. During the first six months of
2022 there has been a significant improvement in public finances. Driven by
higher inflation and a higher nominal GDP, total revenues increased by 16.7%
from the year before while total spending declined by 1%. As a result, the
budget was near balanced in the period, and a small surplus may be expected
for the year as a whole. The debt-to-GDP ratio is expected to decline further
in 2022.
The underlying resilience of the banking system improved steadily in recent
years, and starting positions are vastly different today than what they were
more than ten years ago. Banks restructured their operations, shrunk their
balance sheets, and bolstered liquidity and capital positions. They refocused
their operations domestically and reduced markedly their overseas exposures.
Prudential oversight has been strengthened within the EU supervisory
framework. However, weaknesses persist evidenced in high cost to income, low
profitability and concerns about a renewed rise in NPEs if problems in some
sectors related with the COVID-19 pandemic and the Ukrainian crisis, persist.
Banks managed to weather the pandemic crisis well, with their liquidity and
capital buffers intact. Non-performing loans continued their declining trend
attributed mostly to sales packages by the two largest banks. However, amidst
uncertain conditions asset quality remains a focal point for bank management
and the supervisory authorities. The Russia-Ukraine war poses new challenges,
and close monitoring of developments will be required. Total NPEs at the end
of May 2022 amounted to €3 billion, unchanged since December 2021. The ratio
to gross loans was 11.4% and the coverage ratio of provisions to
non-performing exposures was 50.7%. Loans to residents excluding the
government, dropped to €23.3 bn at the end of June 2022, or about 90% of
expected nominal GDP at year end.
C. Operating Environment (continued)
Cyprus received the first disbursement from the Recovery and Resilience
Facility of €157 mn in September 2021 and applied for the second
disbursement of €85 mn in July 2022. The allocation in grants and loans
amount to €1.2 bn in total (€1 bn in grants and €200 mn in loans) and
will be conditional on the implementation of the reforms agreed in the
national recovery plan. The plan allocates 41% of the funds to green
investments and an additional 23% to digital investments. Reforms include
increasing the efficiency of the public sector and local government; improving
the governments of state-owned enterprises; improving the efficiency of the
judicial system; and accelerating anti-corruption reforms.
Economic activity remained resilient in the year so far, despite the fallout
of the war in Ukraine and Western sanctions on Russia. According to an
announcement from the press office of the Minister of Finance, real GDP is
expected to grow by over 5% in 2022, outperforming the Euro area. Real GDP is
expected to slow in 2023, as the external environment, particularly in Europe
is expected to deteriorate.
Sanctions and Russia's retaliation by cutting supplies, will exacerbate
Europe's energy crisis in the coming winter. Gas shortages can be expected,
and rationing may become necessary in the industrial sectors. Households will
be affected, and industrial activity may be disrupted. All countries will be
impacted by soaring energy prices, fall in confidence and weaker external
trade. Europe's efforts to decouple from Russia and secure alternative sources
of gas supply will continue but will face limitations. In these conditions the
risk of disruption increases, and confidence is undermined. The agreement
reached in the EU for the voluntary reduction of gas usage by 15% will be
helpful in reducing disruption but sharing across member states may become
necessary in some cases. Higher prices will likely persist which will have
real income effects.
Sovereign ratings
The sovereign risk ratings of the Cyprus Government improved considerably in
recent years reflecting reduced banking sector risks, and improvements in
economic resilience and consistent fiscal outperformance. Cyprus demonstrated
policy commitment to correcting fiscal imbalances through reform and
restructuring of its banking system. Public debt remains high in relation to
GDP but large-scale asset purchases from the ECB ensure favourable funding
costs for Cyprus and ample liquidity in the sovereign bond market.
Most recently in August 2022, Moody's Investors Service affirmed the
Government of Cyprus' long-term issuer and senior unsecured ratings to Ba1
and changed the outlook from stable to positive. The key drivers reflecting
the affirmation are the strong reduction in Cyprus' public debt ratio in 2022,
stronger-than expected economic resilience to Russia's invasion of Ukraine and
the COVID-19 pandemic as well the ongoing strengthening of the banking sector.
In March 2022, Fitch Ratings affirmed Cyprus' Long-Term Issuer Default rating
at investment grade BBB- since November 2018 and stable outlook. The stable
outlook reflects the view that despite Cyprus' exposure to Russia through its
tourism and investment linkages, near-term risks are mitigated by a
strengthened government fiscal position, and continued normalisation of
spending after the pandemic shock. Meanwhile, medium-term growth prospects
remain positive on the back of the government's Recovery and Resilience Plan
(RRP).
Also in March 2022, S&P Global Ratings affirmed Cyprus' investment grade
rating of BBB- and positive outlook. The positive outlook reflects the view
that Cyprus' sovereign rating could be upgraded within the next 24 months if
the country's economic and budgetary performance continues to strengthen,
supported by the Government's implementation of structural reforms. While the
crisis in Ukraine weighs on Cyprus' economic performances via the sanctions
imposed on Russia, medium-term economic prospects remain solid according to
S&P.
In April 2022, DBRS Morningstar upgraded the Republic of Cyprus's Long-Term
Foreign and Local Currency - Issuer Ratings from BBB (low) to BBB and changed
the trend from Positive to Stable. The rating upgrades reflect Cyprus'
stronger-than-anticipated economic and public finance performance during 2021
and the expectation of DBRS Morningstar that medium term conditions remain
supportive of Cyprus' debt reduction efforts, despite risks posed by Russia's
invasion of Ukraine and the pandemic.
D. Business Overview
Credit ratings
The Group's financial performance is highly correlated to the economic and
operating conditions in Cyprus. In June 2022, Standard and Poor's affirmed
their long-term issuer credit rating on the Bank of B+, maintaining the
positive outlook, despite the deteriorating macroeconomic environment and
escalating inflation. In December 2021, Moody's Investors Service upgraded the
Bank's long-term deposit rating to Ba3 from B1, maintaining the positive
outlook. The upgrade reflects significant ongoing improvement in the Bank's
asset quality following the agreement reached for Project Helix 3 in November
2021. In December 2021, Fitch Ratings affirmed the Bank's long-term issuer
default rating of B- and revised the outlook to positive from negative. The
revision of the outlook reflects significant improvement in asset quality
following the agreement reached for Project Helix 3, as well as in organically
reducing problem assets since the end of 2019, despite an adverse operating
environment in Cyprus, together with an expectation that this trend will
continue in the near future.
Strategic priorities for the medium term
The Group is a diversified, leading, financial and technology hub in Cyprus.
In February 2022, the Group updated its medium term strategic targets with an
increased focus on creating shareholder value and increased its medium term
return on tangible equity (ROTE) target to over 10% (2025), providing the
foundations for a return to dividend distributions, subject to performance and
relevant approvals. The prolonged geopolitical crisis in Ukraine has changed
the economic landscape, reflecting potential slowdown in economic growth
impacted by the escalating inflationary pressures and rising interest rate
outlook. As a result of the changing and dynamic economic outlook, the Group
will benefit substantially from the interest rate increases, setting NII to
growth trajectory and outweighing potential pressures on total operating costs
and cost of risk. Overall, return on tangible equity (ROTE) is now expected to
reach to over 10% in 2023, supporting the ability to make meaningful dividend
distributions from 2023 onwards, subject to regulatory approvals and market
conditions. A ROTE in excess of 10% for 2024-2025 is reaffirmed.
Favourable interest rate environment
The structure of the Group's balance sheet is geared towards higher interest
rates. As at 30 June 2022, cash balances with ECB (including TLTRO of c.€3.0
bn and Exempt Tier of c.€1.0 bn) amounted to c.€9.9 bn and following the
uplift of 50 bps of ECB deposit rate in July 2022, the Group will have an
immediate NII benefit of c.€12 mn. The repricing of the reference rates will
gradually benefit the interest income on loans, as around 50% of the loan book
is priced on Euribor. Overall, the rising interest rate environment
facilitates faster growth in net interest income, with FY2022 NII expected to
reach to c.€320 mn. NII is expected to increase further in 2023 by a range
of €100 mn to €120 mn on a yearly basis. These improvements in NII
demonstrate faster repricing of loans and liquids than funding costs and
incorporate assumptions on partial pass-through to deposits, gradual change in
deposit mix, and higher wholesale funding costs.
Growing revenues in a more capital efficient way
The Group has a renewed focus on growing revenues in a more capital efficient
way. It aims to grow its high quality new lending, drive growth in niche areas
for further market penetration and diversify through non-banking services,
such as insurance and digital products.
The Group has continued to provide high quality new loans in 1H2022 via
prudent underwriting standards. Growth in new lending in Cyprus has been
focused on selected industries more in line with the Bank's target risk
profile.
During 1H2022, new lending amounted to €1.2 bn, increased by 30% yoy,
returning to pre-pandemic levels, whilst maintaining strict lending criteria.
The yoy increase is driven by increased activity across all sectors. As a
result, the net performing loan book expanded further to €9.7 bn reflecting
an increase of 4% during the six months 2022. Aiming at supporting investments
by SMEs and Mid-Caps, the Bank continues its collaboration with the European
Investment Bank (EIB), the European Investment Fund (EIF) and the Cyprus
Government.
Separately, the Group aims to increase revenues over the medium term through
multiple less capital-intensive initiatives, with a focus on fees and
commissions, insurance and non-banking opportunities, leveraging on the
Group's digital capabilities. In 1Q2022, a revised price list for charges and
fees was implemented and liquidity fees were extended to a wider customer
group. As a result, net fee and commission income for 1H2022 remained strong
at €94 mn, reflecting an increase of 12% yoy. Net fee and commission income
is likely to be under pressure in the near term mainly due to the phasing out
of liquidity fees in 2023.
Net fee and commission income is also enhanced by transaction fees from the
Group's subsidiary, JCC Payment Systems Ltd (JCC), a leading player in the
card processing business, 75% owned by the Bank. JCC's net fee and commission
income contributed 9% of non-interest income and amounted to €12 mn in
1H2022, up 26% yoy, backed by strong transaction volume.
D. Business Overview (continued)
Strategic priorities for the medium term (continued)
Growing revenues in a more capital efficient way (continued)
Management is placing emphasis on diversifying income streams by optimising
fee income from international transaction services, wealth management and
insurance. The Group's insurance companies, EuroLife Ltd and General Insurance
of Cyprus Ltd (GIC) operating in the sectors of life and general insurance
respectively, are leading players in the insurance business in Cyprus, and
have been providing a stable, recurring income, further diversifying the
Group's income streams. The insurance income net of claims and commissions for
1H2022 contributed to 21% of non-interest income and amounted to €33 mn, up
6% yoy, driven by increased new business and the positive changes in valuation
assumptions, partially offset by higher insurance claims. Specifically,
Eurolife increased its total regular income by 19% yoy, whilst GIC increased
its gross written premiums by 8% yoy. Furthermore, there are initiatives
underway to further enhance the value of the insurance companies by business
growth supported by digitisation and a lean operating structure. For
information on IFRS 17 please refer to the relevant subsection below.
Finally, the Group through the Digital Economy Platform (Jinius) aims to
generate new revenue sources over the medium term, leveraging on the Bank's
market position, knowledge and digital infrastructure. The Platform aims to
bring stakeholders together, link businesses with each other and with
consumers and to drive opportunities in lifestyle banking and beyond. The
platform is expected to allow the Bank to enhance the engagement of its
customer base, attract new customers, optimise the cost of the Bank's own
processes, and position the Bank next to the customer at the point and time of
need.
Lean operating model
Striving for a lean operating model is a key strategic pillar for the Group in
order to deliver shareholder value in the medium term, whilst funding its
digital transformation and investing in the business. Management also expects
that restructuring costs will be effectively eliminated as balance sheet
de-risking is largely complete.
Management remains focused on further improvement in efficiency, through for
example further branch footprint optimisation and substantial streamline of
workforce. In July 2022 the Group successfully completed a voluntary staff
exit plan (VEP) through which c.550 applicants were approved to leave at a
total cost of c.€99 mn. Following the completion of the Plan, the overall
number of employees is reduced by c.16% whilst the annual savings are
estimated at c.€37 mn or 19% of staff costs. Additionally in January 2022
one of the Bank's subsidiaries completed a small-scale targeted voluntary
staff exit plan (VEP), through which a small number of full-time employees
were approved to leave at a total cost of €3 mn. In relation to branch
restructuring, the Group has reduced its number of branches by 20 year-to-date
to 60, a reduction of 25%. Through these two successful initiatives, the Group
has delivered ahead of schedule on its commitment to reduce its workforce by
c.15% and its number of branches by 25%.
The cost to income ratio excluding special levy on deposits and other
levies/contributions in 2022 is revised downwards to around current levels
compared to initial expectations of mid-60s, reflecting mainly the rising
revenue on improving interest rate environment and management's ongoing
efforts to contain costs. In 2023 the cost to income ratio excluding special
levy on deposits and other levies/contributions is expected to decrease
further to c.50%, as efficiency actions on staff and branch reduction unlock
meaningful savings in 2023.
Transformation plan
The Group continues to work towards becoming a more customer centric
organisation. A transformation plan is already in progress and aims to enable
the shift to modern banking by digitally transforming customer service, as
well as internal operations. The holistic transformation aims to (i) shift to
a more customer-centric operating model by defining customer segment
strategies, (ii) redefine our distribution model across existing and new
channels, (iii) digitally transform the way we serve our customers and operate
internally, and (iv) improve employee engagement through a robust set of
organisational health initiatives.
Digital transformation
The Bank's digital transformation focuses on developing digital services and
products that improve the customer experience, streamlining internal
processes, and introducing new ways of working to improve the workplace
environment.
During the second quarter of the year, the Bank continued to enrich and
improve its digital portfolio launching a new innovative service to its
customers, the mobile cheque deposit functionality, which allows the Bank's
retail customers to deposit their cheques through the Bank's mobile app
without the need to visit a branch for this service. This solution further
differentiates the BOC within the Cypriot market and enhances its status as a
digital leader in banking.
D. Business Overview (continued)
Strategic priorities for the medium term (continued)
Digital transformation (continued)
The adoption of digital products and services continued to grow and gained
momentum in the second quarter of 2022 and beyond. As at the end of July 2022,
93.0% of the number of transactions involving deposits, cash withdrawals and
internal/external transfers were performed through digital channels (up by
26.6 p.p. from 66.4% in September 2017 when the digital transformation
programme was initiated). In addition, 79.9% of individual customers were
digitally engaged (up by 19.7 p.p. from 60.2% in September 2017), choosing
digital channels over branches to perform their transactions. As at the end of
July 2022, active mobile banking users and active QuickPay users have grown by
17.4% and 37.4% respectively in the last 12 months. The highest number of
QuickPay users to date was recorded in July 2022 with 154 thousand active
users. Likewise, the highest number of QuickPay payments was recorded in July
2022 with 470 thousand transactions. New features, such as managing fixed
deposits accounts, as well as the opening of new lending products entirely
through the Group's digital channels will soon be available to customers.
Strengthening asset quality
Ensuring the Bank's loan portfolio quality remains healthy is a priority for
the Group and is aiming to maintain high quality of new lending and complete
legacy de-risking.
Balance sheet normalisation continued in the first six months of 2022 with
further c.€170 mn of organic NPE reduction, reducing the Group's NPE ratio
to 5.7%, pro forma for NPE sales. During 2021, the Group completed Project
Helix 2 and reached an agreement for Project Helix 3. Overall, since the
beginning of 2021, and including organic NPE reductions of c.€570 mn, the
Group reduced its NPEs by 81% and its NPE ratio from 25.2% to 5.7%, on a pro
forma basis. For further information please refer to Section B.2.5 'Loan
portfolio quality'.
The Group has already achieved a mid-single digit NPE ratio and is on track to
achieve a target ratio of c.5% by the end of 2022 and less than 3% by the end
of 2025.
In 2022 the cost of risk is expected to reach to c.50 bps. The cost of risk is
expected to range between 50-80 bps in 2023, reflecting the prevailing
uncertainty on macroeconomic outlook. The normalised cost of risk target of
40-50 bps remains unchanged.
Enhancing organisational resilience and ESG (Environmental, Social and
Governance) agenda
Moving to a sustainable economy is the challenge of our time. As part of its
vision to be the leading financial hub in Cyprus, the Bank is determined to
lead the transition of Cyprus to a sustainable future.
The Group has set the foundations to enhance its organisational resilience and
ESG (Environmental, Social and Governance) agenda and continues to work
towards building a forward-looking organisation with a clear strategy
supported by effective corporate governance aligned with ESG agenda
priorities.
In 2022, the Company received a rating of AA (on a scale of AAA-CCC) in the
MSCI ESG Ratings assessment. In 2020, the Bank received a rating of A in the
MSCI ESG Ratings assessment.
In 2021, the first ESG strategy of the Group was formulated, whereby, in
addition to maintaining its leading role in the social and governance pillars,
there will be a shift of focus on increasing the Bank's positive impact on the
environment by transforming not only its own operations, but also the
operations of its client chain.
The Bank has committed to the following primary ESG targets, which reflect the
pivotal role of ESG in the Bank' strategy:
● Become carbon neutral by 2030
● Become Net Zero by 2050
● Steadily increase Green Asset Ratio
● Steadily increase Green Mortgage Ratio
● ≥30% women in Group's management bodies (defined as the
Executive Committee (EXCO) and the Extended EXCO) by 2030
The Board composition of the Company and the Bank is diverse, with one third
of the Board members being female as at 30 June 2022. The Board displays a
strong skill set stemming from broad international experience. Moreover, the
Bank aspires to achieve a representation of at least 30% women in Group's
management bodies (defined as the EXCO and the Extended EXCO) by 2030. As at
30 June 2022, there is a 26% representation of women in Group's management
bodies and 38% representation of women at key positions below the Extended
EXCO level (defined as positions between Assistant Manager and Manager).
D. Business Overview (continued)
Ukrainian crisis
The economic environment has evolved rapidly since February 2022 following
Russia's invasion in Ukraine. In response to the war in Ukraine, the EU, the
UK and the US, in a coordinated effort joined by several other countries
imposed a variety of financial sanctions and export controls on Russia,
Belarus and certain regions of Ukraine as well as various related entities and
individuals. As the war is prolonged, geopolitical tension persists and
inflation accelerates, impacted by the soaring energy prices and disruptions
in supply chains. The escalating inflation weighs on business confidence and
consumers' purchasing power. In this context the Group is closely monitoring
the developments, utilising dedicated governance structures including a Crisis
Management Committee as required and has assessed the impact it has on the
Group's operations and financial performance.
Direct impact
The Group does not have any banking operations in Russia or Ukraine, following
the sale of its operations in Ukraine in 2014 and in Russia in 2015. The Group
has run down its legacy net exposure to less than €1 mn as at 30 June 2022
in Russia through write-offs and provisions.
The Group has no exposure to Russian bonds or banks which are the subject of
sanctions.
The Group has limited direct exposure with loans related to Ukraine, Russia
and Belarus, representing 0.4% of total assets or 1% of net loans as at 30
June 2022. The net book value of these loans stood at €108 mn as at 30 June
2022, of which €95 mn are performing, whilst the remaining were classified
as NPEs well before the current crisis. The portfolio is granular and secured
mainly by real estate properties in Cyprus.
Customer deposits related to Ukrainian, Russian and Belarusian customers
account for only 5% of total customer deposits as at 30 June 2022. This
exposure is not material, given the Group's strong liquidity position. The
Group operates with a significant surplus liquidity of €6.7 bn (LCR ratio of
299%) as at 30 June 2022.
Only c.3% of the Group's 2021 net fee and commission income is derived from
Ultimate Beneficiary Owners (UBOs) from Ukraine, Russia or Belarus.
Indirect impact
Although the Group's direct exposure to Ukraine, Russia or Belarus is limited,
the crisis in Ukraine may have an adverse impact on the Cypriot economy,
mainly due to a negative impact on the tourism and professional services
sectors, increasing energy prices resulting in inflationary pressures, and
disruptions to global supply chains.
At this stage, it is considered that the impact on the Cypriot economy is
expected to come from higher inflation and a consequential slowdown in
economic activity. The performance of tourism sector in the first seven months
of 2022 is better than initially anticipated and represents 77% of 2019
respective levels, despite the loss from Russia and Ukraine. The Group
continues to monitor the exposures in sectors likely impacted by the prolonged
geopolitical uncertainty and persistent inflationary pressures and remains in
close contact with customers to offer solutions as necessary.
Cyprus has no energy dependence on Russia as it imports oil from Greece, Italy
and the Netherlands; however it is indirectly affected by pricing pressures in
the international energy markets.
Professional services account for c.10% of GDP (based on FY2020) of which some
relate to Russia or Ukraine and thus expected to be adversely impacted. There
is however no credit risk exposure as the sector is not levered.
Between 2018-2020, Cyprus recorded net foreign direct investment (FDI) outflow
to Russia. While Russian gross FDI flows in and out of Cyprus may be quite
large, these often reflect the typical set-up of Special Purpose Entities,
with limited actual impact on the Cypriot economy, hence likely to have
limited impact on domestic activity levels.
Conclusion
Overall, the Group expects limited impact from its direct exposure, while any
indirect impact will depend on the duration and severity of the crisis and its
impact on the Cypriot economy, which remains uncertain at this stage.
The Group will continue to closely monitor the situation, taking all necessary
and appropriate measures to minimise the impact on its operations and
financial performance, as well as to manage all related risks and comply with
the applicable sanctions.
D. Business Overview (continued)
IFRS 17
IFRS 17, an accounting standard that will be effective from 1 January 2023,
impacts the phasing of profit recognition for insurance contracts. Upon
implementation, the Group's insurance-related retained earnings will be
restated and the reporting of insurance new business revenue will be spread
over time, as the Group provides service to its policyholders (versus
recognised up-front under current accounting standards), with the quantum and
timing of the impact dependent on, inter alia, the amount and mix of new
business and extent of assumption changes in any given year following
implementation. As highlighted in our 2021 Annual Financial Report, IFRS 17
requires a number of key changes compared with our current accounting policies
for insurance.
· Under IFRS 17, there will be no present value of in-force
insurance contracts ('PVIF') asset recognised. Instead, the estimated future
profit will be included in the measurement of the insurance contract liability
as the contractual service margin ('CSM') and this will be gradually
recognised in revenue as services are provided over the duration of the
insurance contract. While the profit over the life of an individual contract
will be unchanged, its emergence will be later under IFRS 17.
· IFRS 17 requires the increased use of current market values in
the measurement of insurance assets and liabilities hence insurance
liabilities and related assets will be adjusted to reflect IFRS 17 measurement
requirements.
· In accordance with IFRS 17, directly attributable costs will be
incorporated in the CSM and, as recognised, will be presented as a deduction
to reported revenue. This will result in a reduction in operating expenses.
The Group continues to make progress on the implementation of IFRS 17 and
preliminary management estimate on the impact is as previously communicated
and included below. However, industry practice and interpretation of the
standard are still developing, hence uncertainty remains as to the final
transition impact. Additionally, the impact on the forecast future returns of
the Group's insurance business is dependent on the growth, duration and
composition of its insurance contract portfolio. These estimates are therefore
subject to change in the period up to adoption of the standard.
For the purposes of planning the Group's financial resources, the initial
estimate is that the accounting changes will result in:
a) the removal of value in force from the insurance business (including
associated deferred tax liability) of c.€105 mn as per the Group's
consolidated balance sheet as at 30 June 2022, which will reduce Group
accounting equity by a respective amount (with no impact on the Group
regulatory capital or tangible equity), and
b) the remeasurement of insurance assets and liabilities and the creation of a
contractual service margin (CSM) liability which will increase both the
insurance business and the Group's equity by an amount of c.€50 mn,
predominantly relating to the life business of the Group.
The adoption of IFRS 17 may result in a modest annual negative impact on the
contribution to profits of the Group's insurance business in the near term
which has been incorporated in the Group business plan.
The day 1 benefit from IFRS 17 arising from the net remeasurement of insurance
liabilities of c.€50 mn (including the creation of the CSM liability),
referred to in (b) above, enables an equivalent dividend distribution to the
Bank which would benefit Group regulatory capital by an equivalent amount
(upon the payment of dividend by the subsidiary), enhancing CET1 ratio by c.50
bps.
E. Strategy and Outlook
The strategic objectives for the Group are to become a stronger, safer and a
more efficient institution capable of supporting the recovery of the Cypriot
economy and delivering appropriate shareholder returns in the medium term.
The key pillars of the Group's strategy are to:
· Grow revenues in a more capital efficient way; by enhancing
revenue generation via growth in performing book
and less capital-intensive banking and financial services operations
(Insurance and Digital Economy)
· Improve operating efficiency; by achieving leaner operations
through digitisation and automation
· Strengthen asset quality; maintaining high quality new lending,
completing legacy de-risking, normalising cost of risk and reducing (other)
impairments
· Enhance organisational resilience and ESG (Environmental, Social
and Governance) agenda; by continuing to work towards building a
forward-looking organisation with a clear strategy supported by effective
corporate governance aligned with ESG agenda priorities
KEY STRATEGIC PILLARS ACTION TAKEN IN 1H2022 and to date PLAN OF ACTION
Growing revenues in a more capital efficient way; by enhancing revenue • A revised price list for charges and fees was implemented in • Grow net performing book and increase in new lending over the medium
generation via growth in performing book, and less capital-intensive banking February 2022 term
and financial services operations (Insurance and Digital Economy)
• Liquidity fees were extended to a wider customer group in March • Enhance fee and commission income, e.g. on-going review of price
2022 list for charges and fees, increase average product holding through cross
selling, new sources of revenue through introduction of Digital Economy
• Net performing loan book grew to €9.7 bn, an increase of 4% in Platform
1H2022
• Phasing out of liquidity fees in 2023
• For further information, please refer to Section B.2.5 'Loan
portfolio quality' and Section D 'Business Overview' • Profitable insurance business with further opportunities to grow,
e.g. focus on high margin products, leverage on Bank's strong franchise and
customer base for more targeted cross selling enabled by digital
transformation
Improving operating efficiency; by achieving leaner operations through • Completion of a Voluntary staff exit plan in July 2022, through • Effectively eliminate restructuring costs as de-risking is largely
digitisation and automation which c.550 applicants were approved to leave at a total cost of c.€99 mn; complete
estimated annual saving of c.€37 mn (19%) of staff costs
• Enhance procurement control
• Rationalisation of branch footprint as 15 branches closed down in
July 2022; a reduction of 25% year-to- date
• Completion of a small-scale targeted voluntary staff exit plan Cost to income ratio (excluding special levy on deposits and other
(VEP) in 1Q2022, by one of the Bank's subsidiaries, through which a small levies/contributions) revised downwards to around current levels for 2022,
number of the Group's full-time employees were approved to leave at a total compared to initial expectations of mid-60s
cost of €3 mn
• Further developments in the Transformation Plan and the
digitisation of the Bank
E. Strategy and Outlook (continued)
KEY STRATEGIC PILLARS ACTION TAKEN IN 1H2022 and to date PLAN OF ACTION
Strengthening asset quality • Balance sheet normalisation continued in 1H2022 with further • The Group is on track to achieve a target NPE ratio of c.5% by the
c.€170 mn of organic NPE reduction end of 2022 and of less than 3% by the end of 2025
• NPE ratio (pro forma for HFS) reduced to mid-single digit of 5.7%
as at 30 June 2022
• For further information, please refer to Section B.2.5 'Loan
portfolio quality' and Section D. 'Business Overview'
Enhancing organisational resilience and ESG (Environmental, Social and • Initiation of ESG training to Board of Directors and staff to • Implement ESG strategy with a shift of focus on environment
Governance) agenda; by continuing to work towards building a forward-looking increase awareness
organisation with a clear strategy supported by effective corporate governance
• Embed ESG sustainability in the Bank's culture
aligned with ESG agenda priorities • Initiation of decarbonisation of the Group's operations and
portfolio • Continuous enhancement of structure and corporate governance
• Approval of Green Lending Policy based on the Green Loan • Invest in people and promote talent
Principles (GLPs)
• Environmental products launched e.g. under the Fil-eco product
scheme
• For further information, please refer to Section D. 'Business
Overview'
In November 2020 the Group, after a considerable period of change, announced
for the first time its medium-term targets and its priorities to set the Group
on a path for sustainable profitability. These included completion on balance
sheet de-risking, delivery of sustainable profitability, enhancement on
operating efficiency, modernisation of the Bank's franchise, including IT and
digital investment, addressing challenges from low rates and surplus
liquidity, initiation of MREL issuance and Tier 2 refinancing and optimisation
on capital management. Since then, the Group's progress was remarkable,
delivering on all fronts. In summary the key achievements were:
· 81% NPE reduction through organic and inorganic actions; NPE
ratio is approaching to 5% and is on track with 2022 target
· Completion of several Voluntary Staff Exit Plans and branch
footprint rationalisation
· 26% increase in active digital users
· Net interest income bottomed out and now is reverting to growth
· Inaugural MREL issuance and Tier 2 refinancing, regaining market
access
The medium-term recurring ROTE target of c.7% was achieved in 1H2022, two
years ahead of schedule and is on path to achieve a double-digit ROTE in 2023.
The CET1 ratio since September 2020 remained broadly flat, absorbing in full
the restructurings and is now positioned for dividend resumptions.
As a result the medium-term strategic targets have evolved, reflecting a
dynamic strategy, capitalising on the changed macroeconomic outlook and the
Group's strong performance.
Overall, a return on tangible equity (ROTE) over 10% is now expected to be
achieved in 2023 and to be sustained for the following years 2024 and 2025,
supporting the ability to make meaningful dividend distributions from 2023
onwards, subject to regulatory approvals and market conditions.
Also, higher profitability will be positive for the Group's CET1 ratio, which
is expected to be further increased following the adoption of IFRS 17 on 1
January 2023. Specifically, a day 1 benefit from IFRS 17 on Group regulatory
capital by c.€50 mn is estimated, thereby enhancing Group CET1 ratio by c.50
bps.
E. Strategy and Outlook (continued)
The Group's progress is being noticed. In an announcement on 19 August 2022
the Board noted the announcement made by LSF XI Investments LLC ('Lone Star')
and confirmed that it has received and unanimously rejected three unsolicited,
conditional, non-binding proposals from Lone Star relating to a possible cash
offer for the entire issued, and to be issued, share capital of the Company.
The Board expressed its confidence in the Group's strategy and remains
committed to delivering its strategy of becoming a stronger, safer and a more
focused institution capable of further supporting the recovery of the Cypriot
economy. In addition, the Board remains confident in its ability to implement
its strategic objectives, delivering strong shareholder returns in the medium
and long term, and accordingly has unequivocally rejected the proposal from
Lone Star.
The evolution of the Group's medium term strategic targets are set out below:
Key Metrics November 2020 February 2022 May 2022 August 2022
2024 2025 2025 2025
Profitability Return on Tangible Equity (ROTE)(1) c.7% in 2024 >10% in 2025 >10% from 2024
>10% from 2023 onwards
Cost to income ratio(2) Mid-50s 50%-55%
50-55% c.50%
Asset Quality NPE ratio c.5% <3% <3% <3%
Cost of risk 70-80 bps 40-50 bps 40-50 bps 40-50 bps
Capital returns Dividend No guidance Consider from 2023 onwards(3) Consider meaningful from 2023 onwards(3) Meaningful from 2023
onwards(4)
Capital CET1 ratio at least 13% Supported by CET1 ratio of 13.5%-14.5% Supported by CET1 ratio of 13.5%-14.5%
1. Return on Tangible Equity (ROTE) is calculated as Profit after Tax
(annualised) divided by Shareholders' equity minus intangible assets.
2. Calculated using total operating expenses which comprise staff
costs and other operating expenses. Total operating expenses do not include
the special levy on deposits or other levies/contributions and do not include
any advisory or other restructuring costs.
3. Subject to performance and regulatory approvals
4. Subject to regulatory approvals and market conditions
F. Definitions & Explanations
Advisory and other restructuring costs Comprise mainly (a) fees of external advisors in relation to: (i) disposal of
operations and non-core assets, and (ii) customer loan restructuring
activities, and (b) the cost of the tender offer for the Old T2 Capital Notes,
where applicable.
Allowance for expected loan credit losses (previously 'Accumulated Comprises (i) allowance for expected credit losses (ECL) on loans and advances
provisions') to customers (including allowance for expected credit losses on loans and
advances to customers held for sale), (ii) the residual fair value adjustment
on initial recognition of loans and advances to customers (including residual
fair value adjustment on initial recognition on loans and advances to
customers classified as held for sale), (iii) allowance for expected credit
losses for off-balance sheet exposures (financial guarantees and commitments)
disclosed on the balance sheet within other liabilities, and (iv) the
aggregate fair value adjustment on loans and advances to customers classified
and measured at FVPL.
AT1 AT1 (Additional Tier 1) is defined in accordance with the Capital Requirements
Regulation (EU) No 575/2013, as amended by CRR II applicable as at the
reporting date.
Basic earnings/(losses) after tax and before non-recurring items per share Basic earnings/(losses) after tax and before non-recurring items per share
(attributable to the owners of the Company) (attributable to the owners of the Company) is the Profit/(loss) after tax and
before non-recurring items (as defined below) (attributable to the owners of
the Company) divided by the weighted average number of shares in issue during
the period, excluding treasury shares.
Carbon neutral The reduction and balancing (through a combination of offsetting investments
or emission credits) of greenhouse gas emissions from own operations.
CET1 capital ratio (transitional basis) CET1 capital ratio (transitional basis) is defined in accordance with the
Capital Requirements Regulation (EU) No 575/2013, as amended by CRR II
applicable as at the reporting date.
CET1 fully loaded (FL) ratio The CET1 fully loaded (FL) ratio is defined in accordance with the Capital
Requirements Regulation (EU) No 575/2013, as amended by CRR II applicable as
at the reporting date.
Cost to Income ratio Cost-to-income ratio comprises total expenses (as defined) divided by total
income (as defined).
Data from the Statistical Service The latest data from the Statistical Service of the Republic of Cyprus, Cyprus
Statistical Service, was published on 29 August 2022.
Digital transactions ratio This is the ratio of the number of digital transactions performed by
individuals and legal entity customers to the total number of transactions.
Transactions include deposits, withdrawals, internal and external transfers.
Digital channels include mobile, browser and ATMs.
Digitally engaged customers ratio This is the ratio of digitally engaged individual customers to the total
number of individual customers. Digitally engaged customers are the
individuals who use the digital channels of the Bank (mobile banking app,
browser and ATMs) to perform banking transactions, as well as digital enablers
such as a bank-issued card to perform online card purchases, based on an
internally developed scorecard.
ECB European Central Bank
F. Definitions & Explanations (continued)
Gross loans Gross loans comprise: (i) gross loans and advances to customers measured at
amortised cost before the residual fair value adjustment on initial
recognition (including loans and advances to customers classified as
non-current assets held for sale) and (ii) loans and advances to customers
classified and measured at FVPL adjusted for the aggregate fair value
adjustment
Gross loans are reported before the residual fair value adjustment on initial
recognition relating mainly to loans acquired from Laiki Bank (calculated as
the difference between the outstanding contractual amount and the fair value
of loans acquired) amounting to €145 mn as at 30 June 2022 (compared to
€149 mn at 31 March 2022 and €178 mn at 31 December 2021).
Additionally, gross loans include loans and advances to customers classified
and measured at fair value through profit or loss adjusted for the aggregate
fair value adjustment of €313 mn as at 30 June 2022 (compared to €312 mn
at 31 March 2022 and €336 mn at 31 December 2021).
Group The Group consists οf Bank of Cyprus Holdings Public Limited Company, "BOC
Holdings" or the "Company", its subsidiary Bank of Cyprus Public Company
Limited, the "Bank" and the Bank's subsidiaries.
Legacy exposures Legacy exposures are exposures relating to (i) Restructuring and Recoveries
Division (RRD), (ii) Real Estate Management Unit (REMU), and (iii) non-core
overseas exposures.
Leverage ratio The leverage ratio is the ratio of tangible total equity (including Other
equity instruments) to total assets as presented on the balance sheet.
Tangible total equity comprises of equity attributable to the owners of the
Company minus intangible assets.
Leverage Ratio Exposure (LRE) Leverage Ratio Exposure (LRE) is defined in accordance with the Capital
Requirements Regulation (EU) No 575/2013, as amended.
Loan credit losses (PL) (previously 'Provision charge') Loan credit losses comprise: (i) credit losses to cover credit risk on loans
and advances to customers, (ii) net gains on derecognition of financial assets
measured at amortised cost and (iii) net gains on loans and advances to
customers at FVPL, for the reporting period/year.
Loan credit losses charge (previously 'Provisioning charge') (cost of risk) Loan credit losses charge (cost of risk) (year-to-date) is calculated as the
annualised 'loan credit losses' (as defined) divided by average gross loans.
The average gross loans are calculated as the average of the opening balance
and the closing balance, for the reporting period/year.
Market Shares Both deposit and loan market shares are based on data from the CBC. The Bank
is the single largest credit provider in Cyprus with a market share of 41.2%
as at 30 June 2022 compared to 41.9% at 31 March 2022 and 38.8% at 31 December
2021. The increase during the first six months 2022 is mainly due to a
reduction in loans in the banking system.
MSCI ESG Rating The use by the Company and the Bank of any MSCI ESG Research LLC or its
affiliates ('MSCI') data, and the use of MSCI Logos, trademarks, service marks
or index names herein, do not constitute a sponsorship, endorsement,
recommendation or promotion of the Company or the Bank by MSCI. MSCI Services
and data are the property of MSCI or its information providers and are
provided "as-is" and without warranty. MSCI Names and logos are trademarks or
service marks of MSCI.
Net fee and commission income over total income Fee and commission income less fee and commission expense divided by total
income (as defined).
Net Interest Margin Net interest margin is calculated as the net interest income (annualised)
divided by the 'quarterly average interest earning assets' (as defined).
Net loans and advances to customers Net loans and advances to customers comprise gross loans (as defined) net of
allowance for expected loan credit losses (as defined, but excluding allowance
for expected credit losses on off-balance sheet exposures disclosed on the
balance sheet within other liabilities).
Net loans to deposits ratio Net loans to deposits ratio is calculated as gross loans (as defined) net of
allowance for expected loan credit losses (as defined) divided by customer
deposits.
Net performing loan book Net performing loan book is the total net loans and advances to customers (as
defined) excluding the legacy exposures (as defined).
F. Definitions & Explanations (continued)
Net Stable Funding Ratio (NSFR) The NSFR is calculated as the amount of "available stable funding" (ASF)
relative to the amount of "required stable funding" (RSF). The regulatory
limit, enforced in June 2021, has been set at 100% as per the CRR II.
Net zero emissions The reduction of greenhouse gas emissions to net zero through a combination of
reduction activities and offsetting investments
New lending New lending includes the disbursed amounts of the new and existing
non-revolving facilities (excluding forborne or re-negotiated accounts) as
well as the average year-to-date change (if positive) of the current accounts
and overdraft facilities between the balance at the beginning of the period
and the end of the period. Recoveries are excluded from this calculation since
their overdraft movement relates mostly to accrued interest and not to new
lending.
Non-interest income Non-interest income comprises Net fee and commission income, Net foreign
exchange gains/(losses) and net gains/(losses) on financial instruments and
(excluding net gains on loans and advances to customers at FVPL), Insurance
income net of claims and commissions, Net gains/(losses) from revaluation and
disposal of investment properties and on disposal of stock of properties, and
Other income.
Non-performing exposures (NPEs) As per the European Banking Authorities (EBA) standards and European Central
Bank's (ECB) Guidance to Banks on Non-Performing Loans (which was published in
March 2017), non-performing exposures (NPEs) are defined as those exposures
that satisfy one of the following conditions:
(i) The borrower is assessed as unlikely to pay its credit obligations in
full without the realisation of the collateral, regardless of the existence of
any past due amount or of the number of days past due.
(ii) Defaulted or impaired exposures as per the approach provided in the
Capital Requirement Regulation (CRR), which would also trigger a default under
specific credit adjustment, diminished financial obligation and obligor
bankruptcy.
(iii) Material exposures as set by the CBC, which are more than 90 days past
due.
(iv) Performing forborne exposures under probation for which additional
forbearance measures are extended.
(v) Performing forborne exposures previously classified as NPEs that present
more than 30 days past due within the probation period.
From 1 January 2021 two regulatory guidelines came into force that affect NPE
classification and Days-Past-Due calculation. More specifically, these are the
RTS on the Materiality Threshold of Credit Obligations Past-Due
(EBA/RTS/2016/06), and the Guideline on the Application of the Definition of
Default under article 178 (EBA/RTS/2016/07).
The Days-Past-Due (DPD) counter begins counting DPD as soon as the arrears or
excesses of an exposure reach the materiality threshold (rather than as of the
first day of presenting any amount of arrears or excesses). Similarly, the
counter will be set to zero when the arrears or excesses drop below the
materiality threshold. Payments towards the exposure that do not reduce the
arrears/excesses below the materiality threshold, will not impact the counter.
For retail debtors, when a specific part of the exposures of a customer that
fulfils the NPE criteria set out above is greater than 20% of the gross
carrying amount of all on balance sheet exposures of that customer, then the
total customer exposure is classified as non‑performing; otherwise only the
specific part of the exposure is classified as non‑performing. For
non‑retail debtors, when an exposure fulfils the NPE criteria set out above,
then the total customer exposure is classified as non‑performing.
Material arrears/excesses are defined as follows: (a) Retail exposures: Total
arrears/excess amount greater than €100, (b) Exposures other than retail:
Total arrears/excess amount greater than €500 and the amount in
arrears/excess in relation to the customer's total exposure is at least 1%.
For further information please refer to the Annual Financial Report 2021.
F. Definitions & Explanations (continued)
Non-recurring items Non-recurring items as presented in the 'Interim Condensed Consolidated Income
Statement - Underlying basis' relate to the following items, as applicable:
(i) Advisory and other restructuring costs - organic, (ii) Provisions/net loss
relating to NPE sales, (iii) Restructuring and other costs relating to NPE
sales, and (iv) Restructuring costs relating to the Voluntary Staff Exit Plan.
NPE coverage ratio (previously 'NPE Provisioning coverage ratio') The NPE coverage ratio is calculated as the allowance for expected loan credit
losses (as defined) over NPEs (as defined).
NPE ratio NPEs ratio is calculated as the NPEs as per EBA (as defined) divided by gross
loans (as defined).
NPE sales NPE sales refer to sales of NPE portfolios completed, as well as contemplated
and potential future sale transactions, irrespective of whether or not they
met the held for sale classification criteria at the reporting dates.
Operating profit before credit losses and impairments The operating profit before credit losses and impairments comprises profit
before Total loan credit losses, impairments and provisions (as defined), tax,
(profit)/loss attributable to non-controlling interests and non-recurring
items (as defined).
Operating profit return on average assets Operating profit before credit losses and impairments return on average assets
is calculated as the annualised operating profit (as defined) divided by the
quarterly average of total assets for the relevant period. Average total
assets exclude total assets of discontinued operations at each quarter end, if
applicable.
Phased-in Capital Conservation Buffer (CCB) In accordance with the legislation in Cyprus which has been set for all credit
institutions, the applicable rate of the CCB is 1.25% for 2017, 1.875% for
2018 and 2.5% for 2019 (fully phased-in).
Profit/(loss) after tax and before non-recurring items (attributable to the This refers to the profit or loss after tax (attributable to the owners of the
owners of the Company) Company), excluding any 'non-recurring items' (as defined).
Profit/(loss) after tax - organic (attributable to the owners of the Company) This refers to the profit or loss after tax (attributable to the owners of the
Company), excluding any 'non-recurring items' (as defined, except for the
'advisory and other restructuring costs - organic').
Pro forma for HFS (held for sale) and VEP (Voluntary Staff Exit Plan) References to pro forma figures and ratios as at 30 June 2022 refer to Project
Helix 3, Project Sinope and to VEP. They are based on 30 June 2022 underlying
basis figures and assume their completion, currently expected to occur in
2H2022. The completion of Project Helix 3 remains subject to customary
regulatory and other approvals. Project Sinope was completed in August 2022.
VEP refers to the Voluntary Staff Exit Plan that the Group completed in July
2022, through which c.550 applicants were approved to leave at a total cost of
c.€99 mn, expected to be recorded in the 3Q2022 income statement.
Project Helix 2 Project Helix 2 refers to the sale of portfolios of loans with a total gross
book value of €1.3 bn completed in June 2021. For further information please
refer to section B.2.5 'Loan portfolio quality'.
Project Helix 3 Project Helix 3 refers to the agreement the Group reached in November 2021 for
the sale of a portfolio of NPEs with gross book value of €568 mn, as well as
real estate properties with book value of c.€120 mn as at 30 September 2021.
For further information please refer to section B.2.5 Loan portfolio quality.
Project Sinope Project Sinope refers to the agreement the Group reached in December 2021 for
the sale of a portfolio of NPEs with gross book value of €12 mn as at 31
December 2021, as well as properties in Romania with carrying value €0.6 mn
as at 31 December 2021. For further information please refer to section B.2.5
'Loan portfolio quality'.
F. Definitions & Explanations (continued)
Quarterly average interest earning assets This relates to the average of 'interest earning assets' as at the beginning
and end of the relevant quarter. Average interest earning assets exclude
interest earning assets of any discontinued operations at each quarter end, if
applicable. Interest earning assets include: cash and balances with central
banks (including cash and balances with central banks classified as
non-current assets held for sale), plus loans and advances to banks, plus net
loans and advances to customers (including loans and advances to customers
classified as non-current assets held for sale), plus 'deferred consideration
receivable' included within 'other assets', plus investments (excluding
equities and mutual funds).
Qoq Quarter on quarter change
Return on Tangible equity (ROTE) after tax and before non-recurring items Return on Tangible Equity (ROTE) after tax and before non-recurring items is
calculated as Profit/(loss) after tax and before non-recurring items
(attributable to the owners of the Company) (as defined) (annualised), -
(based on year to date days)), divided by the quarterly average of
Shareholders' equity minus intangible assets at each quarter end
Return on Tangible equity (ROTE) Return on Tangible Equity (ROTE) is calculated as Profit/(loss) after tax
(attributable to the owners of the Company) (as defined) (annualised - (based
on year to date days)), divided by the quarterly average of Shareholders'
equity minus intangible assets at each quarter end
Special levy on deposits and other levies/contributions Relates to the special levy on deposits of credit institutions in Cyprus,
contributions to the Single Resolution Fund (SRF), contributions to the
Deposit Guarantee Fund (DGF), as well as the DTC levy, where applicable.
Total Capital ratio Total capital ratio is defined in accordance with the Capital Requirements
Regulation (EU) No 575/2013, as amended by CRR II applicable as at the
reporting date.
Total expenses Total expenses comprise staff costs, other operating expenses and the special
levy on deposits and other levies/contributions. It does not include (i)
'advisory and other restructuring costs-organic', (ii) restructuring costs
relating to NPE sales, or (iii) restructuring costs relating to the Voluntary
Staff Exit Plan. (i) 'Advisory and other restructuring costs-organic' amounted
to €4 mn for 2Q2022 (compared to €1 mn for 1Q2022 and €3 mn for 4Q2021),
(ii) Restructuring costs relating to NPE sales for 2Q2022 amounted to €0.8
mn (compared to €1 mn for 1Q2022 and €0.2 mn for 4Q2021), and (iii)
Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) for 2Q2022
was nil (compared to €3 mn for 1Q2022 and €16 mn for 4Q2021).
Total income Total income comprises net interest income and non-interest income (as
defined).
Total loan credit losses, impairments and provisions Total loan credit losses, impairments and provisions comprises loan credit
losses (as defined), plus impairments of other financial and non-financial
assets, plus (provisions)/net reversals for litigation, claims, regulatory and
other matters.
Underlying basis This refers to the statutory basis after being adjusted for certain items as
explained in the Basis of Presentation.
Write offs Loans together with the associated loan credit losses are written off when
there is no realistic prospect of future recovery. Partial write-offs,
including non-contractual write-offs, may occur when it is considered that
there is no realistic prospect for the recovery of the contractual cash flows.
In addition, write-offs may reflect restructuring activity with customers and
are part of the terms of the agreement and subject to satisfactory
performance.
Yoy Year on year change
Basis of Presentation
This announcement covers the results of Bank of Cyprus Holdings Public Limited
Company, "BOC Holdings" or "the Company", its subsidiary Bank of Cyprus Public
Company Limited, the "Bank" or "BOC PCL", and together with the Bank's
subsidiaries, the "Group", for the six months ended 30 June 2022.
At 31 December 2016, the Bank was listed on the Cyprus Stock Exchange (CSE)
and the Athens Exchange. On 18 January 2017, BOC Holdings, incorporated in
Ireland, was introduced in the Group structure as the new holding company of
the Bank. On 19 January 2017, the total issued share capital of BOC Holdings
was admitted to listing and trading on the LSE and the CSE.
Financial information presented in this announcement is being published for
the purposes of providing an overview of the Group financial results for the
six months ended 30 June 2022.
The financial information in this announcement does not constitute statutory
financial statements of BOC Holdings within the meaning of section 340 of the
Companies Act 2014. The Group statutory financial statements for the year
ended 31 December 2021, upon which the auditors have given an unqualified
report, were published on 30 March 2022 and are expected to be delivered to
the Registrar of Companies of Ireland within 56 days of 30 September 2022. The
Board of Directors approved the Group statutory financial statements for the
six months ended 30 June 2022 on 30 August 2022.
Statutory basis: Statutory information is set out on pages 4-5. However, a
number of factors have had a significant effect on the comparability of the
Group's financial position and performance. Accordingly, the results are also
presented on an underlying basis.
Underlying basis: The financial information presented under the underlying
basis provides an overview of the Group financial results for the six month
ended 30 June 2022, which the management believes best fits the true
measurement of the financial performance and position of the Group. For
further information, please refer to 'Commentary on Underlying Basis' on page
7. The statutory results are adjusted for certain items (as described on pages
9-10) to allow a comparison of the Group's underlying financial position and
performance, as set out on pages 6-8.
The financial information included in this announcement is neither reviewed
nor audited by the Group's external auditors.
The Consolidated Condensed Interim Financial Statements for the six months
ended 30 June 2022 have not been audited by the Group's external auditors. The
Group's external auditors have conducted a review of the Consolidated
Condensed Interim Financial Statements in accordance with the International
Standard on Review Engagements 2410 'Review of Interim Financial Information
performed by the Independent Auditor of the Entity (UK & Ireland)'.
The Interim Financial Report 2022 is available at the Bank of Cyprus Holdings
Public Limited Company Office (51, Stassinos Street, Ayia Paraskevi, P.O. Box
24884, 1398, Nicosia, Cyprus) and on the Group's website www.bankofcyprus.com
Group/Investor Relations/Financial Results).
This announcement and the presentation for the Group Financial Results for the
six months ended 30 June2022 have been posted on the Group's website
www.bankofcyprus.com (Group/Investor Relations/Financial Results).
Definitions: The Group uses definitions in the discussion of its business
performance and financial position which are set out in section F, together
with explanations.
The Group Financial Results for the six months ended 30 June 2022 are
presented in Euro (€) and all amounts are rounded as indicated. A comma is
used to separate thousands and a dot is used to separate decimals.
Forward Looking Statements
This document contains certain forward-looking statements which can usually be
identified by terms used such as "expect", "should be", "will be" and similar
expressions or variations thereof or their negative variations, but their
absence does not mean that a statement is not forward-looking. Examples of
forward-looking statements include, but are not limited to, statements
relating to the Group's near term, medium term and longer term future capital
requirements and ratios, intentions, beliefs or current expectations and
projections about the Group's future results of operations, financial
condition, expected impairment charges, the level of the Group's assets,
liquidity, performance, prospects, anticipated growth, provisions,
impairments, business strategies and opportunities. By their nature,
forward-looking statements involve risk and uncertainty because they relate to
events, and depend upon circumstances, that will or may occur in the future.
Factors that could cause actual business, strategy and/or results to differ
materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements made by the Group include, but
are not limited to: general economic and political conditions in Cyprus and
other European Union (EU) Member States, interest rate and foreign exchange
fluctuations, legislative, fiscal and regulatory developments, information
technology, litigation and other operational risks, adverse market conditions,
the impact of outbreaks, epidemics or pandemics, such as the COVID-19 pandemic
and ongoing challenges and uncertainties posed by the COVID-19 pandemic for
businesses and governments around the world. Russian invasion of Ukraine has
led to heightened volatility across global markets and to the coordinated
implementation of sanctions on Russia, Russian entities and nationals. The
Russian invasion of Ukraine has already caused significant population
displacement, and as the conflict continues, the disruption will likely
increase. The scale of the conflict and the speed and extent of sanctions, as
well as the uncertainty as to how the situation will develop, may have
significant adverse effects on the market and macroeconomic conditions,
including in ways that cannot be anticipated. This creates significantly
greater uncertainty about forward-looking statements. Should any one or more
of these or other factors materialise, or should any underlying assumptions
prove to be incorrect, the actual results or events could differ materially
from those currently being anticipated as reflected in such forward looking
statements. The forward-looking statements made in this document are only
applicable as at the date of publication of this document. Except as required
by any applicable law or regulation, the Group expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward looking statement contained in this document to reflect any change in
the Group's expectations or any change in events, conditions or circumstances
on which any statement is based.
Further Information
In accordance with Rule 26.1 of the Irish Takeover Rules, a copy of this
announcement will be available on the Company's website at
https://www.bankofcyprus.com/en-gb/group/investor-relations/possible-offer/ by
no later than 12.00 (noon) (Irish/UK time) on the business day following
publication of this announcement. The content of the website referred to in
this announcement is not incorporated into, and does not form part of, this
announcement. This announcement is not intended to, and does not, constitute
or form part of any offer, invitation or the solicitation of an offer to
purchase, otherwise acquire, subscribe for, sell or otherwise dispose of, any
securities, or the solicitation of any vote or approval in any jurisdiction,
pursuant to this announcement or otherwise. Any offer will be made solely by
certain offer documentation which will contain the full terms and conditions
of any offer, including details of how it may be accepted.
This announcement has been prepared in accordance with and in compliance with
the applicable laws of Ireland, Cyprus and England and information disclosed
may not be the same as that which would have been prepared in accordance with
the laws of other jurisdictions.
The distribution of this announcement in jurisdictions other than Ireland,
Cyprus and the United Kingdom and the availability of any offer to
shareholders of the Company who are not resident in Ireland, Cyprus or the
United Kingdom may be affected by the laws of relevant jurisdictions.
Therefore, any persons who are subject to the laws of any jurisdiction other
than Ireland, Cyprus or the United Kingdom or shareholders of the Company who
are not resident in Ireland, Cyprus or the United Kingdom will need to inform
themselves about, and observe, any applicable requirements.
Jurisdiction
The Company is a public limited company incorporated in Ireland with relevant
securities listed and admitted to trading on the Main Market of the London
Stock Exchange and on the Cyprus Stock Exchange. As a result, any transaction
to acquire the Company which constitutes a "takeover bid" (as defined in
Directive 2004/25/EC (the "Takeover Bids Directive")) will be subject to the
shared jurisdiction of the Irish Takeover Panel and the Cyprus Securities
Exchange Commission in line with the procedures set out in Article 4 of the
Takeover Bids Directive, as implemented in Ireland and Cyprus. Any transaction
to acquire control of the Company which proceeds otherwise than by way of
takeover bid will be subject to the jurisdiction of the Irish Takeover Panel
under the Irish Takeover Rules. Prior to a determination being made as to the
manner in which any transaction to acquire the Company would be implemented,
the possible offer is subject to the jurisdiction of both the Irish Takeover
Panel and the Cyprus Securities Exchange Commission. There is no certainty
that any formal offer to acquire the Company will be made nor as to the terms
on which any offer might be made.
Further Information (continued)
Responsibility Statement
The Directors of the Company accept responsibility for the information
contained in this announcement. To the best of their knowledge and belief
(having taken all reasonable care to ensure such is the case), the information
contained in this announcement is in accordance with the facts and does not
omit anything likely to affect the import of such information.
Disclosure requirements of the Irish Takeover Rules
Under Rule 8.3(a) of the Irish Takeover Rules, any person who is 'interested'
(directly or indirectly) in 1% or more of any class of 'relevant securities'
of the Company must make an 'opening position disclosure' by no later than
3.30pm (Irish/UK time) on 2 September 2022. An 'opening position disclosure'
must contain the details specified in Rule 8.6(a) of the Irish Takeover Rules,
including details of the person's interests and short positions in any
'relevant securities' of the Company. Relevant persons who deal in any
'relevant securities' of the Company prior to the deadline for making an
'opening position disclosure' must instead make a dealing disclosure as
described below.
Under Rule 8.3(b) of the Irish Takeover Rules, any person 'interested'
(directly or indirectly) in 1% or more of any class of 'relevant securities'
of the Company must disclose all 'dealings' in such 'relevant securities'
during the 'offer period'. The disclosure of a 'dealing' in 'relevant
securities' by a person to whom Rule 8.3(b) applies must be made by no later
than 3.30 pm (Irish/UK time) on the business day following the date of the
transaction. A dealing disclosure must contain the details specified in Rule
8.6(b) of the Irish Takeover Rules, including details of the dealing concerned
and of the person's interests and short positions in any 'relevant securities'
of the Company.
In addition, Lone Star must make an 'opening position disclosure' by no later
than 12.00 (noon) (Irish/UK time) on 2 September 2022 and disclose details of
any 'dealings' by it or any person 'acting in concert' with it in 'relevant
securities' of the Company by no later than 12.00 (noon) (Irish/UK time) on
the business day following the date of the transaction.
All 'dealings' in 'relevant securities' of the Company by Lone Star, or by any
party acting in concert with Lone Star, must also be disclosed by no later
than 12 noon (Irish/UK time) on the 'business' day following the date of the
relevant transaction. If two or more persons co-operate on the basis of an
agreement, either express or tacit, either oral or written, to acquire for one
or more of them an interest in relevant securities, they will be deemed to be
a single person for these purposes.
Disclosure tables, giving details of the companies in whose 'relevant
securities' 'opening positions' and 'dealings' should be disclosed, can be
found on the Irish Takeover Panel's website at www.irishtakeoverpanel.ie.
'Interests' in securities arise, in summary, when a person has long economic
exposure, whether conditional or absolute, to changes in the price of
securities. In particular, a person will be treated as having an 'interest' by
virtue of the ownership or control of securities, or by virtue of any option
in respect of, or derivative referenced to, securities.
Terms in quotation marks in this section are defined in the Irish Takeover
Rules, which can also be found on the Irish Takeover Panel's website. If you
are in any doubt as to whether or not you are required to disclose a dealing
or an opening position under Rule 8, please consult the Irish Takeover Panel's
website at www.irishtakeoverpanel.ie or contact the Irish Takeover Panel on
telephone number +353 1 678 9020.
Disclosure requirements of the Cypriot Takeover Bids Law
In addition to the requirements under Rule 8 of the Irish Takeover Rules as
outlined above, under section 26 of the Cypriot Takeover Bids Law, during the
'period of the takeover bid':
a. Lone Star and every person holding a percentage of five per cent
(5%) or more of the voting rights of the Company or Lone Star, must announce
immediately, in accordance with the provisions of the Cypriot Takeovers Bids
Law, every acquisition of securities in the Company or Lone Star made by
themselves or by persons acting in their own name but on their behalf or in
concert with them or by undertakings controlled by them, as well as the
acquisition price and any voting rights already held in that company; and
b. every person acquiring a percentage equal to half per cent (0.5%)
or greater of the voting rights of the Company or Lone Star, must make an
announcement for this acquisition in accordance with the provisions of the
Cypriot Takeovers Bids Law, as well as every subsequent acquisition of
securities of these companies by themselves or by persons acting in their own
name but on their behalf or in concert with them or by undertakings controlled
by them, as well as the acquisition price and any voting rights already held
in that company.
Terms in quotation marks in this section are defined in the Cypriot Takeover
Bids Law, which can also be found on the website of the Securities and
Exchange Commission of Cyprus at www.cysec.gov.cy.
Further Information (continued)
Profit Forecast / Asset Valuations / Quantified Financial Benefit Statement
The financial results for the period ended 30 June 2022 provided in this
announcement constitute a profit estimate for the purposes of the Irish
Takeover Rules and are subject to Rule 28.5. Other than the foregoing, no
statement in this announcement is intended to constitute a profit forecast for
any period, nor should any statements be interpreted to mean that earnings or
earnings per share will necessarily be greater or lesser than those for the
relevant preceding financial periods for the Company. No statement in this
announcement constitutes an asset valuation or quantified financial benefit
statement.
Contacts
For further information please contact:
Investor Relations
+ 357 22 122239
investors@bankofcyprus.com
The Bank of Cyprus Group is the leading banking and financial services group
in Cyprus, providing a wide range of financial products and services which
include retail and commercial banking, finance, factoring, investment banking,
brokerage, fund management, private banking, life and general insurance. At 30
June 2022, the Bank of Cyprus Group operated through a total of 86 branches in
Cyprus, of which 11 operated as cash offices*. The Bank of Cyprus Group
employed 3,422 staff worldwide**. The Bank of Cyprus Group comprises Bank of
Cyprus Holdings Public Limited Company, its subsidiary Bank of Cyprus Public
Company Limited and its subsidiaries.
*The number of branches and cash offices were reduced by 15 and 7 respectively
on 1 July 2022.
** The number of staff has been reduced by c.550 employees following the
completion of a voluntary staff exit plan in July 2022.
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