REG - Bank of Cyprus Hldgs - 1H2023 Group Financial Results
09/08/2023 07:00
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RNS Number : 7745I Bank of Cyprus Holdings PLC 09 August 2023
Announcement
Group Financial Results for the six months ended 30 June 2023
Nicosia, 9 August 2023
Key Highlights for the six months ended 30 June 2023
Positive Economic outlook
· Strong economic growth; Cyprus GDP expanded by 3.4%(1) in 1Q2023,
the second highest in the Eurozone; 2023 growth expected of c.2.8%(1)
· New lending stable at €1.1 bn, despite the rising interest rate
environment
· Gross performing loan book flat qoq and yoy at €9.9 bn as
ongoing repayments offset new lending
Strong profitability continuing to benefit from tailwinds
· NII of €358 mn up 146% yoy, underpinned by rising interest
rates and continued low deposit pass-through
· Total operating expenses(2) down 2% yoy, reflecting efficiency
actions taken in FY2022; cost to income ratio(2) reduced to 32%
· Profit after tax of €220 mn, of which €125 mn in 2Q2023 (vs
€43 mn in 1H2022)
· ROTE of 24.0% vs 4.9% in 1H2022, supported by strong NII growth
Liquid and resilient balance sheet
· Asset quality in line with target; NPE ratio at 3.6% (0.8% on net
basis) down 7 p.p. yoy
· Coverage increased to 78%; Cost of risk at 48 bps
· Sticky, retail funded deposit base at €19.2 bn, up 4% yoy and
broadly flat qoq
· Highly liquid balance sheet with €9.1 bn placed at the ECB
· 2025 MREL requirement already achieved post successful issuance
of €350 mn senior preferred notes in July 2023
Robust capital and shareholder focus
· Organic capital generation of c.220 bps(3) in 1H2023, of which
c.120 bps(3) in 2Q2023
· CET1 ratio of 16.0%(4) and Total Capital ratio of 21.1%(4)
· Successful refinancing of €220 mn AT1 Capital Securities
· Payment of dividend in June 2023; payout ratio of 14% out of 2022
earnings(5)
Key takeaways from the Investor Update Event in June 2023
· ROTE raised to >17% for 2023 and >16% for 2025 (on an
illustrative 15% CET1 ratio)
· Strong capital generation of c.200-250 bps per annum
pre-distributions for 2023-2025
· Group's dividend policy reiterated; payout ratio expected to
build prudently and progressively to 30-50% of adjusted recurring
profitability(6)
1. In accordance with Ministry of Finance
2. Excluding special levy on deposits and other levies/contributions
3. Based on profit after tax
4. Includes reviewed profits for 1H2023 and is net of dividend accrual
(refer to section B.2.1 'Capital Base'). Any recommendation for a dividend is
subject to regulatory approval
5. On adjusted recurring profitability as reported in 2022 Financials
6. Profit after tax before non-recurring items (attributable to the
owners of the Company) taking into consideration distributions under other
equity instruments such as the annual AT1 coupon
*On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout are on a restated basis unless otherwise stated. Further
information on IFRS 17 is provided under the sections "Commentary on
Underlying Basis' and in the Note 3.3.1 of the Consolidated Condensed Interim
Financial Statements in the Interim Financial Report 2023.
Group Chief Executive Statement
"In the first half of 2023 we delivered a strong financial and operational
performance, on the back of continuing interest rate rises, improving
efficiency and a broadly stable cost of risk, generating a profit after tax of
€220 mn, equivalent to a ROTE of 24.0%. This performance demonstrates that
we are well on track to achieve our 2023 targets presented during our
inaugural investor update event in June 2023.
Total income amounted to €511 mn, of which €358 mn relates to net interest
income, more than double last year's level, a reflection of the higher
interest rate environment supported by continued low deposit pass-through
levels. Our tight cost management is proving successful despite persistent
inflationary pressures with total operating expenses reduced by 2% yoy and our
cost to income ratio (excluding levies and contributions) at 32%.
Our cost of risk remained broadly stable yoy at 48 bps, underpinned by a low
NPE ratio of 3.6% and an improved level of coverage of 78% as at 30 June 2023.
We have a highly liquid balance sheet and are therefore benefitting
significantly from higher rates; over one third of our assets are cash
balances with central banks while our deposit base grew modestly by 4% yoy to
€19.2 bn.
Despite uncertainty in the global and European economic outlook, the Cypriot
economy remains robust with strong economic growth of 3.4% in 1Q2023, the
second highest in the Eurozone. As the largest financial group in Cyprus, we
continued to support the economy by extending €1.1 bn of new loans in
1H2023, while maintaining strict lending criteria. Our performing loan book
remained broadly flat qoq and yoy at €9.9 bn, as ongoing repayments offset
new lending.
Our capital position remains robust and comfortably in excess of our
regulatory requirements, with approximately 220 bps of organically generated
capital in 1H2023. We ended the first half with a CET1 ratio of 16.0% and a
Total Capital ratio of 21.1%. Recently the Group made a successful return to
capital markets with the refinancing of the €220 mn AT1 Capital securities
in June 2023 and the issuance of €350 mn MREL-eligible senior preferred
notes in July 2023. In this respect, the Group is now already in full
compliance with its 2025 MREL requirements.
In June 2023, we made our first dividend payment for 12 years, marking the
Group's transformation into a strong, diversified, well-capitalised and
sustainably profitable banking and financial services organisation. The
Group's strong financial performance is progressing well, in line with our
targets, and lays the foundations for shareholder value creation and
sustainable returns."
Panicos Nicolaou
A. Group Financial Results - Statutory Basis
Interim Consolidated Income Statement for the six months ended 30 June 2023
Six months ended
30 June
2023 2022
(restated)(1)
€000 €000
Turnover 646,203 414,966
Interest income 403,852 181,470
Income similar to interest income 22,172 9,518
Interest expense (56,083) (37,514)
Expense similar to interest expense (11,599) (7,752)
Net interest income 358,342 145,722
Fee and commission income 93,879 98,086
Fee and commission expense (4,275) (4,447)
Net foreign exchange gains 15,839 11,898
Net gains/(losses) on financial instruments 5,680 (10,183)
Net gains on derecognition of financial assets measured at amortised cost 5,861 1,648
Net insurance finance income/(expense) and net reinsurance finance 263 2,653
income/(expense)
Net insurance service result 34,086 31,268
Net reinsurance service result (9,788) (10,197)
Net gains/(losses) from revaluation and disposal of investment properties 788 (1,372)
Net gains on disposal of stock of property 3,906 8,242
Other income 12,200 8,927
Total operating income 516,781 282,245
Staff costs (93,043) (98,303)
Special levy on deposits and other levies/contributions (18,236) (16,507)
Provisions for pending litigations, claims, regulatory and other matters (net (14,148) (594)
of reversals)
Other operating expenses (70,456) (75,824)
Operating profit before credit losses and impairment 320,898 91,017
Credit losses on financial assets (36,772) (24,826)
Impairment net of reversals on non-financial assets (23,206) (12,157)
Profit before tax 260,920 54,034
Income tax (39,768) (11,158)
Profit after tax for the period 221,152 42,876
Attributable to:
Owners of the Company 220,247 42,214
Non-controlling interests 905 662
Profit for the period 221,152 42,876
Basic profit per share attributable to the owners of the Company (€ cent) 49.4 9.5
Diluted profit per share attributable to the owners of the Company (€ cent) 49.3 9.5
(1. ) 2022 comparative information has been restated to reflect the
impact of IFRS 17. Refer to Note 3.3.1 of the Consolidated Condensed Interim
Financial Statements in the Interim Financial Report 2023.
A. Group Financial Results - Statutory Basis (continued)
Interim Consolidated Balance Sheet as at 30 June 2023
30 June 31 December 2022 1 January 2022
2023 (restated) (restated)
Assets €000 €000 €000
Cash and balances with central banks 9,127,429 9,567,258 9,230,883
Loans and advances to banks 431,812 204,811 291,632
Derivative financial assets 49,302 48,153 6,653
Investments at FVPL 138,661 190,209 199,194
Investments at FVOCI 487,806 467,375 748,695
Investments at amortised cost 2,703,240 2,046,119 1,191,274
Loans and advances to customers 10,007,819 9,953,252 9,836,405
Life insurance business assets attributable to policyholders 587,882 542,321 551,797
Prepayments, accrued income and other assets 609,607 609,054 583,777
Stock of property 945,831 1,041,032 1,111,604
Investment properties 74,339 85,099 117,745
Deferred tax assets 227,953 227,934 265,942
Property and equipment 267,410 253,378 252,130
Intangible assets 47,546 52,546 54,144
Non-current assets and disposal groups held for sale - - 358,951
Total assets 25,706,637 25,288,541 24,800,826
Liabilities
Deposits by banks 448,713 507,658 457,039
Funding from central banks 2,004,480 1,976,674 2,969,600
Derivative financial liabilities 18,391 16,169 32,452
Customer deposits 19,166,155 18,998,319 17,530,883
Insurance liabilities 631,917 599,992 623,791
Accruals, deferred income, other liabilities and other provisions 429,585 379,182 356,697
Provisions for pending litigation, claims, regulatory and other matters 128,267 127,607 104,108
Debt securities in issue 291,976 297,636 302,555
Subordinated liabilities 309,348 302,104 340,220
Deferred tax liabilities 34,618 34,634 39,817
Total liabilities 23,463,450 23,239,975 22,757,162
Equity
Share capital 44,620 44,620 44,620
Share premium 594,358 594,358 594,358
Revaluation and other reserves 80,686 76,939 99,541
Retained earnings 1,264,795 1,090,349 1,062,711
Equity attributable to the owners of the Company 1,984,459 1,806,266 1,801,230
Other equity instruments 235,517 220,000 220,000
Non‑controlling interests 23,211 22,300 22,434
Total equity 2,243,187 2,048,566 2,043,664
Total liabilities and equity 25,706,637 25,288,541 24,800,826
(1) 2022 comparative information has been restated to reflect the impact of
IFRS 17. Refer to Note 3.3.1 of the Consolidated Condensed Interim Financial
Statements in the Interim Financial Report 2023.
B. Group Financial Results - Underlying Basis
Interim Condensed Consolidated Income Statement
€ mn 1H2023 1H2022 2Q2023 1Q2023 qoq +% yoy +%
IFRS 17(1)
Net interest income 358 145 196 162 21% 146%
Net fee and commission income 90 94 46 44 3% -4%
Net foreign exchange gains and net gains/(losses) on financial instruments 21 3 8 13 -35% -
Net insurance result 25 24 15 10 57% 4%
Net gains/(losses) from revaluation and disposal of investment properties and 5 7 3 2 99% -32%
on disposal of stock of properties
Other income 12 9 9 3 218% 37%
Total income 511 282 277 234 19% 81%
Staff costs (93) (95) (47) (46) 4% -2%
Other operating expenses (69) (69) (35) (34) 1% -1%
Special levy on deposits and other levies/contributions (18) (17) (7) (11) -36% 10%
Total expenses (180) (181) (89) (91) -2% -1%
Operating profit 331 101 188 143 32% 228%
Loan credit losses (24) (23) (13) (11) 18% 6%
Impairments of other financial and non-financial assets (30) (13) (19) (11) 68% 128%
Provisions for pending litigations, regulatory and other matters (net of (14) (1) (8) (6) 24% -
reversals)
Total loan credit losses, impairments and provisions (68) (37) (40) (28) 39% 86%
Profit before tax and non-recurring items 263 64 148 115 30% -
Tax (40) (11) (22) (18) 24% 256%
Profit attributable to non-controlling interests (1) (1) 0 (1) -36% 37%
Profit after tax and before non-recurring items (attributable to the owners of 222 52 126 96 32% -
the Company)
Advisory and other transformation costs - organic (2) (5) (1) (1) 11% -57%
Profit after tax - organic (attributable to the owners of the Company) 220 47 125 95 32% -
Provisions/net profit/(loss) relating to NPE sales - - - - - -
Restructuring and other costs relating to NPE sales - (1) - - - -100%
Restructuring costs - Voluntary Staff Exit Plan (VEP) - (3) - - - -100%
Profit after tax (attributable to the owners of the Company) 220 43 125 95 33% -
B. Group Financial Results - Underlying Basis (continued)
Interim Condensed Consolidated Income Statement - Key Performance Ratios
Key Performance Ratios 1H2023 1H2022 2Q2023 1Q2023 qoq+% yoy+%
IFRS 17(1)
Net Interest Margin (annualised) 3.17% 1.32% 3.43% 2.91% 52 bps 185 bps
Cost to income ratio 35% 64% 32% 39% -7 p.p. -29 p.p.
Cost to income ratio excluding special levy on deposits and other 32% 58% 29% 34% -5 p.p. -26 p.p.
levies/contributions
Operating profit return on average assets (annualised) 2.6% 0.8% 3.0% 2.3% 0.7 p.p. 1.8 p.p.
Basic earnings per share attributable to the owners of the Company (€ 49.4 9.5 28.2 21.2 7.0 39.9
cent)(2)
Return on tangible equity (ROTE) 24.0% 4.9% 26.6% 21.3% 5.3 p.p. 19.1 p.p.
1. On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout are on a restated basis unless otherwise stated. For further
details, please refer to Note 3.3.1 of the Consolidated Condensed Interim
Financial Statements in the Interim Financial Report 2023.
2. The diluted earnings per share attributable to the owners of the Company
for 2Q2023 amounted to 49.3 cents
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 2023 on the
'underlying basis' which management believes best fits the true measurement of
the performance and position of the Group, as this presents separately any
non-recurring items and also includes certain reclassifications of items,
other than non-recurring items, which are done for presentational purposes
under the underlying basis for aligning their presentation with items of a
similar nature.
Reconciliations between the statutory basis and the underlying basis to
facilitate the comparability of the underlying basis to the statutory
information, are included in Section B.1 'Reconciliation of the Interim
Condensed Consolidated Income Statement for the six months ended 30 June 2023
between statutory and underlying basis' and in 'Alternative Performance
Measures Disclosures' of the Interim Financial Report 2023.
Throughout this announcement, financial information in relation to FY2022 and
quarterly 2022 financial information has been restated for the effects of
transition to IFRS 17 which was adopted on 1 January 2023 and applied
retrospectively. As a result, such 2022 financial information, ratios and
metrics are presented on a restated basis unless otherwise stated. Further
information on impact of IFRS 17 transition is provided below and in Note
3.3.1 of the Consolidated Condensed Interim Financial Statements in the
Interim Financial Report 2023.
Throughout this announcement, the capital ratios as at 31 December 2022 have
been restated in order to take into consideration the 2022 dividend
declaration. This refers to the proposal by the Board of Directors to the
shareholders of a final dividend in respect of the FY2022 earnings following
the approval by the European Central Bank ('ECB'). The proposed final dividend
was declared at the Annual General Meeting ('AGM') which was held on 26 May
2023. This dividend amounted to €22.3 mn in total and had a negative impact
of 22 bps on the Group's CET1 ratio and Total Capital ratio as at 31 December
2022. As a result the 31 December 2022 capital ratios are presented as
restated for the 2022 dividend unless otherwise stated. Further details are
provided in Section 'B.2.1 Capital Base'.
Transition to IFRS 17
On 1 January 2023 the Group adopted IFRS 17 'Insurance Contracts' ('IFRS 17')
which replaced IFRS 4 'Insurance contracts. IFRS 17 is an accounting standard
that was implemented on 1 January 2023, with retrospective application and
establishes principles for the recognition, measurement, presentation and
disclosure of insurance contracts issued, investment contracts with
discretionary participation features issued and reinsurance contracts held. In
substance, IFRS 17 impacts the phasing of profit recognition for insurance
contracts as profitability is spread over the lifetime of the contract
compared to being recognised substantially up-front under IFRS 4. This new
accounting standard does not change the economics of the insurance contracts
but decreases the volatility of the Group's insurance companies profitability.
The Group's total equity as at 31 December 2022 as restated for IFRS 17
compared to IFRS 4, was reduced by overall €52 mn (predominantly relating to
the life insurance business of the Group) from the below changes:
· The removal of the present value of in-force life insurance
contracts ('PVIF') asset including the associated deferred tax liability,
resulting in a reduction of €101 mn in the Group's total equity.
Commentary on Underlying Basis (continued)
Transition to IFRS 17 (continued)
· The remeasurement of insurance assets and liabilities (including
the impact of the contractual service margin('CSM')) resulting in an increase
in the Group's equity by €49 mn.
The estimated future profit of insurance contracts is included in the
measurement of the insurance contract liabilities 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. A contractual
service margin liability of c.€42 mn was recognised as at 31 December 2022
(reflected in the impact from the remeasurement of insurance liabilities
mentioned above).
With regards to the Group's income statement for the year ended 31 December
2022, as restated for IFRS 17, the profit after tax (attributable to the
owners of the Company) was reduced by €14 mn to €57 mn (vs €71 mn under
IFRS 4) reflecting mainly:
· Profit is deferred and held as CSM liability as mentioned above
to be recognised in the income statement over the contract service period.
· The impact of assumption changes relating to the future service
is also deferred through CSM liability and is recognised in the income
statement over the contract service period.
· There is increased use of current market values in the
measurement of insurance assets and liabilities (for unit-linked business) and
market volatility on unit-linked business is deferred to the CSM, thereby
reducing the volatility in the income statement.
The transition to IFRS 17 had no impact on the Group's regulatory capital.
However, as a result of the benefit arising from the remeasurement of the
insurance assets and liabilities, the life insurance subsidiary distributed
€50 mn as dividend to the Bank in February 2023, which benefited Group
regulatory capital by an equivalent amount on the same date, enhancing CET1
ratio by c.50 bps. Going forward, meaningful dividend generation from the
insurance business is expected to continue.
B. Group Financial Results- Underlying Basis (continued)
Interim Condensed Consolidated Balance Sheet
€ mn 30.06.2023 31.12.2022 +%
IFRS 17(1)
Cash and balances with central banks 9,127 9,567 -5%
Loans and advances to banks 432 205 111%
Debt securities, treasury bills and equity investments 3,330 2,704 23%
Net loans and advances to customers 10,008 9,953 1%
Stock of property 946 1,041 -9%
Investment properties 74 85 -13%
Other assets 1,790 1,734 3%
Total assets 25,707 25,289 2%
Deposits by banks 449 508 -12%
Funding from central banks 2,004 1,977 1%
Customer deposits 19,166 18,998 1%
Debt securities in issue 292 298 -2%
Subordinated liabilities 309 302 2%
Other liabilities 1,244 1,157 7%
Total liabilities 23,464 23,240 1%
Shareholders' equity 1,984 1,807 10%
Other equity instruments 236 220 7%
Total equity excluding non-controlling interests 2,220 2,027 10%
Non-controlling interests 23 22 4%
Total equity 2,243 2,049 10%
Total liabilities and equity 25,707 25,289 2%
Key Balance Sheet figures and ratios 30.06.2023 31.12.2022(1) +
Gross loans (€ mn) 10,277 10,217 1%
Allowance for expected loan credit losses (€ mn) 288 282 2%
Customer deposits (€ mn) 19,166 18,998 1%
Loans to deposits ratio (net) 52% 52% -
NPE ratio 3.6% 4.0% -40 bps
NPE coverage ratio 78% 69% +9 p.p.
Leverage ratio 8.5% 7.8% +70 bps
Capital ratios and risk weighted assets 30.06.2023(3) 31.12.2022(2) +
Common Equity Tier 1 (CET1) ratio (transitional) 16.0% 15.2% 80 bps
Total capital ratio (transitional) 21.1% 20.4% 70 bps
Risk weighted assets (€ mn) 10,257 10,114 1%
1. On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout are on a restated basis unless otherwise stated. Please refer to
Note 3.3.1 of the Consolidated Condensed Interim Financial Statements 2023.
2. The capital ratios have been restated to take into consideration the
dividend in respect of FY2022 earnings. For further details please refer to
section B.2.1.
3. Includes reviewed profits for 1H2023 and is net of dividend accrual (refer
to section B.2.1 'Capital Base'). Any recommendation for a dividend is subject
to regulatory approval
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 2023 between statutory and
underlying basis
€ million Underlying basis Other Statutory
basis
Net interest income 358 - 358
Net fee and commission income 90 - 90
Net foreign exchange gains and net gains on financial instruments 21 - 21
Net gains on derecognition of financial assets measured at amortised cost - 6 6
Net insurance result* 25 - 25
Net gains from revaluation and disposal of investment properties and on 5 - 5
disposal of stock of properties
Other income 12 - 12
Total income 511 6 517
Total expenses (180) (16) (196)
Operating profit 331 (10) 321
Loan credit losses (24) 24 -
Impairment of other financial and non-financial assets (30) 30 -
Provisions for pending litigations, regulatory and other matters (net of (14) 14 -
reversals)
Credit losses on financial assets and impairment net of reversals of - (60) (60)
non-financial assets
Profit before tax and non-recurring items 263 (2) 261
Tax (40) - (40)
Profit attributable to non-controlling interests (1) - (1)
Profit after tax and before non-recurring items (attributable to the owners of 222 (2) 220
the Company)
Advisory and other transformation costs - organic (2) 2 -
Profit after tax (attributable to the owners of the Company) 220 - 220
* Net insurance result per underlying basis comprises the aggregate of
captions 'Net insurance finance income/(expense) and net reinsurance finance
income/(expense)', 'Net insurance service result' and 'Net reinsurance service
result' per the statutory basis.
The reclassification differences between the statutory basis and the
underlying basis are explained below:
· Net gains on loans and advances to customers at FVPL of
approximately zero million included in 'Loan credit losses' under the
underlying basis are included in 'Net gains/(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.
· 'Net gains on derecognition of financial assets
measured at amortised cost' of approximately €6 mn under the statutory basis
comprise net gains on derecognition of loans and advances to customers
included in 'Loan credit losses' under the underlying basis as to align their
presentation with the loan credit losses on loans and advances to customers.
· Provisions for pending litigations, regulatory and
other matters amounting to €14 mn presented within 'Operating profit before
credit losses and impairment' under the statutory basis, are presented under
the underlying basis in conjunction with loan credit losses and impairments.
· Advisory and other transformation costs of
approximately €2 mn 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.
B. Group Financial Results-Underlying Basis (continued)
B.1 Reconciliation of the Interim Condensed Consolidated Income
Statement for the six months ended 30 June 2023 between statutory and
underlying basis (continued)
· '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 loans and advances to customers of €30
mn, which are included in 'Loan credit losses' under the underlying basis, and
ii) credit losses of other financial assets of €7 mn and impairment
net of reversals of non-financial assets of €23 mn, which are included in
'Impairment 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 €2,220 mn as at 30
June 2023 compared to €2,119 mn as at 31 March 2023 and to €2,027 mn as at
31 December 2022. Shareholders' equity totalled to €1,984 mn as at 30 June
2023 compared to €1,899 mn as at 31 March 2023 and to €1,807 mn as at 31
December 2022.
The Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at
16.0% as at 30 June 2023, compared to 15.2% as at 31 March 2023 and to 15.2%
as at 31 December 2022, as restated. Organic capital generation for 2Q2023
amounted to c.120 bps. During 2Q2023, CET1 ratio was positively affected
mainly by pre-provision income and other movements and negatively affected by
provisions and impairments as well as the AT1 distributions and refinancing
costs and the increase in risk weighted assets. Throughout this announcement,
the capital ratios as at 30 June 2023 include reviewed profits for the six
months ended 30 June 2023 and an accrual for an estimated final dividend at a
payout ratio of 30% of the Group's adjusted recurring profitability for the
period, which represents the low-end range of the Group's approved dividend
policy. As per the latest SREP decision, any dividend distribution is subject
to regulatory approval. Such dividend accrual does not constitute a binding
commitment for a dividend payment nor does it constitute a warranty or
representation that such a payment will be made. Group adjusted recurring
profitability is defined as the Group's profit after tax before non-recurring
items (attributable to the owners of the Company) taking into account
distributions under other equity instruments such as the annual AT1 coupon.
For more details please refer to 'Resumption of dividends' further below in
section B.2.1. For Capital Requirements Regulation (CRR) purposes, a payout
ratio of 50% of the Group's adjusted recurring profitability for the period,
the high-end of the payout range of the Group's approved dividend policy is
prescribed, corresponding to a CET1 ratio of 15.6% as at 30 June 2023.
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 was
phased-in gradually, with the impact being fully phased-in (100%) by 1 January
2023. The final phasing-in of the impact of the impairment amount from the
initial application of IFRS 9 was c.65 bps on the CET1 ratio on 1 January
2023. 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 17 bps on Group's CET1 ratio as at 30
June 2023.
The Total Capital ratio stood at 21.1% as at 30 June 2023, compared to 20.3%
as at 31 March 2023 and to 20.4% as at 31 December 2022, as restated. As at 30
June 2023, Existing Capital Securities (for further details refer to "Other
equity Instruments" section below in B.2.1) of a nominal amount of c.€8 mn
are included in Total Capital, the impact of which is c.8 bps on the Total
Capital ratio. For CRR purposes, a payout ratio of 50% of the Group's adjusted
recurring profitability for the period, the high-end of the payout range of
the Group's approved dividend policy is prescribed, corresponding to a Total
Capital ratio of 20.7% as at 30 June 2023.
The Group's capital ratios are above the Supervisory Review and Evaluation
Process (SREP) requirements.
In the context of the annual SREP performed by the ECB in 2022 and based on
the final SREP decision received in December 2022, effective from 1 January
2023, the Pillar II requirement has been revised to 3.08%, compared to the
previous level of 3.26%. The Pillar II requirement includes a revised Pillar
II requirement add-on of 0.33% relating to ECB's prudential provisioning
expectations. When disregarding the Pillar II add-on relating to ECB's
prudential provisioning expectations, the Pillar 2 requirement has been
reduced from 3.00% to 2.75%.
The Group's minimum phased-in CET1 capital ratio requirement as at 30 June
2023 is set at 10.26%, compared to the previous level of 10.10% in 2022,
comprising a 4.50% Pillar I requirement, a 1.73% Pillar II requirement, the
Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.50% and the CcyB
of c.0.02%. The Group's minimum phased-in Total Capital ratio requirement is
set at 15.10%, compared to the previous level of 15.03% in 2022, 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 3.08% Pillar II
requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of
1.50% and the CcyB of c.0.02%. The ECB has also maintained the non-public
guidance for an additional Pillar II CET1 buffer (P2G) unchanged compared to
the previous year.
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 was
phased-in gradually, having started from 1 January 2019 at 0.50%. The O-SII
buffer was fully phased-in on 1 January 2023 and now stands at 1.50%.
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.
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
B.2.1 Capital Base (continued)
On 30 November 2022, the CBC, following the revised methodology described in
its macroprudential policy, decided to increase the CcyB from 0.00% to 0.50%
of the total risk exposure amounts in Cyprus of each licensed credit
institution incorporated in Cyprus. The new rate of 0.50% must be observed as
from 30 November 2023. Further, in June 2023, the CBC announced a further
increase of 0.50% in the CcyB of the total risk exposure amounts in Cyprus of
each licensed credit institution incorporated in Cyprus to be observed from
June 2024, increasing the CcyB to 1% from June 2024.
The Group participated in the ECB Stress Test of 2023, the results of which
were published by the ECB on 28 July 2023. For further information please
refer to the 'Risk and Capital Management Report' of the 'Interim Financial
Report 2023.
Resumption of dividend payments
Following the 2022 SREP decision, the equity dividend distribution prohibition
was lifted for both the Company and the Bank, with any dividend distribution
being subject to regulatory approval.
In April 2023, the Company obtained the approval of the European Central Bank
to pay a dividend. Following this approval, the Board of Directors of the
Company recommended to the shareholders a final dividend of €0.05 per
ordinary share in respect of earnings for the year ended 31 December 2022
('Dividend'). The proposed final dividend was declared at the Annual General
Meeting ('AGM') which was held on 26 May 2023. This Dividend amounted to
€22.3 mn in total and was equivalent to a payout ratio of 14% of the FY2022
Group's adjusted recurring profitability or 31% based on FY2022 profit after
tax (as reported in the 2022 Annual Financial Report). The Dividend was paid
in cash on 16 June 2023.
This Dividend resulted in a negative capital impact of 22 bps on the Group's
CET1 ratio and Total Capital ratio as at 31 December 2022. Throughout this
announcement, the capital ratios as at 31 December 2022 have been restated in
order to take into consideration the dividend payment.
The resumption of dividend payments after 12 years underpins the Group's
position as a strong and well-diversified organisation, capable of delivering
sustainable shareholder returns.
Dividend policy
In April 2023 the Board of Directors approved the Group dividend policy. The
Group aims to provide a sustainable return to shareholders. Dividend payments
are expected to build prudently and progressively over time, towards a payout
ratio in the range of 30-50% of the Group's adjusted recurring profitability.
The dividend policy takes into consideration market conditions as well as the
outcome of capital and liquidity planning.
Other equity instruments
At 30 June 2023, the Group's other equity instruments relate to Additional
Tier 1 Capital Securities (the "AT1 securities") and amounted to €236 mn, up
7% on the prior quarter and prior year.
In June 2023, the Company successfully launched and priced an issue of €220
mn Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities (the 'New
Capital Securities').
The New Capital Securities constitute unsecured and subordinated obligations
of the Company, are perpetual and are issued at par. They carry an initial
coupon of 11.875% per annum, payable semi-annually and resettable on 21
December 2028 and every 5 years thereafter. The Company will have the option
to redeem the New Capital Securities from, and including, 21 June 2028 to, and
including, 21 December 2028 and on each interest payment date thereafter,
subject to applicable regulatory consents and the relevant conditions to
redemption.
The issue was met with exceptional demand, attracting interest from c.240
institutional investors, with the final order book over 12 times
over-subscribed and final pricing 62.5 bps tighter than the initial pricing
indication. The pricing also reflects significant improvement in the credit
spread to c.910 bps compared to c.1,260 bps for the previous AT1 issue in 2018
('Existing Capital Securities').
The net proceeds of the issue of the New Capital Securities were on-lent by
the Company to the Bank to be used for general corporate purposes. The on-loan
qualifies as Additional Tier 1 capital for the Bank.
The issue of the New Capital Securities will maintain the Group's optimised
capital structure and contributes to the Group's Total Capital Ratio by c.215
bps.
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
B.2.1 Capital Base (continued)
Other equity instruments (continued)
At the same time, the Company invited the holders of its outstanding €220 mn
Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities callable in
December 2023 to tender their Existing Capital Securities at a purchase price
of 103% of the principal amount. The Company received valid tenders of
c.€204 mn in aggregate principal amount, or c.93% of the outstanding
Existing Capital Securities, all of which were accepted by the Company.
As a result, a cost of c.€7 mn was recorded directly in the Company's equity
in 2Q2023, forfeiting the relevant future coupon payments. Transaction costs
of €3.5 mn in relation to the transactions were recorded directly in equity
in June 2023. Existing Capital Securities of c.€16 mn in aggregate principal
amount remain outstanding as at 30 June 2023. In July 2023, the Company
purchased in the open market Existing Capital Securities of c.€7 mn further
reducing the outstanding nominal amount of the Existing Capital Securities to
c.€8 mn.
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 legislative amendments cover the utilisation of income tax losses
transferred from Laiki Bank to the Bank in March 2013. The introduction of the
Capital Requirements Regulation (CRR) and 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 CRR/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 at that time. 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).
In anticipation of modifications to the Law, the Group has since prior years
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 c.€5 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.
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 the 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. The European Council's
proposal on CRR and CRD was published on 8 November 2022. During February
2023, the European Parliament's ECON Committee voted to adopt Parliament's
proposed amendments to the Commission's proposal, and the 2021 Banking Package
is currently in the final stage of the EU legislative process. It is expected
that the 2021 Banking Package will enter into force on 1 January 2025; and
certain measures are expected to be subject to transitional arrangements or to
be phased in over time.
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
B.2.2 Regulations and Directives (continued)
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 February 2023, 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 24.35% 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, the binding interim requirement of 1 January 2022 set at
14.94% of risk weighted assets and 5.91% of LRE must continue to be met. The
own funds used by the Bank to meet the Combined Buffer Requirement (CBR) are
not 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.
The MREL ratio as at 30 June 2023, calculated according to the SRB's
eligibility criteria currently in effect and based on internal estimate, stood
at 21.5% of risk weighted assets (RWA) and at 10.2% of LRE. The MREL ratio as
at 30 June 2023 includes an amount of c.€8 mn that remained following the
tender offer and open market purchases of the Existing Capital Securities,
which have a call option in December 2023. The impact of this amount is
contributing c.8 bps to the MREL ratio expressed as a percentage of RWA and
c.3 bps to the MREL ratio expressed as a percentage of LRE. In July 2023 the
Bank proceeded with an issue of €350 mn senior preferred notes (the
'Notes'). The Notes comply with the MREL criteria and are expected to
contribute towards the Bank's MREL requirements. When accounting for the
Notes, the Bank's MREL ratio improves to 24.9% of RWA and 11.4% of LRE. For
further details, please refer to section B.2.3 'Debt Securities in Issue'. The
MREL ratio expressed as a percentage of risk weighted assets does not include
capital used to meet the CBR requirement, which stood at 4.02% on 30 June 2023
(compared to 3.77% as at 31 December 2022), expected to increase further on 30
November 2023 following increase in CcyB from 0.00% to 0.50% of the total risk
exposure amounts in Cyprus and to 1% from June 2024 as announced by Central
Bank of Cyprus.
Throughout this announcement, the MREL ratios as at 30 June 2023 include
profits for the six months ended 30 June 2023 and an accrual for an estimated
final dividend at a payout ratio of 30% of the Group's adjusted recurring
profitability for the period, which represents the low-end range of the
Group's approved dividend policy. For CRR purposes, a payout ratio of 50% of
the Group's adjusted recurring profitability for the period, the high-end of
the payout range of the Group's approved dividend policy is prescribed,
corresponding to an MREL ratio expressed as a percentage of RWAs of 21.1% and
MREL ratio expressed as a percentage of LRE of 10.1% as at 30 June 2023; pro
forma for the Notes issuance, MREL ratio expressed as a percentage of RWAs
stands at 24.5% and MREL ratio expressed as a percentage of LRE stands at
11.3%.
When accounting for the Notes issued in July 2023, the Bank meets the final
MREL requirement currently set by the SRB well ahead the compliance date of 31
December 2025. Acknowledging that the MREL requirement (amount and date) is
subject to annual review by the regulator, the Bank continues to evaluate
opportunities to optimise the build-up of its MREL.
B.2.3 Funding and Liquidity
Funding
Funding from Central Banks
At 30 June 2023, the Bank's funding from central banks amounted to €2,004
mn, which relates to ECB funding, comprising solely of funding through the
Targeted Longer-Term Refinancing Operations (TLTRO) III, compared to €1,988
mn at 31 March 2023 and to €1,977 mn at 31 December 2022.
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.
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
B.2.3 Funding and Liquidity(continued)
Funding (continued)
Funding from Central Banks (continued)
Following the changes in the terms of the TLTRO III announced by the ECB in
October 2022, and given the Bank's strong liquidity position, the Bank
proceeded with the repayment of €1 bn TLTRO III funding in December 2022.
The maturity date of the Bank's funding of €1.7 bn under the seventh TLTRO
III operation is in March 2024, whilst the €300 mn under the eighth TLTRO
III operation is in June 2024.
Deposits
Customer deposits totalled €19,166 mn at 30 June 2023 (compared to €18,974
mn at 31 March 2023, to €18,998 mn at 31 December 2022 and to €18,450 mn
at 30 June 2022) broadly flat in the second quarter and up 4% year on year.
Customer deposits are mainly retail-funded and almost 60% of deposits are
protected under the deposit guarantee scheme as at 30 June 2023.
The Bank's deposit market share in Cyprus reached 37.4% as at 30 June 2023,
compared to 37.3% as at 31 March 2023 and to 37.2% as at 31 December 2022.
Customer deposits accounted for 75% of total assets and 82% of total
liabilities at 30 June 2023 (flat since 31 December 2022).
The net loans to deposits (L/D) ratio stood at 52% as at 30 June 2023
(compared to 53% as at 31 March 2023 and to 52% as at 31 December 2022 on the
same basis), broadly flat in the second quarter.
Subordinated liabilities
At 30 June 2023, the carrying amount of the Group's subordinated liabilities
(including accrued interest) amounted to €309 mn (compared to €307 mn at
31 March 2023 and to €302 mn at 31 December 2022) and relate to unsecured
subordinated Tier 2 Capital Notes ('T2 Notes').
The 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 of the T2 Notes is 23 October 2031. The Company will have the option to
redeem the T2 Notes early on any day during the six-month period from 23 April
2026 to 23 October 2026, subject to applicable regulatory approvals.
Debt securities in issue
At 30 June 2023, the carrying value of the Group's debt securities in issue
(including accrued interest) amounted to €292 mn (compared to €300 mn at
31 March 2023 and to €298 mn at 31 December 2022) and relate to senior
preferred notes.
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.
In July 2023, the Bank has successfully launched and priced an issuance of
€350 mn of senior preferred notes (the "Notes"). The Notes were priced at
par with a fixed coupon of 7.375% per annum, payable annually in arrear, until
the Optional Redemption Date i.e. 25 July 2027. The maturity date of the Notes
is 25 July 2028; however, the Bank may, at its discretion, redeem the Notes on
the Optional Redemption Date subject to meeting certain conditions (including
applicable regulatory consents) as specified in the Terms and Conditions. If
the Notes are not redeemed by the Bank, the coupon payable from the Optional
Redemption Date until the Maturity Date will convert from a fixed rate to a
floating rate, and will be equal to 3-month Euribor + 409.5 bps, payable
quarterly in arrear. The issuance was met with strong demand, attracting
interest from more than 90 institutional investors, with a peak orderbook of
€950 mn and final pricing 37.5 bps tighter than the initial pricing
indication. The Notes comply with the criteria for the Minimum Requirement for
Own Funds and Eligible Liabilities ("MREL") and contribute towards the Bank's
MREL requirements.
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
Liquidity
At 30 June 2023, the Group Liquidity Coverage Ratio (LCR) stood at 316%
(compared to 303% at 31 March 2023 and to 291% at 31 December 2022), well
above the minimum regulatory requirement of 100%. The LCR surplus as at 30
June 2023 amounted to €7.7 bn (compared to €7.4 bn at 31 March 2023 and to
€7.2 bn at 31 December 2022). The increase in liquidity surplus in 2Q2023
reflects primarily the increase in deposits. When disregarding the TLTRO III
and including the €350 mn of the senior preferred notes issued on July 2023,
the Group's liquidity position remains strong with an LCR of 270% and
liquidity surplus of €6.1 bn.
At 30 June 2023, the Group Net Stable Funding Ratio (NSFR) stood at 165%
(compared to 160% at 31 March 2023 and to 168% at 31 December 2022), well
above the minimum regulatory requirement of 100%.
B.2.4 Loans
Group gross loans totalled €10,277 mn at 30 June 2023, compared to €10,278
mn at 31 March 2023 and to €10,217 mn at 31 December 2022, flat on the prior
quarter as ongoing repayments offset new lending.
New lending granted in Cyprus reached €494 mn for 2Q2023 (compared to a
seasonally strong new lending of €624 mn for 1Q2023 and to €444 mn for
4Q2022) down by 21% qoq. New lending in 2Q2023 comprised €212 mn of
corporate loans, €184 mn of retail loans (of which €119 mn were housing
loans), €48 mn of SME loans and €50 mn of shipping and international
loans. During 1H2023, new lending remained strong at €1,118 mn, mainly
driven by strong demand for business loans.
At 30 June 2023, the Group net loans and advances to customers totalled
€10,008 mn (compared to €10,013 mn at 31 March 2023 and to €9,953 mn at
31 December 2022), up 1% since the beginning of the year.
The Bank is the largest credit provider in Cyprus with a market share of 42.4%
at 30 June 2023, compared to 42.4% at 31 March 2023 and to 40.9% at 31
December 2022.
B.2.5 Loan portfolio quality
The Group has continued to make steady progress across all asset quality
metrics. Today, the Group's priorities focus mainly on maintaining high
quality new lending with strict underwriting standards and preventing asset
quality deterioration following the ongoing macroeconomic uncertainty.
The loan credit losses for 2Q2023 totalled €13 mn, compared to €11 mn for
1Q2023. Further details regarding loan credit losses are provided in Section
B.3.3 'Profit before tax and non-recurring items'.
The elevated inflation combined with the rising interest rate environment are
expected to weigh on customer behaviour. Despite these persisting pressures
there are no signs of asset quality deterioration to date. While defaults have
been limited, the additional monitoring and provisioning for sectors and
individuals 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.
Non-performing exposures
Non-performing exposures (NPEs) as defined by the European Banking Authority
(EBA) were reduced by €18 mn, or 5% in 2Q2023, compared to a net organic
reduction of €22 mn in 1Q2023, to €371 mn at 30 June 2023 (compared to
€389 mn at 31 March 2023 and €411 mn at 31 December 2022).
As a result, the NPEs account for 3.6% of gross loans as at 30 June 2023,
compared to 3.8% at 31 March 2023 and to 4.0% at 31 December 2022.
The NPE coverage ratio stands at 78% at 30 June 2023, compared to 73% at 31
March 2023 and to 69% as at 31 December 2022. When taking into account
tangible collateral at fair value, NPEs are fully covered.
Overall, since the peak in 2014, the stock of NPEs has been reduced by €14.6
bn or 98% to below €0.4 bn and the NPE ratio by 59 percentage points, from
63% to below 4%.
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
B.2.5 Loan portfolio quality (continued)
Mortgage-To-Rent Scheme ("MTR)
In July 2023, the Mortgage-to-Rent Scheme ('MTR') was approved by the Council
of Ministers and aims for the reduction of NPEs backed by primary residence
and simultaneously protect the primary residence of vulnerable borrowers. The
eligible criteria include:
· Borrowers that were non-performing as at 31 December 2021 and
remained non-performing as at 31 December 2022 with facilities backed by
primary residence with open market value up to €250k;
· Borrowers that that had a fully completed application to Estia
Scheme and were assessed as eligible but not viable with a primary residence
of up to €350k Open Market Value; and
· all applicants that were approved under Estia Scheme but their
inclusion was terminated.
The eligible applicants will be able to reside in their primary residence as
tenants and are exempted from their mortgage loan, as the state will be
covering fully the required rent on their behalf. The eligible applicants will
be able to acquire the primary residence after 5 years at a favourable price,
below the Open Market Value.
The scheme has not been launched yet; it is expected to act as another tool to
address NPEs in the Retail sector.
B.2.6 Fixed income portfolio
Fixed income portfolio amounts to €3,178 mn as at 30 June 2023, compared to
€2,747 mn as at 31 March 2023 and to €2,500 mn as at 31 December 2022,
increased by 16% on the prior quarter. The quarterly increase reflects
incremental new investments in the 2Q2023 ahead of expected maturities in
2H2023. The portfolio represents 13% of total assets (net of TLTRO III) and
comprises €2,703 mn (85%) measured at amortised cost and €475 mn (15%) at
fair value through other comprehensive income ('FVOCI').
The fixed income portfolio measured at amortised cost is held to maturity and
therefore no fair value gains/losses are recognised in the Group's income
statement or equity. This fixed income portfolio has high average rating at A1
or at Aa2 when Cyprus government bonds are excluded. The fair value of the
amortised cost fixed income portfolio as at 30 June 2023 amounts to €2,619
mn, reflecting an unrealised fair value loss of €84 mn, equivalent to c.80
bps of CET1 ratio.
B.2.7 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 2019 amount to €0.8 bn and exceed properties
on-boarded in the same period of €0.5 bn.
During the six months ended 30 June 2023, the Group completed disposals of
€71 mn (compared to €87 mn in 1H2022), resulting in a profit on disposal
of €4 mn for 1H2023 (compared to a profit of c.€8 mn for 1H2022). Asset
disposals are across all property classes, with almost 45% by value in 1H2023
relating to land.
During the six months ended 30 June 2023, the Group executed sale-purchase
agreements (SPAs) for disposals of 273 properties with contract value of €78
mn, compared to SPAs for disposals of 373 properties with contract value of
c.€99 mn for 1H2022.
In addition, the Group had a strong pipeline of €66 mn by contract value as
at 30 June 2023, of which €38 mn related to SPAs signed (compared to a
pipeline of €81 mn as at 30 June 2022, of which €41 mn related to SPAs
signed).
REMU on-boarded €6 mn of assets in 1H2023 (compared to additions of €26 mn
in 1H2022), via the execution of debt for asset swaps and repossessed
properties.
As at 30 June 2023, assets held by REMU had a carrying value of €1,010 mn,
of which €974 mn are repossessed properties (comprising properties of €946
mn classified as 'Stock of property' and €64 mn as 'Investment properties'),
compared to €1,116 mn as at 31 December 2022 (comprising properties of
€1,041 mn classified as 'Stock of property' and €75 mn as 'Investment
properties').
B. Group Financial Results - Underlying Basis (continued)
B.2. Balance Sheet Analysis (continued)
B.2.7 Real Estate Management Unit (REMU) (continued)
Assets held by REMU
Assets held by REMU (Group) 1H2023 1H2022 2Q2023 1Q2023 qoq +% yoy +%
€ mn
Opening balance 1,116 1,215 1,050 1,116 -6% -8%
On-boarded assets 6 26 4 2 85% -78%
Sales (71) (87) (30) (41) -26% -19%
Net impairment loss (23) (8) (15) (8) 77% 181%
Transfer to/from own properties (18) - 1 (19) - -
Closing balance 1,010 1,146 1,010 1,050 -4% -12%
Analysis by type and country Cyprus Greece Total
30 June 2023 (€ mn)
Residential properties 57 20 77
Offices and other commercial properties 142 14 156
Manufacturing and industrial properties 47 17 64
Hotels 22 0 22
Land (fields and plots) 462 4 466
Golf courses and golf-related property 225 0 225
Total 955 55 1,010
Cyprus Greece Total
31 December 2022 (€ mn)
Residential properties 69 21 90
Offices and other commercial properties 180 14 194
Manufacturing and industrial properties 48 19 67
Hotels 24 0 24
Land (fields and plots) 502 4 506
Golf courses and golf-related property 235 0 235
Total 1,058 58 1,116
B. Group Financial Results - Underlying Basis (continued)
B.3. Income Statement Analysis
B.3.1 Total income
€ mn 1H2023 1H2022 2Q2023 1Q2023 qoq +% yoy +%
IFRS 17(1)
Net interest income 358 145 196 162 21% 146%
Net fee and commission income 90 94 46 44 3% -4%
Net foreign exchange gains and net gains/(losses) on financial instruments 21 3 8 13 -35% -
Net insurance result 25 24 15 10 57% 4%
Net gains/(losses) from revaluation and disposal of investment properties and 5 7 3 2 99% -32%
on disposal of stock of properties
Other income 12 9 9 3 218% 37%
Non-interest income 153 137 81 72 14% 12%
Total income 511 282 277 234 19% 81%
Net Interest Margin (annualised) 3.17% 1.32% 3.43% 2.91% 52 bps 185 bps
Average interest earning assets 22,781 22,235 22,903 22,638 1% 2%
(€ mn)
1. On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout are on a restated basis unless otherwise stated. For further
details, please refer to Note 3.3.1 of the Consolidated Condensed Interim
Financial Statements in the Interim Financial Report 2023.
p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1
percentage point
Net interest income (NII) for 1H2023 amounted to €358 mn compared to €145
mn for 1H2022, up 146% yoy driven mainly by the repricing of loans and liquids
to higher rates, the limited increase in funding costs and the increase of
fixed income portfolio, notwithstanding the foregone NII on the NPE sale Helix
3 portfolio (c.€8 mn in 1H2022) and end of TLTRO favourable terms (c.€7 mn
in 1H2022).
Net interest income (NII) for 2Q2023 amounted to €196 mn compared to €162
mn for 1Q2023, up 21% qoq, attributable to the rising interest rates and the
continued low deposit pass-through.
Quarterly average interest earning assets (AIEA) for 1H2023 amounted to
€22,781 mn, up 2% yoy driven by the increase in liquid assets mainly as a
result of the increase in fixed income portfolio and deposits by c.€1.3 bn
yoy and €0.7 bn yoy respectively, partly offset by the repayment of €1.0
bn TLTRO funding in December 2022. Quarterly average interest earning assets
for 2Q2023 remained broadly flat on the prior quarter.
Net interest margin (NIM) for 1H2023 amounted to 3.17% (compared to 1.32% for
1H2022), up 185 bps yoy driven by interest rate rises and the increase in
average interest earning assets. Net interest margin (NIM) for 2Q2023 stood at
3.43% (compared to 2.91% for 1Q2023) up 52 bps supported by interest rate
rises.
Non-interest income for 1H2023 amounted to €153 mn (compared to €137 mn
for 1H2022, up 12% yoy) comprising net fee and commission income of €90 mn,
net foreign exchange gains and net gains/(losses) on financial instruments of
€21 mn, net insurance result of €25 mn, net gains/(losses) from
revaluation and disposal of investment properties and on disposal of stock of
properties of €5 mn and other income of €12 mn. The yoy increase is mainly
driven by higher net foreign exchange gains and net gains/(losses) on
financial instruments.
Non-interest income for 2Q2023 amounted to €81 mn (compared to €72 mn for
1Q2023, up 14% qoq) comprising net fee and commission income of €46 mn, net
foreign exchange gains and net gains/(losses) on financial instruments of €8
mn, net insurance result of €15 mn, net gains/(losses) from revaluation and
disposal of investment properties and on disposal of stock of properties of
€3 mn and other income of €9 mn. The qoq increase mainly relates to higher
net insurance result as well as a non-recurring insurance receivable of c.€5
mn included in other income.
Net fee and commission income for 1H2023 amounted to €90 mn (compared to
€94 mn for 1H2022, down 4% yoy); when disregarding the impact of the
liquidity fees and NPE sale-related servicing fee, net fee and commission
income was up 8% yoy, reflecting the introduction of a revised price list in
February 2022 and higher net credit card commissions.
Net fee and commission income for 2Q2023 amounted to €46 mn, up 3% qoq
mainly due to higher net credit card commissions driven by higher volume of
transactions.
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
€21 mn for 1H2023 (comprising net foreign exchange gains of €16 mn and net
gains on financial instruments of €5 mn), compared to €3 mn for 1H2022,
reflecting higher foreign exchange income through FX swaps and higher net
gains on financial instruments.
Net foreign exchange gains and net gains/(losses) on financial instruments
amounted to €8 mn for 2Q2023, compared to €13 mn for 1Q2023, down 35% qoq,
due to higher net revaluation gains on financial instruments in the previous
quarter. Net foreign exchange gains and net gains/(losses) on financial
instruments are considered volatile profit contributors.
Net insurance result amounted to €25 mn for 1H2023, compared to €24 mn for
1H2022, up 4% yoy.
Net insurance result amounted to €15 mn for 2Q2023, compared to €10 mn for
1Q2023, up 57% qoq. The quarterly increase is attributed to the improved
experience variance (life insurance) and lower claims.
Net gains/(losses) from revaluation and disposal of investment properties and
on disposal of stock of properties for 1H2023 amounted to €5 mn (comprising
net gains on disposal of stock of properties of €4 mn, and net gains from
revaluation of investment properties of €1 mn), compared to €7 mn for
1H2022. REMU profit remains volatile.
Net gains/(losses) from revaluation and disposal of investment properties and
on disposal of stock of properties for 2Q2023 amounted to €3 mn (comprising
net gains on disposal of stock of properties of €2 mn, and net gains from
revaluation of investment properties of €1 mn), compared to €2 mn for
1Q2023.
Total income amounted to €511 mn for 1H2023 (compared to €282 mn for
1H2022, up 81% yoy), and to €277 mn for 2Q2023 (compared to €234 mn for
1Q2023, up 19% qoq), mainly driven by strong growth in net interest income, as
explained above.
B. Group Financial Results - Underlying Basis (continued)
B.3. Income Statement Analysis (continued)
€ mn 1H2023 1H2022 2Q2023 1Q2023 qoq +% yoy +%
IFRS 17(1)
Staff costs (93) (95) (47) (46) 4% -2%
Other operating expenses (69) (69) (35) (34) 1% -1%
Total operating expenses (162) (164) (82) (80) 3% -2%
Special levy on deposits and other levies/contributions (18) (17) (7) (11) -36% 10%
Total expenses (180) (181) (89) (91) -2% -1%
Cost to income ratio 35% 64% 32% 39% -7 p.p. -29 p.p.
Cost to income ratio excluding special levy on deposits and other 32% 58% 29% 34% -5 p.p. -26 p.p.
levies/contributions
1. On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout are on a restated basis unless otherwise stated. For further
details, please refer to Note 3.3.1 of the Consolidated Condensed Interim
Financial Statements in the Interim Financial Report 2023. p.p. = percentage
points, bps = basis points, 100 basis points (bps) = 1 percentage point
B.3.2 Total expenses
Total expenses for 1H2023 were €180 mn (compared to €181 mn for 1H2022,
down 1% yoy), 52% of which related to staff costs (€93 mn), 38% to other
operating expenses (€69 mn) and 10% to special levy on deposits and other
levies/contributions (€18 mn). The yoy decrease mainly relates to the
reduction in staff costs. Total expenses for 2Q2023 were €89 mn (compared to
€91 mn for 1Q2023, down 2% qoq), mainly driven by the 36% decrease in
special levy on deposits and other levies/contributions.
Total operating expenses amounted to €162 mn for 1H2023 (compared to €164
mn for 1H2022, down 2% yoy), as benefits from FY2022 efficiency actions
continue to partly offset wage and inflationary pressures. Total operating
expenses amounted to €82 mn for 2Q2023 (compared to €80 mn for 1Q2023, up
3% qoq).
Staff costs for 1H2023 were €93 mn (compared to €95 mn for 1H2022, down by
2% yoy) reflecting the savings of the Voluntary Staff Exit Plan (VEP) that
took place in 3Q2022, partially offset by inflationary pressures and the
accrual of termination benefits cost of c.€3 mn. In addition, staff costs
for 1H2023 include c.€3.8 mn staff cost rewards (variable pay), namely the
Short-Term Incentive Plan and the Long-Term Incentive Plan. The Short-Term
Incentive Plan involves variable remuneration to selected employees and will
be driven by both, delivery of the Group's strategy as well as individual
performance. Staff costs for 2Q2023 were €47 mn, up 4% qoq attributed mainly
to the accrued staff termination benefits cost.
During December 2022 the Group has granted to eligible employees share awards
under a long-term incentive plan ("2022 LTIP" or the "2022 Plan"). The 2022
Plan involves the granting of share awards and is driven by scorecard
achievement, with measures and targets set to align pay outcomes with the
delivery of the Group's strategy. The employees eligible for the 2022 LTIP are
the members of the Extended EXCO. The 2022 LTIP stipulates that performance
will be measured over a 3 year period and financial and non-financial
objectives to be achieved (driven by both delivery of the Group's strategy as
well as individual performance). At the end of the performance period, the
performance outcome will be used to assess the percentage of the awards that
will vest.
These shares will then normally vest in six tranches, with the first tranche
vesting after the end of the performance period and the last tranche vesting
on the fifth anniversary of the first vesting date.
In July 2022 the Group completed a VEP which led to the reduction of the
Group's full-time employees by 16%, at a total cost of €101 mn, recorded in
the consolidated income statement in 3Q2022. The gross annual savings were
estimated at c.€37 mn or 19% of staff costs with a payback period of 2.7
years. The estimated savings of the VEP are expected to be partially offset by
the renewal of the collective agreement in 2023.
As at 30 June 2023, the Group employed 2,902 persons compared to 2,883 persons
as at 31 March 2023 and to 2,889 persons as at 31 December 2022.
Other operating expenses for 2Q2023 amounted to €35 mn, broadly flat qoq and
totaled €69 mn for 1H2023, broadly flat yoy.
B. Group Financial Results - Underlying Basis (continued)
B.3. Income Statement Analysis (continued)
B.3.2 Total expenses (continued)
Special levy on deposits and other levies/contributions for 1H2023 amounted to
€18 mn compared to €17 mn for 1H2022, up 10% yoy, driven mainly by the
increase of deposits of €0.7 bn yoy. Special levy on deposits and other
levies/contributions for 2Q2023 amounted to €7 mn down by 36% qoq, due to
the €4 mn contribution of the Bank to the Deposit Guarantee Fund (DGF)
relating to 1H2023 which was recorded in 1Q2023 (in line with IFRSs).
The cost to income ratio excluding special levy on deposits and other
levies/contributions for 1H2023 was 32% compared to 58% for 1H2022, down 26
p.p. yoy. The cost to income ratio excluding special levy on deposits and
other levies/contributions for 2Q2023 was 29% compared to 34% for 1Q2023, down
5 p.p. qoq. The qoq and yoy decrease is driven mainly by the higher total
income.
B. Group Financial Results - Underlying Basis (continued)
B.3. Income Statement Analysis (continued)
B.3.3 Profit before tax and non-recurring items
€ mn 1H2023 1H2022 2Q2023 1Q2023 qoq+% yoy +%
IFRS 17(1)
Operating profit 331 101 188 143 32% 228%
Loan credit losses (24) (23) (13) (11) 18% 6%
Impairments of other financial and non-financial assets (30) (13) (19) (11) 68% 128%
Provisions for pending litigations, regulatory and other matters (net of (14) (1) (8) (6) 24% -
reversals)
Total loan credit losses, impairments and provisions (68) (37) (40) (28) 39% 86%
Profit before tax and non-recurring items 263 64 148 115 30% -
Cost of risk 0.48% 0.43% 0.51% 0.44% 7 bps 5 bps
1. On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout are on a restated basis unless otherwise stated. For further
details, please refer to Note 3.3.1 of the Consolidated Condensed Interim
Financial Statements in the Interim Financial Report 2023. p.p. = percentage
points, bps = basis points, 100 basis points (bps) = 1 percentage point
Operating profit for 1H2023 amounted to €331 mn, compared to €101 mn for
1H2022 (up 228% yoy). Operating profit for 2Q2023 amounted to €188 mn,
compared to €143 mn for 1Q2023 (up 32% qoq). The qoq and yoy increase is
driven mainly by the significant increase in net interest income.
Loan credit losses for 1H2023 were €24 mn, compared to €23 mn for 1H2022
(up 6% yoy). Loan credit losses for 2Q2023 were €13 mn, compared to €11 mn
for 1Q2023.
Cost of risk for 1H2023 was 48 bps, compared to a cost of risk of 43 bps for
1H2022 (up 5 bps). Cost of risk for 2Q2023 was 51 bps, compared to a cost of
risk of 44 bps for 1Q2023, up 7 bps and includes 26 bps (c.€ 7mn) management
overlays on Stage 1 and Stage 2 exposures to capture conservative assumptions
as well as 17 bps (c.€4 mn) one-off charge to a specific customer group in
Stage 3.
At 30 June 2023, 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 and
Explanations' for definition) totalled €288 mn (compared to €282 mn at 31
March 2023 and to €282 mn at 31 December 2022) and accounted for 2.8% of
gross loans (compared to 2.7% of gross loans for 31 March 2023 and to 2.8% of
gross loans for 31 December 2022).
Impairments of other financial and non-financial assets for 1H2023 amounted to
€30 mn, compared to €13 mn for 1H2022, up 128% yoy, driven mainly by
higher impairments on specific, large, illiquid REMU stock properties.
Impairments of other financial and non-financial assets for 2Q2023 amounted to
€19 mn compared to €11 mn for 1Q2023, up 68% qoq.
Provisions for pending litigations, regulatory and other matters (net of
reversals) for 1H2023 amounted to €14 mn, compared to €1 mn for 1H2022.
The yoy increase is driven by the revised approach on pending litigation fees
and provisions relating to other matters in relation to the run-down and
disposal of legacy and non-core operations of the Group. Provisions for
pending litigations, regulatory and other matters (net of reversals) for
2Q2023 amounted to €8 mn compared to €6 mn for 1Q2023.
Profit before tax and non-recurring items for 1H2023 totalled €263 mn,
compared to €64 mn for 1H2022. Profit before tax and non-recurring items for
2Q2023 amounted to €148 mn compared to €115 mn for 1Q2023 (up 30% 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 1H2023 1H2022 2Q2023 1Q2023 qoq +% yoy +%
IFRS 17(1)
Profit before tax and non-recurring items 263 64 148 115 30% -
Tax (40) (11) (22) (18) 24% 256%
Profit attributable to non-controlling interests (1) (1) 0 (1) -36% 37%
Profit after tax and before non-recurring items (attributable to the owners of 222 52 126 96 32% -
the Company)
Advisory and other transformation costs - organic (2) (5) (1) (1) 11% -57%
Profit after tax - organic (attributable to the owners of the Company) 220 47 125 95 32% -
Provisions/net profit/(loss) relating to NPE sales - 0 - - - -
Restructuring and other costs relating to NPE sales - (1) - - - -100%
Restructuring costs - Voluntary Staff Exit Plan (VEP) - (3) - - - -100%
Profit after tax (attributable to the owners of the Company) 220 43 125 95 33% -
1. On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout are on a restated basis unless otherwise stated. For further
details, please refer to Note 3.3.1 of the Consolidated Condensed Interim
Financial Statements in the Interim Financial Report 2023. p.p. = percentage
points, bps = basis points, 100 basis points (bps) = 1 percentage point
The tax charge for 2Q2023 is €22 mn compared to €18 mn for 1Q2023, and
totalled to €40 mn for 1H2023, compared to
€11 mn for 1H2022.
Profit after tax and before non-recurring items (attributable to the owners of
the Company) for 1H2023 is €222 mn, compared to €52 mn for 1H2022. Profit
after tax and before non-recurring items (attributable to the owners of the
Company) for 2Q2023 is €126 mn, compared to €96 mn for 1Q2023.
Advisory and other transformation costs - organic for 1H2023 are €2 mn,
compared to €5 mn for 1H2022, down 57% yoy. Advisory and other
transformation costs - organic for 2Q2023 are €1 mn, broadly flat qoq.
Profit after tax arising from the organic operations (attributable to the
owners of the Company) for 1H2023 amounted to €220 mn, compared to €47 mn
for 1H2022. Profit after tax arising from the organic operations (attributable
to the owners of the Company) amounted to €125 mn for 2Q2023, compared to
€95 mn for 1Q2023 (up 32% qoq).
Following completion of Helix 3 project, there are no amounts recognised for
provisions/net profit/(loss) relating to NPE sales for 1H2023.
Restructuring and other costs relating to NPE sales for 1H2023 was nil
compared to €1 mn for 1H2022 (relating to the agreements for the sale of
portfolios of NPEs). Restructuring and other costs relating to NPE sales for
2Q2023 was nil, flat qoq.
Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) of €3 mn
in 1H2022 related to a Voluntary Staff Exit Plan (VEP), through one of the
Group's subsidiaries of which a small number of its employees were approved to
leave.
Profit after tax attributable to the owners of the Company for 1H2023 amounts
to €220 mn, corresponding to a ROTE of 24.0%, compared to €43 mn for
1H2022, corresponding to a ROTE of 4.9%. Profit after tax attributable to the
owners of the Company for 2Q2023 amounts to €125 mn, compared to €95 mn
for 1Q2023 (up 33% qoq). ROTE stands at 26.6% for 2Q2023, compared to 21.3%
for 1Q2023.
C. Operating Environment
The Cyprus economy recovered strongly from the Covid-induced recession of 2020
and succeeded in improving its credit and macroeconomic profile significantly
in the period that followed. The general government budget returned to a
surplus position and the public debt dropped sharply relative to GDP in
2021-2022. In the banking sector banks restructured their balance sheets and
reduced their non-performing exposures significantly, while at the same time
increasing their capital buffers and raising their profitability. The growth
outlook remains positive over the medium term supported by Next Generation EU
funds.
First quarter growth for 2023, was 3.4% according to the Cyprus Statistical
Service, which was largely as expected. For the year the growth forecast is
around 2.8% according to the Ministry of Finance, and the economy is thus
expected to weaken somewhat in the second half of the year. This follows
strong growth of 6.6% and 5.6% respectively in 2021-2022 driven by a strong
recovery in tourism toward pre pandemic levels, and also strong growth in
other services sectors.
Employment growth remained strong in 2021-2022 averaging 1.2% and 2.8%
respectively following a 1% drop in 2020. Productivity growth was particularly
strong in the period immediately after the Covid recession and started to slow
in more recent quarters. In the first quarter 2023, the volume of employment
increased by 2.1% and the unemployment rate dropped to 6.7% seasonally
adjusted, from 7.1% in the fourth quarter 2022.
Inflation measured by the Harmonised Index of Consumer Prices, was 8.1% in
2022 compared with 8.4% in the Euro area. Inflation peaked in July 2022 at
10.6% and has been decelerating since, reaching 3.6% in May 2023, 2.8% in June
2023 and 2.4% in July 2023 (estimate). This was driven by the non-core
components of energy and food, while core inflation, defined as total index
less energy and food, was stickier and was 4% in June 2023. In the first half
of 2023, total harmonised inflation was 4.9% and consisted of 4.6 percentage
points of core inflation.
Harmonised inflation is expected to moderate further but only gradually.
Without energy prices spiking unexpectedly, headline inflation is projected at
3.2% in 2023 in Cyprus and 2.5% in 2024 according to the Ministry of Finance
(Strategic Framework for Fiscal Policy 2024-2026).
Tourist activity continued to rebound in the first half of the year after a
strong performance in 2022. Arrivals increased by 32% in January-June 2023,
from a year earlier, and corresponded to 99% of arrivals in the same period of
2019. Likewise, receipts increased by 34% in January-May 2023, from the same
period a year earlier and exceeded receipts from the same period in 2019 by
12%.
Private consumption remains strong and retail sales picked up in the first
four months of 2023 up by 8% year on year excluding vehicles. This was driven
by all retail categories particularly food and beverages, non-food products,
textiles and clothing, and computers and telecommunications equipment.
Public finances continued to improve following significant advances in
2021-2022. The budget deficit narrowed to 2.0% of GDP in 2021, from a deficit
of 5.8% of GDP in 2020 and turned into a surplus of 2.1% of GDP in 2022. Gross
debt dropped from 101.2% of GDP in 2021 to 86.5% in 2022. In the first quarter
of 2023, gross debt to GDP dropped further to 84.0%. In the first quarter of
the year the budget surplus increased to €329 million from €240 million in
the first quarter of 2022. This was driven by considerable increases in direct
and indirect tax revenue and in social contributions which were influenced by
the inflation driven increases in the respective tax bases.
Interest payments declined to 1.5% of GDP in 2022 or 3.6% of general
government revenue indicating that debt affordability remains favourable. Debt
affordability will remain favourable in the medium term as the government
still refinances maturing debt at lower cost while the cash buffer allows the
government a high degree of flexibility with regards to funding.
In the banking sector, pure new business lending which excludes renegotiated
amounts, slowed in January-April 2023, compared to the same period of last
year but picked up in May. In total for the period, January-May 2023, pure new
loans were marginally higher than pure new loans in the same period of last
year, with a difference in their composition. This year there were more new
loans extended to non-financial companies, in comparison, and less mortgage
lending, primarily due to higher interest rates.
Banks managed to weather the pandemic crisis well, with their liquidity and
capital buffers intact. Non-performing exposures (NPEs) continued their
declining trend following the sale of packages by the two largest banks. Total
NPEs at the end of April 2023, were €2.2 bn or 9% of gross loans.
Respectively, the NPE ratio in the non-financial companies' segment was 7.7%
and that of households was 11.6%. About 44.8% of total NPEs are restructured
facilities and the coverage ratio was 54.2%.
Private indebtedness measured by loans to residents on bank balance sheets,
excluding the government, dropped to €20.9 bn at the end of June 2023, or
about 77% of GDP. In comparison, private indebtedness peaked at the end of
December 2012, amounted to €53 bn or about three times GDP.
The federal reserve in the United States and the European Central Bank, in
their July 2023 meetings, raised their policy rates by 25 bps. The federal
reserve started hiking in March 2022 and the ECB followed in July 2022. The
federal funds rate now stands at 5.25-5.5% target range, and the ECB's Minimum
Refinance Operations rate stands at 4.25%.
C. Operating environment (continued)
Cyprus' current account deficit narrowed from 10.1% of GDP in 2020 to 6.8% in
2021 before deteriorating to 8.8% of GDP in 2022. The current account deficit
will narrow modestly according to the IMF, in 2023-2024, to 7.8% and 7.7% of
GDP respectively. The current account deficit will remain higher than
pre-pandemic levels in the medium term, partly due to strong import growth
linked to higher energy prices and EU investment plans, which will weigh on
the trade balance. The size of the country's deficits is partly structural, a
consequence of special purpose vehicles domiciled in Cyprus.
The outlook remains positive. The government debt ratio will continue to
decline while debt affordability metrics will remain strong. Growth in the
recent period has been broadly based and Cyprus' economic resilience has been
stronger than expected vis-à-vis the exogenous shocks of Russia's invasion of
Ukraine and also the pandemic. Solid medium-term GDP growth prospects are
supported by the European Union's Next Generation EU package of grants and
loans.
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.
Fitch Ratings has affirmed Cyprus' Long-Term Foreign-Currency Issuer Default
Rating at 'BBB' with a Stable Outlook, in June 2023, following its upgrade
last March. The affirmation reflects the improvement in public finances and
the government indebtedness as well as strong growth in GDP, the resiliency of
the Cypriot economy to external shocks and the improvement in the Banking
sector in asset quality.
In March 2023, DBRS Morningstar confirmed the Republic of Cyprus' Long-Term
Foreign and Local Currency - Issuer Ratings at BBB (low) and maintained the
trend Stable. The affirmation is supported by a stable political environment,
the government's sound fiscal and economic policies, and the favourable
government debt profile. The stable outlook balances recent favourable fiscal
dynamics against downside risks for the economic outlook.
In September 2022, S&P Global Ratings upgraded Cyprus' investment grade
rating of BBB and has changed the outlook from positive to stable. The upgrade
reflects the resiliency of the Cypriot economy to recent external shock
(including the COVID-19 pandemic). The stable outlook balances risks from the
crisis in Ukraine and the economy's diversified structure and the expectation
that the government's fiscal position will continue to improve. The credit
rating was later reviewed and affirmed in March 2023.
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 ratings and positive outlook were affirmed again
in credit opinion updates published in April 2023 and June 2023. 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 a credit assessment that was published
in December 2022, and updated in June 2023, Moody's investors service affirmed
a new Cyprus' credit profile.
D. Strategy and Outlook
The vision of the Group is to create a lifelong partnership with its
customers, guiding and supporting them in an evolving world.
The strategic pillars of the Group are:
· Grow revenues in a more capital efficient way; by enhancing
revenue generation via growth in high quality new lending, diversification to
less capital intensive banking and other financial services (such as insurance
and the digital economy) as well as prudent management of the Group's
liquidity
· Achieve a lean operating model; by ongoing focus on efficiency
through further automations facilitated by digitisation
· Maintain robust asset quality; by maintaining high quality new
lending via strict underwriting criteria, normalising cost of risk and
reducing other impairments
· Enhance organisational resilience and ESG (Environmental, Social
and Governance) agenda; by leading the transition of Cyprus to a sustainable
future and building a forward-looking organisation embracing ESG in all
aspects.
The Group's transformation into a strong, diversified, well-capitalised and
sustainably profitable banking and financial services organisation lay the
foundations to create the conditions for higher returns. Capitalising on this
transformation, the Group has revised its financial targets during the
Investor Update Event in June 2023 and raised its Return on Tangible Equity
(ROTE) guidance for 2023 and 2024 to over 17% and over 14% respectively, from
over 13% per annum (as previously announced on 20 February 2023). The key
driver of the upgrade is the revised expectation for net interest income,
primarily to reflect higher rates for longer.
The structure of the Group's balance sheet is very liquid with almost half of
its assets held as cash balances with central banks and fixed income
portfolio, demonstrating that it is well-positioned to benefit from rising
interest rates. Factoring in the expectations for the evolution of interest
rates at the time (with the ECB deposit facility rate averaging 3% for 2023
and 3.1% for 2024), the net interest income guidance was upgraded and is
expected to exceed €650 mn for 2023 and to fall modestly to over €625 mn
for 2024. For 2025 net interest income is expected to be lower than 2024
reflecting a lower projected ECB deposit facility rate of 2.5%. These net
interest income targets incorporate assumptions of:
· gradual increase in time and notice deposit pass-through to c.50%
by June 2024 (previously assumed by December 2023)
· gradual change in deposit mix towards time and notice deposits to
c.50% by December 2024 (previously assumed by December 2023) and;
· higher wholesale funding costs.
The Group is expected to continue to gradually deploy excess liquidity to
further expand the fixed income portfolio. Over the recent quarters the Group
has increased its fixed income portfolio reflecting the improved market
conditions, whilst maintaining a low risk, diversified, highly rated
portfolio. Going forward, it is expected to prudently grow the fixed income
portfolio to reach c.15% of the Group's total assets (net of TLTRO III) in
order to be broadly in line with the average of EU peers (excluding Greek
banks).
Separately, the Group continues to focus on improving revenues through
multiple less capital-intensive initiatives, with a focus on net fee and
commission income, insurance and non-banking activities, enhancing the Group's
diversified business model further. Non-interest income is an important
contributor to the Group's profitability and historically covered on average
around 80% of its total operating expenses. In 2023 net fee and commission
income is negatively affected by the termination of liquidity fees in December
2022 and an NPE sale-related servicing fee in mid-February 2023. Adjusting for
these items, net fee and commission income is expected to rise by c.3% per
annum for 2022-2024, broadly in line with projected economic growth, driven by
cross-selling and growth in capital-light sales.
The Group's insurance companies, EuroLife Ltd (Eurolife) and Genikes Insurance
of Cyprus Ltd (GI) are respectively leading players in the life and general
insurance business in Cyprus, and have been providing a recurring and
improving income, further diversifying the Group's income streams. In the life
insurance business, further growth is expected to be driven through the
pursuit of new market segments, cross-selling opportunities in the
occupational pensions market and other appealing products and widening the
customer base by leveraging on its bancassurance model and strengthening
further its agency force. In the general insurance business, further growth is
expected by growing the bancassurance potential leveraging on the Bank's
strong market share, promoting and enhancing the digital sales through the
Bank's mobile application, exploiting synergies with the life insurance agency
force and pursuing profitable segments and products. In this respect, regular
income for the life insurance business is expected to rise by c.6% per annum
for 2022-2025 whilst premium income for the non-life insurance business is
expected to rise by over 8% per annum for the same period.
D. Strategy and Outlook (continued)
Finally, there is additional revenue upside coming from the Digital Economy
Platform (Jinius) which aims to generate new revenue sources over the medium
term, leveraging on the Bank's market position, knowledge and digital
infrastructure.
The significant improvement in the Group's revenues (driven primarily from the
expansion of net interest income) will effectively lead to an improvement in
the Group's operating efficiency. The cost to income ratio excluding special
levy on deposits or other levies/contributions is expected to remain below 40%
for 2023 and then to increase modestly to c.40% for 2024, despite inflationary
pressures. There is some upward pressure on costs from investments in
transformation and digitisation as well as inflationary pressure on staff
costs arising from the renewal of the collective agreement and variable
remuneration to selected employees driven by the delivery of the Group's
strategy and individual performance.
In terms of asset quality, the cost of risk target of 50-80 bps for 2023 is
reiterated to weather the ongoing macroeconomic and geopolitical
uncertainties, and then to normalise to c.40-50 bps over the medium-term.
Additionally, the NPE ratio is expected to remain below 4% for 2023 and 2024
and to fall modestly to below 3% for 2025. To achieve this, the Group aims to
maintain high quality of new lending with strict underwriting standards and to
prevent asset quality deterioration. Currently, there are no signs of asset
quality deterioration.
Since 2019, the Real Estate Management Unit (REMU) stock has been consistently
reducing, with properties sold exceeding the book value of properties
acquired, while inflows remain substantially reduced following balance sheet
de-risking. Going forward, REMU sales are expected to continue at a similar
pace, with expected inflows to remain at low levels. Therefore, REMU portfolio
is expected to halve to €0.5 bn by 2025.
Overall, these returns are expected to increase the Group's equity base,
corresponding to strong organic capital generation of between 200 and 250 bps
per annum (pre distributions) for 2023-2025, facilitating strong capital
ratios and healthy capital buffers. In summary, the Group expects to deliver a
ROTE of over 17% for 2023 and over 14% for 2024 (which corresponds to a ROTE
of over 17% based on 15% CET1 ratio). For 2025, the Group expects to generate
a ROTE of over 13% which is equivalent to over 16% based on a 15% CET1 ratio,
reflecting lower interest rate assumptions. By 31 December 2025, the Group
expects its CET1 ratio to stand at c.19%, after deducting projected dividends
(which remain subject to regulatory approval) per its dividend distribution
policy.
The Group's aim to provide sustainable shareholder returns is reiterated.
Dividend payments are expected to build prudently and progressively over time,
towards a payout ratio in the range of 30-50% of the Group's adjusted
recurring profitability.
E. Business Overview
Credit ratings
The Group's financial performance is highly correlated to the economic and
operating conditions in Cyprus. In May 2023 Moody's Investors Service upgraded
the Bank's long-term deposit rating to Ba1 from Ba2, maintaining the positive
outlook. The main drivers for this upgrade are the continued strengthening of
the Bank's asset quality and its improving profitability prospects that
continue to reduce risks to its capital. In April 2023, S&P Global Ratings
affirmed the long-term issuer credit rating of the Bank at BB- and revised the
outlook to positive from stable. The revised outlook reflects the likelihood
of further progress in Cyprus' operating environment, in particular materially
easing funding risks. In December 2022, Fitch Ratings upgraded the Bank's
long-term issuer default rating to B+ from B-, whilst maintaining the positive
outlook. The two-notch upgrade reflects improved Bank's asset quality,
supported by the completion of Project Helix 3 together with the organic
reduction of impaired assets. The upgrade is also underpinned by Fitch's view
of the resilience of the Cypriot economy, even in light of growing economic
uncertainties.
Financial performance
The Group is a leading, financial and technology hub in Cyprus. In 2022 the
Group completed its transformation into a diversified and well-capitalised
organisation with sustainably profitable banking and other financial services.
This was marked by the resumption of dividend payments after 12 years, a
significant milestone, as it represents a new chapter for the Group.
In April 2023, the Company obtained the approval of the European Central Bank
to pay a dividend out of FY2022 profitability. Following this approval, the
Board of Directors of the Company recommended to the shareholders for approval
at the AGM a final Dividend of €0.05 per ordinary share in respect of
earnings for the year ended 31 December 2022. This proposed Dividend was
declared at the AGM on 26 May 2023, amounted to €22.3 mn in total and was
equivalent to a payout ratio of 14% of the FY2022 adjusted recurring
profitability or 31% based on FY2022 profit after tax (as reported in 2022
Annual Financial Report). The dividend was paid in cash on 16 June 2023.
Additionally, the Board of Directors approved the Group's dividend policy. The
Group aims to provide a sustainable return to shareholders. Dividend payments
are expected to build prudently and progressively over time, towards a payout
ratio in the range of 30-50% of the Group's profitability after tax, before
non-recurring items, adjusted for AT1 distributions (referred to as "adjusted
recurring profitability"). The dividend policy takes into consideration market
conditions as well as the outcome of capital and liquidity planning.
During the quarter ended 30 June 2023, the Group's financial performance was
strong, with well-diversified revenues and disciplined cost containment,
despite inflationary pressures. Overall, the Group generated a ROTE of 26.6%
compared to 21.3% in the previous quarter, underpinned mainly by the interest
rate rises and simultaneously a well-managed deposit pass-through.
On 8 June 2023, the Company presented and discussed an update of the Group's
outlook at the Investor Update event in London. During the Investor Update
event, the Company has presented its updated 2023 and 2024 financial targets
and raised its ROTE guidance to over 17% and over 14% respectively, from over
13% per annum (as previously announced on 20 February 2023). The key driver of
the upgrade is the revised expectation for net interest income, primarily to
reflect higher rates for longer. In a normalised interest rate environment,
the Company expects to generate ROTE of over 13% by 2025. These returns expect
to increase the Group's equity base, corresponding to a strong organic capital
generation of c.200-250 bps per annum (pre distributions) for 2023-2025. By 31
December 2025, the Group expects its CET1 ratio to stand at c.19%, after
deducting projected dividend distributions, per its dividend distribution
policy. Finally, the Group's dividend policy has been reiterated. Therefore,
dividend payments are expected to build prudently and progressively over time,
towards a payout ratio in the range of 30-50% of the Group's adjusted
recurring profitability.
Favourable interest rate environment
The structure of the Group's balance sheet is geared towards higher interest
rates. As at 30 June 2023, cash balances with ECB (excluding TLTRO III of
c.€2.0 bn) amounted to c.€7.1 bn, reflecting immediate benefit from
interest rate rises. The repricing of the reference rates gradually benefits
the interest income on loans, as over 95% of the Group's loan portfolio is
variable rate as at 30 June 2023. The net interest income for 1H2023 stood at
€358 mn, more than double compared to 1H2022. This increase is underpinned
by faster and steeper than expected interest rate rises as well as a resilient
low deposit pass-through.
In July 2023, ECB set the remuneration of minimum reserves (MRR) at 0%. The
impact on foregone NII is c.€7 mn p.a. at an annual depo rate of 3.75%.
Growing revenues in a more capital efficient way
The Group remains focused on growing revenues in a more capital efficient way.
The Group aims to continue 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.
E. Business Overview (continued)
Growing revenues in a more capital efficient way (continued)
The Group has continued to provide high quality new lending in 1H2023 via
prudent underwriting standards. Growth in new lending in Cyprus has been
focused on selected industries in line with the Bank's target risk profile.
During 1H2023, new lending remained strong at €1,118 mn, mainly driven by
strong demand for business loans. Gross performing loan book remained broadly
flat yoy to €9.9 bn, as ongoing repayments offset new lending. Performing
loan book is expected to remain broadly flat in 2023.
Fixed income portfolio amounts to €3,178 mn as at 30 June 2023, compared to
€2,747 mn as at 31 March 2023 and to €2,500 mn as at 31 December 2022,
increased by 16% on the prior quarter. The quarterly increase reflects
incremental new investments in 2Q2023 ahead of expected maturities in 2H2023.
The portfolio represents 13% of total assets (excluding TLTRO III) and
comprises €2,703 mn (85%) measured at amortised cost and €475 mn (15%) at
fair value through other comprehensive income ('FVOCI').
The fixed income portfolio measured at amortised cost is held to maturity and
therefore no fair value gains/losses are recognised in the Group's income
statement or equity. This fixed income portfolio has high average rating at A1
or at Aa2 when Cyprus government bonds are excluded. The fair value of the
amortised cost fixed income portfolio as at 30 June 2023 amounts to €2,619
mn, reflecting an unrealised fair value loss of €84 mn, equivalent to c.80
bps of CET1 ratio.
Separately, the Group focuses to continue improving revenues 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. During the first six months of 2023, non-interest income
(excluding the non-recurring insurance receivable of c.€5 mn) amounted to
€148 mn, remaining an important contributor to the Group's profitability,
and contributing to c.90% of the Group's total operating expenses. Going
forward, non-interest income is expected to continue covering c.80% of the
Group's total operating expenses.
In 2023, net fee and commission income is negatively affected by the
termination of liquidity fees in December 2022 and an NPE sale-related
servicing fee in mid-February 2023. As a result, net fee and commission income
was reduced by 4% yoy in the first half 2023 to €90 mn.
Net fee and commission income is enhanced by transaction fees from the Group's
subsidiary, JCC Payment Systems Ltd (JCC), a leading player in the card
processing business and payment solutions, 75% owned by the Bank. JCC's net
fee and commission income contributed 9% of total non-interest income and
amounted to €14 mn in 1H2023, up 11% yoy, backed by strong transaction
volume.
The Group's insurance companies, EuroLife and GI are respectively leading
players in the life and general insurance business in Cyprus, and have been
providing recurring and improving income, further diversifying the Group's
income streams. The net insurance result for 1H2023 contributed 16% of
non-interest income and amounted to €25 mn, up 4% yoy; insurance companies
remain valuable and sustainable contributors to the Group's profitability. On
1 January 2023, the Group adopted IFRS 17, retrospectively, which impacts the
profit recognition for insurance contracts by phasing of profit over their
lifetime compared to recognising profit substantially up-front under IFRS 4.
The new accounting standard does not change the economics of the insurance
business and decreases the volatility of the Group's insurance companies
profitability. For further details please refer to Note 3.3.1 of the
Consolidated Condensed Interim Financial Statements in the Interim Financial
Report 2023.
Finally, the Group through the Digital Economy Platform (Jinius) ('the
Platform') aims to support the national digital economy by optimising
processes in a cost-efficient way, allow the Bank to strengthen its client
relationships, create cross-selling opportunities as well as to generate new
revenue sources over the medium term, leveraging on the Bank's market
position, knowledge and digital infrastructure. The first Business-to-Business
services are already in use by clients and include electronic invoicing,
remittance management, tenders management and ecosystem management. The next
key milestone is the launch of the first Business-to-Consumer service, a
product marketplace, driving opportunities in lifestyle banking and beyond.
Currently, over 1,600 companies are registered in the platform.
Lean operating model
Striving for a lean operating model is a key strategic pillar for the Group in
order to deliver shareholder value, without constraining funding its digital
transformation and investing in the business.
The efficiency actions of the Group in 2022 to maintain operating expenses
under control in an inflationary environment included further branch footprint
optimisation and substantial streamline of workforce. In July 2022, the Group
successfully completed a Voluntary Staff Exit Plan (VEP) through which 16% of
the Group's full-time employees were approved to leave at a total cost of
€101 mn. Following the completion of the VEP, the gross annual savings were
estimated at c.€37 mn or 19% of staff costs with a payback period of 2.7
years.
E. Business Overview (continued)
Lean operating model (continued)
Additionally, in January 2022, one of the Bank's subsidiaries completed a
small-scale targeted 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, during 2022 the Group reduced the number of branches by 20 to
60, a reduction of 25%. As a result, the Group's total operating expenses for
1H2023 were reduced by 2% on prior year, reflecting the benefits from the
efficiency actions in an inflationary environment. The cost to income ratio
excluding special levy on deposits and other levies/contributions for 1H2023
was reduced further to 32%, 26 p.p. down compared to 1H2022, driven mainly by
the higher total income. In 2H2023, some upward pressure on total operating
expenses is expected, reflecting the increased cost of living adjustment
(COLA) in staff costs and the launch of a reward programme through 'Antamivi
Reward scheme' to the Group's performing borrowers, with an expected impact of
c.€4 mn in other operating expenses.
During December 2022 the Group has granted to eligible employees share awards
under a long-term incentive plan ("2022 LTIP" or the "2022 Plan"). The 2022
Plan involves the granting of share awards and is driven by scorecard
achievement, with measures and targets set to align pay outcomes with the
delivery of the Group's strategy. The employees eligible for the 2022 LTIP are
the members of the Extended EXCO. The 2022 LTIP stipulates that performance
will be measured over a 3 year period and financial and non-financial
objectives to be achieved (driven by both delivery of the Group's strategy as
well as individual performance). At the end of the performance period, the
performance outcome will be used to assess the percentage of the awards that
will vest.
These shares will then normally vest in six tranches, with the first tranche
vesting after the end of the performance period and the last tranche vesting
on the fifth anniversary of the first vesting date.
In addition, staff costs for 1H2023 include c.€3.5 mn staff cost rewards,
namely the Short-term Incentive Plan. The Short-term Incentive Plan involves
variable remuneration to selected employees and will be driven by both,
delivery of the Group's strategy as well as individual performance.
Transformation plan
The Group's focus continues on deepening the relationship with its customers
as a 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 distribution model across
existing and new channels, (iii) digitally transform the way the Group serves
its customers and operates internally, and (iv) improve employee engagement
through a robust set of organisational health initiatives.
Digital transformation
The Bank's digital transformation continues to focus on developing digital
services and products that improve the customer experience, streamlining
internal processes, and introducing new ways for improving the workplace
environment.
During 2Q2023, the Bank continued to enrich and improve its digital portfolio
with new innovative services to its customers. QuickHub, the Bank's new,
digital branch has been introduced at the beginning of May 2023, offering all
products and services that are digitally available to customers at the tap of
a button. Additionally, customers are now able to manage their Fixed Deposit
accounts through digital channels by providing instructions for maturity.
These include options such as changing the duration of their fixed deposit,
increasing or decreasing capital and closing the account. Moreover, the
customer experience during digital onboarding has been improved by providing
the NFC technology during the ID verification process through passport.
The adoption of digital products and services continued to grow and gained
momentum in the second quarter of 2023. As at the end of June 2023, 95.0% of
the number of transactions involving deposits, cash withdrawals and
internal/external transfers were performed through digital channels (up by
11.2 p.p. from 83.8% in June 2020). In addition, 83.2% of individual customers
were digitally engaged (up by 10.8 p.p. from 72.4% in June 2020), choosing
digital channels over branches to perform their transactions. As at the end of
June 2023, active mobile banking users and active QuickPay users have grown by
15.0% and 25.1% respectively over the last 12 months. The highest number of
QuickPay users to date was recorded in June 2023 with 186 thousand active
users. Likewise, the highest number of QuickPay payments (in 2023) was
recorded in June 2023 with 602 thousand transactions (up 32% yoy).
Digital offerings via digital channels continued to enhance Group's sales
further in the second quarter of 2023. During 2Q2023, new lending via
Quickloans reached €26 mn (compared to new lending of €18 mn for 1Q2023)
up by 45% qoq and totalled €44 mn for 1H2023. Digital deposits have also
shown an increase of 33% yoy, reaching €221 mn at 30 June 2023. 1H2023
digital insurance sales, with two new products in mobile app (Motor & Home
Insurance), have more than doubled compared to FY2022 sales (€159k in 1H2023
compared to €68k in FY2022).
E. Business Overview (continued)
Asset quality
Balance sheet de-risking was largely completed in 2022, marked by the
completion of Project Helix 3 in November 2022 which refers to the sale of
non-performing exposures with gross book value of c.€550 mn as at the date
of completion. Project Helix 3 represented a further milestone in the delivery
of one of the Group's strategic priorities of improving asset quality through
the reduction of NPEs and delivering NPE ratio below 5%. As at 30 June 2023,
the Group's NPE ratio stood at 3.6%.
The Group's priorities remain intact, maintaining high quality new lending
with strict underwriting standards and preventing asset quality deterioration
in this uncertain outlook.
Capital market presence
In June 2023, the Company successfully launched and priced an issue of €220
mn Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities (the 'New
Capital Securities').
The issue was met with exceptional demand, attracting interest from c.240
institutional investors, with the final order book over 12 times
over-subscribed and final pricing 62.5 bps tighter than the initial pricing
indication. This also reflects significant improvement in the credit spread to
c.910 bps compared to c.1,260 bps for the previous AT1 issue in 2018
('Existing Capital Securities').
In July 2023, the Bank has successfully launched and priced an issuance of
€350 mn of senior preferred notes (the "Notes"). The Notes were priced at
par with a fixed coupon of 7.375% per annum, payable annually in arrear, until
the Optional Redemption Date i.e. 25 July 2027. The issuance was met with
strong demand, attracting interest from more than 90 institutional investors,
with a peak orderbook of €950 mn and final pricing 37.5 bps than the initial
pricing indication.
Enhancing organisational resilience and ESG (Environmental, Social and
Governance) agenda
Climate change and transition to a sustainable economy is one of the greatest
challenges. As part of its vision to be the leading financial hub in Cyprus,
the Group is determined to lead the transition of Cyprus to a sustainable
future. The Group continuously evolves towards its ESG agenda and continues to
progress towards building a forward-looking organisation embracing ESG in all
aspects of business as usual. In 2022, the Company received a rating of AA (on
a scale of AAA-CCC) in the MSCI ESG Ratings assessment.
The ESG strategy formulated in 2021 is continuously expanding. The Group is
maintaining its leading role in the Social and Governance pillars and focus on
increasing the Group's positive impacts on the Environment by transforming not
only its own operations, but also the operations of its customers.
The Group has committed to the following primary ESG targets, which reflect
the pivotal role of ESG in the Group's 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
For the Group to articulate the delivery of its primary ESG targets and
address regulatory expectations, a comprehensive ESG working plan has been
established in 2022. The ESG working plan is closely monitored by the
Sustainability Committee, the Executive Committee and the Board of Directors
at frequent intervals.
Environmental Pillar
The Group has estimated the Scope 1 and Scope 2 greenhouse gas ('GHG')
emissions of 2021 relating to own operations in order to set the baseline for
carbon neutrality target. The Bank being the main contributor of GHG emissions
of the Group, designed in 2022 the strategy to meet the carbon neutrality
target by 2030 and progress towards Net Zero target of 2050. For the Group to
become carbon neutral by 2030, Scope 1 and Scope 2 emissions should be reduced
by 42% by 2030. The Bank plans to invest in energy efficient installations and
actions as well as replace fuel intensive machineries and vehicles from 2023
to 2025, which would lead to c.5-10% reduction in Scope 1 and Scope 2
emissions by 2025 compared to 2021. The Bank expects that the Scope 2
emissions will be reduced further when the energy market in Cyprus shifts
further towards renewable energy. The Bank achieved a reduction of 5% in Scope
1 - Mobile Combustion GHG emissions and 16% in Scope 2 - Purchased electricity
GHG emissions in 1H2023 compared to 1H2022 due to new solar panels connected
to energy network in 2022 and early 2023 as well as buildings abandonment as
part of the digitalization journey. The Bank achieved an increase by 50% in
renewable energy production, from 79,424 Kwh to 119,499 Kwh, in 1H2023
compared to 1H2022.
E. Business Overview (continued)
Enhancing organisational resilience and ESG (Environmental, Social and
Governance) agenda (continued)
The Bank is the first bank in Cyprus to join the Partnership for Carbon
Accounting Financials (PCAF) in October 2022 and is following the recommended
methodology for the estimation of the Financed Scope 3 emissions. The Group
has estimated Financed Scope 3 GHG emissions relating to the loan portfolio
based on PCAF standard and proxies. Following the estimation of Financed Scope
3 GHG emissions derived from its loan portfolio and in conjunction with the
materiality assessment's results on climate and environmental risks the Bank
will be able to identify the carbon-concentrated areas so as to take the
necessary actions to minimise the environmental and climate impact associated
with its loan portfolio by offering targeted climate friendly products and
engaging with its customers. In 2023, following the identification of
carbon-concentrated sectors and asset classes, the Group is in the process to
set decarbonisation targets aligned with 1.5C climate scenario (Science based
targets) which will assist in the formulation of the Group's strategy going
forward.
The Bank in 2022 launched a low emission vehicle loan product (either hybrid
or electric) and is working to expand its range of environmentally friendly
products further in 2023. The gross amount of environmentally friendly loans
as at 30 June 2023 was €21.2 mn compared to €20.9 mn as at 31 December
2022.
Moreover, the Bank is making substantial progress in further integrating
climate risk considerations into its risk management approach, as it tries to
integrate climate related risk into its risk culture. The Bank, within the
context of underwriting processes, is currently in the process of
incorporating the assessment of ESG and climate matters and amending its
Policies and Procedures in such a way that potential impact from ESG and
climate is reflected in the fundamental elements of the creditworthiness
assessment. The Bank designed ESG questionnaires for key selected sectors
which will then be leveraged for deriving an ESG classification. In addition,
the Bank is in the process to enhance its risk quantification methodology to
assess how the portfolio is affected by Climate and Environmental (C&E)
risks and will be incorporating the above elements into the stress testing
infrastructure.
During 2023, in order to enhance the awareness and skillset towards the ESG,
the Group performed trainings to the Board of Directors and Senior Management.
In addition, the internal communication channels are enhanced by establishing
an ESG internal portal and launching Green@work which provides tips on energy
efficiency actions at work. Early in 2023 the Bank launched a campaign on new
Visa Debit cards produced from recyclable plastic extracted from the ocean.
The campaign aims to inform the public on the level of water contamination
from plastic and the impact on life below water.
Social Pillar
At the centre of the Group's leading social role lie its investments in the
Bank of Cyprus Oncology Centre (with an overall investment of c.€70 mn since
1998, whilst 60% of diagnosed cancer cases in Cyprus are being treated at the
Centre), the work of SupportCY Network, which was developed in 2020, the
contribution of the Bank of Cyprus Cultural Centre in promoting the cultural
heritage of the island, and the Work of IDEA Innovation Centre. The Cultural
Centre undertook a number of innovative projects such as 'AISTHISEIS' - Multi
sensory museum experience for people with disabilities as well as the
ReInHerit program facilitating innovation and research cooperation between
European museums and heritage continuing also into 2023, with 16,542 people
participating in events at the Cultural Foundation between January to June
2023. The IDEA Innovation Centre, invested c.€4 mn in start-up business
creation since its incorporation, supported creation of 89 new companies to
date, and provided support to 210+ entrepreneurs through its Startup program
since incorporation. Staff have continued to engage in voluntary initiatives
to support charities, foundations, people in need and initiatives to protect
the environment.
The Group has continued to upgrade its staff's skillset by providing training
and development opportunities to all staff and capitalising on modern delivery
methods. In 2023, the Bank's employees attended 31,012 hours of trainings.
In addition, in 2023 the Group launched the BoC Academy to offer up-skilling
short courses for employees. Moreover, the Group continues its emphasis on
staff wellness into 2023 by offering webinars, team building activities and
family events with sole purpose to enhance mental, physical, financial and
social health.
Governance Pillar
The Group continues to operate successfully within a complex regulatory
framework of a holding company which is registered in Ireland, listed on two
Stock Exchanges and run in compliance with a number of rules and regulations.
Its governance and management structures enable it to achieve present and
future economic prosperity, environmental integrity and social equity across
its value chain. The Group operates within a framework of prudent and
effective controls, which enable risk assessment and risk management based on
the relevant policies under the leadership of the Board of Directors. The
Group has set up a robust Governance Structure to oversee its ESG agenda.
Progress on the implementation and evolution of the Group's ESG strategy is
monitored by the Sustainability Committee and the Board of Directors. The
Sustainability Committee is a dedicated executive committee set up in early
2021 to oversee the ESG agenda of the Group, review the evolution of the
Group's ESG strategy, monitor the development and implementation of the
Group's ESG objectives and the embedding of ESG priorities in the Group's
business targets. The Group's ESG Governance structure continues to evolve, so
as to better address the Group's evolving ESG needs. The Group's regulatory
compliance continues to be an undisputed priority.
E. Business Overview (continued)
Enhancing organisational resilience and ESG (Environmental, Social and
Governance) agenda (continued)
The Board composition of the Company and the Bank is diverse, with 44% of the
Board members being female as at 30 June 2023. The Board displays a strong
skillset stemming from broad international experience. Moreover, the Group
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 2023, there is a 27% representation of women in Group's management
bodies and a 40% representation of women at key positions below the Extended
EXCO level (defined as positions between Assistant Manager and Manager).
E. 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 remains elevated, impacted by soaring energy prices and disruptions
in supply chains. This high inflation weighs on business confidence and
consumers' behaviour. 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 the crisis 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 2023
in Russia through write-offs and provisions.
The Group has no exposure to Russian bonds or banks which are subject to
sanctions.
The Group has limited direct exposure with loans related to Russia and
Belarus, representing 0.3% of total assets or <1% of net loans as at 30
June 2023. The net book value of these loans stood at €81 mn as at 30 June
2023, of which €74 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 Russian and Belarusian customers account for only
4% of total customer deposits as at 30 June 2023. This exposure is not
material, given the Group's strong liquidity position. The Group operates with
a significant surplus liquidity of €7.7 bn (LCR ratio of 316%) as at 30 June
2023.
Since 2014 the Bank, has engaged in a very demanding and rigorous
anti-financial crime remediation programme. It fully adheres to all relevant
UN, EU, USA and UK sanction frameworks and has implemented additional measures
to monitor a complicated sanctions environment including systemic
enhancements, specialised training and revision of risk appetite. As a result,
the Bank has effectively terminated the relationship with professional
intermediaries introducing customers to the Bank. Additionally, c.25,900
customer relationships were terminated and c.12,000 potential new customer
relationships were suspended solely on compliance reasons (eg: KYC, or AML) in
the years 2015-2022.
Indirect impact
Although the Group's direct exposure to Russia or Belarus is limited, the
crisis in Ukraine had a negative impact on the Cypriot economy, mainly arising
from the tourism and professional services sectors, increasing energy prices
fuelling inflation and disruptions to global supply chains. During the first
six months of 2023 the performance of the tourism sector was strong and
represented 99% of 2019 respective levels, despite the sizeable loss of
tourist arrivals from Russia and Ukraine. To date, tourist activity is
recovering to pre-pandemic levels. The Group continues to monitor 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. The focus on renewables increases, and a
steady increase in contribution from renewables is noted.
Overall, the Group has limited impact from its direct exposure, while any
indirect impact depends on the duration and severity of the crisis and its
impact on the Cypriot economy.
The Group continues 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.
F. Definitions and Explanations
Adjusted recurring profitability The Group's profit after tax before non-recurring items (attributable to the
owners of the Company) taking into account distributions under other equity
instruments such as the annual AT1 coupon.
Advisory and other transformation costs Comprise mainly of fees of external advisors in relation to: (i) the
transformation program and other strategic projects of the Group and (ii)
customer loan restructuring activities, 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 where applicable), (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 where applicable), (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 after tax per share (attributable to the owners of the Company) Basic earnings after tax per share (attributable to the owners of the Company)
is the Profit/(loss) after tax (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) 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 01 August 2023.
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.
Diluted earnings per share Diluted earnings per share is the Profit/(loss) after tax (attributable to the
owners of the Company) divided by the weighted average number of ordinary
shares in issue adjusted for the ordinary shares that may arise in respect of
share awards granted to executive directors and senior management of the Group
under the Long-Term Incentive Plan (2022 LTIP).
ECB European Central Bank
F. Definitions and Explanations (continued)
Green Asset ratio The proportion of the share of a credit institution's assets financing and
invested in EU Taxonomy-aligned economic activities as a share of total
covered assets.
Green Mortgage ratio The proportion of the share of a credit institution's assets financing EU
Taxonomy-aligned mortgages (acquisition, construction or renovation of
buildings) as a share of total mortgages assets.
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 where applicable) 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 €72 mn as at 30 June 2023 (compared to €78
mn as at 31 March 2023 and to €86 mn as at 31 December 2022).
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 €207 mn as at 30 June 2023 (compared to €208 mn
as at 31 March 2023 and to €211 mn as at 31 December 2022).
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 to total assets as
presented on the balance sheet. Tangible total equity comprises of equity
attributable to the owners of the Company and Other equity instruments 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 relating to loans and advances to customers 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 of Gross loans (as defined), 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 42.4%
as at 30 June 2023 compared to 42.4% as at 31 March 2023 and to 40.9% as at 31
December 2022. The Bank's deposit market share in Cyprus reached 37.4% in 30
June 2023 compared to 37.3% as at 31 March 2023 and to 37.2% as at 31
December 2022.
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 Interest Margin Net interest margin is calculated as the net interest income (annualised)
divided by the 'quarterly average interest earning assets' (as defined).
F. Definitions and Explanations (continued)
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 net loans included in the legacy exposures (as defined).
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), Net
insurance result, 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.
F. Definitions and Explanations (continued)
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%.
The NPEs are reported before the deduction of allowance for expected loan
credit losses (as defined).
Non-recurring items Non-recurring items as presented in the 'Unaudited Interim Condensed
Consolidated Income Statement - Underlying basis' relate to 'Advisory and
other transformation costs - organic'. 2022 Non-recurring items relate to: (i)
Advisory and Other transformation costs - ongoing (ii) Provisions/net loss
relating to NPE sales, (iii) Restructuring and other costs relating to NPE
sales, and (iv) Restructuring costs - Voluntary Staff Exit Plan (VEP).
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).
Operating profit Operating profit comprises profit before loan credit losses (as defined),
impairments of other financial and non-financial assets, provisions for
pending litigations, regulatory and other matters (net of reversals), tax,
profit attributable to non-controlling interests and non-recurring items (as
defined).
Operating profit return on average assets Operating profit 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 after tax and before non-recurring items (attributable to the owners of This refers to the profit after tax (attributable to the owners of the
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 transformation costs - organic').
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 €551 mn, as well as
real estate properties with book value of c.€88 mn as at 30 September 2022.
Project Helix 3 was completed in November 2022.
F. Definitions and Explanations (continued)
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. Project Sinope was completed in August 2022.
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) 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.
Shareholders' equity Shareholders' equity comprise total equity adjusted for non-controlling
interest and other equity instruments.
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.
Time deposit Calculated as a percentage of the cost (interest expense) of Time and Notice
deposits over the average 6-month Euribor rate of the period.
pass-through
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 transformation costs-organic', (ii) restructuring and
other costs relating to NPE sales, or (iii) restructuring costs relating to
the Voluntary Staff Exit Plan, where applicable. (i) 'Advisory and other
transformation costs-organic' amounted to €1 mn for 2Q2023 (compared to €1
mn for 1Q2023 and to €1 mn for 4Q2022), (ii) Restructuring costs relating to
NPE sales for 2Q2023 amounted to a gain of €0.2 mn (compared to a loss of
€0.2 mn for 1Q2023 and to a loss of €0.3 mn for 4Q2022), and (iii)
Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) for 2Q2023
was nil (compared to nil for 1Q2023 and 4Q2022).
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 comprise loan credit
losses (as defined), plus impairments of other financial and non-financial
assets, plus provisions for pending litigations, regulatory and other matters
(net of reversals).
Underlying basis This refers to the statutory basis after being adjusted for reclassification
of 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 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 2023.
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 2023.
The financial information in this announcement is not audited and 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 2022, upon which the auditors have
given an unqualified opinion, were published on 31 March 2023 and are expected
to be delivered to the Registrar of Companies of Ireland within 56 days of 30
September 2023. The Board of Directors approved the Group statutory financial
statements for the six months ended 30 June 2023 on 8 August 2023.
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 months
ended 30 June 2023, 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 pages
7-8. The statutory results are adjusted for certain items (as described on
pages 10-11) to allow a comparison of the Group's underlying financial
position and performance, as set out on pages 6 and 9.
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 2023 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 2023 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
(file:///Q%3A/IRD/Attachments/2023/Unpublished/20230809%201H2023%20Resutls/ENG/www.bankofcyprus.com)
Group/Investor Relations/Financial Results).
This announcement and the presentation for the Group Financial Results for the
six months ended 30 June 2023 have been posted on the Group's website
www.bankofcyprus.com
(file:///Q%3A/IRD/Attachments/2023/Unpublished/20230809%201H2023%20Resutls/ENG/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 quarter ended 30 June 2023 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. The 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
caused significant population displacement, and as the conflict continues, the
disruption will likely increase. The scale of the conflict and the 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. Changes in our
reporting frameworks and accounting standards, including the recently
announced reporting changes and the implementation of IFRS 17 'Insurance
Contracts', which may have a material impact on the way we prepare our
financial statements and (with respect to IFRS 17) may negatively affect the
profitability of Group's insurance business
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 2023, the Bank of Cyprus Group operated through a total of 64 branches in
Cyprus, of which 4 operated as cash offices. The Bank of Cyprus Group employed
2,902 staff worldwide. At 30 June 2023, the Group's Total Assets amounted to
€25.7 bn and Total Equity was €2.2 bn. The Bank of Cyprus Group comprises
Bank of Cyprus Holdings Public Limited Company, its subsidiary Bank of Cyprus
Public Company Limited and its subsidiaries.
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