REG - Bank of Cyprus Hldgs - Half-year Report -Part 1
09/08/2023 07:15
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RNS Number : 7749I Bank of Cyprus Holdings PLC 09 August 2023
Ιnterim Financial Report 2023
Bank of Cyprus Holdings
Ιnterim Financial Report
Six months ended 30 June 2023
Contents Page
Board of Directors and Executives 1
Forward Looking Statements and Notes 2
Interim Management Report 3
Risk and Capital Management Report 34
Consolidated Condensed Interim Financial statements
Interim Consolidated Income Statement 72
Interim Consolidated Statement of Comprehensive Income 73
Interim Consolidated Balance Sheet 74
Interim Consolidated Statement of Changes in Equity 75
Interim Consolidated Statement of Cash Flows 77
Notes to the Consolidated Condensed Interim Financial Statements
1. Corporate information 79
2. Unaudited financial statements 79
3. Summary of significant accounting policies 79
4. Going concern 96
5. Economic and geopolitical environment 96
6. Significant and other judgements, estimates and assumptions 97
7. Segmental analysis 104
8. Interest income and income similar to interest income 110
9. Interest expense and expense similar to interest expense 111
10. Net gains/(losses) on financial instruments 111
11. Staff costs and other operating expenses 112
12. Credit losses on financial assets and impairment net of reversals of 114
non‑financial assets
13. Income tax 114
14. Earnings per share 116
15. Investments 117
16. Derivative financial instruments 121
17. Fair value measurement 122
18. Loans and advances to customers 128
19. Stock of property 130
20. Prepayments, accrued income and other assets 131
21. Funding from central banks 132
22. Customer deposits 133
23. Debt securities in issue and Subordinated liabilities 134
24. Accruals, deferred income, other liabilities and other provisions 135
25. Share capital 135
26. Dividends 137
27. Provisions for pending litigation, claims, regulatory and other matters 137
28. Cash and cash equivalents 143
29. Analysis of assets and liabilities by expected maturity 145
30. Risk management ‑ Credit risk 146
31. Risk management ‑ Market risk 161
32. Risk management ‑ Liquidity and funding risk 166
33. Capital management 170
34. Related party transactions 171
35. Group companies 172
36. Investments in associates and joint venture 175
37. Events after the reporting period 176
Independent Review Report to the Bank of Cyprus Holdings Public Limited 177
Company
Alternative Performance Measures Disclosures 179
Board of Directors and Executives
as at 08 August 2023
Board of Directors of Bank of Cyprus Holdings Public Limited Company Efstratios‑Georgios Arapoglou
CHAIRMAN
Lyn Grobler
VICE‑CHAIRPERSON
Panicos Nicolaou
Constantine Iordanou
Eliza Livadiotou
Ioannis Zographakis
Maria Philippou
Nicolaos Sofianos
Paula Hadjisotiriou
Executive Committee Panicos Nicolaou
CHIEF EXECUTIVE OFFICER
Dr. Charis Pouangare
DEPUTY CHIEF EXECUTIVE OFFICER & CHIEF OF BUSINESS
Eliza Livadiotou
EXECUTIVE DIRECTOR FINANCE
Demetris Th. Demetriou
CHIEF RISK OFFICER
Irene Gregoriou
EXECUTIVE DIRECTOR PEOPLE & CHANGE
George Kousis
EXECUTIVE DIRECTOR TECHNOLOGY & OPERATIONS
Company Secretary Katia Santis
Legal Advisers as to matters of Irish Law Arthur Cox
Legal Advisers as to matters of English and US Law Sidley Austin LLP
Legal Advisers as to matters of Cypriot Law Chryssafinis & Polyviou LLC
Statutory Auditors PricewaterhouseCoopers
One Spencer Dock
North Wall Quay
Dublin 1
D01 X9R7
Ireland
Registered Office 10 Earlsfort Terrace
Dublin 2
D02 T380
Ireland
Forward Looking Statements and Notes
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 Bank of Cyprus Holdings Group's (the Group) near
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 rate fluctuations, legislative, fiscal and
regulatory developments and information technology, litigation and other
operational risks, adverse market conditions, the impact of outbreaks and
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 if 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.
Changes in reporting frameworks and accounting standards, including the
recently announced reporting changes and the implementation of IFRS 17
'Insurance Contracts', 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 the Group's insurance business. 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.
Non‑IFRS performance measures
Bank of Cyprus Holdings Public Limited Company's (the Company) management
believes that the non‑IFRS performance measures included in this document
provide valuable information to the readers of the Interim Financial Report as
they enable the readers to identify a more consistent basis for comparing the
Group's performance between financial periods and provide more detail
concerning the elements of performance which management are directly able to
influence or are relevant for an assessment of the Group. They also reflect an
important aspect of the way in which the operating targets are defined and
performance is monitored by the Group's management. However, any non‑IFRS
performance measures in this document are not a substitute for IFRS measures
and readers should consider the IFRS measures as the key measures of the 30
June position. Refer to 'Alternative Performance Measures Disclosures' on
pages 179 to 191 of the Interim Financial Report for the six months ended 30
June 2023 for further information, reconciliations with Consolidated Condensed
Interim Financial Statements and calculations of non‑IFRS performance
measures included throughout this document and their reconciliation to the
most directly comparable IFRS measures.
The Interim Financial Report for the six months ended 30 June 2023 is
available on the Group's website
www.bankofcyprus.com (Group/Investor Relations) (the Group's website).
The Interim Financial Report for the six months ended 30 June 2023 is
originally issued in English. The Greek translation of the Interim Financial
Report for the six months ended 30 June 2023 will be available on the Group's
website by 11 August 2023. In case of a difference or inconsistency between
the English document and the Greek document, the English document prevails.
The Interim Financial Report relates to Bank of Cyprus Holdings Public Limited
Company (the Company) and together with its subsidiaries the Group, which was
listed on the London Stock Exchange (LSE) and the Cyprus Stock Exchange (CSE)
as at 30 June 2023.
Activities
The Company is the holding company of the Group and of Bank of Cyprus Public
Company Ltd (BOC PCL or the Bank). The principal activities of BOC PCL and its
subsidiary companies involve the provision of banking, financial, and
insurance services and the management and disposal of property predominately
acquired in exchange of debt.
All Group companies and branches are set out in Note 35 to the Consolidated
Condensed Interim Financial Statements. The Group has established branches in
Greece. There were no acquisitions of subsidiaries and no material disposals
of subsidiaries during the six months ended 30 June 2023. Information on Group
companies and acquisitions and disposals during the period are detailed in
Note 35 to the Consolidated Condensed Interim Financial Statements.
Group financial results on the underlying basis
The main financial highlights for the six months ended 30 June 2023 are set
out below:
Consolidated Condensed Interim Income Statement on the underlying basis
€ million Six months ended
30 June
2023(1) 2022(1,2)
(restated)
Net interest income 358 145
Net fee and commission income 90 94
Net foreign exchange gains and net gains/(losses) on financial instruments 21 3
Net insurance result 25 24
Net gains from revaluation and disposal of investment properties and on 5 7
disposal of stock of properties
Other income 12 9
Total income 511 282
Staff costs (93) (95)
Other operating expenses (69) (69)
Special levy on deposits and other levies/contributions (18) (17)
Total expenses (180) (181)
Operating profit 331 101
Loan credit losses (24) (23)
Impairments of other financial and non‑financial assets (30) (13)
Provisions for pending litigations, regulatory and other matters (net of (14) (1)
reversals)
Total loan credit losses, impairments and provisions (68) (37)
Profit before tax and non‑recurring items 263 64
Tax (40) (11)
Profit attributable to non‑controlling interests (1) (1)
Profit after tax and before non‑recurring items (attributable to the owners 222 52
of the Company)
Advisory and other transformation costs ‑ organic (2) (5)
Profit after tax ‑ organic (attributable to the owners of the Company) 220 47
Provisions/net loss relating to NPE sales - (0)
Restructuring and other costs relating to NPE sales - (1)
Restructuring costs ‑ Voluntary Staff Exit Plan (VEP) - (3)
Profit after tax (attributable to the owners of the Company) 220 43
(1. ) The financial information is derived from and should be read in
conjunction with the accompanied Consolidated Condensed Interim Financial
Statements.
(2. ) On 1 January 2023 the Group adopted IFRS 17 'Insurance contracts'
which replaced IFRS 4 'Insurance contracts'. 2022 comparative information has
been restated to reflect the impact of IFRS 17. For further details refer to
Note 3.3.1 of the Consolidated Condensed Interim Financial Statements.
( )
Group financial results on the underlying basis (continued)
Consolidated Condensed Interim Income Statement on the underlying basis
(continued)
Key Performance Ratios Six months ended
30 June
2023 2022(1)
(restated)
Net interest margin (annualised) 3.17% 1.32%
Cost to income ratio 35% 64%
Cost to income ratio excluding special levy on deposits and other 32% 58%
levies/contributions
Operating profit return on average assets (annualised) 2.6% 0.8%
Basic earnings per share attributable to the owners of the Company (€ 49.4 9.5
cent)(2)
Return on tangible equity (ROTE) 24.0% 4.9%
(1. ) On 1 January 2023 the Group adopted IFRS 17 ' Insurance
contracts', which replaced IFRS 4 'Insurance contracts'. 2022 comparative
information has been restated to reflect the impact of IFRS 17. For further
details refer to Note 3.3.1 of the Consolidated Condensed Interim Financial
Statements.
(2. ) The diluted earnings per share attributable to the owners of the
Company as at 30 June 2023 amounted to 49.3 cents in Euro (€).
Consolidated Condensed Interim Balance Sheet on the underlying basis
€ million 30 June 31 December 2022(1,2)
2023(1) (restated)
Cash and balances with central banks 9,127 9,567
Loans and advances to banks 432 205
Debt securities, treasury bills and equity investments 3,330 2,704
Net loans and advances to customers 10,008 9,953
Stock of property 946 1,041
Investment properties 74 85
Other assets 1,790 1,734
Total assets 25,707 25,289
Deposits by banks 449 508
Funding from central banks 2,004 1,977
Customer deposits 19,166 18,998
Debt securities in issue 292 298
Subordinated liabilities 309 302
Other liabilities 1,244 1,157
Total liabilities 23,464 23,240
Shareholders' equity 1,984 1,807
Other equity instruments 236 220
Total equity excluding non‑controlling interests 2,220 2,027
Non‑controlling interests 23 22
Total equity 2,243 2,049
Total liabilities and equity 25,707 25,289
(1. ) The financial information is derived from and should be read in
conjunction with the accompanied Consolidated Condensed Interim Financial
Statements.
(2. ) On 1 January 2023 the Group adopted IFRS 17 'Insurance contracts'
which replaced IFRS 4 'Insurance contracts'. 2022 comparative information has
been restated to reflect the impact of IFRS 17. For further details refer to
Note 3.3.1 of the Consolidated Condensed Interim Financial Statements.
Group financial results on the underlying basis (continued)
Consolidated Condensed Interim Balance Sheet on the underlying basis
(continued)
Key Balance Sheet figures and ratios 30 June 31 December 2022(1,2)
2023 (restated)
Gross loans (€ million) 10,277 10,217
Allowance for expected loan credit losses (€ million) 288 282
Customer deposits (€ million) 19,166 18,998
Loans to deposits ratio (net) 52% 52%
NPE ratio 3.6% 4.0%
NPE coverage ratio 78% 69%
Leverage ratio 8.5% 7.8%
Capital ratios and risk weighted assets
Common Equity Tier 1 (CET1) ratio (transitional for IFRS 9) 16.0%(3) 15.2%
Total capital ratio (transitional) 21.1%(3) 20.4%
Risk weighted assets (€ million) 10,257 10,114
(1. ) On 1 January 2023 the Group adopted IFRS 17 'Insurance contracts'
which replaced IFRS 4 'Insurance contracts'. 2022 comparative information has
been restated to reflect the impact of IFRS 17. For further details refer to
Note 3.3.1 of the Consolidated Condensed Interim Financial Statements.
(2. ) The capital ratios have been restated to take into consideration
the dividend in respect of the FY2022 earnings. More information is provided
in 'Capital Base' under the 'Balance Sheet Analysis' section below.
(3. ) Includes reviewed profits for the six months ended 30 June 2023
and is net of dividend accrual (refer to section 'Balance Sheet Analysis -
Capital Base' below).
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 'Reconciliation of the Interim Condensed
Consolidated Income Statement for the six months ended 30 June 2023 between
the statutory and underlying basis' and in 'Alternative Performance Measures
Disclosures' of the Interim Financial Report 2023.
Throughout the Interim Management Report, financial information in relation to
the year ended 31 December 2022 financial information has been restated to
reflect the 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 the impact of IFRS 17 transition is provided below and in Note
3.3.1 of the Consolidated Condensed Interim Financial Statements for the six
months ended 30 June 2023.
Throughout the Interim Management Report, 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 earnings of the year ended
31 December 2022 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 million in
total and had a negative impact of 22 basis points 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 'Capital Base'
below.
Group financial results on the underlying basis (continued)
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 million (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 million in the Group's total equity.
· 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 million.
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 approximately €42 million 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 million to €57 million (compared
to €71 million 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 million as dividend to BOC PCL in February 2023, which benefited Group
regulatory capital by an equivalent amount on the same date, enhancing CET1
ratio by approximately 50 basis points. Going forward, meaningful dividend
generation from the insurance business is expected to continue.
Group financial results on the underlying basis (continued)
Reconciliation of the Consolidated Condensed Interim Income Statement for the
six months ended 30 June 2023 between the statutory and the 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/(losses) 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 the 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 €6 million 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 million 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.
Group financial results on the underlying basis (continued)
Reconciliation of the Consolidated Condensed Interim Income Statement for the
six months ended 30 June 2023 between the statutory and the underlying basis
(continued)
· Advisory and other transformation costs of €2 million
included in 'Other operating expenses' under the statutory basis are
separately presented under the underlying basis since they comprise mainly
fees to external advisors in relation to the transformation programme and
other strategic projects of the Group.
· '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 million, which are included in 'Loan credit losses' under the underlying
basis, and ii) credit losses of other financial assets of €7 million and
impairment net of reversals of non-financial assets of €23 million, 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.
Balance Sheet Analysis
Capital Base
Total equity excluding non-controlling interests totalled €2,220 million as
at 30 June 2023 compared to €2,027 million as at 31 December 2022.
Shareholders' equity totalled €1,984 million as at 30 June 2023 compared to
€1,807 million 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 December 2022 as
restated. During the six months ended 30 June 2023, CET1 ratio was positively
affected mainly by pre-provision income and the €50 million dividend
distributed to BOC PLC in February 2023 by the life insurance subsidiary, and
negatively affected by provisions and impairments, as well as the AT1
distributions and refinancing costs and the increase in risk weighted assets.
Throughout the Interim Management Report, 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. For Capital Requirements Regulation
(CRR) purposes a payout of 50% of the Group's adjusted recurring profitability
for the period, the high-end of the payout range, 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 approximately 65 basis points 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 basis
points 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 20.4%
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) of a nominal amount of approximately €8 million are included in Total
Capital, the impact of which is approximately 8 basis points on the Total
Capital ratio. For CRR purposes a payout of 50% of the Group's adjusted
recurring profitability for the period, the high-end of the payout range, is
prescribed corresponding to a Total Capital Ratio 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%.
Group financial results on the underlying basis (continued)
Balance Sheet Analysis(continued)
Capital Base (continued)
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 approximately 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 approximately 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.
BOC PCL 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.
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 BOC PCL, 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 the earnings of the year ended 31 December 2022
('Dividend'). The proposed final dividend was declared at the 'AGM' which was
held on 26 May 2023. This Dividend amounted to €22.3 million in total and is
equivalent to a payout ratio of 14% of the year ended 31 December 2022 Group's
adjusted recurring profitability or 31% based on the year ended 31 December
2022 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 basis points on the
Group's CET1 ratio and Total Capital ratio as at 31 December 2022. Throughout
the Interim Management Report 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.
Group financial results on the underlying basis (continued)
Balance Sheet Analysis(continued)
Capital Base (continued)
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
million.
In June 2023, the Company successfully launched and priced an issue of €220
million 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 five 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 net proceeds of the issue of the New Capital Securities were on-lent by
the Company to BOC PCL to be used for general corporate purposes. The on-loan
qualifies as Additional Tier 1 capital for BOC PCL.
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
approximately 215 basis points.
At the same time, the Company invited the holders of its outstanding €220
million Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities
callable in December 2023 (the 'Existing Capital Securities') to tender their
Existing Capital Securities at a purchase price of 103% of the principal
amount. The Company received valid tenders of approximately €204 million in
aggregate principal amount, or approximately 93% of the outstanding Existing
Capital Securities, all of which were accepted by the Company. As a result, a
cost of approximately €7 million was recorded directly in the Company's
equity during the six months ended 30 June 2023, forfeiting the relevant
future coupon payments. Transaction costs of €3.5 million in relation to the
transactions were recorded directly in equity in June 2023. Existing Capital
Securities of approximately €16 million 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 a nominal value of approximately
€7 million, further reducing the outstanding nominal amount of the Existing
Capital Securities to approximately €8 million.
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 BOC PCL 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 BOC PCL. 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 million per year, and also allowing for a higher
amount to be charged in the year the amendments are effective (i.e. in 2022).
Group financial results on the underlying basis (continued)
Balance Sheet Analysis(continued)
Capital Base (continued)
Legislative amendments for the conversion of DTA to DTC (continued)
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 approximately €5 million 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.
Regulations and Directives
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.
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 approximately €8 million that
remained following the tender offer and open market purchases of the Existing
Capital Securities. The impact of this amount is contributing approximately 8
basis points to the MREL ratio expressed as a percentage of RWA and
approximately 3 basis points to the MREL ratio expressed as a percentage of
LRE. In July 2023 BOC PCL proceeded with an issue of €350 million 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 'Debt securities in issue'.
Group financial results on the underlying basis (continued)
Balance Sheet Analysis (continued)
Regulations and Directives (continued)
Bank Recovery and Resolution Directive (BRRD) (continued)
Minimum Requirement for Own Funds and Eligible Liabilities (MREL) (continued)
The MREL ratio expressed as a percentage of risk weighted assets does not
include capital used to meet the CBR amount, 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
CBC.
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 RWA of 21.1% and an MREL ratio expressed as a
percentage of LRE of 10.1% as at 30 June 2023 and pro forma for the Notes
issuance, the MREL ratio expressed as a percentage of RWA stands at 24.5% and
the MREL ratio expressed as a percentage of LRE stands at 11.3%.
When accounting for the Notes issued in July 2023, BOC PCL 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, BOC PCL continues to evaluate
opportunities to optimise the build-up of its MREL.
Funding and Liquidity
Funding
Funding from Central Banks
At 30 June 2023, the Bank's funding from central banks amounted to €2,004
million, which relates to ECB funding, comprising solely of funding through
the Targeted Longer-Term Refinancing Operations (TLTRO) III, compared to
€1,977 million at 31 December 2022.
The Bank borrowed an overall amount of €3 billion under TLTRO III by June
2021, despite its comfortable liquidity position, given the favourable
borrowing terms, in combination with the relaxation of collateral
requirements.
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 billion TLTRO III funding in December
2022. The maturity date of the Bank's funding of €1.7 billion under the
seventh TLTRO III operation is in March 2024, whilst the €300 million under
the eighth TLTRO III operation is in June 2024.
Deposits
Customer deposits totalled €19,166 million at 30 June 2023, compared to
€18,998 million at 31 December 2022. 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 37.2% 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 52% as at 31 December 2022, remaining broadly flat.
Subordinated liabilities
At 30 June 2023, the carrying amount of the Group's subordinated liabilities
(including accrued interest) amounted to €309 million, compared to €302
million at 31 December 2022, and relate to unsecured subordinated Tier 2
Capital Notes ('T2 Notes').
Group financial results on the underlying basis (continued)
Balance Sheet Analysis (continued)
Funding and Liquidity (continued)
Funding (continued)
Subordinated liabilities (continued)
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 million, compared to €298
million at 31 December 2022, and relate to senior preferred notes.
In June 2021, the Bank executed its inaugural MREL transaction issuing €300
million 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 million 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 plus 409.5 basis
points, payable quarterly in arrears. The issuance was met with strong demand,
attracting interest from more than 90 institutional investors, with a peak
orderbook of €950 million and final pricing 37.5 basis points tighter than
the initial pricing indication. The Notes comply with the criteria for the
Minimum Requirement for Own Funds and Eligible Liabilities and contributes
towards the Bank's MREL requirements.
Liquidity
At 30 June 2023, the Group Liquidity Coverage Ratio (LCR) stood at 316%,
compared 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
billion, compared to €7.2 billion at 31 December 2022. When disregarding the
TLTRO III and including the €350 million 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 billion.
At 30 June 2023, the Group Net Stable Funding Ratio (NSFR) stood at 165%,
compared to 168% at 31 December 2022, well above the minimum regulatory
requirement of 100%.
Loans
Group gross loans totalled €10,277 million at 30 June 2023, compared to
€10,217 million at 31 December 2022, remaining largely flat as ongoing
repayments offset new lending.
New lending granted in Cyprus totalled €1,118 million for the six months
ended 30 June 2023, compared to €1,159 million for the six months ended 30
June 2022, mainly driven by strong demand for business loans. New lending in
the six months ended 30 June 2023 comprised €509 million of corporate loans,
€370 million of retail loans (of which €227 million were housing loans),
€125 million of SME loans and €114 million of shipping and international
loans.
At 30 June 2023, the Group net loans and advances to customers totalled
€10,008 million, compared to €9,953 million at 31 December 2022, up by 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 40.9% at 31 December 2022.
Group financial results on the underlying basis (continued)
Balance Sheet Analysis (continued)
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 the six months ended 30 June 2023 totalled €24
million. Further details regarding loan credit losses are provided in section
'Profit before tax and non-recurring items'.
The elevated inflation combined with the rising interest rate environment are
expected to weigh on customers 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 €40 million (net), to €371 million at 30 June 2023,
compared to €411 million as at 31 December 2022.
As a result, the NPEs account for 3.6% of gross loans as at 30 June 2023,
compared to 4.0% at 31 December 2022.
The NPE coverage ratio stands at 78% at 30 June 2023, compared 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
billion or 98% to below €0.4 billion and the NPE ratio by 59 percentage
points, from 63% to below 4%.
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 €250 thousand;
· Borrowers that had a fully completed application to Estia Scheme
and were assessed as eligible but not viable with a primary residence of up to
€350 thousand 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 five 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.
Group financial results on the underlying basis (continued)
Balance Sheet Analysis (continued)
Fixed income portfolio
Fixed income portfolio amounts to €3,178 million as at 30 June 2023,
compared to €2,500 million as at 31 December 2022. As at 30 June 2023, the
portfolio represents 13% of total assets (net of TLTRO III) and comprises
€2,703 million (85%) measured at amortised cost and €475 million (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
million, reflecting an unrealised fair value loss of €84 million, equivalent
to approximately 80 basis points of CET1 ratio.
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 billion and exceed properties
on-boarded in the same period of €0.5 billion.
During the six months ended 30 June 2023, the Group completed disposals of
€71 million (compared to €87 million in the six months ended 30 June
2022), resulting in a profit on disposal of €5 million for the six months
ended 30 June 2023 (compared to a profit of approximately €8 million for the
six months ended 30 June 2022). Asset disposals are across all property
classes, with almost 45% by value in the six months ended 30 June 2023
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
million, compared to SPAs for disposals of 373 properties, with contract value
of approximately €99 million for the six months ended 30 June 2022.
In addition, the Group had a strong pipeline of €66 million by contract
value as at 30 June 2023, of which €38 million related to SPAs signed
(compared to a pipeline of €81 million as at 30 June 2022, of which €41
million related to SPAs signed).
REMU on-boarded €6 million of assets in the six months ended 30 June 2023
(compared to additions of €26 million in the six months ended 30 June 2022),
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
million, (comprising properties of €946 million classified as 'Stock of
property' and €64 million as 'Investment properties'), compared to €1,116
million as at 31 December 2022 (comprising properties of €1,041 million
classified as 'Stock of property' and €75 million as 'Investment
properties').
In addition to assets held by REMU, properties classified as 'Investment
properties' with carrying value of €10 million as at 30 June 2023, compared
to €10 million as at 31 December 2022, are not managed by REMU.
Group financial results on the underlying basis (continued)
Income Statement Analysis
Total income
Net interest income (NII) for the six months ended 30 June 2023 amounted to
€358 million, compared to €145 million for the six months ended 30 June
2022, up by 146% compared to the prior period, driven mainly by the repricing
of loans and liquid assets 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 (of approximately €8 million in the
six months ended 30 June 2022) and the end of TLTRO favourable terms
(approximately €7 million in the six months ended 30 June 2022).
Quarterly average interest earning assets (AIEA) for the six months ended 30
June 2023 amounted to €22,781 million, compared to €22,235 million as at
30 June 2022. The increase was driven by the increase in liquid assets, mainly
as a result of the increase in fixed income portfolio and deposits by
approximately €1.3 billion and €0.7 billion respectively, partly offset by
the repayment of €1.0 billion TLTRO funding in December 2022.
Net interest margin (NIM) for the six months ended 30 June 2023 amounted to
3.17% compared to 1.32% for the six months ended 30 June 2022, driven by
interest rate rises and the increase in average interest earning assets.
Non-interest income for the six months ended 30 June 2023 amounted to €153
million, compared to €137 million for the six months ended 30 June 2022,
comprising net fee and commission income of €90 million, net foreign
exchange gains and net gains/(losses) on financial instruments of €21
million, net insurance result of €25 million, net gains/(losses) from
revaluation and disposal of investment properties and on disposal of stock of
properties of €5 million and other income of €12 million. Each of the
components is further analysed below.
Net fee and commission income for the six months ended 30 June 2023 amounted
to €90 million, compared to €94 million for the six months ended 30 June
2022. When disregarding the impact of the liquidity fees and NPE sale-related
servicing fee, net fee and commission income was up 8% compared to the prior
period, reflecting the introduction of a revised price list in February 2022,
and higher net credit card commissions.
Net foreign exchange gains and net gains/(losses) on financial instruments
amounted to €21 million for the six months ended 30 June 2023, compared to
€3 million for the six months ended 30 June 2022. The increase was driven by
higher net foreign exchange gains of €16 million (30 June 2022: €12
million) reflecting higher foreign exchange income through FX swaps, and net
gains in financial instruments of €5 million (30 June 2022: losses of €9
million).
Net insurance result amounted to €25 million for the six months ended 30
June 2023, compared to €24 million for the six months ended 30 June 2022, up
by 4% compared to the prior period.
Net gains/(losses) from revaluation and disposal of investment properties and
on disposal of stock of properties for the six months ended 30 June 2023
amounted to €5 million (comprising net gains on disposal of stock of
properties of €4 million, and net gains from revaluation and disposal of
investment properties of €1 million), compared to €7 million for the six
months ended 30 June 2022 (comprising a profit on disposal of stock of
properties of €8 million and net losses from revaluation and disposal of
investment properties of €1 million). REMU profit remains volatile.
Total income amounted to €511 million for the six months ended 30 June 2023,
compared to €282 million for the six months ended 30 June 2022. The increase
was mainly driven by strong growth in net interest income as explained above.
Total expenses
Total expenses for the six months ended 30 June 2023 were €180 million,
compared to €181 million for the six months ended 30 June 2022, 52% of which
related to staff costs (€93 million), 38% to other operating expenses (€69
million) and 10% to special levy on deposits and other levies/contributions
(€18 million). The decrease mainly relates to the reduction in staff costs,
as further explained below.
Group financial results on the underlying basis (continued)
Income Statement Analysis (continued)
Total expenses (continued)
Total operating expenses amounted to €162 million for the six months ended
30 June 2023, compared to €164 million for the six months ended 30 June
2022, as benefits from the efficiency actions in the year ended 31 December
2022 continue to partly offset wage and inflationary pressures.
Staff costs for the six months ended 30 June 2023 were €93 million, compared
to €95 million for the six months ended 30 June 2022, reflecting the savings
of the Voluntary Staff Exit Plan (VEP) that took place in July 2022, partially
offset by inflationary pressures and the accrual of termination benefits cost
of approximately €3 million. In addition staff costs for the six months
ended 30 June 2023 include €3.8 million staff cost rewards (variable pay),
namely the Short-Term Incentive Plan ('STIP') and the Long-Term Incentive
Plan. The STIP involves variable remuneration to selected employees and will
be driven by both delivery of the Group's strategy, as well as individual
performance.
During December 2022 the Group 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 million,
recorded in the consolidated income statement in the nine months ended 30
September 2022. The gross annual savings were estimated at approximately €37
million 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 2,889 persons
as at 31 December 2022.
Other operating expenses totaled €69 million for the six months ended 30
June 2023 and remained broadly flat compared to the six months ended 30 June
2022.
Special levy on deposits and other levies/contributions for the six months
ended 30 June 2023 amounted to €18 million compared to €17 million for the
six months ended 30 June 2022, up 10% compared to the prior period, driven
mainly by the increase of deposits of €0.7 billion compared to the prior
period.
The cost to income ratio excluding special levy on deposits and other
levies/contributions for the six months ended 30 June 2023 was 32% compared to
58% for the six months ended 30 June 2022, down by 26 percentage points. The
decrease is driven mainly by the higher total income.
Profit before tax and non-recurring items
Operating profit for the six months ended 30 June 2023 amounted to €331
million, compared to €101 million for the six months ended 30 June 2022,
driven mainly by the significant increase in net interest income.
Loan credit losses for the six months ended 30 June 2023 were €24 million,
compared to €23 million for the six months ended 30 June 2022.
Cost of risk for the six months ended 30 June 2023 was 48 basis points,
compared to a cost of risk of 43 basis points for the six months ended 30 June
2022.
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 (refer to 'Alternative Performance Measures
Disclosures' section of the Interim Financial Report 2023 for the respective
definitions) totalled €288 million, compared to €282 million at 31
December 2022, and accounted for 2.8% of gross loans (31 December 2022: 2.8%).
Group financial results on the underlying basis (continued)
Income Statement Analysis (continued)
Profit before tax and non-recurring items (continued)
Impairments of other financial and non-financial assets for the six months
ended 30 June 2023 amounted to €30 million, compared to €13 million for
the six months ended 30 June 2022, driven mainly by higher impairments on
specific, large, illiquid REMU stock properties.
Provisions for pending litigations, regulatory and other matters (net of
reversals) for the six months ended 30 June 2023 amounted to €14 million,
compared to €1 million for the six months ended 30 June 2022. The increase
is driven by the revised approach on pending litigation fees and the progress
on legal cases, as well as provisions for other matters in relation to the
run-down and disposal of the Group's legacy and non-core operations.
Profit before tax and non-recurring items for the six months ended 30 June
2023 totalled €263 million, compared to €64 million for the six months
ended 30 June 2022.
Profit after tax (attributable to the owners of the Company)
The tax charge totaled to €40 million for the six months ended 30 June 2023,
compared to €11 million for the six months ended 30 June 2022.
Profit after tax and before non-recurring items (attributable to the owners of
the Company) for the six months ended 30 June 2023 is €222 million, compared
to €52 million for the six months ended 30 June 2022.
Advisory and other transformation costs - organic for the six months ended 30
June 2023 are €2 million, compared to €5 million for the six months ended
30 June 2022, down by 57%.
Profit after tax arising from the organic operations (attributable to the
owners of the Company) for the six months ended 30 June 2023 amounted to
€220 million, compared to €47 million for the six months ended 30 June
2022.
Following completion of Helix 3 project, there are no amounts recognised for
provisions/net profit/(loss) relating to NPE sales for the six months ended 30
June 2023.
Restructuring and other costs relating to NPE sales for the six months ended
30 June 2023 was nil compared to €1 million for the six months ended 30 June
2022 (relating to the agreements for the sale of portfolios of NPEs).
Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) of €3
million in the six months ended 30 June 2022, 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 the six months
ended 30 June 2023 amounts to €220 million, corresponding to a ROTE of
24.0%, compared to €43 million for the six months ended 30 June 2022,
corresponding to a ROTE of 4.9%.
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. The growth forecast for the year 2023 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.
Operating Environment (continued)
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 of 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 to 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 and 2.8% in June
2023, and is estimated to reach 2.4% in July 2023. 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 billion 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 billion 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 billion 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 basis points. The
federal reserve started hiking in March 2022 and the ECB followed in July of
the same year. 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%.
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.
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 of the event (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 million for 2023 and to fall modestly to over
€625 million 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
approximately 50% by June 2024 (previously assumed by December 2023)
· gradual change in deposit mix towards time and notice deposits to
approximately 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 approximately 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
approximately 3% per annum for 2022-2024, broadly in line with projected
economic growth, driven by cross-selling and growth in capital-light sales.
Strategy and Outlook (continued)
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 approximately 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.
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 approximately 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 basis points for
2023 is reiterated to weather the ongoing macroeconomic and geopolitical
uncertainties, and then to normalise to approximately 40-50 basis points 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 billion 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
basis points (pre-distributions) per annum 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 approximately 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.
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 million in total and
is 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 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 approximately 200-250 basis points (pre-distributions) per annum
for 2023-2025. By 31 December 2025, the Group expects its CET1 ratio to stand
at approximately 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
approximately €2.0 billion) amounted to approximately €7.1 billion,
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 the six months ended 30 June 2023 stood at €358 million,
more than double compared to the six months ended 30 June 2022. This increase
is underpinned by faster and steeper than expected interest rate rises as well
as a resilient low deposit pass-through.
Business Overview (continued)
Favourable interest rate environment (continued)
In July 2023, ECB set the remuneration of minimum reserves (MRR) at 0%. The
impact on forgone net interest income from the recent reduction of MRR is
expected to be approximately €7 million per annum 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.
The Group has continued to provide high quality new lending in the six months
ended 30 June 2023 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 the six months ended 30 June 2023, new lending remained strong at
€1,118 million, mainly driven by strong demand for business loans. Gross
performing loan book remained broadly flat as ongoing repayments offset new
lending. Performing loan book is expected to remain broadly flat in 2023.
Fixed income portfolio amounts to €3,178 million as at 30 June 2023,
compared to €2,500 million as at 31 December 2022. The increase reflects
incremental new investments in the six months ended 30 June 2023 ahead of
expected maturities in the second half of 2023. The portfolio represents 13%
of total assets (excluding TLTRO III) and comprises €2,703 million (85%)
measured at amortised cost and €475 million (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
million, reflecting an unrealised fair value loss of €84 million, equivalent
to approximately 80 basis points 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 six months ended 30 June 2023, non-interest income
amounted to €148 million (excluding an one-off insurance receivable in other
income), remaining an important contributor to the Group's profitability, and
contributing to approximately 90% of the Group's total operating expenses.
Going forward, non-interest income is expected to continue covering
approximately 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% in the first half 2023 to €90 million.
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 million in the six months ended 30 June 2023, up 11%
compared to the prior period, 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 a recurring and improving income, further diversifying the Group's
income streams. The net insurance result for the six months ended 30 June 2023
contributed 16% of non-interest income and amounted to €25 million, up 4%
compared to the prior period; 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 within the Interim Financial Report 2023.
Business Overview (continued)
Growing revenues in a more capital efficient way (continued)
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 million. Following the completion of the VEP, the gross annual savings
were estimated at approximately €37 million or 19% of staff costs with a
payback period of 2.7 years. 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
million. 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 the six months ended 30 June 2023 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 the six months
ended 30 June 2023 was reduced further to 32%, 26 percentage points down
compared to the six months ended 30 June 2022, driven mainly by the higher
total income. In the second half of 2023, 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 approximately €4 million 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 the six months ended 30 June 2023 include
approximately €3.5 million staff cost rewards, in relation to 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.
Business Overview (continued)
Lean operating model (continued)
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 the second quarter of 2023, 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 percentage points from 83.8% in June 2020). In addition, 83.2% of
individual customers were digitally engaged (up by 10.8 percentage points 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% compared to the prior year period).
Digital offerings via digital channels continued to enhance Group's sales
further in the second quarter of 2023. During the second quarter of 2023, new
lending via Quickloans reached €26 million (compared to new lending of €18
million for the first quarter of 2023) and totalled €44 million for the six
months ended 30 June 2023. Digital deposits have also shown an increase of 33%
compared to the prior year period, reaching €221 million at 30 June 2023.
For the six months ended 30 June 2023, digital insurance sales, with two new
products in mobile app (Motor & Home Insurance), amounted to €159
thousand (31 December 2022: €68 thousand).
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 approximately €550 million
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
million Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities (the
'New Capital Securities').
The issue was met with exceptional demand, attracting interest from
approximately 240 institutional investors, with the final order book over 12
times over-subscribed and final pricing 62.5 basis points tighter than the
initial pricing indication. This also reflects significant improvement in the
credit spread to approximately 910 basis points compared to approximately
1,260 basis points for the previous AT1 issue in 2018 ('Existing Capital
Securities').
Business Overview (continued)
Capital market presence (continued)
In July 2023, the Bank has successfully launched and priced an issuance of
€350 million 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 million and final pricing 37.5
basis points tighter 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 approximately 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 the six months ended 30 June 2023, compared to the six months
ended 30 June 2022 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 the six months ended 30 June 2023 compared
to the six months ended 30 June 2022 respectively.
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.
Business Overview (continued)
Enhancing organisational resilience and ESG (Environmental, Social and
Governance) agenda (continued)
Environmental Pillar (continued)
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 million compared to €20.9 million 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 approximately
€70 million 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 approximately €4 million 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.
Business Overview (continued)
Enhancing organisational resilience and ESG (Environmental, Social and
Governance) agenda (continued)
Governance Pillar (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).
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 Russia in 2015. The Group
has run down its legacy net exposure to less than €1 million 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 less than 1% of net loans as at
30 June 2023. The net book value of these loans stood at €81 million as at
30 June 2023, of which €74 million 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 billion (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, approximately
25,900 customer relationships were terminated and approximately 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.
Business Overview (continued)
Ukrainian crisis (continued)
Indirect impact (continued)
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.
Going concern
The Directors have made an assessment of the ability of the Group, the Company
and BOC PCL to continue as a going concern for a period of 12 months from the
date of approval of these Consolidated Financial Statements.
The Directors have concluded that there are no material uncertainties which
would cast significant doubt over the ability of the Group, the Company and
BOC PCL to continue to operate as a going concern for a period of 12 months
from the date of approval of the Consolidated Condensed Interim Financial
Statements.
In making this assessment, the Directors have considered a wide range of
information relating to present and future conditions, including projections
of profitability, cash flows, capital requirements and capital resources,
taking also into consideration, the Group's Financial Plan approved by the
Board in February 2023 (the 'Plan') and the operating environment, as well as
any reforecast exercises performed. The Group has sensitised its projection to
cater for a downside scenario and has used reasonable economic inputs to
develop its medium-term strategy. The Group is working towards materialising
its Strategy.
Capital
The Directors and Management have considered the Group's forecasted capital
position, including the potential impact of a deterioration in economic
conditions. The Group has developed capital projections under a base and an
adverse scenario and the Directors believe that the Group has sufficient
capital to meet its regulatory capital requirements throughout the period of
assessment.
Funding and liquidity
The Directors and Management have considered the Group's funding and liquidity
position and are satisfied that the Group has sufficient funding and liquidity
throughout the period of assessment. The Group continues to hold a significant
liquidity buffer at 30 June 2023 that can be easily and readily monetised in a
period of stress.
Principal risks and uncertainties ‑ Risk management and mitigation
As part of its business activities, the Group faces a variety of risks. The
Group monitors, manages and mitigates these risks through various control
mechanisms. Credit risk, liquidity and funding risk, market risk (arising from
adverse movements in foreign currency exchange rates, interest rates, security
prices and property prices) and insurance and re‑insurance risk, are some of
the key significant risks the Group faces. In addition, key risks facing the
Group include operational risk which includes also compliance, legal and
reputational risk, regulatory risk, information security and cyber risk,
digital transformation risk, technology risk, climate risk as well as business
model and strategic risk.
Information relating to the principal risks the Group faces and risk
management is set out in Notes 30 to 32 of the Consolidated Condensed Interim
Financial Statements and in the 'Risk and Capital Management Report', both of
which form part of the Interim Financial Report for the six months ended 30
June 2023. In addition, in relation to legal risk arising from litigations,
investigations, claims and other matters, further information is disclosed in
Note 27 of the Consolidated Condensed Interim Financial Statements.
Additionally, the Group is exposed to the risk of changes in the value of
property which is held either for own use or as stock of property or as
investment property. Stock of property is predominately acquired in exchange
for debt and is intended to be disposed of in line with the Group's strategy.
Further information is disclosed in Note 19 to the Consolidated Condensed
Interim Financial Statements.
Details of the financial instruments and hedging activities of the Group are
set out in Note 16 of the Consolidated Condensed Interim Financial Statements.
Further information on financial instruments is also presented in Notes 30-31
of the Consolidated Condensed Interim Financial Statements.
Going concern (continued)
Principal risks and uncertainties ‑ Risk management and mitigation
(continued)
The Group activities are mainly in Cyprus therefore the Group's performance is
impacted by changes in the Cyprus operating environment, as described in the
'Operating environment' section of the Interim Management Report and changes
in the macroeconomic conditions and geopolitical developments as described in
the 'Risk and Capital Management Report' which forms part of the Interim
Financial Report for the six months ended 30 June 2023.
In addition, details of the significant and other judgements, estimates and
assumptions which may have a material impact on the Group's financial
performance and position are set out in Note 6 to the Consolidated Condensed
Interim Financial Statements.
The invasion of Russia in Ukraine and the sanctions imposed on Russia raised
new challenges for the Group and the developments are closely monitored. The
Group's direct exposure is limited, however any indirect impact will depend on
the duration and severity of the crisis in Ukraine and its impact on the
Cypriot economy, mainly due to a negative impact on the tourism sector, the
increasing energy prices resulting in inflationary pressures and disruptions
to global supply chains. Further disclosures are provided in 'Business
Overview' and 'Operating Environment' sections of the Interim Management
Report.
The risk factors discussed above and in the reports referenced above should
not be regarded as a complete and comprehensive statement of all potential
risks and uncertainties. There may be risks and uncertainties of which the
Group is not aware or which the Group does not consider significant, but which
may become significant. The challenging conditions in global markets arise due
to factors including the Ukraine-Russian war, high interest rate environment,
inflationary pressures, the growing threat from cyberattacks and other unknown
risks. As a result the precise nature of all risks and uncertainties that the
Group faces cannot be predicted as many of these risks are outside of the
Group's control.
Events after the reporting date
In July 2023, BOC PCL issued a €350 million senior preferred note (the
'Notes') under the EMTN Programme. 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, BOC PCL 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 of
the Notes. If the Notes are not redeemed by BOC PCL, 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 plus 409.5 basis
points, payable quarterly in arrears. The Notes are listed on the Luxembourg
Stock Exchange's Euro MTF market. The Notes comply with the criteria for the
minimum requirement for own funds and eligible liabilities (MREL) and
contribute towards BOC PCL's MREL requirements.
No other significant non adjusting events have taken place since 30 June 2023.
Dividends
Based on the 2022 SREP decision, effective from 1 January 2023, any equity
dividend distribution is subject to regulatory approval, both for the Company
and BOC PCL. The requirement for approval does not apply if the distributions
are made via the issuance of new ordinary shares to the shareholders which are
eligible as Common Equity Tier 1 Capital nor to the payment of coupons on any
AT1 capital instruments issued by the Company or BOC PCL.
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 for approval at the Annual General
Meeting ('AGM') on 26 May 2023, a final dividend of €0.05 per ordinary share
in respect of the earnings of the year ended 31 December 2022 ('Dividend').
The AGM on 26 May 2023 declared a final dividend of €0.05 per share. The
Dividend amounted to €22,310 thousand in total and is equivalent to a payout
ratio of 14% of the financial year 2022 recurring profitability adjusted for
the AT1 coupon or 31% based on the financial year 2022 profit after tax (as
reported in the 2022 Annual Financial Report).
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Interim Financial Report in
accordance with International Accounting Standard (IAS) 34 on 'Interim
Financial Reporting' as adopted by the European Union, the Transparency
(Directive 2004/109/EC) Regulations 2007, as amended, Part 2 (Transparency
Requirements) of the Central Bank (Investment Market Conduct) Rules 2019 and
the applicable requirements of the Disclosure Guidance and Transparency Rules
of the UK's Financial Conduct Authority.
Each of the Directors, whose names and functions are listed on page 1,
confirms that to the best of each person's knowledge and belief:
· the Consolidated Condensed Interim Financial Statements, prepared
in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU,
give a true and fair view of the assets, liabilities and financial position of
the Group at 30 June 2023, and its profit for the period then ended; and
· the Interim Financial Report includes a fair review of:
a. important events that have occurred during the first six months
of the year, and their impact on the Consolidated Condensed Interim Financial
Statements;
b. a description of the principal risks and uncertainties for the
next six months of the financial year;
c. details of any related party transactions that have materially
affected the Group's financial position or performance in the six months ended
30 June 2023; and
d. any changes in the related parties' transactions described in
the last annual report that could have a material effect on the financial
position or performance of the Group in the first six months of the current
financial year.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included in the Company's website.
Legislation in Ireland governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Efstratios‑Georgios Arapoglou
Chairman
Panicos Nicolaou
Chief Executive Officer
08 August 2023
Risk and Capital Management Report 30 June 2023
One of the Group's main priorities is to continually improve its risk
management framework so as to be able to respond to the ever changing
environment in an appropriate manner. Effective risk management is critical to
the success of the Group, and as such the Group maintains a risk management
framework designed to ensure the safety and soundness of the institution,
protect the interests of depositors and shareholders and comply with
regulatory requirements. Clearly defined lines of authority and accountability
are in place as well as the necessary infrastructure and analytics so as to
allow the Group to identify, assess, monitor and control risk.
1. Risk Management Framework (RMF)
The Board of Directors, through the Risk Committee, is responsible to ensure
that a coherent and comprehensive Risk Management Framework (the 'framework'
or 'RMF') for the identification, assessment, monitoring and controlling of
all risks is in place. The framework ensures that material and emerging risks
are identified, including, but not limited to, risks that might threaten the
Group's business model, future performance, liquidity, and solvency. Such
risks are taken into consideration in defining the Group's overall business
strategy ensuring alignment with the Group's risk appetite. In setting its
risk appetite, the Group ensures that its risk bearing capacity is considered
so that the appropriate capital levels are always maintained.
The RMF is supported by a strong governance structure and is comprised by
several components that are analysed in the sections below. The RMF is
reviewed, updated and approved by the Board at least annually to reflect any
changes to the Group's business or to take into consideration external
regulations, corporate governance requirements and industry best practices.
1.1 Risk Governance
The responsibility for the governance of risk at the Group lies with the Board
of Directors (the 'Board') which is ultimately accountable for the effective
management of risks and for the system of internal controls in the Group. The
Board is assisted in its risk governance responsibilities by the Board Risk
and Board Audit Committees (RC and AC respectively) and at executive level by
the Executive Committee (EXCO), Asset and Liability Committee (ALCO), Asset
Disposal Committee (ADC), Technology Committee (TC), Sustainability Committee
(SC) and the Credit Committees.
The RC supports the Board on risk oversight matters including the monitoring
of the Group's risk profile and of all risk management activities whilst the
AC supports the Board in relation to the effectiveness of the system of
internal controls. In addition, discussion and escalation processes are in
place through both Board and Executive Committees that provide for a
consistent approach to risk management and decision-making.
Discussion around risk management is supported by the appropriate risk
information submitted by the Risk Management Division (RMD) and Executive
Management. The Chief Risk Officer (CRO) or his representatives participate in
all such key committees to ensure that the information is appropriately
presented, and that RMD's position is clearly articulated.
Furthermore, certain roles within the Group are critical as they carry
specific responsibilities with respect to risk management. These include:
1. Risk Management Framework (RMF) (continued)
1.1 Risk Governance (continued)
Chief Executive Officer (CEO)
The CEO is accountable for leading the development of the Group's strategy and
business plans in a manner that is consistent with the approved risk appetite
and for managing and organising Executive Management to ensure these are
executed. It is the CEO's responsibility to manage the Group's financial and
operational performance within the approved risk appetite.
Chief Risk Officer (CRO)
The CRO leads an independent RMD across the Group including its subsidiaries.
The CRO is responsible for the execution of the Risk Management Framework and
the development of risk management strategies. The CRO is expected to
challenge business strategy and overall risk taking and risk governance within
the Group and independently submit his findings, where necessary, to the RC.
The CRO reports to the RC and for administrative purposes has a dotted line to
the CEO.
Accountability and Authority
The RMD operates independently and this is achieved through:
- Organisational independence from the activities assigned to be
controlled
- Unrestricted and direct access to Executive Management and the
Board, either through the RC or directly
- Direct and unconditional access to all business lines that
have the potential to generate material risk to the Group. Front Line managers
are required to cooperate with the RMD managers and provide access to all
records and files of the Group as well as any other information necessary
- A separate budget submitted to the RC for approval
- The CRO is a member of the EXCO and holds voting or veto
presence in key executive committees as well as operational committees
Furthermore, this independence is also ensured as:
- The CRO is assessed annually by the RC that is jointly
responsible with Human Resources & Remuneration Committee
(https://www.bankofcyprus.com/en-gb/group/who-we-are/our-governance/group-committees/human-resources-remuneration-committee/)
- The CRO maintains a close working relationship with both the
RC and its Chairperson which includes regular and frequent communication both
during official RC meetings as well as unofficial meetings and discussions
1.2 Organisational Model
The RMD is the business function set up to manage the risk management process
of the Group on a day-to-day basis. The risk management process is integrated
into BOC PCL's internal control system. The RMD is organized into several
departments, each of which is specialized in one or several categories of
risks. The organization of RMD reflects the types of risks inherent in the
Group.
The RMD organisational model is structured so as to:
- Define risk appetite and report regularly on the status of the
risk profile
- Ensure that all material and emerging risks have proper
ownership, management, monitoring and clear reporting
- Promote proper empowerment in key risk areas that will assist in
the creation of a robust risk culture
- Provide tools and methodologies for risk management to the
business units
- Report losses from risks identified to the EXCO, the RC and the
Board and, where necessary, to the Regulatory Authorities
- Collect and monitor Key Risk Indicators (KRIs)
RMD is responsible for the risk management across the Group companies.
1. Risk Management Framework (continued)
1.3 Risk Identification
The risk identification process is comprised of two simultaneous but
complementary approaches, namely, the top-down and the bottom-up approaches.
The top-down process is led by Senior Management and focuses on identifying
the Group's material risks whilst the bottom-up approach risks are identified
and captured through several methods such as the Risk and Control
Self-Assessment (RCSA) process, incident capture, fraud events capture,
regulatory audits, direct engagement with specialized units and other. The
risks captured by these processes are compiled during the annual ICAAP process
and its quarterly updates and form the Groups' material risks.
To ensure a complete and comprehensive identification of risks the Group has
integrated several key processes into its risk identification
process,including the:
- Internal Capital Adequacy Assessment Process (ICAAP)
- Internal Liquidity Adequacy Assessment Process (ILAAP)
- Stress testing
- Group Financial Plan compilation process
- Regulatory, internal and external reviews and audits
1.4 Three Lines of Defence
The Group complies with the regulatory guidelines for corporate governance and
has established the "Three Lines of Defence" model as a framework for
effective risk and compliance management and control. The three lines of
defence model defines the responsibilities in the risk management process
ensuring adequate segregation in the oversight and assurance of risk.
First Line of Defence
The first line of defence lies with the functions that own and manage risks as
part of their responsibility for achieving objectives and are responsible for
implementing corrective actions to address, process and control deficiencies.
It comprises of management and staff of business lines and support functions
who are directly aligned with the delivery of products and/or services.
Second Line of Defence
The second line of defence includes functions that oversee the compliance of
the first line management and staff, with the regulatory framework and risk
management principles. It comprises of the RMD, Information Security and
Compliance functions. The second line of defence sets the corporate governance
framework of the Group and establishes policies and guidelines that the
business lines and support functions, Group entities and staff should operate
within. The second line of defence also provides support, as well as
independent oversight of the risk profile and risk framework.
Third Line of Defence
The third line of defence is the Internal Audit Division (IA) which provides
independent assurance to the Board and the EXCO on the design adequacy and
operating effectiveness of the Group's internal control framework, corporate
governance and risk management processes for the management of risks according
to the risk appetite set by the Board. Findings are communicated to the
Board through the committees and senior management and other key stakeholders,
with remediation plans monitored for progress against agreed completion dates.
1. Risk Management Framework (continued)
1.4 Three Lines of Defence (continued)
1. Risk Management Framework (continued)
1.5 Risk Appetite Framework (RAF)
The objective of the Risk Appetite Framework (RAF) is to set out the level of
risk that the Group is willing to take in pursuit of its strategic objectives,
outlying the key principles and rules that govern the risk appetite setting.
It comprises the Risk Appetite Statement (RAS), the associated policies and
limits where appropriate, as well as the roles and responsibilities for the
implementation and monitoring of the RAF.
The RAF has been developed in order to be used as a key management tool to
better align business strategy (financial and non-financial targets) with risk
management, and it should be perceived as the focal point for all relevant
stakeholders within the Group, as well as the supervisory bodies, for the
assessment of whether the undertaken business activities are consistent with
the set risk appetite.
The RAF is one of the main elements of the Risk Management Framework which
includes, among others, a number of frameworks, policies and circulars that
address the principal risks of the Group. Separate RAFs are in place for all
operating subsidiaries which are subject to each subsidiary's board approval.
Risk Appetite Statement (RAS)
The RAS is the articulation, in written form, of the aggregate level and types
of risk that the Group is willing to accept in the course of executing its
business objectives and strategy. It includes qualitative statements as well
as quantitative measures expressed relative to capital, liquidity, earnings,
funding and other risks.
The RAS considers both principal and other risks (financial and
non-financial), which indicatively include the following:
Financial Risks Non-Financial Risks
Capital Transaction Processing & Execution Risk
Earnings Compliance Risk
Credit Risk Reputational Risk
Market Risk Legal Risk
Interest Rate Risk in the Banking Book (IRRBB) Information Security and Cyber Risk
Concentration Risk Technology Risk
Funding & Liquidity Risk Outsourcing/3rd Party Risk
Climate & Environmental (C&E) risks
Risk appetite and Financial Plan interaction
The RAS is subject to an annual review process during the period in which the
Group's Financial Plan as well as the divisional strategic plans are being
devised. The interplay between these processes provides for an iterative cycle
of feedback during which RAS indicators, with minimum regulatory requirements,
act as a backstop to the Financial Plan while for other indicators the
Financial Plan provides input for risk tolerance setting. Furthermore, every
revision of the Group Financial Plan (as well as different scenarios run under
the Group Financial Plan) and/or Reforecast exercises run, are tested to
ensure they are within the Group's risk appetite.
Risk Appetite Dashboard monitoring
To ensure that the risk profile of the Group is within the approved risk
appetite, a consolidated risk report and a risk appetite dashboard are
regularly reviewed and discussed by the Board and the RC.
Where a breach occurs, the Risk Appetite Framework provides the necessary escalation process to analyse the materiality and nature of the breach, notify the appropriate authorities, and decide the necessary remediation actions.
1. Risk Management Framework (continued)
1.6 Risk Taxonomy
In order to ensure that all risks the Group may face are identified and
managed, a risk taxonomy is in place which is a key component of the Internal
Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity
Adequacy Assessment Process (ILAAP). The taxonomy ensures that the coverage of
risks is comprehensive and identifies potential linkages between risks.
1.7 Risk measurement and reporting
The RMD uses several systems and models to support key business processes and
operations, including stress testing, credit approvals, fraud risk and
financial reporting. The RMD has established a model governance and validation
framework to help address risks arising from model use.
Additionally, the RMD:
- Maintains a categorization and definitions of risks and
terminologies which are used throughout the Group
- Collates reports of Key Risk Indicators (KRIs) and other
relevant risk information. When limit violations occur, escalation and
reporting procedures are in place
- Checks that risk information provided by management is
complete and accurate and management has made all reasonable endeavour to
identify and assess all key risks
- Ensures that the risk information submitted to the RC and the
Board by RMD and management is appropriate and enables monitoring and control
of all the risks faced by the Group
- Discloses risk information externally and prepares reports on
significant risks in line with internal and external regulatory requirements.
Stress testing
Stress testing is a key risk management tool used by the Group to provide
insights on the behaviour of different elements of the Group in a crisis
scenario and assess Group's resilience and capital and liquidity adequacy,
through the use of a range of scenarios, based on variations of market,
economic and other operating environment conditions. Stress tests are
performed for both internal and regulatory purposes and serve an important
role in:
- Understanding the risk profile of the Group
- Evaluating whether there is sufficient capital or adequate
liquidity under stressed conditions (ICAAP and ILAAP) so as to put in place
the appropriate mitigants
- Evaluating of the Group's strategy
- Establishing or revising limits
- Assisting the Group to understand the events that might push the
Group outside its risk appetite
The Group carries out the stress testing process through a combination of
bottom-up and top-down approaches. Scenario and sensitivity analysis follows a
bottom-up approach, whereas reverse stress testing follows through a top-down
approach.
If the stress testing scenarios reveal vulnerability to a given set of risks,
management makes recommendations to the Board, through RC, for remedial
measures or actions.
The Group's stress testing programme embraces a range of forward looking
stress tests and takes all the Group's material risks into account. These key
internal exercises include:
· ICAAP stress testing undertaken in support of the Internal
Capital Adequacy Assessment Process. Quarterly ICAAP reviews are also
undertaken.
· ILAAP stress testing applied to the funding and liquidity plan in
support of the Internal Liquidity Adequacy Assessment Process to formally
assess the Group's liquidity risks. Quarterly ILAAP reviews are also
undertaken.
· Ad hoc stress testing as and if required, including in response
to regulatory requests.
1. Risk Management Framework (continued)
1.7 Risk measurement and reporting (continued)
Other business and risk type specific stress tests
The Market Risk and Liquidity Risk Department performs additional stress
tests, which include the following:
- Monthly stress testing for interest rate risk (2% shock on
Economic Value (EV))
- Quarterly stress testing for interest rate risk (2% shock on
Net Interest Income (NII))
- Quarterly stress testing for interest rate risk (based on the
six predefined Basel interest rate scenarios which involve flattening,
steepening, short up, short down, parallel up, parallel down shocks)
- Quarterly stress testing on items that are marked to market:
impact on profit/loss and reserves is indicated from changes in interest rates
and prices of bonds and equities
ICAAP
The ICAAP is a process whose main objective is to assess the Group's capital
adequacy in relation to the level of underlying material risks that may arise
from pursuing the Group's strategy or from changes in its operating
environment. More specifically, the ICAAP analyses, assesses and quantifies
the Group's risks, establishes the current and future capital needs for the
material risks identified and assesses the Group's absorption capacity under
both the baseline scenario and stress testing conditions, aiming to
demonstrate that the Group has sufficient capital, under both the base and
stress case scenarios, to support its business and achieve its strategic
objectives as per its Board‑approved Risk Appetite and Strategy.
The Group undertakes quarterly reviews of its ICAAP results as well as on an
ad-hoc basis if needed, which are submitted to the ALCO and the RC,
considering the latest actual and forecasted information. During the quarterly
review, the Group's risk profile is reviewed and any material
changes/developments since the annual ICAAP exercise are assessed in terms of
capital adequacy.
The 2022 ICAAP was submitted to the ECB on 31 March 2023. The 2022 ICAAP
indicated that the Group has sufficient capital and available mitigants to
support its risk profile and its business and to enable it to meet its
regulatory requirements, both under a baseline and stressed conditions
scenarios.
ILAAP
The ILAAP is a process whose main objective is to assess whether the volume
and capacity of liquidity resources available to the Group are adequate to
support its business model, to achieve its strategic objectives under both the
base and severe stress scenarios, and to meet regulatory requirements
including the LCR and the NSFR.
The Group undertakes quarterly reviews of its ILAAP results through quarterly
liquidity stress tests which are submitted to the ALCO and the RC, where
actual and forecasted information is considered. Any material changes since
the year-end are assessed in terms of liquidity and funding. The quarterly
review assessment identifies whether the Group has an adequate liquidity
buffer to cover the stress outflows.
The 2022 ILAAP was submitted to the ECB on 31 March 2023. The 2022 ILAAP
indicated that the Group maintains liquidity resources which are adequate to
ensure its ability to meet obligations as they fall due under ordinary and
stressed conditions scenarios.
The Group participated in the ECB's inaugural climate risk stress test in
2022
The exercise served as a learning exercise for banks to introduce climate risk
into risk management as a qualitative part of the Supervisory Review and
Evaluation Process (SREP).
1.8.
2023 ECB SREP Stress Test
The Group participated in the ECB SREP Stress Test of 2023. The stress test
measures how banks would fare in a hypothetical adverse economic scenario
(https://www.esrb.europa.eu/mppa/stress/html/index.en.html?skey=20%20March%202023)
, which assumes a prolonged period of low growth, elevated interest rates and
high inflation. It is not a 'pass-or-fail' exercise, and no threshold is set
to define the failure or success of banks. Instead, the findings of the stress
test will feed into the ongoing supervisory dialogue, in which supervisors
explain their assessment to banks and discuss potential measures to address
any shortcomings.
The ECB published on 28 July 2023 the results of the stress test. As per the
relevant ECB press release 'Capital depletion at the end of the three-year
horizon was lower than in previous stress tests. This was mainly due to banks
overall being in better shape going into the exercise, with higher-quality
assets and stronger profitability.
1.8. 2023 ECB SREP Stress Test (continued)
By its standard procedures, the ECB considers the quantitative performance in
the adverse scenario as an input when reconsidering the level of the Pillar II
Guidance in its 2023 SREP assessment and the qualitative performance as one
aspect when holistically reviewing the Pillar II Requirement. The stress test
was based on a Static balance sheet approach, thus using the Group's financial
and capital position as at 31 December 2022 as a starting point. The results
for the Group, as published by the ECB, are presented below:
High-level individual results Scenario sensitivities: 2023-2025 projections
by range
adverse scenario, FL (de
lta
ove
r
tot
al
REA
FL
202
2)
Institution Sample Maximum CET1 ratio (FL) depletion Minimum CET1 ratio (FL) by ranges Minimum Tier 1 leverage ratio (FL) by ranges Delta projected NII adverse vs. baseline scenario Delta projected LLPs adverse vs. baseline scenario Delta projected profit/ loss adverse vs. base-line scenario (in %)
by ranges (in %) (in %)
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