REG - Bank of Cyprus Hldgs - Preliminary FY2023 Group Financial Results
19/02/2024 07:00
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RNS Number : 5822D Bank of Cyprus Holdings PLC 19 February 2024
Announcement
Preliminary Group Financial Results for the year ended 31 December 2023 and
Updated Financial Targets
Nicosia, 19 February 2024
Key Highlights for the year ended 31 December 2023
Resilient economic outlook
· Continued strong economic growth; Cyprus' GDP growth of 2.3%(1)
for 4Q2023, outperforming the Eurozone average
· New lending of €2.0 bn, despite the rising interest rate
environment
· Gross performing loan book at €9.8 bn, broadly flat year on
year as repayments offset new lending
Delivering ROTE of 24.8% in FY2023
· NII of €792 mn up 114% year on year; which peaked at €220 mn
in 4Q2023 (up 3% quarter on quarter)
· Non-NII of €300 mn up 3% year on year, covering 88% of total
operating expenses(2)
· Total operating expenses(2) up 5% year on year with 2022
efficiency actions partly offsetting inflationary pressures; cost to income
ratio(2) reduced to 31% (vs 49% in FY2022)
· Profit after tax of €487 mn (vs €57 mn in FY2022); basic
earnings per share of €1.09 for FY2023
Liquid and resilient balance sheet
· NPE ratio broadly flat on prior quarter at 3.6% (1.0% on net
basis) down 40 bps year on year and in line with guidance
· NPE Coverage at 73% up 4 p.p. on prior year; cost of risk at 62
bps
· Retail funded deposit base at €19.3 bn, up 2% year on year and
broadly flat compared to prior quarter
· Highly liquid balance sheet with €9.6 bn placed at the ECB
Robust capital and shareholder focus
· Regulatory CET1 ratio and Total Capital ratio of 16.5% and 21.5%
respectively
· Organic capital generation(3) of 482 bps in FY2023, of which 134
bps in 4Q2023
· Tangible book value per share of €4.93 in 2023, up 24% year on
year
2024-2025 Targets
· Reiterated ROTE of over 17%(4) for 2024 and over 16%(4) for 2025
based on a 15% CET1 ratio
· Net interest income for 2024 upgraded to over €670 mn
· NPE ratio of c.3% by end-2024 and <3% by end-2025
· Reiterated dividend policy to build prudently and progressively
towards a 30-50% payout ratio
1. Source: Cyprus' Ministry of Finance
2. Excluding special levy on deposits and other levies/contributions
3. Based on profit after tax (pre-distributions)
4. Excluding amounts reserved for distribution
*Key Highlights are based on the financial results on an 'Underlying Basis'.
** On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout is on a restated basis unless otherwise stated. Further information
on IFRS 17 is provided under the section 'Commentary on Underlying Basis'.
Group Chief Executive Statement
"2023 was a milestone year for the Group representing the new chapter of
becoming a strong and well-capitalised organisation. During 2023 we achieved
strong financial and operational performance. We generated profit after tax of
€487 mn, benefiting from sharply rising interest rates and ample liquidity
whilst maintaining cost control despite inflationary pressures and robust
asset quality. Our business model is diversified as demonstrated by the
significant contribution of non-interest income to the Group's profitability,
covering almost 90% of our total operating expenses.
Overall, we delivered a ROTE of 24.8%, significantly surpassing our 2023
targets. This performance facilitated rapid capital build-up, unlocking c.480
bps organic capital generation and driving our CET1 ratio to 18.7% at year
end, pre- distributions. Accruing for a dividend at the top end of our
dividend policy(1) our regulatory CET1 ratio stands at 16.5%. Our tangible
book value per share improved by 24% year on year to €4.93, reflecting
accelerating shareholder value creation.
The Cypriot economy remains strong with GDP growing by 2.3% in 4Q2023,
demonstrating once again its resilience to external shocks. In this supportive
environment, we are entering 2024, from a position of strength. We will
continue to execute on those levers under our control and we are confident
that we can deliver a ROTE of over 17% on a 15% CET1 ratio for 2024 and
mid-teens on a more normalised interest rate environment (2.0-2.5%).
We recognise the importance of shareholder returns and reiterate our dividend
policy to build prudently and progressively towards a 30% to 50% payout ratio.
We continue to execute our strategy, with a clear focus on supporting our
customers, delivering shareholder value and assisting the development of the
Cypriot economy."
Panicos Nicolaou
(1)In line with Commission Delegated Regulation (EU) No 241/2014 principles.
The dividend accrual does not constitute an approval by regulators or a
decision by the Bank with respect to dividend payments for 2023. Any
recommendation of a dividend is subject to regulatory approval
A. Preliminary Group Financial Results- Statutory Basis
Unaudited Consolidated Income Statement for the year ended 31 December 2023
2023 2022
(restated)(1)
€000 €000
Interest income 920,078 428,849
Income similar to interest income 65,450 22,119
Interest expense (146,899) (65,721)
Expense similar to interest expense (46,412) (14,840)
Net interest income 792,217 370,407
Fee and commission income 188,343 202,583
Fee and commission expense (7,320) (10,299)
Net foreign exchange gains 28,588 31,291
Net gains/(losses) on financial instruments 12,780 (614)
Net gains on derecognition of financial assets measured at amortised cost 6,361 5,235
Net insurance finance income/(expense) and net reinsurance finance 960 784
income/(expense)
Net insurance service result 73,528 60,530
Net reinsurance service result (21,000) (16,748)
Net gains/(losses) from revaluation and disposal of investment properties 1,043 (999)
Net gains on disposal of stock of property 8,972 13,970
Other income 18,337 16,681
Total operating income 1,102,809 672,821
Staff costs (192,266) (285,154)
Special levy on deposits and other levies/contributions (42,380) (38,492)
Provisions for pending litigations, claims, regulatory and other matters (net (28,464) (11,880)
of reversals)
Other operating expenses (151,093) (157,916)
Operating profit before credit losses and impairment 688,606 179,379
Credit losses on financial assets (79,830) (59,087)
Impairment net of reversals on non-financial assets (46,852) (29,549)
Profit before tax 561,924 90,743
Income tax (72,980) (31,312)
Profit after tax for the year 488,944 59,431
Attributable to:
Owners of the Company 487,207 56,565
Non-controlling interests 1,737 2,866
Profit for the year 488,944 59,431
Basic profit per share attributable to the owners of the Company (€ cent) 109.2 12.7
Diluted profit per share attributable to the owners of the Company (€ cent) 109.0 12.7
(1. ) 2022 comparative information has been restated to reflect the
impact of IFRS 17. Refer to 'Commentary on Underlying Basis'
A. Preliminary Group Financial Results- Statutory Basis (continued)
Unaudited Consolidated Balance Sheet as at 31 December 2023
31 December 2023 31 December 2022 1 January 2022 (restated)(1)
(restated)(1)
Assets €000 €000 €000
Cash and balances with central banks 9,614,502 9,567,258 9,230,883
Loans and advances to banks 384,802 204,811 291,632
Reverse repurchase agreements 403,199 - -
Derivative financial assets 51,055 48,153 6,653
Investments at FVPL 135,275 190,209 199,194
Investments at FVOCI 443,420 467,375 748,695
Investments at amortised cost 3,116,714 2,046,119 1,191,274
Loans and advances to customers 9,821,788 9,953,252 9,836,405
Life insurance business assets attributable to policyholders 649,212 542,321 551,797
Prepayments, accrued income and other assets 584,919 609,054 583,777
Stock of property 826,115 1,041,032 1,111,604
Investment properties 62,105 85,099 117,745
Deferred tax assets 201,268 227,934 265,942
Property and equipment 285,568 253,378 252,130
Intangible assets 48,635 52,546 54,144
Non-current assets and disposal groups held for sale - - 358,951
Total assets 26,628,577 25,288,541 24,800,826
Liabilities
Deposits by banks 471,556 507,658 457,039
Funding from central banks 2,043,868 1,976,674 2,969,600
Derivative financial liabilities 17,980 16,169 32,452
Customer deposits 19,336,915 18,998,319 17,530,883
Insurance liabilities 658,424 597,981 622,398
Accruals, deferred income, other liabilities and other provisions 469,265 381,193 358,090
Provisions for pending litigation, claims, regulatory and other matters 131,503 127,607 104,108
Debt securities in issue 671,632 297,636 302,555
Subordinated liabilities 306,787 302,104 340,220
Deferred tax liabilities 32,306 34,634 39,817
Total liabilities 24,140,236 23,239,975 22,757,162
Equity
Share capital 44,620 44,620 44,620
Share premium 594,358 594,358 594,358
Revaluation and other reserves 89,920 76,939 99,541
Retained earnings 1,518,182 1,090,349 1,062,711
Equity attributable to the owners of the Company 2,247,080 1,806,266 1,801,230
Other equity instruments 220,000 220,000 220,000
Non‑controlling interests 21,261 22,300 22,434
Total equity 2,488,341 2,048,566 2,043,664
Total liabilities and equity 26,628,577 25,288,541 24,800,826
1. 2022 comparative information has been restated to reflect the impact of
IFRS 17. Refer to 'Commentary on Underlying Basis'
B. Preliminary Group Financial Results - Underlying Basis
Unaudited Consolidated Income Statement
€ mn FY2023 FY2022 4Q2023 3Q2023 2Q2023 1Q2023 qoq +% yoy +%
(IFRS17)(1)
Net interest income 792 370 220 214 196 162 3% 114%
Net fee and commission income 181 192 46 45 46 44 4% -6%
Net foreign exchange gains and net gains/(losses) on financial instruments 37 26 8 8 8 13 13% 46%
Net insurance result 54 44 16 13 15 10 19% 20%
Net gains/(losses) from revaluation and disposal of investment properties and 10 13 3 2 3 2 28% -23%
on disposal of stock of properties
Other income 18 17 3 3 9 3 8% 10%
Total income 1,092 662 296 285 277 234 4% 65%
Staff costs (192) (181) (51) (48) (47) (46) 5% 6%
Other operating expenses (149) (144) (42) (38) (35) (34) 15% 4%
Special levy on deposits and other levies/contributions (43) (38) (13) (12) (7) (11) 10% 10%
Total expenses (384) (363) (106) (98) (89) (91) 9% 6%
Operating profit 708 299 190 187 188 143 2% 137%
Loan credit losses (63) (47) (19) (20) (13) (11) -5% 34%
Impairments of other financial and non-financial assets (53) (33) (15) (8) (19) (11) 97% 66%
Provisions for pending litigations, claims, regulatory and other matters (net (28) (11) (8) (6) (8) (6) 22% 140%
of reversals)
Total loan credit losses, impairments and provisions (144) (91) (42) (34) (40) (28) 24% 59%
Profit before tax and non-recurring items 564 208 148 153 148 115 -3% 171%
Tax (73) (31) (10) (23) (22) (18) -56% 133%
Profit attributable to non-controlling interests (2) (3) 0 (1) 0 (1) -94% -39%
Profit after tax and before non-recurring items (attributable to the owners of 489 174 138 129 126 96 7% 181%
the Company)
Advisory and other transformation costs - organic (2) (11) - - (1) (1) - -80%
Profit after tax - organic (attributable to the owners of the Company) 487 163 138 129 125 95 7% 199%
Net profit/(loss)/ provisions relating to NPE sales - 1 - - - - - -100%
Restructuring and other costs relating to NPE sales - (3) - - - - - -100%
Restructuring costs - Voluntary Staff Exit Plan (VEP) - (104) - - - - - -100%
Profit after tax (attributable to the owners of the Company) 487 57 138 129 125 95 7% -
B. Preliminary Group Financial Results - Underlying Basis (continued)
Unaudited Consolidated Income Statement- Key Performance Ratios
Key Performance Ratios FY2023 FY2022 4Q2023 3Q2023 2Q2023 1Q2023 qoq +% yoy +%
IFRS 17(1)
Net Interest Margin (annualised) 3.41% 1.65% 3.66% 3.63% 3.43% 2.91% 3 bps 176 bps
Cost to income ratio 35% 55% 36% 34% 32% 39% 2 p.p. -20 p.p.
Cost to income ratio excluding special levy on deposits and other 31% 49% 32% 30% 29% 34% 2 p.p. -18 p.p.
levies/contributions
Operating profit return on average assets (annualised) 2.7% 1.2% 2.8% 2.9% 3.0% 2.3% -0.1 p.p. 1.5 p.p.
Basic earnings per share attributable to the owners of the Company (€)(2) 1.09 0.13 0.31 0.29 0.28 0.21 0.02 0.96
Return on tangible equity (ROTE) 24.8% 3.2% 25.6% 25.6% 26.6% 21.3% - 21.6 p.p.
Tangible book value per share (€) 4.93 3.93 4.93 4.63 4.34 4.15 0.30 1.00
1. On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout is on a restated basis unless otherwise stated. For further
details, please refer to 'Commentary on Underlying Basis'.
2. The diluted earnings per share attributable to the owners of the Company
for 4Q2023 amounted to €0.31 and €1.09 for FY2023
p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1
percentage point
Commentary on Underlying Basis
The financial information presented in this Section provides an overview of
the Group financial results for the year ended 31 December 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 the presentation with items of a
similar nature.
Reconciliations between the statutory basis and the underlying basis to
facilitate the comparability of the underlying basis to the statutory
information, are included in Section B.1 'Unaudited Reconciliation of
consolidated Income statement for the year ended 31 December 2023 between
statutory basis and underlying basis' and will also be available in the Annual
Financial Report for the year ended 31 December 2023 under 'Alternative
Performance Measures Disclosures'.
Throughout this announcement, financial information in relation to FY2022 and
quarterly 2022 financial information has been restated for the effects of
transition to IFRS 17 which was adopted on 1 January 2023 and applied
retrospectively. As a result, 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.
Throughout this announcement, the capital ratios as at 31 December 2022 have
been restated in order to take into consideration the 2022 dividend
declaration. This refers to the proposal by the Board of Directors to the
shareholders of a final dividend in respect of the FY2022 earnings following
the approval by the European Central Bank ('ECB'). The proposed final dividend
was declared at the Annual General Meeting ('AGM') which was held on 26 May
2023. This dividend amounted to €22.3 mn in total and had a negative impact
of 22 bps on the Group's CET1 ratio and Total Capital ratio as at 31 December
2022. As a result, the 31 December 2022 capital ratios are presented as
restated for the 2022 dividend unless otherwise stated.
B. Preliminary Group Financial Results - Underlying Basis (continued)
Commentary on 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 mn (predominantly relating to
the life insurance business of the Group) from the below changes:
· The removal of the present value of in-force life insurance
contracts ('PVIF') asset including the associated deferred tax liability,
resulting in a reduction of c.€101 mn in the Group's total equity.
· The remeasurement of insurance assets and liabilities (including
the impact of the recognition of the contractual service margin ('CSM'))
resulting in an increase in the Group's equity by €49 mn.
The estimated future profit of insurance contracts is included in the
measurement of the insurance contract liabilities as the contractual service
margin ('CSM') and this will be gradually recognised in revenue, as services
are provided over the duration of the insurance contract. A contractual
service margin liability of c.€42 mn was recognised as at 31 December 2022
(reflected in the impact from the remeasurement of insurance liabilities
mentioned above).
With regards to the Group's income statement for the year ended 31 December
2022, as restated for IFRS 17, the profit after tax (attributable to the
owners of the Company) was reduced by €14 mn to €57 mn (vs €71 mn under
IFRS 4) reflecting mainly:
· Profit is deferred and held as CSM liability as mentioned above
to be recognised in the income statement over the contract service period.
· The impact of assumption changes relating to the future service
is also deferred through the CSM liability and is recognised in the income
statement over the contract service period.
· There is increased use of current market values in the
measurement of insurance assets and liabilities (for unit-linked business) and
market volatility on unit-linked business is deferred to the CSM, thereby
reducing the volatility in the income statement.
The transition to IFRS 17 had no impact on the Group's regulatory capital.
However, as a result of the benefit arising from the remeasurement of the
insurance assets and liabilities, the life insurance subsidiary distributed
€50 mn as dividend to the Bank in February 2023, which benefited Group
regulatory capital by an equivalent amount on the same date, enhancing CET1
ratio by c.50 bps. Going forward, meaningful dividend generation from the
insurance business is expected to continue.
B. Preliminary Group Financial Results- Underlying Basis (continued)
Unaudited Condensed Consolidated Balance Sheet
€ mn 31.12.2023 31.12.2022 +%
IFRS 17(1)
Cash and balances with central banks 9,615 9,567 0%
Loans and advances to banks 385 205 88%
Reverse repurchase agreements 403 - -
Debt securities, treasury bills and equity investments 3,695 2,704 37%
Net loans and advances to customers 9,822 9,953 -1%
Stock of property 826 1,041 -21%
Investment properties 62 85 -27%
Other assets 1,821 1,734 5%
Total assets 26,629 25,289 5%
Deposits by banks 472 508 -7%
Funding from central banks 2,044 1,977 3%
Customer deposits 19,337 18,998 2%
Debt securities in issue 672 298 126%
Subordinated liabilities 307 302 2%
Other liabilities 1,309 1,157 13%
Total liabilities 24,141 23,240 4%
Shareholders' equity 2,247 1,807 24%
Other equity instruments 220 220 -
Total equity excluding non-controlling interests 2,467 2,027 22%
Non-controlling interests 21 22 -5%
Total equity 2,488 2,049 21%
Total liabilities and equity 26,629 25,289 5%
Key Balance Sheet figures and ratios 31.12.2023 31.12.2022(1) +
Gross loans (€ mn) 10,070 10,217 -1%
Allowance for expected loan credit losses (€ mn) 267 282 -5%
Customer deposits (€ mn) 19,337 18,998 2%
Loans to deposits ratio (net) 51% 52% -1 p.p.
NPE ratio 3.6% 4.0% -40 bps
NPE coverage ratio 73% 69% +4 p.p.
Leverage ratio 9.1% 7.8% +130 bps
Capital ratios and risk weighted assets 31.12.2023 31.12.2022(2) +
(Regulatory(3))
Common Equity Tier 1 (CET1) ratio (transitional) 16.5% 15.2% +130 bps
Total capital ratio (transitional) 21.5% 20.4% +110 bps
Risk weighted assets (€ mn) 10,341 10,114 +2%
1. On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'.2022 comparative information presented
throughout is on a restated basis unless otherwise stated. Please refer to
'Commentary on Underlying Basis'.
2. The capital ratios have been restated to take into consideration the
dividend in respect of FY2022 earnings. For further details please refer to
section B.2.1.
3. Includes unaudited preliminary profits for the year ended 31 December 2023
net of dividend accrual (refer to section B.2.1). Any recommendation for a
dividend is subject to regulatory approval. p.p. = percentage points, bps =
basis points, 100 basis points (bps) = 1 p.p.
B. Preliminary Group Financial Results- Underlying Basis (continued)
B.1 Unaudited Reconciliation of Consolidated Income Statement
for the year ended 31 December 2023 between the statutory and underlying basis
€ million Underlying basis Other Statutory
basis
Net interest income 792 - 792
Net fee and commission income 181 - 181
Net foreign exchange gains and net gains/(losses) on financial instruments 37 4 41
Net gains on derecognition of financial assets measured at amortised cost - 6 6
Net insurance result* 54 - 54
Net gains/(losses) from revaluation and disposal of investment properties and 10 - 10
on disposal of stock of properties
Other income 18 - 18
Total income 1,092 10 1,102
Total expenses (384) (30) (414)
Operating profit 708 (20) 688
Loan credit losses (63) 63 -
Impairment of other financial and non-financial assets (53) 53 -
Provisions for pending litigations, claims, regulatory and other matters (net (28) 28 -
of reversals)
Credit losses on financial assets and impairment net of reversals of - (126) (126)
non-financial assets
Profit before tax and non-recurring items 564 (2) 562
Tax (73) - (73)
Profit attributable to non-controlling interests (2) - (2)
Profit after tax and before non-recurring items (attributable to the owners of 489 (2) 487
the Company)
Advisory and other transformation costs - organic (2) 2 -
Profit after tax (attributable to the owners of the Company) 487 - 487
* Net insurance result per underlying basis comprises the aggregate of
captions 'Net insurance finance income/(expense) and net reinsurance finance
income/(expense)', 'Net insurance service result' and 'Net reinsurance service
result' per the statutory basis.
The reclassification differences between the statutory basis and the
underlying basis are explained below:
· Net gains on loans and advances to customers at FVPL of
€2 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
the below items which are reclassified accordingly under the underlying basis
as follows:
· €8 million net gains on derecognition of loans and advances to
customers included in 'Loan credit losses' under the underlying basis as to
align to the presentation of the loan credit losses arising from loans and
advances to customers.
· Net losses on derecognition of debt securities measured at amortised
cost of c.€2 million included in 'Net foreign exchange gains and net
gains/(losses) on financial instruments' under the underlying basis in order
to align their presentation with the gains/(losses) arising on financial
instruments.
· 'Provisions for pending litigations, claims, regulatory
and other matters (net of reversals)' amounting to €28 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.
· 'Advisory and other transformation costs - organic' of
approximately €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.
B. Preliminary Group Financial Results- Underlying Basis (continued)
B.1 Unaudited Reconciliation of Income Statement for the year
ended 31 December 2023 between the statutory and underlying basis (continued)
· 'Credit losses on financial assets' and 'Impairment net
of reversals on non-financial assets' under the statutory basis include: i)
credit losses to cover credit risk on loans and advances to customers of €73
million, which are included in 'Loan credit losses' under the underlying
basis, and ii) credit losses of other financial assets of €6.5 million and
impairment net of reversals of non-financial assets of €47 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.
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.2 Balance Sheet Analysis
B.2.1 Capital Base
Total equity excluding non-controlling interests totalled €2,467 mn as at 31
December 2023 compared to €2,342 mn as at 30 September 2023 and to €2,027
mn as at 31 December 2022. Shareholders' equity totalled to €2,247 mn as at
31 December 2023 compared to €2,114 mn as at 30 September 2023 and to
€1,807 mn as at 31 December 2022.
The regulatory Common Equity Tier 1 capital (CET1) ratio on a transitional
basis stood at 16.5% as at 31 December 2023, compared to 15.2% as at 30
September 2023 (or 15.8% when including retained earnings and after dividend
accrual for 3Q2023) and 15.2% as at 31 December 2022, as restated. During
FY2023 organic capital generation amounted to 482 bps (of which 134 bps were
recorded in 4Q2023) and a dividend accrual at the top end of the Group's
approved dividend policy of c.225 bps was accrued. Throughout this
announcement, the capital ratios as at 31 December 2023 include unaudited
preliminary profits for year ended 31 December 2023 in line with the ECB
Decision (EU) (2015/656) on the recognition of interim or year-end profits in
CET1 capital in accordance with Article 26(2) of the CRR and an accrual
thereon of dividend at the top end of the Group's approved dividend policy in
line with the principles of Commission Delegated Regulation EU No 241/2014
(such ratios are referred as regulatory). 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. From
3Q2023, the amount corresponding to the Pillar II add-on requirement relating
to ECB's prudential provisioning expectations of 32 bps (as at 31 December
2023) is deducted from CET1 capital and therefore has been eliminated from the
Pillar II SREP capital requirements from 1 January 2024. 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 12 bps on Group's CET1 ratio as at 31 December 2023. In addition, the Group
is subject to increased capital requirements in relation to its real estate
repossessed portfolio which follow a SREP provision to ensure minimum capital
levels retained on long-term holdings of real estate assets, with such
requirements being dynamic by reference to the in-scope REMU assets remaining
on the balance sheet of the Group and the value of such assets. As at 31
December 2023 the impact of these requirements were 24 bps on Group's CET1
ratio. The above-mentioned requirements are within the capital plans of the
Group and incorporated within its capital projections.
The Group had elected to apply the EU transitional arrangements for regulatory
capital purposes (EU Regulation 2017/2395) where the impact on the impairment
amount from the initial application of IFRS 9 on the capital ratios was
phased-in gradually, with the impact being fully phased-in (100%) by 1 January
2023. The final phasing-in of the impact of the impairment amount from the
initial application of IFRS 9 was c.65 bps on the CET1 ratio on 1 January
2023.
The regulatory Total Capital ratio on a transitional basis stood at 21.5% as
at 31 December 2023, compared to 20.4% as at 30 September 2023 (or 21.0% when
including retained earnings and after dividend accrual for 3Q2023) and to
20.4% as at 31 December 2022, as restated.
The Group's capital ratios are above the Supervisory Review and Evaluation
Process (SREP) requirements.
The Group's minimum phased-in CET1 capital ratio requirement as at 31 December
2023 was set at 10.72%, comprising a 4.50% Pillar I requirement, a 1.73%
Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII
Buffer of 1.50% and the CcyB of c.0.48%. The Group's minimum phased-in Total
Capital ratio requirement was set at 15.56%, comprising an 8.00% Pillar I
requirement, of which up to 1.50% can be in the form of AT1 capital and up to
2.00% in the form of T2 capital, a 3.08% Pillar II requirement, the Capital
Conservation Buffer of 2.50%, the O-SII Buffer of 1.50% and the CcyB of
c.0.48%. Following the annual SREP performed by the ECB in 2022, ECB has also
maintained the non-public guidance for an additional Pillar II CET1 buffer
(P2G) unchanged compared to 2021.
Following the annual SREP performed by the ECB in 2023, and based on the final
SREP decision received in November 2023, effective from 1 January 2024, the
Group's minimum phased-in CET1 capital ratio and Total Capital ratio
requirements decreased, when disregarding the phasing in of the O-SII buffer
and CcyB, reflecting the elimination of the Pillar II add-on relating to ECB's
prudential provisioning expectations, following the Group's decision to
directly deduct from own funds such amount. On 1 January 2024 the Group's
minimum phased-in CET1 capital ratio is set at c.10.91%, comprising a 4.50%
Pillar I requirement, a 1.55% Pillar II requirement, the Capital Conservation
Buffer of 2.50%, the O-SII Buffer of 1.875% and CcyB of c.0.48%. Likewise, the
Group's minimum phased-in Total Capital ratio requirement is set at c.15.61%,
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 2.75% Pillar
II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of
1.875% and the CcyB of c.0.48%. The ECB has also provided revised lower
non-public guidance for an additional Pillar II CET1 buffer (P2G) compared to
previous year. From 2 June 2024 both CET1 capital and Total Capital
requirements are expected to increase by c.0.50% as a result of the increase
in the CcyB.
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.2 Balance Sheet Analysis (continued)
B.2.1 Capital Base (continued)
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 had been revised to 3.08%, compared to the
previous level of 3.26%. The Pillar II requirement included 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%. From 30 September 2023, the Pillar II add-on of
0.33% relating to ECB's prudential provisioning expectations is being deducted
from capital and therefore the Pillar 2 requirement decreased to 2.75% on 1
January 2024.
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 effective from 30 November 2023. Further,
in June 2023, the CBC announced an additional 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
1.00%.
The Bank has been designated as an Other Systemically Important Institution
(O-SII) by the Central Bank of Cyprus (CBC) in accordance with the provisions
of the Macroprudential Oversight of Institutions Law of 2015 and the relevant
buffer stood at 1.50%. In October 2023, the CBC concluded its reassessment for
the designation of credit institutions that meet the definition of O-SII
institutions and the setting of O-SII buffer to be observed. The Group's O-SII
buffer has been revised to 2.25% (from 1.50%), phased in annually by 37.5 bps,
to 1.875% on 1 January 2024 and to 2.25% on 1 January 2025.
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.
The Group participated in the ECB Stress Test of 2023, the results of which
were published by the ECB on 28 July 2023. For further information please
refer to the 'Risk and Capital Management Report' of the 'Interim Financial
Report 2023.
Resumption of dividend payments
Following the 2022 SREP decision, the equity dividend distribution prohibition
was lifted for both the Company and the Bank, with any dividend distribution
being subject to regulatory approval.
In April 2023, the Company obtained the approval of the European Central Bank
to pay a dividend. Following this approval, the Board of Directors of the
Company recommended to the shareholders a final dividend of €0.05 per
ordinary share in respect of earnings for the year ended 31 December 2022
('Dividend'). The proposed final dividend was declared at the Annual General
Meeting ('AGM') which was held on 26 May 2023. The Dividend amounted to
€22.3 mn in total and was equivalent to a payout ratio of 14% of the FY2022
Group's adjusted recurring profitability or 31% based on FY2022 profit after
tax (as reported in the 2022 Annual Financial Report). The Dividend was paid
in cash on 16 June 2023.
The Dividend had a negative capital impact of 22 bps on the Group's CET1 ratio
and Total Capital ratio as at 31 December 2022.
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's dividend policy. The
Group aims to provide a sustainable return to shareholders. In line with the
Group's dividend policy, 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. 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.
The dividend policy takes into consideration market conditions as well as the
outcome of capital and liquidity planning. The distribution level will
reflect, amongst other things, the strength of the Group's capital and capital
generation, the Board of Directors' assessment of the capital required to
implement the Group Strategy and any capital the Group retains to cover
uncertainties (e.g. related to the economic outlook) and any impact from the
evolving regulatory and accounting environments.
Other equity instruments
At 31 December 2023, the Group's other equity instruments relate to Additional
Tier 1 Capital Securities (the "AT1 securities") and amounted to €220 mn,
compared to €228 mn as at 30 September 2023, down 4% on prior quarter.
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.2 Balance Sheet Analysis (continued)
B.2.1 Capital Base (continued)
Other equity instruments (continued)
In June 2023, the Company successfully launched and priced an issue of €220
mn Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities (the 'New
Capital Securities'). The New Capital Securities constitute unsecured and
subordinated obligations of the Company, are perpetual and are issued at par.
They carry an initial coupon of 11.875% per annum, payable semi-annually and
resettable on 21 December 2028 and every 5 years thereafter. The Company will
have the option to redeem the New Capital Securities from, and including, 21
June 2028 to, and including, 21 December 2028 and on each interest payment
date thereafter, subject to applicable regulatory consents and the relevant
conditions to redemption.
At the same time, the Company invited the holders of its outstanding €220 mn
Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities callable in
December 2023 to tender their Existing Capital Securities at a purchase price
of 103% of the principal amount, after which c.€16 mn Existing Capital
Securities remained outstanding. As a result, a cost of c.€7 mn was recorded
directly in the Company's equity in 2Q2023, forfeiting the relevant future
coupon payments. Transaction costs of €3.5 mn in relation to the
transactions were recorded directly in equity in June 2023.
In July 2023, the Company purchased and cancelled a further c.€7 mn Existing
Capital Securities in the open market. In November 2023, the Board of
Directors resolved to exercise the Company's option to redeem the remaining
c.€8 mn in aggregate principal amount outstanding of the Existing AT1
Capital Securities on 19 December 2023.
Legislative amendments for the conversion of DTA to DTC
Legislative amendments allowing for the conversion of specific deferred tax
assets (DTA) into deferred tax credits (DTC) became effective in March 2019.
The legislative amendments cover the utilisation of income tax losses
transferred from Laiki Bank to the Bank in March 2013. The introduction of the
Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD)
IV in January 2014 and its subsequent phasing-in led to a more
capital-intensive treatment of this DTA for the Bank. With this legislation,
institutions are allowed to treat such DTAs as 'not relying on future
profitability', according to CRR/CRD IV and as a result not deducted from
CET1, hence improving a credit institution's capital position. The Law
provides that a guarantee fee on annual tax credit is payable annually by the
credit institution to the Government.
Following certain modifications to the Law in May 2022, the annual guarantee
fee is to be determined by the Cyprus Government on an annual basis, providing
however that such fee to be charged is set at a minimum fee of 1.5% of the
annual instalment and can range up to a maximum amount of €10 mn per year,
and also allowing for a higher amount to be charged in the year the amendments
are effective (i.e. in 2022).
The Group estimates that such fees could range up to c.€5 mn per year (for
each tax year in scope i.e. since 2018) although the Group understands that
such fee may fluctuate annually as to be determined by the Ministry of
Finance. An amount of €5 mn was recorded in FY2023.
B.2.2 Regulations and Directives
B.2.2.1 The 2021 Banking Package (CRR III and CRD VI and BRRD)
In October 2021, the European Commission adopted legislative proposals for
further amendments to the Capital Requirements Regulation (CRR), CRD IV and
the BRRD (the "2021 Banking Package"). Amongst other things, the 2021 Banking
Package would implement certain elements of Basel III that have not yet been
transposed into EU law. The 2021 Banking Package is subject to amendment in
the course of the EU's legislative process; and its scope and terms may change
prior to its implementation. In addition, in the case of the proposed
amendments to CRD IV and the BRRD, their terms and effect will depend, in
part, on how they are transposed in each member state. The European Council's
proposal on CRR and CRD was published on 8 November 2022. During February
2023, the European Parliament's ECON Committee voted to adopt Parliament's
proposed amendments to the Commission's proposal, and the 2021 Banking Package
is currently in the final stage of the EU legislative process. In June 2023,
negotiators from the Council presidency and the European Parliament reached a
provisional agreement on amendments to the Capital Requirements Regulation and
the Capital Requirements Directive. In December 2023, the preparatory bodies
of the Council and European Parliament have endorsed the banking package. With
the decisions taken by the Council and European Parliament preparatory bodies,
the legal texts have now been published on the Council and the Parliament
websites. Although still subject to legal revision and to the final vote in
the Plenary, no changes in substance are expected until its adoption in the
European Parliament by the second quarter of 2024. It is expected that the
2021 Banking Package will enter into force on 1 January 2025; and certain
measures are expected to be subject to transitional arrangements or to be
phased in over time.
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.2 Balance Sheet Analysis (continued)
B.2.2 Regulations and Directives (continued)
B.2.2.2 Bank Recovery and Resolution Directive (BRRD)
Minimum Requirement for Own Funds and Eligible Liabilities (MREL)
The Bank Recovery and Resolution Directive (BRRD) requires that from January
2016, EU member states shall apply the BRRD's provisions requiring EU credit
institutions and certain investment firms to maintain a minimum requirement
for own funds and eligible liabilities (MREL), subject to the provisions of
the Commission Delegated Regulation (EU) 2016/1450. On 27 June 2019, as part
of the reform package for strengthening the resilience and resolvability of
European banks, the BRRD ΙΙ came into effect and was required to be
transposed into national law. BRRD II was transposed and implemented in Cyprus
law in early May 2021. In addition, certain provisions on MREL have been
introduced in CRR ΙΙ which also came into force on 27 June 2019 as part of
the reform package and took immediate effect.
In January 2024, the Bank received final notification from the SRB regarding
the 2024 MREL decision, by which the final MREL requirement is now set at
25.00% of risk weighted assets and must be met by 31 December 2024, one year
earlier than the previous decision, in light of the Group's progress over the
years of becoming a strong, well-capitalised with sustainable profitability
organisation.
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 regulatory MREL ratio as at 31 December 2023, calculated according to the
SRB's eligibility criteria currently in effect and based on internal estimate,
stood at 24.6% of risk weighted assets (RWA) and at 11.4% of LRE. The MREL
ratio expressed as a percentage of risk weighted assets does not include
capital used to meet the CBR requirement, which stood at 4.48% on 31 December
2023 (compared to 4.04% as at 30 September 2023 and 3.77% as at 31 December
2022), reflecting the increase on 30 November 2023 of CcyB from 0.00% to 0.50%
of the total risk exposure amounts in Cyprus. CCyB is expected to further
increase from June 2024 as announced by CBC. Additionally, the CBR requirement
is increased further on 1 January 2024 following an increase in O-SII buffer
from 1.50% to 1.875% and subsequently to 2.25% from 1 January 2025, as
announced by CBC.
Throughout this announcement, the MREL ratios as at 31 December 2023 include
unaudited preliminary profits for the year ended 31 December 2023 in line with
the ECB Decision (EU) (2015/656) on the recognition of interim or year-end
profits in CET1 capital in accordance with Article 26(2) of the CRR and an
accrual of dividend at the top end of the Group's approved dividend policy in
line with the principles of Commission Delegated Regulation EU No241/2014.
The Bank continues to evaluate opportunities to optimise the build-up of its
MREL.
B.2.3 Funding and Liquidity
Funding
Funding from Central Banks
At 31 December 2023, the Bank's funding from central banks amounted to
€2,044 mn, which relates to ECB funding, comprising solely of funding
through the Targeted Longer-Term Refinancing Operations (TLTRO) III, compared
to €2,023 mn at 30 September 2023 and to €1,977 mn at 31 December 2022.
The maturity date of the Bank's funding of €1.7 bn under the seventh TLTRO
III operation is in March 2024, whilst the €300 mn under the eighth TLTRO
III operation is in June 2024.
Deposits
Customer deposits totalled €19,337 mn at 31 December 2023 (compared to
€19,267 mn at 30 September 2023 and to €18,998 mn at 31 December 2022)
broadly flat in the fourth quarter. Customer deposits are mainly retail-funded
and 58% of deposits are protected under the deposit guarantee scheme as at 31
December 2023.
The Bank's deposit market share in Cyprus reached 37.7% as at 31 December
2023, the same as at 30 September 2023 and to 37.2% as at 31 December 2022.
Customer deposits accounted for 73% of total assets and 80% of total
liabilities at 31 December 2023 (compared to 75% of total assets and 82% of
total liabilities as at 31 December 2022).
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.2 Balance Sheet Analysis (continued)
B.2.3 Funding and Liquidity (continued)
Deposits (continued)
The net loans to deposits (L/D) ratio stood at 51% as at 31 December 2023
(compared to 51% as at 30 September 2023 and to 52% as at 31 December 2022 on
the same basis), flat in the fourth quarter.
Subordinated liabilities
At 31 December 2023, the carrying amount of the Group's subordinated
liabilities amounted to €307 mn (compared to €315 mn at 30 September 2023
and to €302 mn at 31 December 2022) and relate to unsecured subordinated
Tier 2 Capital Notes ('T2 Notes').
The T2 Notes were priced at par with a fixed coupon of 6.625% per annum,
payable annually in arrears and resettable on 23 October 2026. The maturity
date of the T2 Notes is 23 October 2031. The Company will have the option to
redeem the T2 Notes early on any day during the six-month period from 23 April
2026 to 23 October 2026, subject to applicable regulatory approvals.
Debt securities in issue
At 31 December 2023, the carrying value of the Group's debt securities in
issue amounted to €672 mn (compared to €644 mn at 30 September 2023 and to
€298 mn at 31 December 2022) and relate to senior preferred notes. The
increase of 126% since the beginning of the year, relates to the issuance of
€350 mn senior preferred notes in 3Q2023.
In July 2023, the Bank successfully launched and priced an issuance of €350
mn of senior preferred notes (the "Notes"). The Notes were priced at par with
a fixed coupon of 7.375% per annum, payable annually in arrear, until the
Optional Redemption Date i.e. 25 July 2027. The maturity date of the Notes is
25 July 2028; however, the Bank may, at its discretion, redeem the Notes on
the Optional Redemption Date subject to meeting certain conditions (including
applicable regulatory consents) as specified in the Terms and Conditions. If
the Notes are not redeemed by the Bank, the coupon payable from the Optional
Redemption Date until the Maturity Date will convert from a fixed rate to a
floating rate and will be equal to 3-month Euribor + 409.5 bps, payable
quarterly in arrear. The Notes comply with the criteria for the Minimum
Requirement for Own Funds and Eligible Liabilities ("MREL") and contribute
towards the Bank's MREL requirements.
In June 2021, the Bank executed its inaugural MREL transaction issuing €300
mn of senior preferred notes (the "SP Notes"). The SP Notes were priced at par
with a fixed coupon of 2.50% per annum, payable annually in arrears and
resettable on 24 June 2026. The maturity date of the SP Notes is 24 June 2027
and the Bank may, at its discretion, redeem the SP Notes on 24 June 2026,
subject to meeting certain conditions as specified in the Terms and
Conditions, including applicable regulatory consents. The SP Notes comply with
the criteria for MREL and contribute towards the Bank's MREL requirements.
Liquidity
At 31 December 2023, the Group Liquidity Coverage Ratio (LCR) stood at 359%
(compared to 350% at 30 September 2023 and to 291% at 31 December 2022), well
above the minimum regulatory requirement of 100%. The LCR surplus as at 31
December 2023 amounted to €9.1 bn (compared to €8.6 bn at 30 September
2023 and to €7.2 bn at 31 December 2022). The increase in liquidity surplus
in 4Q2023 is due to higher deposits. When disregarding the TLTRO III, the
Group's liquidity position remains strong with an LCR of 302% and liquidity
surplus of €7.1 bn.
At 31 December 2023, the Group Net Stable Funding Ratio (NSFR) stood at 158%
(compared to 162% at 30 September 2023 and to 168% at 31 December 2022), well
above the minimum regulatory requirement of 100%.
B.2.4 Loans
Group gross loans totalled €10,070 mn at 31 December 2023, compared to
€10,167 mn at 30 September 2023 and to €10,217 mn at 31 December 2022,
broadly flat yoy as repayments offset new lending.
New lending granted in Cyprus reached €462 mn for 4Q2023 (compared to €445
mn for 3Q2023, €494 mn for 2Q2023 and to €624 mn for 1Q2023) up by 4% qoq.
New lending in 4Q2023 comprised €166 mn of corporate loans, €187 mn of
retail loans (of which €124 mn were housing loans), €43 mn of SME loans
and €66 mn of shipping and international loans. New lending for FY2023 stood
at €2,025 mn, despite the rising interest rate environment, driven mainly by
corporate demand.
At 31 December 2023, the Group net loans and advances to customers totalled
€9,822 mn (compared to €9,910 mn at 30 September 2023 and to €9,953 mn
at 31 December 2022), broadly flat since the beginning of the year.
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.2 Balance Sheet Analysis (continued)
B.2.4 Loans (continued)
The Bank is the largest credit provider in Cyprus with a market share of 42.2%
at 31 December 2023, compared to 42.3% at 30 September 2023 and to 40.9% at 31
December 2022.
In December 2023 the Bank entered into an agreement with Cyprus Asset
Management Company ('KEDIPES') to acquire a portfolio of performing and
restructured loans with gross book value of c.€58 mn with reference date 31
December 2022 (the 'Transaction'). The Transaction is expected to be broadly
neutral to the Group's income statement and capital position. The Transaction
is subject to relevant regulatory approvals and is expected to be completed in
1Q2024.
B.2.5 Loan portfolio quality
The Group has continued to make steady progress across all asset quality
metrics. Today, the Group's priorities focus mainly on maintaining high
quality new lending with strict underwriting standards and preventing asset
quality deterioration following the ongoing macroeconomic uncertainty.
The loan credit losses for 4Q2023 amounted to €19 mn broadly flat compared
to prior quarter, and totalled to €63 mn for FY2023, compared to €47 mn
for FY2022. Further details regarding loan credit losses are provided in
Section B.3.3 'Profit before tax and non-recurring items'.
Non-performing exposures
Following a deep dive assessment of the Group's loan portfolio in the second
half of 2023, an amount of €53 mn was classified as unlikely to pay
exposures ('UTPs') in 4Q2023, of which €42 mn relate to specific customers
with idiosyncratic characteristics, compared to €37 mn UTPs in 3Q2023. The
vast majority of the UTPs are not linked with the current macroeconomic
environment, they adhere their payment schedule and present no arrears.
Despite the high interest rates and inflation, there are no material signs of
asset quality deterioration to date. While defaults have been limited, the
additional monitoring and provisioning for sectors and individuals vulnerable
to the 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 (NPEs) as defined by the European Banking Authority
(EBA) were increased by €7 mn, or 2% in 4Q2023, compared to a net organic
reduction of €13 mn in 3Q2023, to €365 mn at 31 December 2023 (compared to
€358 mn at 30 September 2023 and €411 mn at 31 December 2022).
As a result, the NPEs account for 3.6% of gross loans as at 31 December 2023,
compared to 3.5% at 30 September 2023 and to 4.0% at 31 December 2022.
The NPE coverage ratio stands at 73% at 31 December 2023, compared to 77% at
30 September 2023 and to 69% as at 31 December 2022. When taking into account
tangible collateral at fair value, NPEs are fully covered.
Overall, since the peak in 2014, the stock of NPEs has been reduced by €14.6
bn or 98% to below €0.4 bn and the NPE ratio by 59 p.p. 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,
remained non-performing as at 31 December 2022 and who also received
government allowances during the period January 2021 to December 2022, with
facilities backed by primary residence with Open Market Value up to €250k;
· 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
€350k Open Market Value; and
· all applicants that were approved under Estia Scheme but their
inclusion was terminated.
Under the MTR, eligible property owners will voluntarily surrender ownership
of their residence to Cyprus Asset Management Company ('KEDIPES') which has
been approved by the Government to provide and manage social housing and will
be exempted from their mortgage loan, as the state will be covering fully the
required rent on their behalf. KEDIPES will carry out a new valuation and a
technical due diligence for the eligible applicants' property and if satisfied
will approve the application and pay to the banks an amount equal to 65% of
the Open Market Value of the primary residence in exchange for the mortgage
release, the write off of the NPE loan and the transfer of the property title
deeds.
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.2 Balance Sheet Analysis (continued)
B.2.5 Loan portfolio quality (continued)
Mortgage-To-Rent Scheme ("MTR") (continued)
The eligible applicants will be able to acquire the primary residence after 5
years at a favourable price, below the Open Market Value.
The scheme has been launched in December 2023; it is expected to act as
another tool to address NPEs in the Retail sector.
B.2.6 Fixed income portfolio
Fixed income portfolio amounts to €3,548 mn as at 31 December 2023, compared
€3,489 mn as at 30 September 2023 and to €2,500 mn as at 31 December 2022,
increased by 2% on the prior quarter and by 42% on prior year. As at 31
December 2023, the portfolio represents 14% of total assets (net of TLTRO III)
and comprises €3,117 mn (88%) measured at amortised cost and €431 mn (12%)
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
Aa3. The amortised cost fixed income portfolio as at 31 December 2023 has an
unrealised gain of €3 mn, compared to an unrealised loss of €91 mn as at
30 September 2023, reflecting an improvement in the market value of this
portfolio, following the reduction in bond yields.
B.2.7 Real Estate Management Unit (REMU)
The Real Estate Management Unit (REMU) is focused on the disposal of
on-boarded properties resulting from debt for asset swaps. Cumulative sales of
repossessed assets since the beginning of 2019 amount to €0.9 bn and exceed
properties on-boarded in the same period of €0.5 bn.
During the year ended 31 December 2023, the Group completed disposals of
€194 mn (compared to €162 mn in FY2022), resulting in a profit on disposal
of c.€11 mn for FY2023 (compared to a profit of c.€16 mn for FY2022).
Asset disposals are across all property classes, with 47% gross sale value in
FY2023 relating to land.
During the year ended 31 December 2023, the Group executed sale-purchase
agreements (SPAs) for disposals of 569 properties with contract value of
€213 mn, compared to SPAs for disposals of 674 properties with contract
value of €184 mn for FY2022.
In addition, the Group had a strong pipeline of €40 mn by contract value as
at 31 December 2023, of which €29 mn related to SPAs signed (compared to a
pipeline of €70 mn as at 31 December 2022, of which €47 mn related to SPAs
signed).
REMU on-boarded €21 mn of assets in FY2023 (compared to additions of €86
mn in FY2022), via the execution of debt for asset swaps and repossessed
properties.
As at 31 December 2023, assets held by REMU had a carrying value of €878 mn,
(comprising properties of €826 mn classified as 'Stock of property' and
€52 mn as 'Investment properties') of which €862 mn are repossessed
properties, compared to €1,116 mn as at 31 December 2022 (comprising
properties of €1,041 mn classified as 'Stock of property' and €75 mn as
'Investment properties').
Assets held by REMU
Assets held by REMU (Group) FY2023 FY2022 4Q2023 3Q2023 qoq +% yoy +%
€ mn
Opening balance 1,116 1,215 983 1,010 -3% -8%
On-boarded assets 21 86 3 12 -72% -75%
Sales (194) (162) (93) (30) 213% 20%
Net impairment loss (47) (23) (15) (9) 76% 108%
Transfer to/from own properties (18) - - - - -
Closing balance 878 1,116 878 983 -11% -21%
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.2 Balance Sheet Analysis (continued)
B.2.7 Real Estate Management Unit (REMU) (continued)
Analysis by type and country Cyprus Greece Total
31 December 2023 (€ mn)
Residential properties 50 12 62
Offices and other commercial properties 115 13 128
Manufacturing and industrial properties 36 16 52
Hotels 17 0 17
Land (fields and plots) 416 4 420
Golf courses and golf-related property 199 0 199
Total 833 45 878
Cyprus Greece Total
31 December 2022 (€ mn)
Residential properties 69 21 90
Offices and other commercial properties 180 14 194
Manufacturing and industrial properties 48 19 67
Hotels 24 0 24
Land (fields and plots) 502 4 506
Golf courses and golf-related property 235 0 235
Total 1,058 58 1,116
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.3 Income Statement Analysis
B.3.1 Total income
€ mn FY2023 FY2022 4Q2023 3Q2023 2Q2023 1Q2023 qoq +% yoy +%
IFRS 17(1)
Net interest income 792 370 220 214 196 162 3% 114%
Net fee and commission income 181 192 46 45 46 44 4% -6%
Net foreign exchange gains and net gains/(losses) on financial instruments 37 26 8 8 8 13 13% 46%
Net insurance result 54 44 16 13 15 10 19% 20%
Net gains/(losses) from revaluation and disposal of investment properties and 10 13 3 2 3 2 28% -23%
on disposal of stock of properties
Other income 18 17 3 3 9 3 8% 10%
Non-interest income 300 292 76 71 81 72 8% 3%
Total income 1,092 662 296 285 277 234 4% 65%
Net Interest Margin (annualised) 3.41% 1.65% 3.66% 3.63% 3.43% 2.91% 3 bps 176 bps
Average interest earning assets 23,211 22,483 23,858 23,383 22,903 22,638 2% 3%
(€ mn)
1. On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout
is on a restated basis unless otherwise stated. For further details, please
refer to to 'Commentary on Underlying Basis'.
p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1
percentage point
Net interest income (NII) for FY2023 amounted to €792 mn compared to €370
mn for FY2022, up 114% yoy, benefitting from higher interest rates on liquid
assets and loans, growth of fixed income portfolio and well-managed deposit
pass-through, notwithstanding the foregone NII on the NPE sale Helix 3
portfolio (c.€13 mn in FY2022) and end of TLTRO III favourable terms
(c.€15 mn in FY2022).
Net interest income (NII) for 4Q2023 amounted to €220 mn at its peak level,
compared to €214 mn for 3Q2023, up 3% qoq, attributable to the repricing of
loans and liquid assets to higher rates and the continued low deposit
pass-through at 18% (compared to 15% pass-through for 3Q2023).
Quarterly average interest earning assets (AIEA) for FY2023 amounted to
€23,211 mn, up 3% yoy driven by the increase in liquid assets mainly as a
result of the increase in deposits by c.€0.34 bn yoy and the issuance of
senior preferred notes of €0.35 bn. Quarterly average interest earning
assets for 4Q2023 was also up by 2% on prior quarter.
Net interest margin (NIM) for FY2023 amounted to 3.41% (compared to 1.65% for
FY2022), up 176 bps yoy driven by the higher interest rate environment. Net
interest margin (NIM) for 4Q2023 stood at 3.66% broadly flat qoq.
Non-interest income for FY2023 amounted to €300 mn (compared to €292 mn
for FY2022, up 3% yoy) comprising net fee and commission income of €181 mn,
net foreign exchange gains and net gains/(losses) on financial instruments of
€37 mn, net insurance result of €54 mn, net gains/(losses) from
revaluation and disposal of investment properties and on disposal of stock of
properties of €10 mn and other income of €18 mn. The yoy increase relates
to higher net foreign exchange gains and net gains/(losses) on financial
instruments and net insurance result partly offset by lower net fee and
commission income.
Non-interest income for 4Q2023 amounted to €76 mn (compared to €71 mn for
3Q2023, up 8% qoq) comprising net fee and commission income of €46 mn, net
foreign exchange gains and net gains/(losses) on financial instruments of €8
mn, net insurance result of €16 mn, net gains/(losses) from revaluation and
disposal of investment properties and on disposal of stock of properties of
€3 mn and other income of €3 mn. The qoq increase relates mainly to
increased net insurance result.
Net fee and commission income for FY2023 amounted to €181 mn (compared to
€192 mn for FY2022, down 6% yoy); when disregarding the impact of the
liquidity fees and NPE sale-related servicing fee, net fee and commission
income was up 6% yoy, reflecting higher net credit card commissions and
transactional fees.
Net fee and commission income for 4Q2023 amounted to €46 mn, broadly flat
qoq.
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.3 Income Statement Analysis (continued)
B.3.1 Total income (continued)
Net foreign exchange gains and net gains/(losses) on financial instruments of
€37 mn for FY2023 (comprising net foreign exchange gains of c.€28.5 mn and
net gains on financial instruments of c.€8.5 mn), compared to €26 mn for
FY2022 up 46% yoy, due to higher net gains on financial instruments.
Net foreign exchange gains and net gains/(losses) on financial instruments
amounted to €8 mn for 4Q2023, flat qoq. Net foreign exchange gains and net
gains/(losses) on financial instruments are considered volatile profit
contributors.
Net insurance result amounted to €54 mn for FY2023, compared to €44 mn for
FY2022, up 20% yoy, driven mainly by improved experience variance due to
better claims experience and the reduction in the loss component from the
insurance contracts (recognised upfront in line with IFRS 17) in life
insurance business.
Net insurance result amounted to €16 mn for 4Q2023, compared to €13 mn for
3Q2023, up 19% qoq driven mainly by the improved experience variance in life
insurance business.
Net gains/(losses) from revaluation and disposal of investment properties and
on disposal of stock of properties for FY2023 amounted to €10 mn (comprising
net gains on disposal of stock of properties of €9 mn, net gains on disposal
of investment properties of €2 mn and net loss from revaluation of
investment properties of €1 mn), compared to €13 mn for FY2022. REMU
profit remains volatile.
Net gains/(losses) from revaluation and disposal of investment properties and
on disposal of stock of properties for 4Q2023 amounted to €3 mn relating
mainly to net gains on disposal of stock of properties, compared to €2 mn
for 3Q2023.
Total income amounted to €1,092 mn for FY2023 (compared to €662 mn for
FY2022, up 65% yoy), and to €296 mn for 4Q2023 (compared to €285 mn for
3Q2023, up 4% qoq), driven by strong growth in net interest income, as
explained above.
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.3. Income Statement Analysis (continued)
B.3.2 Total expenses
€ mn FY2023 FY2022 4Q2023 3Q2023 2Q2023 1Q2023 qoq +% yoy +%
IFRS 17(1)
Staff costs (192) (181) (51) (48) (47) (46) 5% 6%
Other operating expenses (149) (144) (42) (38) (35) (34) 15% 4%
Total operating expenses (341) (325) (93) (86) (82) (80) 9% 5%
Special levy on deposits and other levies/contributions (43) (38) (13) (12) (7) (11) 10% 10%
Total expenses (384) (363) (106) (98) (89) (91) 9% 6%
Cost to income ratio 35% 55% 36% 34% 32% 39% 2 p.p. -20 p.p.
Cost to income ratio excluding special levy on deposits and other 31% 49% 32% 30% 29% 34% 2 p.p. -18 p.p.
levies/contributions
1. On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout is on a restated basis unless otherwise stated. For further
details, please refer to 'Commentary on Underlying Basis'.
p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1
percentage point
Total expenses for FY2023 were €384 mn (compared to €363 mn for FY2022, up
6% yoy), 50% of which related to staff costs (€192 mn), 39% to other
operating expenses (€149 mn) and 11% to special levy on deposits and other
levies/contributions (€43 mn). Total expenses for 4Q2023 were €106 mn
compared to €98 mn for 3Q2023, up 9% qoq, impacted by seasonally higher
other operating expenses (as expected) and higher staff costs on the
performance related pay accrual and higher termination costs.
Total operating expenses amounted to €341 mn for FY2023 (compared to €325
mn for FY2022, up 5% yoy) with savings from the efficiency actions undertaken
in 2022, partly offsetting inflationary pressures. Total operating expenses
for FY2023 included c.€11 mn performance related pay accrual (both the
long-term incentive Plan ('LTIP') and Short-term Incentive Plan ('STIP')),
c.€7.5 mn small-scale Voluntary Staff Exit Plan ('VEP') and €2.5 mn cost
on the introduction of a Reward Programme to reward performer borrowers. When
disregarding the aforementioned, total operating expenses for FY2023 amounted
to c.€320 mn down 1% on prior year. Total operating expenses amounted to
€93 mn for 4Q2023, compared to €86 mn for 3Q2023, up 9% qoq.
Staff costs for FY2023 were €192 mn (compared to €181 mn for FY2022, up 6%
yoy) due to the small- scale VEP of c.€7.5 mn and the performance related
pay accrual of c.€11 mn, partly offset by the savings of the VEP that took
place in 3Q2022. The performance-related pay accrual relates to the Short-Term
Incentive Plan and the Long-Term Incentive Plan. The Short-Term Incentive Plan
involves variable remuneration to selected employees and will be driven by
both, delivery of the Group's strategy as well as individual performance.
During FY2023 a small-scale, targeted VEP took place, by which 48 full-time
employees were approved to leave the Group at a total cost of c.€7.5 mn.
Staff costs for 4Q2023 were €51 mn, up 5% qoq due to higher
performance-related pay accrual and exit cost compared to prior quarter.
At the Annual General Meeting which took place in May 2022, a special
resolution was approved for the establishment and implementation of the share
based Long-term Incentive Plan ('LTIP'). In December 2022 the Group granted
819,860 share awards to 22 eligible employees under the LTIP, comprising the
Extended Executive Committee of the Group. The awards granted in December 2022
are subject to a three year performance period for 2022-2024 (with all
performance conditions being non-market performance conditions). In October
2023, 479,160 share awards were granted to 21 eligible employees, comprising
the Extended Executive Committee of the Group. The awards granted in October
2023 are subject to a three-year performance period 2023-2025 (with all
performance conditions being non market performance conditions).
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.
As at 31 December 2023, the Group employed 2,830 persons compared to 2,913
persons as at 30 September 2023 and to 2,889 persons as at 31 December 2022.
Other operating expenses for FY2023 amounted to €149 mn, compared to €144
mn for FY2022, driven mainly by inflationary pressures and higher expenses due
to a Reward Programme launched to reward performing borrowers under Antamivi
Reward Scheme.
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.3 Income Statement Analysis (continued)
B.3.2 Total expenses (continued)
Other operating expenses for 4Q2023 amounted to €42 mn, up 15% qoq due to
seasonally higher expenses in professional fees and IT expenses.
Special levy on deposits and other levies/contributions for FY2023 amounted to
€43 mn compared to €38 mn for FY2022, up 10% yoy, driven by the increase
of deposits of €0.34 bn yoy. Special levy on deposits and other
levies/contributions for 4Q2023 amounted to €13 mn broadly flat qoq,
reflecting mainly the net impact of a levy in the form of annual guarantee fee
relating to the expected revised income tax legislation of c.€5 mn in 4Q2023
(see Section B.2.1 'Capital Base') and the contribution of the Bank to the
Deposit Guarantee Fund (DGF) of c.€4 mn which relates to 2H2023 and was
recorded in 3Q2023 (in line with IFRSs).
The cost to income ratio excluding special levy on deposits and other
levies/contributions for FY2023 was 31% compared to 49% for FY2022, down 18
p.p. yoy. The yoy decrease is driven by the higher total income and
disciplined cost management. The cost to income ratio excluding special levy
on deposits and other levies/contributions for 4Q2023 was 32%, up 2 p.p. qoq.
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.3 Income Statement Analysis (continued)
B.3.3 Profit before tax and non-recurring items
€ mn FY2023 FY2022 4Q2023 3Q2023 2Q2023 1Q2023 qoq+% yoy +%
IFRS 17(1)
Operating profit 708 299 190 187 188 143 2% 137%
Loan credit losses (63) (47) (19) (20) (13) (11) -5% 34%
Impairments of other financial and non-financial assets (53) (33) (15) (8) (19) (11) 97% 66%
Provisions for pending litigations, claims, regulatory and other matters (net (28) (11) (8) (6) (8) (6) 22% 140%
of reversals)
Total loan credit losses, impairments and provisions (144) (91) (42) (34) (40) (28) 24% 59%
Profit before tax and non-recurring items 564 208 148 153 148 115 -3% 171%
Cost of risk 0.62% 0.44% 0.73% 0.76% 0.51% 0.44% -3 bps 18 bps
1. On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout is on a restated basis unless otherwise stated. For further
details, please refer to 'Commentary on Underlying Basis'.
p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1
percentage point
Operating profit for FY2023 amounted to €708 mn, compared to €299 mn for
FY2022 (up 137% yoy). The yoy increase is driven by the significant increase
in net interest income. Operating profit for 4Q2023 amounted to €190 mn,
broadly flat qoq.
Loan credit losses for FY2023 were €63 mn of which €19 mn were recorded in
4Q2023, broadly flat on prior quarter, compared to €47 mn for FY2022 (up 34%
yoy) and include €19 mn higher loan credit losses on specific customers with
idiosyncratic characteristics assessed as 'Unlikely to pay' ('UTPs) exposures,
even though they adhere to their repayment schedule and present no arrears.
Cost of risk for FY2023 is equivalent to 62 bps, in line with 2023 target,
compared to a cost of risk of 44 bps for FY2022, up by 18 bps yoy. Cost of
risk for 4Q2023 was 73 bps, broadly flat qoq.
At 31 December 2023, the allowance for expected loan credit losses, including
residual fair value adjustment on initial recognition and credit losses on
off-balance sheet exposures (please refer to Section F. 'Definitions and
Explanations' for definition) totalled €267 mn (compared to €275 mn at 30
September 2023 and to €282 mn at 31 December 2022) and accounted for 2.7% of
gross loans (flat on prior quarter and compared to 2.8% for 31 December 2022).
Impairments of other financial and non-financial assets for FY2023 amounted to
€53 mn, compared to €33 mn for FY2022, up €20 mn yoy, driven mainly by
higher impairments on specific, large, illiquid REMU stock properties.
Impairments of other financial and non-financial assets for 4Q2023 amounted to
€15 mn compared to €8 mn for 3Q2023.
Provisions for pending litigations, claims regulatory and other matters (net
of reversals) for FY2023 amounted to €28 mn, compared to €11 mn for
FY2022. The yoy increase is driven mainly by the revised approach on pending
litigation fees and provisions in relation to certain legacy matters as well
in relation to the run-down of legacy and non-core operations of the Group.
Provisions for pending litigations, claims, regulatory and other matters (net
of reversals) for 4Q2023 amounted to €8 mn compared to €6 mn for 3Q2023.
Profit before tax and non-recurring items for FY2023 totalled to €564 mn,
compared to €208 mn for FY2022. Profit before tax and non-recurring items
for 4Q2023 amounted to €148 mn compared to €153 mn for 3Q2023 (down 3%
qoq).
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.3 Income Statement Analysis (continued)
B.3.4 Profit after tax (attributable to the owners of the Company)
€ mn FY2023 FY2022 4Q2023 3Q2023 2Q2023 1Q2023 qoq +% yoy +%
IFRS 17(1)
Profit before tax and non-recurring items 564 208 148 153 148 115 -3% 171%
Tax (73) (31) (10) (23) (22) (18) -56% 133%
Profit attributable to non-controlling interests (2) (3) 0 (1) 0 (1) -94% -39%
Profit after tax and before non-recurring items (attributable to the owners of 489 174 138 129 126 96 7% 181%
the Company)
Advisory and other transformation costs - organic (2) (11) - - (1) (1) - -80%
Profit after tax - organic (attributable to the owners of the Company) 487 163 138 129 125 95 7% 199%
Provisions/net profit/(loss) relating to NPE sales - 1 - - - - - -100%
Restructuring and other costs relating to NPE sales - (3) - - - - - -100%
Restructuring costs - Voluntary Staff Exit Plan (VEP) - (104) - - - - - -100%
Profit after tax (attributable to the owners of the Company) 487 57 138 129 125 95 7% -
1. On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented
throughout is on a restated basis unless otherwise stated. For further
details, please refer to 'Commentary on Underlying Basis'.
p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1
percentage point
The tax charge for 4Q2023 is €10 mn down 56% qoq mainly due to the
recognition of deferred tax assets relating to temporary differences between
tax and accounting treatment and totalled to €73 mn for FY2023, compared to
€31 mn for FY2022.
On 22 December 2022, the European Commission approved Directive 2022/2523
which provides for a minimum effective tax rate of 15% for the global
activities of large multinational groups (Pillar Two tax). The Directive that
follows closely the OECD Inclusive Framework on Base Erosion and Profit
Shifting should be transposed by the Member States throughout 2023, entering
into force on 1 January 2024. In Cyprus, the legislation has not been
substantively enacted at the balance sheet date however it is expected to be
enacted within 2024. The Group expects to be in scope of the draft legislation
and has performed an initial assessment of the potential impact of Pillar Two
income taxes and does not expect this to be significant. However, the actual
impact will depend on the Group's consolidated income statement variables at
the time of implementation. Because of the calculation complexity resulting
from these rules and as the final legislation has yet to be implemented, the
effects of this reform are still being examined and the Group will further
refine the quantification in view of the first accounting recognition of the
additional tax charge in the Group's consolidated accounts in 2024.
Profit after tax and before non-recurring items (attributable to the owners of
the Company) for FY2023 is €489 mn, compared to €174 mn for FY2022. Profit
after tax and before non-recurring items (attributable to the owners of the
Company) for 4Q2023 is €138 mn, compared to €129 mn for 3Q2023.
Advisory and other transformation costs - organic for FY2023 are €2 mn,
compared to €11 mn for FY2022, down 80% yoy. Advisory and other
transformation costs - organic for 4Q2023 are nil, flat qoq.
Profit after tax arising from the organic operations (attributable to the
owners of the Company) for FY2023 amounted to €487 mn, compared to €163 mn
for FY2022. Profit after tax arising from the organic operations (attributable
to the owners of the Company) amounted to €138 mn for 4Q2023, compared to
€129 mn for 3Q2023 (up 7% qoq).
Following completion of Helix 3 project, there are no amounts recognised for
provisions/net profit/(loss) relating to NPE sales for FY2023.
Restructuring and other costs relating to NPE sales for FY2023 was nil
compared to €3 mn for FY2022 (relating to the agreements for the sale of
portfolios of NPEs).
B. Preliminary Group Financial Results - Underlying Basis (continued)
B.3 Income Statement Analysis (continued)
B.3.4 Profit after tax (attributable to the owners of the Company) (continued)
Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) of €104
mn in FY2022 mainly related to the Voluntary Staff Exit Plan (VEP) that took
place in 3Q2022. In July 2022 the Group completed a VEP which led to the
reduction of the Group's full-time employees by 16%, at a total cost of €101
mn, recorded in the consolidated income statement in 3Q2022. The gross annual
savings were estimated at c.€37 mn or 19% of staff costs with a payback
period of 2.7 years.
Profit after tax attributable to the owners of the Company for FY2023 amounts
to €487 mn, corresponding to a ROTE of 24.8%, compared to €57 mn for
FY2022 (compared to a ROTE of 3.2% for FY2022). Profit after tax attributable
to the owners of the Company for 4Q2023 amounts to €138 mn, compared to
€129 mn for 3Q2023 (up 7% qoq). ROTE stands at 25.6% for 4Q2023, flat on
prior quarter. The adjusted recurring profitability (i.e. 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) amounted to €132 mn for 4Q2023
compared to €122 mn for 3Q2023 and totaled €455 mn for FY2023 compared to
€160 mn for FY2022.
C. Operating Environment
War and geopolitics can be very disruptive to the economy and society and the
extent to which the international system is intertwined, is often
underestimated. Meantime wars continue to rage in Ukraine and in the Middle
East, adding to uncertainty and instability. The attacks on merchant shipping
in the Red Sea from the Houthis in Yemen, is a reflection of the uncertainty.
The attacks are forcing many carriers to change route adding days and costs to
shipping which eventually will add to inflationary pressures, with
implications for monetary policy.
At the same time a large number of countries is preparing for elections (i.e
.Russia in March 2024, in the European Union for the European Parliament in
June 2024, and in the United States in November 2024) adding further
uncertainty. Overall, the economic outlook, locally and globally, in the short
and the medium term is clouded by this rising uncertainty.
The European Commission's Autumn Forecast projects GDP growth in 2023 at 0.6%
in both the EU and the euro area. Going forward, growth is expected to rebound
mildly in the euro area to 1.2% in 2024 and to 1.6% in 2025. HICP inflation is
forecast to decrease from 5.6% in 2023, to 3.2% in 2024, and 2.2% in 2025,
other things being equal. Uncertainty and downside risks to the economic
outlook have increased in recent months, primarily related to the evolution of
the geopolitical environment.
Real GDP growth in Cyprus averaged 2.5% in the four quarters and was
respectively 3.2%, 2.2%, 2.2% and 2.3% in the first, second, third and fourth;
quarter. Trade, transport, and accommodation contributed more than half of the
recorded growth in the period. Accommodation, which is tourism driven,
continues to reflect the recovery from the Covid collapse, and so the
respective contribution to the overall growth of the economy is higher than
normal. Other important contributions came from the sectors of information and
communications, industry and public administration, education and health.
Financial services and professional services made small negative
contributions. The former reflect slower volume growth and continuing
deleveraging. The latter reflects an accumulated weakness related to the
Ukraine war related sanctions.
Private consumption expanded strongly supported by high employment and rising
wages. The automatic partial indexation of wages (COLA) has somewhat cushioned
the negative impact of elevated prices on consumption. Investment,
particularly in residential construction, has been supported by the
interest-subsidisation scheme for mortgages and an influx of foreign
companies.
In the labour market employment growth slowed in the first three quarters of
2023, averaging 0.8% compared with 3.2% and 2.8% respectively in 2021 and
2022. The unemployment rate continued to decline from 6.8% average in 2022, to
6.0% in the third quarter of 2023, seasonally adjusted.
Inflation measured by the Harmonised Index of Consumer Prices, decreased to an
average of 3.9% in Cyprus and 5.4% in the Euro area in 2023, from 8.1% on
average in 2022 in Cyprus and 8.4% in the Euro Area. Core inflation (defined
as total headline inflation excluding energy and food) for 2023 was 2.8% in
Cyprus and 4.9% in the Euro area. The decline in the headline inflation was
driven by the non-core components of energy and food, while core inflation was
stickier. Harmonised inflation is expected to continue to decelerate in the
medium term falling to around 3.0% and 2.2% respectively in 2024 and 2025
according to the European Commission's autumn forecasts assuming falling
energy prices and support measures adopted by the government.
Tourist activity continued to improve in 2023 after a strong performance in
2022. Arrivals increased by 20.1% from a year earlier, reaching 3.8 million
persons, which corresponds to 97% of arrivals in 2019 before Covid. Likewise,
receipts between January 2023 to November 2023 increased by an estimated 22.5%
reaching an estimated €3 billion for the year, higher than total receipts in
the respective period in 2019.
In public finances, there have been significant improvements in budget and
debt dynamics including debt affordability indicators. The recovery in 2021
was underpinned by a significant increase in general government revenue and a
relative decrease in government expenditure. The result was a reduction in the
budget deficit to 1.9% of GDP, from a deficit of 5.7% of GDP in 2020. In 2022
the budget surplus rose to 2.4% of GDP and gross debt dropped to 85.6% of GDP
from 99.3% of GDP in 2021. The budget surplus in 2023 is estimated at 2.4% of
GDP according to the Cyprus Ministry of Finance with gross debt falling to
78.4% of GDP. The budget balance is forecast to remain in surplus at 2.1% of
GDP in 2024 and 2.5% in 2025. Gross debt is set to decline strongly in
relation to GDP, to 71.5% and 66.3% respectively, on the back of nominal GDP
growth and substantial budget surpluses. Debt affordability metrics are
favourable and are expected to remain solid in 2023-2024, as gross financing
needs are moderate, and the cash buffer gives the government a high degree of
financing flexibility.
The ECB left its interest rates unchanged at the latest Governing Council
meeting on 25 January 2024. The minimum refinancing operations rate remained
at 4.5%, compared with zero at the start of the tightening cycle in July 2021,
while the ECB deposit facility rate is at 4.0%, compared with -50 bps in July
2021. The ECB's policy remains focussed on ensuring that inflation returns to
the 2% medium-term target in a timely manner, and so interest rates will
remain at sufficiently restrictive levels for as long as necessary.
C. Operating environment (continued)
Banks managed to weather the pandemic crisis well, with their liquidity and
capital buffers intact. Non-performing exposures (NPE) continued their
declining trend thanks mostly to sales packages by the two largest banks.
Non-performing loans were 8.3% of gross loans at the end of October 2023,
according to data from the Central Bank of Cyprus compared with 9.5% at the
end of December 2022. The NPE ratio in the non-financial corporations segment
was 7.3% and that of households was 11.2%. Private indebtedness continue to
decline with total loans to residents excluding the government dropping to
about 70% of GDP at the end of November 2023. New lending in 2023 remained in
line with new lending volumes in 2022, showing signs of slowing in the last
quarter of the year, particularly in relation to housing loans, reflecting the
tighter monetary conditions prevailing.
Sovereign ratings
The sovereign risk ratings of the Cypriot government have improved
significantly in recent years, reflecting reduced banking sector risks,
improved economic resilience and consistent fiscal outperformance. Cyprus has
demonstrated policy commitment to correcting fiscal imbalances through reform
and restructuring of its banking system. Public debt remains high as a share
of GDP, but large-scale asset purchases by the ECB ensure favourable funding
costs for Cyprus and ample liquidity in the government bond market.
In December 2023, Fitch Ratings affirmed Cyprus' long-term foreign currency
issuer default rating at 'BBB' and revised its outlook from stable to
positive. This follows an affirmation of Cyprus' long-term foreign currency
issuer default rating with a stable outlook in June 2023, and the upgrade in
March 2023. The upgrade and affirmation reflect the improvement in public
finances and government debt, as well as strong GDP growth, the resilience of
the Cypriot economy to external shocks, and the improvement in the banking
sector's asset quality.
In September 2023, Moody's Investors Service upgraded the long-term issuer and
senior unsecured ratings of the Government of Cyprus to Baa2 from Ba1. The
outlook was revised to stable from positive. This is a two-notch upgrade of
Cyprus' ratings, reflecting broad-based and sustained improvements in the
country's credit profile as a result of past and ongoing economic, fiscal and
banking reforms. Economic resilience has improved and medium-term growth
prospects remain strong. Fiscal strength has also improved significantly, with
a positive debt trend and sound debt affordability metrics. The stable outlook
balances the positive credit trends with remaining challenges.
In addition, S&P Global Ratings revised its outlook on Cyprus to positive
from stable in September 2023 and affirmed Cyprus' long-term local and foreign
currency sovereign ratings at BBB. The positive outlook reflects the ongoing
macroeconomic normalisation since the country's financial crisis in 2012-2013,
with the government on track to achieve steady fiscal surpluses and a
declining debt-to-GDP ratio in the coming years. The positive outlook also
reflects the significant progress made in the banking sector.
Also in September 2023, DBRS Ratings GmbH (DBRS Morningstar) upgraded the
long-term foreign and local currency issuer ratings of the Republic of Cyprus
from BBB to BBB (high). The rating action is stable. The upgrade is driven by
the recent decline in government debt and the expectation that public debt
metrics will continue to improve over the next few years, while economic
growth is expected to remain among the strongest in the euro area. The stable
outlook balances the recent favourable fiscal dynamics with downside risks to
the economic outlook.
D. Business Overview
Credit ratings
The Group's financial performance is highly correlated to the economic and
operating conditions in Cyprus. In December 2023, S&P Global Ratings
upgraded the long-term issuer credit rating of the Bank to BB and maintained a
positive outlook. The upgrade by one notch reflects the significant progress
Cypriot banks have made toward rebalancing their funding profiles, reducing
the dependence on non-resident deposits, the improved operating environment
and the profitability prospects due to higher interest rates, improved
efficiency and contained credit losses. In November 2023, Fitch Ratings
upgraded long-term issuer default rating to BB from B+, whilst maintaining the
positive outlook. The two notch upgrade reflects a combination of Fitch's
improved assessment of the Cypriot operating environment and continued
improvement in the Bank's credit profile, strengthened capitalisation, reduced
stock of legacy problem assets and structurally improved profitability. In
October 2023 Moody's Investors Service upgraded the Bank's long-term deposit
rating to the investment grade Baa3 from Ba1, while the outlook remained
positive. The main drivers for this upgrade are the continued resilience of
the Cypriot economy and credit conditions and the continued improvements in
Bank's solvency profile, with further gradual improvements in asset quality
and capital metrics, and a significant strengthening in the Bank's core
profitability.
Financial performance
The Group is a leading, financial and technology hub in Cyprus. During the
quarter ended 31 December 2023, the Group delivered another strong set of
financial results, generating a ROTE of 25.6%, the fourth consecutive quarter
with a ROTE over 20%. Overall, the Group generated €487 mn profit after tax
for the year, corresponding to a ROTE of 24.8%, surpassing its 2023 targets,
supported by strong net interest income growth, whilst non-interest income
remained a significant contributor to the Group's profitability and
diversified model, covering 88% of total operating expenses. The Group's
efficiency ratio was significantly improved on prior year reflecting continued
revenue growth and disciplined cost management amidst inflationary pressures.
The Group's tangible book value per share improved by 24% yoy to €4.93.
Currently, the Group enters in a declining interest rate environment with the
path of interest rate normalisation being very volatile. The Group reiterates
its expectation of delivering a ROTE of over 17% based on 15% CET1 ratio
(excluding amounts reserved for distribution) for 2024. Ιnterest rates are
expected to normalise to around 2.0-2.5% by 2025 and the Group's 2025 ROTE
target of over 16% based on 15% CET1 ratio (excluding amounts reserved for
distribution) is reaffirmed.
Interest rate environment
The structure of the Group's balance sheet is highly liquid, and hence
benefitted immediately from the rises in interest rates. As at 31 December
2023, cash balances with ECB (excluding TLTRO III of c.€2.0 bn) amounted to
c.€7.6 bn. The repricing of the references gradually benefited the interest
income on loans as almost half of the Group's loan portfolio is Euribor based.
As a result, the net interest income for the year ended 31 December 2023
amounted to €792 mn, more than double compared to the previous year. This
increase was underpinned by faster and steeper than expected interest rate
rises as well as a resilient low cost of deposits.
In a dynamic interest rate environment, the Group's interest earning assets
are in majority floating rate. Therefore, the Group undertook pro-active
solutions to reduce the net interest income sensitivity by converting some of
its floating assets to fixed rate assets. These actions included: investing in
fixed rate bonds, initiating the use of reverse repos, offering fixed rate
loans and engaging into receive fixed interest rate swaps. Simultaneously,
about one fifth of the Group's loan portfolio is linked with the Bank's base
rate which provides a natural hedge against the cost of deposits. Overall,
these actions have led to a reduction in the net interest income sensitivity
(to a parallel shift in interest rates by 100 bps) by €16 mn compared to
prior year.
The Group intends to increase its structural hedging position by further
€4-5 bn (with average duration of 3-4 years) by end of 2024, subject to
market conditions, via partial hedge of non-rate sensitive deposits through
receive fixed rate swaps, further investment in fixed rate bonds, additional
reverse repos and continuing offering fixed rate loans. In this respect, it is
expected that NII sensitivity by end-2024 will decrease further by c.€30-40
mn.
In line with the average market forward rates for January 2024, the ECB
deposit facility rate is expected to average to 3.4% in 2024 (compared to 3.3%
in 2023), with recent market expectation indicating great volatility in the
path of rate cuts. Nevertheless, ECB deposit facility rate is expected to
normalise by 2025, with ECB deposit facility rate expected to reduce to 2.7%
by 4Q2024 and to 2.0% by 4Q2025. Euribor rates have already started to move in
expectation of these moves, with 6-month Euribor expected to average to 3.2%
in 2024 (compared to 3.7% in 2023). As a result, the Group's net interest
income is expected to exceed €670 mn (compared to over €625 mn previously
guided in June 2023) with a quarterly declining trend. This updated guidance
incorporates assumptions on deposit pass-through, deposit mix, loan and fixed
income portfolio growth, the impact of structural hedging and wholesale
funding costs. For further details, please refer to the Section 'E. Strategy
and Outlook'.
D. Business Overview (continued)
Growing revenues in a more capital efficient way
The Group remains focused on growing revenues in a more capital efficient way
through growth of high-quality new lending and the growth in niche areas, such
as insurance and digital products that provide further market penetration and
diversify through non-banking operations.
The Group has continued to provide high quality new lending in FY2023 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 year ended 31 December 2023, new lending remained strong at
€2,025 mn, despite the rising interest rate environment. Gross performing
loan book remained broadly flat yoy as repayments offset new lending. Low
single-digit loan growth per annum for 2024 and 2025 is expected.
Fixed income portfolio continued to grow in 2023 to €3,548 mn, and currently
represents 14% of total assets (net of TLTRO III). This portfolio is mostly
measured at amortised cost and is highly rated with average rating at Aa3. The
amortised cost fixed income portfolio as at 31 December 2023 has an unrealised
gain of €3 mn, compared to an unrealised loss of €91 mn as at 30 September
2023, reflecting an improvement in the market value of this portfolio,
following the reduction in bond yields. Careful expansion of fixed income
portfolio is expected, subject to market conditions, so that fixed income
portfolio represents c.16% of total assets by 31 December 2024.
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 year ended 31 December 2023, non-interest income
amounted to €300 mn, remaining an important contributor to the Group's
profitability, and covering overall 88% of the Group's total operating
expenses and is expected to continue covering 70-80% of the Group's total
operating expenses for 2024-2025.
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. When disregarding the aforementioned
impact of the liquidity fees and NPE sale-related servicing fee, net fee and
commission income increased by 6% on prior year, reflecting higher net credit
card commissions and transactional fees. In the following two years, net fee
and commission income is expected to increase broadly in line with economic
growth.
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. During the
year ended 31 December 2023, JCC's net fee and commission income contributed
10% of total non-interest income and amounted to €30 mn, up 11% yoy, backed
by strong transaction volume.
The Group's insurance companies, EuroLife and GI are respectively leading
players in the life and general insurance business in Cyprus, and have been
providing recurring and improving income, further diversifying the Group's
income streams. The net insurance result for the year ended 31 December 2023
contributed 18% of non-interest income and amounted to €54 mn, up 20% yoy,
reflecting improved experience variance in life insurance business; insurance
companies remain valuable and sustainable contributors to the Group's
profitability.
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 invoice, remittance, tender
and ecosystem management. Currently, over 2,000 companies are registered in
the platform and over €360 mn cash were exchanged via the platform in 2023
through invoicing and remittance services. In February 2024 the
Business-to-Consumer service was launched, a Product Marketplace aiming to
increase the touch points with customers. Currently over 50 retailers were
onboarded in fashion, technology sectors and over 100k products were embedded
in the Marketplace.
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 2022 the Group
successfully completed a Voluntary Staff Exit Plan (VEP) through which 16% of
the Group's full-time employees were approved to leave at a total cost of
€101 mn. Following the completion of the VEP, the gross annual savings were
estimated at c.€37 mn or 19% of staff costs with a payback period of 2.7
years. Additionally, in January 2022, one of the Bank's subsidiaries completed
a small-scale targeted VEP, through which a small number of full-time
employees were approved to leave at a total cost of €3 mn. In relation to
branch restructuring, during 2022 the Group reduced the number of branches by
20 to 60, a reduction of 25%.
D. Business Overview (continued)
Lean operating model (continued)
In 2023 the Group completed a small-scale, targeted VEP through which 48
full-time employees were approved to leave at a total cost of c.€7.5 mn,
recorded in staff costs.
In addition, staff costs for the year ended 31 December 2023 include c.€11
mn staff cost rewards, namely the Short-term Incentive Plan and the Long-term
Incentive Plan. The Short-term Incentive Plan involves variable remuneration
to selected employees and will be driven by both, delivery of the Group's
strategy as well as individual performance.
At the Annual General Meeting which took place in May 2022, a special
resolution was approved for the establishment and implementation of the share
based Long-term Incentive Plan ('LTIP'). In December 2022 the Group granted
819,860 share awards to 22 eligible employees under the LTIP, comprising the
Extended Executive Committee of the Group. The awards granted in December 2022
are subject to a three year performance period for 2022-2024 (with all
performance conditions being non-market performance conditions). In October
2023, 479,160 share awards were granted to 21 eligible employees, comprising
the Extended Executive Committee of the Group. The awards granted in October
2023 are subject to a three-year performance period 2023-2025 (with all
performance conditions being non market performance conditions).
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.
The Group's total operating expenses for the year ended 31 December 2023
amounted to €341 mn, up by 5% yoy with savings partly offsetting
inflationary pressures. Total operating expenses excluding exit costs of
c.€7.5 mn, variable pay (STIP and LTIP) of c.€11 mn and the cost of €2.5
mn for Reward Programme, were reduced by 1% yoy. The cost to income ratio
excluding special levy on deposits and other levies/contributions for the year
ended 31 December 2023 was reduced further to 31%, 18 p.p. down compared to
FY2022, driven mainly by the higher total income and disciplined cost
management. Maintaining cost discipline management is a key priority. The cost
to income ratio excluding special levy on deposits and other
levies/contributions for 2024 of c.40% is reaffirmed, reflecting mainly lower
income due to lower rates.
Transformation plan
The Group's focus continues on deepening the relationship with its customers
as a customer centric organisation. A transformation plan is already in
progress and aims to enable the shift to modern banking by digitally
transforming customer service, as well as internal operations. The holistic
transformation aims to (i) shift to a more customer-centric operating model by
defining customer segment strategies, (ii) redefine distribution model across
existing and new channels, (iii) digitally transform the way the Group serves
its customers and operates internally, and (iv) improve employee engagement
through a robust set of organisational health initiatives.
Digital transformation
In the dynamic world of banking, the Group stands as a pioneer of digital
banking innovation in Cyprus, reshaping the banking experience into something
more intuitive, more responsive, and more aligned with the contemporary needs
of its customers, consistently pushing the boundaries to offer unparalleled
banking services. The Group aims to continue to innovate, and simplify the
banking journey, providing a unique and personalised experience to each of its
customers.
The Group's digital channels continue to grow. As at 31 December 2023, the
Group's digital community has increased to more than 450K active subscribers,
both on Internet Banking and the BoC Mobile App, improving by 9.4% yoy.
Likewise, the BoC Mobile App, had more than 410K active subscribers as at 31
December 2023 and increased by 14.4% since the beginning of the year. This app
is a central pillar in the Group's ongoing endeavour to constantly refine,
expand, and elevate its digital services, ensuring that every interaction is a
testament to its commitment to digital excellence.
During 4Q2023, the Group continued to enrich and improve its digital portfolio
with new innovative services to its customers. The redesign of the Home
Insurance flow in Mobile App for improved user experience that will lead to a
substantial increase in user engagement, ultimately translating into higher
adoption rates and amplified sales figures. A new feature 'View Card Details'
was launched in BOC Mobile App empowering users with
greater control and accessibility to their essential payment information. This
new functionality enables users to effortlessly access crucial card details,
including card number, expiry date, and CVV, directly within BOC mobile app.
Finally, the "Youth Culture Card" was launched, a collaboration with the
esteemed Government Minister of Culture where the Group introduced the Youth
Culture Card, a transformative initiative aimed at fostering cultural
engagement among young adults. The Youth Culture Card, designed for
individuals aged 18 and above, is a prepaid card loaded with €220 in credit,
empowering recipients to immerse themselves in a diverse array of enriching
cultural experiences throughout the year.
One of the Group's latest digital innovations, Quickloans, accessible through
both the BoC Mobile App and Internet Banking, has transformed the traditional
loan process, enabling customers to obtain a credit facility decision
instantly, without the need to visit a branch. Since the beginning of the
year, over 33k applications were processed, granting €100 mn new loans.
D. Business Overview (continued)
Lean operating model (continued)
Digital transformation (continued)
The digital signing feature, launched in July 2023 further simplified the
process of allowing customers to apply, sign, and disburse loans up to €15k
and car loans up to €35k efficiently. In collaboration with Genikes
Insurance, an insurance plan purchase was integrated into BOC Mobile App,
enabling customers to access car or home insurance plans through the app at
lower rates than branch prices. Digital insurance sales for the year ended 31
December 2023 amounted to €415k, compared to €68k in FY2022, reflecting
around 1,400 policies in 2023 compared to c.230 policies in 2022.
As at 31 December 2023, 95.6% of the number of transactions involving
deposits, cash withdrawals and internal/external transfers were performed
through digital channels (up by 11.8 p.p. from 83.8% in June 2020). In
addition, 84.1% of individual customers were digitally engaged (up by 11.7
p.p. from 72.4% in June 2020), choosing digital channels over branches to
perform their transactions. Furthermore, digital account openings increased by
108% in 2023 to 9,715 from 4,667 in 2022 and new debit cards increased by 156%
yoy to 11,536 in 2023.
Asset quality
Balance sheet de-risking was largely completed in 2022, marked by the
completion of Project Helix 3 in November 2022 which refers to the sale of
non-performing exposures with gross book value of c.€550 mn as at the date
of completion. As at 31 December 2023, the Group's NPE ratio stood at 3.6%,
considerably below its 2023 target of reaching an NPE ratio below 4%. The
Group's priorities remain intact, maintaining high quality new lending with
strict underwriting standards and preventing asset quality deterioration. The
NPE ratio target for the year ended 31 December 2024 is updated and is
currently expected to stand at c.3% whilst the NPE ratio target of below 3% by
end-2025 is reaffirmed. The cost of risk for 2024-2025 is expected to trend
towards normalised levels of 40-50 bps.
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 2023, the Company received a rating of AA (on
a scale of AAA-CCC) in the MSCI ESG Ratings assessment.
Reaffirming its strong commitment to sustainability and to the long term value
creation for all its stakeholders, in November 2023, the Bank was the first
Bank in Cyprus to become an official signatory of the United Nations
Principles for Responsible Banking representing a single framework for a
sustainable banking industry developed through a collaboration between banks
worldwide and the United Nations Environment Programme Finance Initiative
(UNEP FI).
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 continue its progress against its primary ESG targets and
address the evolving regulatory expectations, it further enhanced in 2023, its
ESG working plan which was established in 2022. Progress on the ESG working
plan is closely monitored by the Sustainability Committee, the Executive
Committee and the Board Committees on a quarterly basis.
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, following the implementation of various energy upgrade
action in 2022 and 2023, achieved a c.18% reduction in Scope 1 and Scope 2 GHG
emissions in 2023 compared to the baseline of 2021.
D. Business Overview (continued)
Enhancing organisational resilience and ESG (Environmental, Social and
Governance) agenda (continued)
Environmental Pillar (continued)
The Bank plans to invest in energy efficient installations and actions as well
as replace fuel intensive machineries and vehicles from 2024 to 2025, which
would lead to c.3-4% reduction in Scope 1 and Scope 2 emissions by 2025
compared to 2021. The Group 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 c.8% in Scope 1 - Mobile and
Stationary Combustion GHG emissions and c.11% in Scope 2 - Purchased
electricity GHG emissions in FY2023 compared to FY2022 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 Group is also
considering several other actions aiming to a further reduction of c.30% in
Scope 1 and Scope 2 GHG emissions by 2030 compared to 2022. The Bank achieved
an increase of 65% in renewable energy production, from 173,583 Kwh to 285,907
Kwh, in FY2023 compared to FY2022.
The Bank is gradually integrating climate-related and environmental (C&E)
risks into its Business Strategy. The Bank was the first bank in Cyprus to
join the Partnership for Carbon Accounting Financials (PCAF) in October 2022,
and has estimated and published the Financed Scope 3 GHG emissions associated
with its lending portfolio using the PCAF standards, methodology and proxies.
Following the estimation of Financed Scope 3 GHG emissions of loan portfolio,
the Bank established a decarbonization target on Mortgage loan portfolio. The
decarbonization target on Mortgage portfolio was established by applying the
International Energy Agency's Below 2 Degree Scenario. For the Bank's Mortgage
portfolio to be aligned with the climate scenario and effectively being
associated with lower transition risks, the baseline as at 31 December 2022 of
53.5 kgCO(2)e/m(2) should be reduced by 43% by 31 December 2030. The carbon
intensity of the Bank's Mortgage portfolio as at 31 December 2023 was
estimated at 50.73 kgCO(2)e/m(2) achieving a c.5% reduction compared to
baseline, due to increased installation of solar panels in residential
properties in 2023. A Green Housing product was launched at the end of 2023 to
support the Bank to meet the decarbonization target on Mortgage and
effectively limit the level of climate transition risk that is exposed. In
addition, the Bank has set lending and investment limits on specific carbon
intensive sectors which are widely considered to be associated with high
climate transition risk. Further, having introduced and implementing a
Business Environment Scan process, the Bank developed green/transition new
lending targets in certain sectors to support its customer's transition to a
low carbon economy and effectively manage climate transition risks.
During 2023, the Bank has made considerable progress in integrating
climate-related and environmental risks into its risk management approach and
risk culture. The Bank revised and enhanced the Materiality assessment process
on C&E risks. The Bank has carried out a comprehensive identification and
assessment of C&E risks as drivers of existing financial and non-financial
risks considering its business profile and loan portfolio composition. As part
of this process, the Bank has identified the risk drivers, both physical and
transition, which could potentially have an impact on its risk profile and
operations and has assessed the severity of each risk driver for all the
existing categories of risks. The Bank has implemented an ESG Due Diligence
process designed to enhance data collection, score customers on their
performance against various aspects around C&E risks and provide guidance
on remediation actions. This process involves the utilization of structured
ESG questionnaires applied at the individual company level for customers of
the Corporate Division to derive an ESG score. The Bank established a
structure and detailed Business Environment Scan process to monitor the impact
of C&E risks on its business environment in the short, medium and
long-term. The results of the preliminary (quarterly) and final (annually)
impact assessment have been incorporated in the Materiality assessment of
C&E risks as well as informed the Bank's Business Strategy.
The gross amount of environmentally friendly loans as at 31 December 2023 was
€24.5 mn compared to €20.9 mn as at 31 December 2022.
During 2023, in order to enhance the awareness and skillset on ESG matters,
the Group performed relevant trainings to the Board of Directors and Senior
Management as well as to members of control functions and other members of
staff.
Social Pillar
At the centre of the Group's leading social role lie its investments in the
Bank of Cyprus Oncology Centre (with an overall investment of c.€70 mn since
1998, whilst 60% of diagnosed cancer cases in Cyprus are being treated at the
Centre), the immediate and efficient response of Bank of Cyprus' SupportCY
network consisting of companies and organisations, to various needs of the
society and in cases of crises and emergencies, through the activation of
programs, specialized equipment and a highly trained Volunteers Corps, the
contribution of the Bank of Cyprus Cultural Foundation in promoting the
cultural heritage of the island, and the work of IDEA Innovation Centre.
During 2023, SupportCY among other initiatives responded to more than 30 fire
incidents in Cyprus and Greece, the deadly floods in Greece and sent support
to the earthquake victims in Syria. The Cultural Foundation undertook a number
of innovative projects such as 'AISTHISEIS' - Multi sensory museum experience
for groups with disabilities, educational programs for schools approved by the
Ministry of education, sport and youth, aspiring to bring youth closer to art,
literature, museums and culture of Cyprus as well as exhibitions, events and
activities developed to encourage and promote the island's history. The
ReInHerit program facilitating innovation and research cooperation between
European museums and heritage continued also into 2023, with 35,154 people
participating in events at the Cultural Foundation between January to December
2023.
D. Business Overview (continued)
Enhancing organisational resilience and ESG (Environmental, Social and
Governance) agenda (continued)
Social Pillar (continued)
The IDEA Innovation Centre, invested c.€4 mn in start-up business creation
since its incorporation, supported creation of 89 new companies to date,
provided support to 210+ entrepreneurs through its Startup program since
incorporation, and provided education to 7,000 entrepreneurs. Staff 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 72,888 hours of trainings. In
addition, in 2023 the Group launched the BoC Academy to offer up-skilling
short courses for employees, with 20 members of staff enrolling on the
Academy's programs. In addition, 4 full MBA scholarships were offered to
selected members of staff. Moreover, the Group continued its emphasis on staff
wellness during 2023 by offering webinars, team building activities and family
events with sole purpose to enhance mental, physical, financial and social
health, attended by c.2,000 employees through its Well at Work program. One of
the highlights of 2023, was the successful launch of the 1st BOC
Intrapreneurship Competition "Think Tank". The vision was to empower
creativity, increase engagement, nurture a Culture of Innovation, and identify
our talents. More than 70 ideas were submitted with 9 Think Tank finalists
presenting their ideas to the committee in a final pitching event. The 3
winning ideas were related with the areas of ESG, Digital Transformation and
New product development.
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 withco adequate control
environment, 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 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.
The Board composition of the Company and the Bank is diverse, with 45% of the
Board members being female as at 31 December 2023. The Board displays a strong
skillset stemming from broad international experience. Moreover, the Group's
aspiration to achieve a representation of at least 30% women in Group's
management bodies (Defined as the EXCO and the Extended EXCO) by 2030, has
been reached earlier with 33% representation of women, as at 31 December 2023,
in Group's management bodies, following the appointment of two female General
Managers in Eurolife and General Insurance of Cyprus. As at 31 December 2023,
there is a 40% representation of women at key positions below the Extended
EXCO level (defined as positions between Assistant Manager and Manager).
E. 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 remain intact:
· 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.
In 2023 there was a fast and steep increase in interest rates and in
conjunction with the Group's highly liquid balance sheet, resulted in a
significant increase in the net interest income of the Group. During 2023 the
Group's net interest income has more than doubled compared to previous year,
facilitating strong profitability. Overall, the Group delivered a ROTE of
24.8% for the year ended 31 December 2023, exceeding significantly its 2023
targets that were set in June 2023 during the Investor Update Event.
In line with the average market forward rates for January 2024, the ECB
deposit facility rate is expected to average to 3.4% in 2024 (compared to 3.3%
in 2023), with recent market expectation indicating great volatility in the
path of rate cuts. Nevertheless, ECB deposit facility rate is expected to
normalise by 2025, with ECB deposit facility rate expected to reduce to 2.7%
by 4Q2024 and to 2.0% by 4Q2025. Euribor rates have already started to move in
expectation of these moves, with 6-month Euribor expected to average to 3.2%
in 2024 (compared to 3.7% in 2023). As a result, the Group's net interest
income is expected to exceed €670 mn (compared to over €625 mn previously
guided in June 2023) with a quarterly declining trend. The main drivers for
this guidance are:
· Time and notice deposit pass-through to increase to an average of
40% in 2024 from 18% in 4Q2023. The interest rate cuts are expected to pass
gradually to new deposits whilst slow repricing of the back book is expected
in 2025;
· Gradual change in deposit mix towards time and notice deposits
from 32% as at 31 December 2023 to c.45% by 31 December 2024;
· Low single-digit loan growth whilst loans are expected to reprice
to lower Euribor rates (in anticipation of ECB deposit facility rate cuts);
· Fixed income portfolio is expected to continue to grow, subject
to market conditions, so that it represents c.16% of total assets by end-2024,
benefitting also from rollover to higher rates and;
· Higher wholesale funding costs, reflecting the full year impact
of the 2023 senior preferred issuance and any further planned issuance in
order to meet the 2024 MREL requirement.
Additionally, as the Group's majority of interest earning assets are floating,
the Group is undertaking solutions in order to reduce its net interest income
sensitivity, converting some of its assets from floating rate to fixed. During
2023 these actions included: investing in fixed rate bonds, initiating the use
of reverse repos, offering fixed rate loans and engaging into receive fixed
interest rate swaps on the subordinated debt and debt securities.
Simultaneously, about one fifth of the Group's loan portfolio is linked with
Bank's base rate which provides a natural hedge against the cost of deposits.
Overall, these structural hedging actions have led to a reduction in the net
interest income sensitivity (to a parallel shift in interest rates by 100 bps)
by €16 mn in 2023 compared to prior year. These actions are expected to
continue in 2024 so that the structural hedging increases by around €4-5 bn
by end of 2024, subject to market conditions, via partial hedge of non-rate
sensitive deposits through receive fixed rate swaps, further investment in
fixed rate bonds, additional reverse repos and continuing offering fixed rate
loans. In this respect, it is expected that NII sensitivity by end-2024 will
decrease further by c.€30-40 mn.
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 and this is expected to continue
covering around 70-80% of the Group's total operating expenses for 2024-2025,
supported by a growing net fee and commission income in line with economic
growth.
Maintaining cost discipline management remains an ongoing focus for the Group.
The cost to income ratio excluding special levy on deposits or other
levies/contributions is reiterated at c.40% for 2024, reflecting mainly
reduced income due to the lower interest rates.
In terms of asset quality, the NPE ratio target by end-2024 is updated and is
currently expected to stand at c.3% whilst the NPE ratio target of below 3% by
end-2025 is reaffirmed. The cost of risk for 2024-2025 is expected to trend
towards normalised levels of 40-50 bps.
E. Strategy and Outlook (continued)
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
derisking. Going forward, REMU sales are expected to continue, with expected
inflows to remain at limited levels. Therefore, the target of REMU portfolio
to reduce to c.€0.5 bn by end-2025 is reiterated.
Overall, the Group continues to expect that it can deliver a ROTE of over 17%
on 15% CET1 ratio (excluding amounts reserved for distribution) for 2024
corresponding to a CET1 generation of between 200-250 bps pre-distributions.
Additionally, the ROTE target for 2025 of over 16% on 15% CET1 ratio
(excluding amounts reserved for distribution) is reiterated, reflecting lower
interest rates (average ECB deposit facility rate at 2.2% for 2025).
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.
A summary of the targets are shown below:
Key metrics FY2024 FY2025 FY2024
(June 2023) (June 2023) (February 2024)
Net interest income >€625 mn Lower than 2024 >€670 mn
Average ECB Deposit facility rate 3.1% 2.5% 3.4%
Cost to income ratio(1) c.40s Mid 40s c.40s
Return on tangible equity on 15% CET1 ratio >17% >16% >17%(5)
NPE ratio <4% <3% c.3%
Cost of risk To normalise towards 40-50 bps over the medium-term Trending towards normalised levels of 40-50 bps
Capital 200-250 bps organic capital generation p.a. pre distributions(2) 200-250 bps CET1 generation pre-distributions(3)
CET1 ratio of c.19% by end-2025
Dividend Building prudently and progressively to 30-50% payout ratio(4)
1. Excluding special levy on deposits and other levies/contributions
2. Based on profit after tax (pre distributions)
3. Yoy Increase in CET1 ratio pre-distributions
4. Payout ratio calculated on adjusted recurring profitability which
refers to profit after tax before non-recurring items (attributable to the
owners of the Company) taking into consideration the distributions from other
equity instruments such as AT1 coupon. Any recommendation for a dividend is
subject to regulatory approval.
5. Excluding amounts reserved for distribution
F. Definitions and Explanations
Adjusted recurring profitability The Group's profit after tax before non-recurring items (attributable to the
owners of the Company) taking into account distributions under other equity
instruments such as the annual AT1 coupon.
Advisory and other transformation costs Comprise mainly of fees of external advisors in relation to: (i) the
transformation program and other strategic projects of the Group and (ii)
customer loan restructuring activities, where applicable.
Allowance for expected loan credit losses (previously 'Accumulated Comprises (i) allowance for expected credit losses (ECL) on loans and advances
provisions') to customers (including allowance for expected credit losses on loans and
advances to customers held for sale where applicable), (ii) the residual fair
value adjustment on initial recognition of loans and advances to customers
(including residual fair value adjustment on initial recognition on loans and
advances to customers classified as held for sale where applicable), (iii)
allowance for expected credit losses for off-balance sheet exposures
(financial guarantees and commitments) disclosed on the balance sheet within
other liabilities, and (iv) the aggregate fair value adjustment on loans and
advances to customers classified and measured at FVPL.
AT1 AT1 (Additional Tier 1) is defined in accordance with the Capital Requirements
Regulation (EU) No 575/2013, as amended by CRR II applicable as at the
reporting date.
Basic earnings per share (attributable to the owners of the Company) Basic earnings after tax per share (attributable to the owners of the Company)
is the Profit/(loss) after tax (attributable to the owners of the Company)
divided by the weighted average number of shares in issue during the period,
excluding treasury shares.
Carbon neutral The reduction and balancing (through a combination of offsetting investments
or emission credits) of greenhouse gas emissions from own operations.
CET1 capital ratio (transitional basis) CET1 capital ratio (transitional basis) is defined in accordance with the
Capital Requirements Regulation (EU) No 575/2013, as amended by CRR II
applicable as at the reporting date.
CET1 Fully loaded (FL) The CET1 fully loaded (FL) ratio is defined in accordance with the Capital
Requirements Regulation (EU) No 575/2013, as amended by CRR II applicable as
at the reporting date.
Cost to Income ratio Cost-to-income ratio comprises total expenses (as defined) divided by total
income (as defined).
Data from the Statistical Service The latest data from the Statistical Service of the Republic of Cyprus, Cyprus
Statistical Service, was published on 14 February 2024.
Digital transactions ratio This is the ratio of the number of digital transactions performed by
individuals and legal entity customers to the total number of transactions.
Transactions include deposits, withdrawals, internal and external transfers.
Digital channels include mobile, browser and ATMs.
Digitally engaged customers ratio This is the ratio of digitally engaged individual customers to the total
number of individual customers. Digitally engaged customers are the
individuals who use the digital channels of the Bank (mobile banking app,
browser and ATMs) to perform banking transactions, as well as digital enablers
such as a bank-issued card to perform online card purchases, based on an
internally developed scorecard.
Diluted earnings per share Diluted earnings per share is the Profit/(loss) after tax (attributable to the
owners of the Company) divided by the weighted average number of ordinary
shares in issue adjusted for the ordinary shares that may arise in respect of
share awards granted to executive directors and senior management of the Group
under the Long-Term Incentive Plans (LTIP)
ECB European Central Bank
F. Definitions and Explanations (continued)
Green Asset ratio The proportion of the share of a credit institution's assets financing and
invested in EU Taxonomy-aligned economic activities as a share of total
covered assets.
Green Mortgage ratio The proportion of the share of a credit institution's assets financing EU
Taxonomy-aligned mortgages (acquisition, construction or renovation of
buildings) as a share of total mortgages assets.
Gross loans Gross loans comprise: (i) gross loans and advances to customers measured at
amortised cost before the residual fair value adjustment on initial
recognition (including loans and advances to customers classified as
non-current assets held for sale where applicable) and (ii) loans and advances
to customers classified and measured at FVPL adjusted for the aggregate fair
value adjustment.
Gross loans are reported before the residual fair value adjustment on initial
recognition relating mainly to loans acquired from Laiki Bank (calculated as
the difference between the outstanding contractual amount and the fair value
of loans acquired) amounting to €69 mn as at 31 December 2023 (compared to
€66 mn as at 30 September 2023 and €86 mn as at 31 December 2022).
Additionally, gross loans include loans and advances to customers classified
and measured at fair value through profit or loss adjusted for the aggregate
fair value adjustment of €138 mn as at 31 December 2023 (compared to €203
mn as at 30 September 2023 and €211 mn as at 31 December 2022).
Group The Group consists οf Bank of Cyprus Holdings Public Limited Company, "BOC
Holdings" or the "Company", its subsidiary Bank of Cyprus Public Company
Limited, the "Bank" and the Bank's subsidiaries.
Legacy exposures Legacy exposures are exposures relating to (i) Restructuring and Recoveries
Division (RRD), (ii) Real Estate Management Unit (REMU), and (iii) non-core
overseas exposures.
Leverage ratio The leverage ratio is the ratio of tangible total equity to total assets as
presented on the balance sheet. Tangible total equity comprises of equity
attributable to the owners of the Company and Other equity instruments minus
intangible assets.
Leverage Ratio Exposure (LRE) Leverage Ratio Exposure (LRE) is defined in accordance with the Capital
Requirements Regulation (EU) No 575/2013, as amended.
Loan credit losses (PL) (previously 'Provision charge') Loan credit losses comprise: (i) credit losses to cover credit risk on loans
and advances to customers, (ii) net gains on derecognition of financial assets
measured at amortised cost relating to loans and advances to customers and
(iii) net gains on loans and advances to customers at FVPL, for the reporting
period/year.
Loan credit losses charge (previously 'Provisioning charge') (cost of risk) Loan credit losses charge (cost of risk) (year-to-date) is calculated as the
annualised 'loan credit losses' (as defined) divided by average gross loans.
The average gross loans are calculated as the average of the opening balance
and the closing balance of Gross loans (as defined), for the reporting
period/year.
Market Shares Both deposit and loan market shares are based on data from the CBC. The Bank
is the single largest credit provider in Cyprus with a market share of 42.2%
as at 31 December 2023 (compared to 42.3% as at 30 September 2023 and 40.9% as
at 31 December 2022). The Bank's deposit market share in Cyprus reached 37.7%
as at 31 December 2023 (compared to 37.7% as at 30 September 2023 and to 37.2%
as at 31 December 2022).
MSCI ESG Rating The use by the Company and the Bank of any MSCI ESG Research LLC or its
affiliates ('MSCI') data, and the use of MSCI Logos, trademarks, service marks
or index names herein, do not constitute a sponsorship, endorsement,
recommendation or promotion of the Company or the Bank by MSCI. MSCI Services
and data are the property of MSCI or its information providers and are
provided "as-is" and without warranty. MSCI Names and logos are trademarks or
service marks of MSCI.
F. Definitions and Explanations (continued)
Net Interest Margin Net interest margin is calculated as the net interest income (annualised)
divided by the 'quarterly average interest earning assets' (as defined).
Net loans and advances to customers Net loans and advances to customers comprise gross loans (as defined) net of
allowance for expected loan credit losses (as defined, but excluding allowance
for expected credit losses on off-balance sheet exposures disclosed on the
balance sheet within other liabilities).
Net loans to deposits ratio Net loans to deposits ratio is calculated as gross loans (as defined) net of
allowance for expected loan credit losses (as defined) divided by customer
deposits.
Net performing loan book Net performing loan book is the total net loans and advances to customers (as
defined) excluding net loans included in the legacy exposures (as defined).
Net Stable Funding Ratio (NSFR) The NSFR is calculated as the amount of "available stable funding" (ASF)
relative to the amount of "required stable funding" (RSF). The regulatory
limit, enforced in June 2021, has been set at 100% as per the CRR II.
Net zero emissions The reduction of greenhouse gas emissions to net zero through a combination of
reduction activities and offsetting investments
New lending New lending includes the disbursed amounts of the new and existing
non-revolving facilities (excluding forborne or re-negotiated accounts) as
well as the average year-to-date change (if positive) of the current accounts
and overdraft facilities between the balance at the beginning of the period
and the end of the period. Recoveries are excluded from this calculation since
their overdraft movement relates mostly to accrued interest and not to new
lending.
Non-interest income Non-interest income comprises Net fee and commission income, Net foreign
exchange gains/(losses) and net gains/(losses) on financial instruments and
(excluding net gains on loans and advances to customers at FVPL), Net
insurance result, Net gains/(losses) from revaluation and disposal of
investment properties and on disposal of stock of properties, and Other
income.
Non-performing exposures (NPEs) As per the European Banking Authorities (EBA) standards and European Central
Bank's (ECB) Guidance to Banks on Non-Performing Loans (which was published in
March 2017), non-performing exposures (NPEs) are defined as those exposures
that satisfy one of the following conditions:
(i) The borrower is assessed as unlikely to pay its credit obligations in
full without the realisation of the collateral, regardless of the existence of
any past due amount or of the number of days past due.
(ii) Defaulted or impaired exposures as per the approach provided in the
Capital Requirement Regulation (CRR), which would also trigger a default under
specific credit adjustment, diminished financial obligation and obligor
bankruptcy.
(iii) Material exposures as set by the CBC, which are more than 90 days past
due.
(iv) Performing forborne exposures under probation for which additional
forbearance measures are extended.
(v) Performing forborne exposures previously classified as NPEs that present
more than 30 days past due within the probation period.
From 1 January 2021 two regulatory guidelines came into force that affect NPE
classification and Days-Past-Due calculation. More specifically, these are the
RTS on the Materiality Threshold of Credit Obligations Past-Due
(EBA/RTS/2016/06), and the Guideline on the Application of the Definition of
Default under article 178 (EBA/RTS/2016/07).
The Days-Past-Due (DPD) counter begins counting DPD as soon as the arrears or
excesses of an exposure reach the materiality threshold (rather than as of the
first day of presenting any amount of arrears or excesses). Similarly, the
counter will be set to zero when the arrears or excesses drop below the
materiality threshold. Payments towards the exposure that do not reduce the
arrears/excesses below the materiality threshold, will not impact the counter.
For retail debtors, when a specific part of the exposures of a customer that
fulfils the NPE criteria set out above is greater than 20% of the gross
carrying amount of all on balance sheet exposures of that customer, then the
total customer exposure is classified as non performing; otherwise only the
specific part of the exposure is classified as non performing. For non retail
debtors, when an exposure fulfils the NPE criteria set out above, then the
total customer exposure is classified as non performing.
F. Definitions and Explanations (continued)
Material arrears/excesses are defined as follows: (a) Retail exposures: Total
arrears/excess amount greater than €100, (b) Exposures other than retail:
Total arrears/excess amount greater than €500 and the amount in
arrears/excess in relation to the customer's total exposure is at least 1%.
The NPEs are reported before the deduction of allowance for expected loan
credit losses (as defined).
Non-recurring items Non-recurring items as presented in the 'Unaudited Consolidated Income
Statement-Underlying basis' relate to 'Advisory and other transformation costs
- organic'. 2022 Non-recurring items relate to: (i) Advisory and Other
transformation costs - organic (ii) Provisions/net loss relating to NPE sales,
(iii) Restructuring and other costs relating to NPE sales, and (iv)
Restructuring costs - Voluntary Staff Exit Plan (VEP).
NPE coverage ratio (previously 'NPE Provisioning coverage ratio') The NPE coverage ratio is calculated as the allowance for expected loan credit
losses (as defined) over NPEs (as defined).
NPE ratio NPEs ratio is calculated as the NPEs as per EBA (as defined) divided by gross
loans (as defined).
Operating profit Operating profit comprises profit before loan credit losses (as defined),
impairments of other financial and non-financial assets, Provisions for
pending litigations, claims regulatory and other matters (net of reversals),
tax, profit attributable to non-controlling interests and non-recurring items
(as defined).
Operating profit return on average assets Operating profit return on average assets is calculated as the annualised
operating profit (as defined) divided by the quarterly average of total assets
for the relevant period. Average total assets exclude total assets of
discontinued operations at each quarter end, if applicable.
Phased-in Capital Conservation Buffer (CCB) In accordance with the legislation in Cyprus which has been set for all credit
institutions, the applicable rate of the CCB is 1.25% for 2017, 1.875% for
2018 and 2.5% for 2019 (fully phased-in).
Profit after tax and before non-recurring items (attributable to the owners of This refers to the profit after tax (attributable to the owners of the
the Company) Company), excluding any 'non-recurring items' (as defined).
Profit/(loss) after tax - organic (attributable to the owners of the Company) This refers to the profit or loss after tax (attributable to the owners of the
Company), excluding any 'non-recurring items' (as defined, except for the
'advisory and other transformation costs - organic').
Project Helix 3 Project Helix 3 refers to the agreement the Group reached in November 2021 for
the sale of a portfolio of NPEs with gross book value of €551 mn, as well as
real estate properties with book value of c.€88 mn as at 30 September 2022.
Project Helix 3 was completed in November 2022.
F. Definitions and Explanations (continued)
Quarterly average interest earning assets This relates to the average of 'interest earning assets' as at the beginning
and end of the relevant quarter. Interest earning assets include: cash and
balances with central banks (including cash and balances with central banks
classified as non-current assets held for sale), plus reverse purchase
agreements (reverse repos) plus loans and advances to banks, plus net loans
and advances to customers (including loans and advances to customers
classified as non-current assets held for sale), plus 'deferred consideration
receivable' included within 'other assets', plus investments (excluding
equities, mutual funds and other non interest bearing investments).
Qoq Quarter on quarter change
Return on Tangible equity (ROTE) Return on Tangible Equity (ROTE) is calculated as Profit/(loss) after tax
(attributable to the owners of the Company) (as defined) (annualised - (based
on year - to - date days)), divided by the quarterly average of Shareholders'
equity minus intangible assets at each quarter end.
Shareholders' equity Shareholders' equity comprise total equity adjusted for non-controlling
interest and other equity instruments.
Special levy on deposits and other levies/contributions Relates to the special levy on deposits of credit institutions in Cyprus,
contributions to the Single Resolution Fund (SRF), contributions to the
Deposit Guarantee Fund (DGF), as well as the DTC levy, where applicable.
Tangible book value per share Calculated as the total equity attributable to the owners of the Company,
(i.e. not including other equity instruments, such as AT1) less intangible
assets at each quarter end divided by the number of ordinary shares of the
Group.
Time deposit Calculated as a percentage of the cost (interest expense) of Time and Notice
deposits over the average 6-month Euribor rate of the period.
pass-through
Total Capital ratio Total capital ratio is defined in accordance with the Capital Requirements
Regulation (EU) No 575/2013, as amended by CRR II applicable as at the
reporting date.
Total expenses Total expenses comprise staff costs, other operating expenses and the special
levy on deposits and other levies/contributions. It does not include (i)
'advisory and other transformation costs-organic', (ii) restructuring and
other costs relating to NPE sales, or (iii) restructuring costs relating to
the Voluntary Staff Exit Plan, where applicable. (i) 'Advisory and other
transformation costs-organic' amounted to nil for 4Q2023 (compared to nil
for 3Q2023, €1 mn for 2Q2023 and for 1Q2023), (ii) Restructuring costs
relating to NPE sales for 4Q2023 amounted to nil (compared to nil for 3Q2023,
a gain of €0.2 mn for 2Q2023 and a loss of €0.2 mn for 1Q2023), and (iii)
Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) for 4Q2023
was nil (compared to nil for 3Q2023, 2Q2023 and 1Q2023).
Total income Total income comprises net interest income and non-interest income (as
defined).
Total loan credit losses, impairments and provisions Total loan credit losses, impairments and provisions comprise loan credit
losses (as defined), plus impairments of other financial and non-financial
assets, plus provisions for pending litigations, claims regulatory and other
matters net of reversals).
Underlying basis This refers to the statutory basis after being adjusted for reclassification
of certain items as explained in the Basis of Presentation.
Write offs Loans together with the associated loan credit losses are written off when
there is no realistic prospect of recovery. Partial write-offs, including
non-contractual write-offs, may occur when it is considered that there is no
realistic prospect for the recovery of the contractual cash flows. In
addition, write-offs may reflect restructuring activity with customers and are
part of the terms of the agreement and subject to satisfactory performance.
Yoy Year on year change
Basis of Presentation
This announcement covers the results of Bank of Cyprus Holdings Public Limited
Company, "BOC Holdings" or "the Company", its subsidiary Bank of Cyprus Public
Company Limited, the "Bank" or "BOC PCL", and together with the Bank's
subsidiaries, the "Group", for the year ended 31 December 2023.
At 31 December 2016, the Bank was listed on the Cyprus Stock Exchange (CSE)
and the Athens Exchange. On 18 January 2017, BOC Holdings, incorporated in
Ireland, was introduced in the Group structure as the new holding company of
the Bank. On 19 January 2017, the total issued share capital of BOC Holdings
was admitted to listing and trading on the LSE and the CSE.
Financial information presented in this announcement is being published for
the purposes of providing an overview of the preliminary Group financial
results for the year ended 31 December 2023.
The financial information in this announcement is not audited and does not
constitute statutory financial statements of BOC Holdings within the meaning
of section 340 of the Companies Act 2014. The Group statutory financial
statements for the year ended 31 December 2023 are expected to be delivered to
the Registrar of Companies of Ireland within 56 days of 30 September 2024 (as
at the date of this report, such statutory financial statements have not been
reported on by independent auditors of BOC Holdings). The Board of Directors
approved this financial information on 16 February 2024. BOC Holding's most
recent statutory financial statements for the purposes of Chapter 4 of Part 6
of the Companies Act 2014 of Ireland for the year ended 31 December 2022, upon
which the auditors have given an unqualified audit report were published on 31
March 2023 and have been annexed to the annual return and delivered to the
Registrar of Companies of Ireland.
Statutory basis: Statutory information is set out on pages 4-5. However, a
number of factors have had a significant effect on the comparability of the
Group's financial position and performance. Accordingly, the results are also
presented on an underlying basis.
Underlying basis: The financial information presented under the underlying
basis provides an overview of the Group financial results for the year ended
31 December 2023, which the management believes best fits the true measurement
of the financial performance and position of the Group. For further
information, please refer to 'Commentary on Underlying Basis' on pages 7-8.
The statutory results are adjusted for certain items (as described on section
B.1) to allow a comparison of the Group's underlying financial position and
performance.
The financial information included in this announcement is neither reviewed
nor audited by the Group's external auditors.
This announcement and the presentation for the Group Financial Results for the
year ended 31 December 2023 have been posted on the Group's website
www.bankofcyprus.com
(file:///Q:/IRD/Attachments/2023/Unpublished/20230809%201H2023%20Resutls/ENG/www.bankofcyprus.com)
(Group/Investor Relations/Financial Results).
Definitions: The Group uses definitions in the discussion of its business
performance and financial position which are set out in section F, together
with explanations.
The Group Financial Results for the year ended 31 December 2023 are presented
in Euro (€) and all amounts are rounded as indicated. A comma is used to
separate thousands and a dot is used to separate decimals.
Forward Looking Statements
This document contains certain forward-looking statements which can usually be
identified by terms used such as "expect", "should be", "will be" and similar
expressions or variations thereof or their negative variations, but their
absence does not mean that a statement is not forward-looking. Examples of
forward-looking statements include, but are not limited to, statements
relating to the Group's near term, medium term and longer term future capital
requirements and ratios, intentions, beliefs or current expectations and
projections about the Group's future results of operations, financial
condition, expected impairment charges, the level of the Group's assets,
liquidity, performance, prospects, anticipated growth, provisions,
impairments, business strategies and opportunities. By their nature,
forward-looking statements involve risk and uncertainty because they relate to
events, and depend upon circumstances, that will or may occur in the future.
Factors that could cause actual business, strategy and/or results to differ
materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements made by the Group include, but
are not limited to: general economic and political conditions in Cyprus and
other European Union (EU) Member States, interest rate and foreign exchange
fluctuations, legislative, fiscal and regulatory developments, information
technology, litigation and other operational risks, adverse market conditions,
the impact of outbreaks, epidemics or pandemics and geopolitical developments.
This creates significantly greater uncertainty about forward-looking
statements. Should any one or more of these or other factors materialise, or
should any underlying assumptions prove to be incorrect, the actual results or
events could differ materially from those currently being anticipated as
reflected in such forward-looking statements. The forward-looking statements
made in this document are only applicable as at the date of publication of
this document. Except as required by any applicable law or regulation, the
Group expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement contained in this
document to reflect any change in the Group's expectations or any change in
events, conditions or circumstances on which any statement is based. Changes
in our reporting frameworks and accounting standards, including the recently
announced reporting changes and the implementation of IFRS 17 'Insurance
Contracts', which may have a material impact on the way we prepare our
financial statements and (with respect to IFRS 17) may negatively affect the
profitability of Group's insurance business.
Contacts
For further information please contact:
Investor Relations
+ 357 22 122239
investors@bankofcyprus.com
The Bank of Cyprus Group is the leading banking and financial services group
in Cyprus, providing a wide range of financial products and services which
include retail and commercial banking, finance, factoring, investment banking,
brokerage, fund management, private banking, life and general insurance. At 31
December 2023, the Bank of Cyprus Group operated through a total of 64
branches in Cyprus, of which 4 operated as cash offices. The Bank of Cyprus
Group employed 2,830 staff worldwide. At 31 December 2023, the Group's Total
Assets amounted to €26.6 bn and Total Equity was €2.5 bn. The Bank of
Cyprus Group comprises Bank of Cyprus Holdings Public Limited Company, its
subsidiary Bank of Cyprus Public Company Limited and its subsidiaries.
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