Announcement
Group Financial Results for the quarter ended 31 March
2024
Nicosia, 16 May
2024
Key Highlights for the quarter ended 31 March
2024
Resilient economic outlook
· 3.3%
GDP growth in 1Q2024; projected to grow by c. 2.9%1 in
2024 outpacing Euro area average
· Seasonally strong quarter of new lending of €676 mn, up 46%
qoq and 8% yoy
· Gross performing loan book at €10.0 bn, up 2% qoq
Delivering ROTE of 23.6% in 1Q2024
· NII
of €213 mn down 3% qoq, reflecting modest decline in Euribor,
hedging and marginally higher cost of deposits
· Total operating expenses2 down 14% on prior
quarter due to quarterly seasonality and broadly flat yoy; cost to
income ratio2 reduced to 29% (vs 34% in
1Q2023)
· Profit after tax of €133 mn down 4% qoq and up 40% yoy; basic
earnings per share of €0.30 for 1Q2024
Liquid and resilient balance sheet
· NPE
ratio at 3.4% (0.8% on net basis) down 20 bps qoq
· NPE
Coverage at 77% up 4 p.p. on prior year; cost of risk at 27
bps
· Retail funded deposit base at €19.3 bn, flat qoq and up 2%
yoy
· Highly liquid balance sheet with €7.2 bn placed at the
ECB; €1.7 bn
TLTRO repaid in March 2024
· In
compliance with 2024 final MREL target post successful issuance
of €300 mn Green
Senior Preferred Notes in April 2024
Robust capital and shareholder focus
· Regulatory CET1 ratio and Total Capital ratio of 17.1% and
22.0% respectively
· Including 1Q2024 profits net of distribution accrual, CET1
ratio at 17.6% and Total Capital ratio at 22.5%
· Organic capital generation3 of 128 bps in
1Q2024
· Tangible book value per share of €5.234 as at 31 March
2024 up 26% yoy
|
1. Source:
Cyprus' Ministry of Finance; projections as of April
2024
2.
Excluding special levy on deposits and other
levies/contributions
3. Based
on profit after tax (pre-distributions)
4. This
includes cash dividend which is expected to be paid on 14 June
2024
*Key Highlights are based on the
financial results on an 'Underlying Basis'.
Group Chief Executive Statement
"We had a strong start to the year underpinned by compelling
financial results and the approval of a meaningful distribution,
representing another important milestone in our strategic progress.
We proposed a total distribution of €137 mn in respect of 2023
earnings comprising a cash dividend of €112 mn and an inaugural
share buyback of up to €25 mn, corresponding to an
overall payout ratio of 30%, a material increase compared to the
previous year.
During the first quarter of the year, we delivered a ROTE of
23.6%, the fifth consecutive quarter with a ROTE over 20%, tracking
ahead of our 2024 targets. Our performance was supported by
continued strong net interest income, declining only modestly from
the previous quarter, reflecting high rates and ample liquidity as
well as our continuous focus on cost discipline and robust asset
quality.
This was all supported by a Cypriot economy that continues to
display strength and resilience against the backdrop of
geopolitical uncertainty. In the first quarter of 2024, GDP
increased by 3.3% in Cyprus and is forecast to grow by
c.2.9%1 in 2024, expected to outpace the Eurozone
average.
Our balance sheet is characterised by a robust capital
position, high liquidity and healthy asset quality. Our regulatory
CET1 ratio stood at 17.1% as at 31 March 2024 or 17.6% including
profits in the quarter net of distribution accrual2.
Organic capital generation was again strong at c.130 bps. Our
tangible book value per share improved by 26% year on year to
€5.23, reflecting our delivery for shareholder value
creation.
In April 2024 the Group successfully issued
€300 mn MREL-eligible green senior preferred notes, thereby
finalising our MREL requirements and including a comfortable
buffer. This issuance was the first ever green bond issuance for
Bank of Cyprus, representing an important step to lead the
transition of Cyprus to a sustainable future.
Our positive set of financial results this quarter provides
the foundations to deliver a ROTE of over 17% on a 15% CET1 ratio.
We will review our financial targets alongside our 1H2024 financial
results. 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. Source:
Cyprus' Ministry of Finance; projections as of April
2024
2. In line
with Commission Delegated Regulation (EU) No 241/2014 principles.
The distribution accrual does not constitute an approval by
regulators or a decision by the Bank with respect to distribution
payments for 2024. Any recommendation of a distribution is subject
to regulatory approval
A. Group Financial Results - Underlying
Basis
Unaudited Interim Condensed Consolidated Income
Statement
€
mn
|
1Q2024
|
4Q2023
|
1Q2023
|
qoq
+%
|
yoy
+%
|
Net interest income
|
213
|
220
|
162
|
-3%
|
31%
|
Net fee and commission
income
|
42
|
46
|
44
|
-10%
|
-5%
|
Net foreign exchange gains and net
gains on financial instruments
|
7
|
8
|
13
|
-12%
|
-44%
|
Net insurance result
|
10
|
16
|
10
|
-37%
|
4%
|
Net gains/(losses) from
revaluation and disposal of investment properties and on disposal
of stock of properties
|
1
|
3
|
2
|
-81%
|
-65%
|
Other income
|
3
|
3
|
3
|
-8%
|
1%
|
Total income
|
276
|
296
|
234
|
-7%
|
18%
|
Staff costs
|
(48)
|
(51)
|
(46)
|
-6%
|
5%
|
Other operating
expenses
|
(33)
|
(42)
|
(34)
|
-24%
|
-3%
|
Special levy on deposits and other levies/contributions
|
(11)
|
(13)
|
(11)
|
-8%
|
4%
|
Total expenses
|
(92)
|
(106)
|
(91)
|
-13%
|
2%
|
Operating profit
|
184
|
190
|
143
|
-3%
|
28%
|
Loan credit losses
|
(7)
|
(19)
|
(11)
|
-64%
|
-39%
|
Impairments of other financial and
non-financial assets
|
(8)
|
(15)
|
(11)
|
-45%
|
-22%
|
Provisions for pending
litigations, claims, regulatory and other matters (net of
reversals)
|
(10)
|
(8)
|
(6)
|
24%
|
55%
|
Total loan credit losses, impairments and
provisions
|
(25)
|
(42)
|
(28)
|
-40%
|
-12%
|
Profit before tax and non-recurring items
|
159
|
148
|
115
|
7%
|
39%
|
Tax
|
(25)
|
(10)
|
(18)
|
148%
|
40%
|
Profit attributable to
non-controlling interests
|
(1)
|
0
|
(1)
|
-
|
5%
|
Profit after tax and before non-recurring items (attributable
to the owners of the Company)
|
133
|
138
|
96
|
-4%
|
38%
|
Advisory and other transformation
costs - organic
|
-
|
-
|
(1)
|
-
|
-100%
|
Profit after tax (attributable to the owners
of the Company)
|
133
|
138
|
95
|
-4%
|
40%
|
A. Group Financial Results - Underlying Basis
(continued)
Unaudited Interim Condensed Consolidated Income Statement-
Key Performance Ratios
|
Key Performance
Ratios
|
1Q2024
|
4Q2023
|
1Q2023
|
qoq
+%
|
yoy
+%
|
Net
Interest Margin (annualised)
|
3.70%
|
3.66%
|
2.91%
|
4
bps
|
79
bps
|
Net
Interest Margin (annualised) excluding TLTRO III
|
3.90%
|
4.00%
|
3.18%
|
-10
bps
|
72
bps
|
Cost to
income ratio
|
33%
|
36%
|
39%
|
-3
p.p.
|
-6
p.p.
|
Cost to
income ratio excluding special levy on
deposits and other levies/contributions
|
29%
|
32%
|
34%
|
-3
p.p.
|
-5
p.p.
|
Operating
profit return on average assets (annualised)
|
2.9%
|
2.8%
|
2.3%
|
0.1
p.p.
|
0.6
p.p.
|
Basic
earnings per share attributable to the owners of the Company
(€)1
|
0.30
|
0.31
|
0.21
|
-0.01
|
0.09
|
Return on
tangible equity (ROTE)
|
23.6%
|
25.6%
|
21.3%
|
-2.0
p.p.
|
2.3
p.p.
|
Return on
tangible equity (ROTE) on 15% CET1 ratio2
|
29.1%
|
28.8%
|
21.9%
|
0.3
p.p.
|
7.2
p.p.
|
Tangible
book value per share (€)
|
5.23
|
4.93
|
4.15
|
0.30
|
1.08
|
Tangible
book value per share excluding the proposed cash
dividend
|
4.98
|
4.68
|
4.10
|
0.30
|
0.88
|
1. The diluted earnings per share
attributable to the owners of the Company for 1Q2024 amounted to
€0.30 (compared to €0.31 for 4Q2023 and
€0.21 for 1Q2023)
2. Calculated as Profit/(loss)
after tax (attributable to the owners of the Company) (annualised -
(based on year - to - date days), divided by the quarterly average
of Shareholders' equity minus intangible assets and after deducting
the excess CET1 capital on a 15% CET1 ratio from the tangible book
value
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 quarter ended 31 March 2024 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 F.1 'Reconciliation of Interim Consolidated
Income statement for the three months ended 31 March 2024 between
statutory and underlying basis' and Section H under 'Alternative
Performance Measures' and Section I under 'Definitions &
Explanations.
A. Group Financial Results- Underlying Basis
(continued)
|
Unaudited Interim Condensed Consolidated Balance
Sheet
|
€
mn
|
|
31.03.2024
|
31.12.2023
|
+%
|
Cash and balances with central
banks
|
|
7,217
|
9,615
|
-25%
|
Loans and advances to
banks
|
|
384
|
385
|
0%
|
Reverse repurchase
agreements
|
|
708
|
403
|
75%
|
Debt securities, treasury bills
and equity investments
|
|
3,876
|
3,695
|
5%
|
Net loans and advances to
customers
|
|
10,028
|
9,822
|
2%
|
Stock of property
|
|
804
|
826
|
-3%
|
Investment properties
|
|
62
|
62
|
0%
|
Other assets
|
|
1,862
|
1,821
|
2%
|
Total assets
|
|
24,941
|
26,629
|
-6%
|
Deposits by banks
|
|
396
|
472
|
-16%
|
Funding from central
banks
|
|
310
|
2,044
|
-85%
|
Customer deposits
|
|
19,260
|
19,337
|
0%
|
Debt securities in
issue
|
|
673
|
672
|
0%
|
Subordinated
liabilities
|
|
309
|
307
|
1%
|
Other liabilities
|
|
1,370
|
1,309
|
5%
|
Total liabilities
|
|
22,318
|
24,141
|
-8%
|
|
|
|
|
|
Shareholders' equity
|
|
2,381
|
2,247
|
6%
|
Other equity
instruments
|
|
220
|
220
|
-
|
Total equity excluding non-controlling
interests
|
|
2,601
|
2,467
|
5%
|
Non-controlling
interests
|
|
22
|
21
|
3%
|
Total equity
|
|
2,623
|
2,488
|
5%
|
Total liabilities and equity
|
|
24,941
|
26,629
|
-6%
|
|
|
|
|
|
|
|
|
|
|
| |
Key Balance Sheet figures and ratios
|
|
31.03.2024
|
31.12.2023
|
+
|
Gross loans (€ mn)
|
|
10,276
|
10,070
|
2%
|
Allowance for expected loan credit
losses (€ mn)
|
|
267
|
267
|
0%
|
Customer deposits (€
mn)
|
|
19,260
|
19,337
|
0%
|
Loans to deposits ratio
(net)
|
|
52%
|
51%
|
1
p.p.
|
NPE ratio
|
|
3.4%
|
3.6%
|
-20
bps
|
NPE coverage ratio
|
|
77%
|
73%
|
+4
p.p.
|
Leverage ratio
|
|
10.2%
|
9.1%
|
+110
bps
|
Capital ratios and risk weighted assets
|
31.03.2024
(Regulatory)
|
31.03.2024
(including Retained
Earnings1)
|
31.12.2023
(Regulatory)2
|
+
|
Common Equity Tier 1 (CET1) ratio
(transitional)
|
17.1%
|
17.6%
|
17.4%
|
+20
bps
|
Total capital ratio
(transitional)
|
22.0%
|
22.5%
|
22.4%
|
+10
bps
|
Risk weighted assets (€
mn)
|
10,548
|
10,548
|
10,341
|
+2%
|
1. Includes unaudited/unreviewed
profits for 1Q2024 net of distribution accrual (refer to A.2.1
'Capital Base'. Any recommendation for a distribution is subject to
regulatory approval
2. Includes profits for the year
ended 31 December 2023 net of distribution at 30% payout ratio,
following ECB approval in March 2024 (refer to section
A.2.1).
p.p. = percentage points, bps =
basis points, 100 basis points (bps) = 1 p.p.
|
A. Group Financial Results - Underlying Basis
(continued)
A.2 Balance Sheet Analysis
A.2.1 Capital Base
Total equity excluding non-controlling
interests totalled €2,601 mn as at
31 March 2024 compared to €2,467 mn as at 31 December 2023 and
€2,119 mn as at 31 March
2023. Shareholders' equity totalled to €2,381 mn as at 31 March 2024
compared to €2,247 mn as at 31 December 2023 and to
€1,899 mn as at 31 March 2023.
The regulatory Common Equity Tier 1 capital (CET1) ratio on a
transitional basis stood at 17.1% as at 31 March 2024
compared to 17.4% as at 31 December 2023. Throughout this
announcement, the regulatory capital ratios as at 31 March 2024 do
not include profits for the quarter ended 31 March 2024 (such
ratios are referred as regulatory). Including the profits for 1Q2024 of c.130 bps, net of
distribution accrual at the top end of the Group's approved
distribution policy in line with Commission Delegated Regulation
(EU) No 241/2014 principles of c.70 bps, the CET1 ratio on a
transitional basis (referred as ratios including retained earnings)
increased to 17.6% as at 31 March 2024. As per the latest SREP
decision, any distribution is subject to regulatory approval. Such
distribution accrual in respect of 2024 earnings does not
constitute a binding commitment for a distribution payment nor does
it constitute a warranty or representation that such a payment will
be made. Since September 2023, a charge is
deducted from own funds in relation to the ECB prudential
expectations for NPEs, which amounted to 32bps as at 31 March 2024,
broadly flat compared to prior quarter. A prudential charge in
relation to an onsite inspection on the value of the Group's
foreclosed assets is being deducted from own funds since June 2021,
the impact of which was
10 bps on Group's CET1 ratio as at 31 March 2024
(compared to 12 bps on 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 March
2024 the impact of these requirements was 41 bps on Group's CET1
ratio, compared to 24 bps as at 31 December 2023. The
above-mentioned requirements are within the capital plans of the
Group and incorporated within its capital projections.
The regulatory Total Capital ratio on a transitional basis stood at 22.0%
as at 31 March 2024 compared to 22.4% as at 31 December 2023.
Including the profits for 1Q2024 of c.130 bps, net of distribution
accrual at the top end of the Group's approved distribution policy
in line with Commission Delegated Regulation (EU) No 241/2014
principles of c.70 bps the Total Capital ratio on transitional
basis (including retained earnings) increases to 22.5% as at 31
March 2024.
The Group's capital ratios are
above the Supervisory Review and Evaluation Process (SREP)
requirements.
As at 31 March 2024 the Group's
minimum phased-in CET1 capital ratio is set at 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 0.49%. Likewise, the Group's minimum phased-in Total Capital
ratio requirement is set at 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 0.49%. 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.
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 increased by 37.5 bps to 1.875% on 1 January 2024.
In April 2024, following a revision by the CBC of its policy 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 reduced to 2.00% on 1 January
2026 (from the previous assessment of 2.25% on 1 January 2025) to
be phased by 6.25 bps annually to 1.9375% on 1 January 2025 and
2.00% as of 1 January 2026 from the current level of
1.875%.
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.
A. Group Financial Results - Underlying Basis
(continued)
A.2 Balance Sheet Analysis (continued)
A.2.1 Capital Base (continued)
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 2022.
Distributions
Following the 2022 SREP decision,
the equity distribution prohibition was lifted for both the Company
and the Bank, with any distribution being subject to regulatory
approval.
In April 2023, the Company
obtained the approval of the ECB to pay a dividend of €0.05 per
ordinary share in respect of earnings for the year ended 31
December 2022. This was the first dividend
payment after 12 years underpinning the Group's position as a
strong and well-diversified organisation, capable of delivering
sustainable shareholder returns.
In March 2024, the Company
obtained the approval of the ECB to pay a cash dividend and to
conduct a share buyback (together the 'Distribution'). The
Distribution corresponded to a 30% payout ratio of FY2023 adjusted
recurring profitability and amounted to €137 mn in total,
comprising a cash dividend of €112 mn and a share buyback of up to
€25 mn. The payout ratio for FY2023 of 30% is in line with the
updated Distribution Policy (see below for further details) and
represents a material increase compared to the previous year (at
14% payout ratio). Following ECB approval, the Board of Directors
of the Company has resolved to propose to the AGM that will be held
on 17 May 2024 for approval, a final cash dividend of €0.25 per
ordinary share in respect of earnings for the year ended 31
December 2023, representing a five-fold increase compared to prior
year (€0.05 per ordinary share). Subject to approval at the AGM,
the dividend will be paid in cash on 14 June 2024 to those
shareholders on the register on 26 April 2024 ('Record date') with
an Ex-dividend date of 25 April 2024.
In April 2024 the Group launched
its inaugural programme to buy back ordinary shares in the Company
for an aggregate consideration of up to €25 mn (the 'Programme').
The purpose of the Programme is to reduce the Company's share
capital and therefore shares purchased under the Programme will be
cancelled. The Company has entered into non-discretionary
agreements with Numis Securities Limited (trading as 'Deutsche
Numis') and The Cyprus Investment and Securities Corporation Ltd
('CISCO') acting as joint lead managers, to conduct the Programme
and to repurchase Shares on the Company's behalf and to make
trading decisions under the Programme independently of the Company
in accordance with certain pre-set parameters. The Programme takes
place on both the London Stock Exchange and the Cyprus Stock
Exchange and may continue until 14 March 2025 subject to market
conditions, the ongoing capital requirements of the business and
early termination rights customary for a transaction of this
nature. The implementation of the share
buyback programme complies with the Company's general authority to
repurchase the Company's ordinary shares as approved by
shareholders at the Company's AGM on 26 May 2023, which is subject
to renewal at the AGM scheduled to take place on 17 May 2024, and
with the terms of the approval received from the ECB. The maximum
number of shares that may be repurchased under the ECB Approval is
1.6% of the total outstanding shares as at 31 December 2023 (i.e.
up to 7,343,249 Shares).
The Distribution in respect of
2023 earnings was equivalent to c.130 bps on CET1 ratio as at 31
December 2023.
Distribution policy
The Group aims to provide a
sustainable return to shareholders. In line with the Group's
distribution policy, distributions 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, including
cash dividends and buybacks. 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 distribution 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.
A. Group Financial Results - Underlying Basis
(continued)
A.2 Balance Sheet Analysis (continued)
A.2.1 Capital Base (continued)
Other equity instruments
At 31 March 2024, the Group's
other equity instruments relate to Additional Tier 1 Capital
Securities (the "AT1 securities") and amounted to €220 mn, flat on
prior quarter.
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.
A.2.2 Regulations and Directives
A.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 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. In the case of the proposed amendments to CRD 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. 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 amendments to the Capital Requirements Regulation and
the Capital Requirements Directive. 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. In April 2024, the European Parliament has voted to adopt the
amendments to the Capital Requirements Regulation and the Capital
Requirements Directive and the texts must now also be
confirmed by the Council, after which they will be published in the
EU's official journal. It is expected that they 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.
A.
Group Financial Results - Underlying Basis
(continued)
A.2 Balance Sheet Analysis (continued)
A.2.2 Regulations and Directives (continued)
A.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 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 were
immediately effective.
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 25.0% of risk
weighted assets (or 30.4% of risk weighted assets taking into
account the expected prevailing CBR as at 31 December 2024 which
needs to be met with own funds on top of the MREL) and 5.91% of
Leverage Ratio Exposure (as defined in the CRR) and must be met by
31 December 2024.
The Bank must comply with the MREL
requirement at the consolidated level, comprising the Bank and its
subsidiaries.
In April 2024 the Bank proceeded
with an issue of €300 million green senior preferred notes (the
'Green Notes'). The Green Notes comply with the MREL criteria and
contribute towards the Bank's MREL requirement.
The MREL ratio as at 31 March
2024, calculated according to the SRB's eligibility criteria
currently in effect and based on internal estimate, stood at 29.3%
of RWAs (including capital used to meet the CBR) and at 12.5% of
LRE (based on the regulatory Total Capital as at 31 March 2024).
The CBR stood at 4.86% as at 31 March 2024 (compared to 4.48% as at
31 December 2023), reflecting the increase of the O-SII buffer from
1.50% to 1.875% on 1 January 2024. The CBR is expected to increase
further in June 2024 as a result of the increase of CcyB to
approximately 1.00% and the phasing in of O-SII buffer from 1.875%
to 1.9375% on 1 January 2025 and to 2.00% on 1 January
2026.
The MREL ratio expressed as a
percentage of RWAs (including capital used to meet the CBR) and the
MREL ratio expressed as a percentage of LRE as at 31 March 2024
stand at 29.8% and 12.7% respectively when including the profits
for the quarter ended 31 March 2024 and an accrual for a
distribution at the top end of the Group's approved distribution
policy in line with Commission Delegated Regulation (EU) No
241/2014 principles. When accounting for the Notes issued in April
2024, the MREL ratio expressed as a percentage of RWAs (including
capital used to meet the CBR) and the MREL ratio expressed as a
percentage of LRE improves to 32.7% and 14.0%
respectively.
A.2.3 Funding and Liquidity
Funding
Funding from Central
Banks
At 31 March 2024, the Bank's
funding from central banks amounts to €310
mn and relates to ECB funding, comprising
solely of funding through the Targeted Longer-Term Refinancing
Operations (TLTRO) III, compared to €2,044 mn as at 31 December
2023. The reduction on prior quarter by 85% is due to the repayment
of €1.7 bn under the seventh TLTRO III
operation in March 2024. The maturity date of the remaining
€0.3 bn under the eighth
TLTRO III operation is in June 2024.
Deposits
Customer deposits totalled €19,260
mn at 31 March 2024 (compared to €19,337 mn at 31 December 2023 and
€18,974 mn as at 31 March
2023) flat since the beginning of the year
and up by 2% on prior year. Customer deposits are mainly
retail-funded and 58% of deposits are protected under the deposit
guarantee scheme as at 31 March 2024.
The Bank's deposit market share in
Cyprus reached 37.5% as at 31 March 2024, compared to 37.7% as at
31 December 2023. Customer deposits
accounted for 77% of total assets and 86% of total liabilities at
31 March 2024 (compared
to 73% of total assets and 80% of total liabilities as at 31
December 2023). The increase year on year relates mainly to the
repayment of €1.7 bn TLTRO.
A.
Group Financial Results - Underlying Basis
(continued)
A.2 Balance Sheet Analysis (continued)
A.2.3 Funding and Liquidity (continued)
Funding (continued)
Deposits
(continued)
The net loans to deposits (L/D)
ratio stood at 52% as at 31 March 2024 (compared to 51% as at 31
December 2023 on the same basis), up by 1 p.p. since the
beginning of the year.
Subordinated
liabilities
At 31 March 2024, the carrying
amount of the Group's subordinated liabilities amounted to €309 mn
(compared to €307 mn at 31 December 2023 ) 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 March 2024, the carrying
value of the Group's debt securities in issue amounted to €673 mn
(compared to €672 mn at 31 December 2023, flat qoq) and relate to
senior preferred notes.
In April 2024, the Bank
successfully launched and priced an issuance of
€300 mn green senior preferred notes
('Green Notes'). The Green Notes were priced at par with a fixed
coupon of 5% per annum, payable in arrear, until the Option
redemption date i.e. 2 May 2028. The maturity date of the
Green Notes is 2 May 2029; however, the Bank may, at its
discretion, redeem the Green Notes on the Optional Redemption Date
subject to meeting certain conditions (including applicable
regulatory consents) as specified in the Terms and Conditions. If
the Green 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 + 197.1 bps, payable quarterly in
arrear.
The issuance was met with strong
demand, attracting interest from more than 120 institutional
investors, with a final orderbook over 4 times over-subscribed at
€1.3 bn and final pricing 50 basis points tighter than the initial
pricing indication. The transaction represents the Bank's inaugural
green bond issuance in line with the Group's Beyond Banking
approach, aimed at creating a stronger, safer and future-focused
Βank and leading the transition of Cyprus to a sustainable future.
An amount equivalent to the net proceeds of the Green Notes will be
allocated to Eligible Green Projects as described in the Bank's
Sustainable Finance Framework, which include Green Buildings,
Energy Efficiency, Clean Transport and Renewable Energy.
Post this issuance, the Bank
finalizes its MREL build-up and creates a comfortable buffer over
the final requirements of 25% of RWAs (or 30.4% of RWAs taking into
account the prevailing CBR as at 31 December 2023) and 5.91%
of LRE which the Bank must meet by 31 December 2024. For further
details, please refer to section A.2.2.2 Minimum Requirement for
Own Funds and Eligible Liabilities (MREL).
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.
A.
Group Financial Results - Underlying Basis
(continued)
A.2 Balance Sheet Analysis (continued)
A.2.3 Funding and Liquidity (continued)
Funding (continued)
Debt securities in
issue (continued)
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 March 2024, the Group
Liquidity Coverage Ratio (LCR) stood at 315% (compared to 359% at
31 December 2023 ), well above the minimum regulatory requirement
of 100%. The LCR surplus as at 31 March
2024 amounted to €7.3 bn (compared to €9.1 bn at 31 December 2023).
The reduction in liquidity surplus in 1Q2024 is due to
the repayment of €1.7 bn
under the seventh TLTRO III operation in March
2024. When disregarding the remaining
TLTRO III of €300 mn (which matures in
June 2024) and including the issuance of €300 mn of the green senior preferred notes in April
2024, the Group's liquidity position
remains flat with an LCR of 315% and liquidity surplus of €7.3
bn.
At 31 March 2024, the Group Net
Stable Funding Ratio (NSFR) stood at 155%
(compared to 158% at 31 December 2023),
well above the minimum regulatory requirement of 100%.
A.2.4 Loans
Group gross loans totalled €10,276 mn at 31
March 2024, compared to €10,070 mn at 31 December 2023 up 2% on the prior
quarter mainly as new lending was ahead of repayments and the
acquisition of a portfolio of performing and restructured gross
loans of c.€58 mn (with reference date as at 31 December 2022)
which was completed in March 2024.
New lending granted in Cyprus
reached €676 mn for 1Q2024 (compared to €462 mn for 4Q2023 and to
€624 mn for 1Q2023) up by 46% qoq and 8% yoy. New lending in 1Q2024
comprised €358 mn of corporate loans, €193 mn of retail loans (of
which €99 mn were housing loans), €61 mn of SME loans and €64 mn of
shipping and international loans. New lending for 1Q2024 is
driven mainly by corporate demand.
At 31 March 2024, the Group net
loans and advances to customers totalled €10,028 mn (compared to
€9,822 mn at 31 December 2023) up 2% since the beginning of the
year.
The Bank is the largest credit
provider in Cyprus with a market share of 42.9% at 31 March 2024,
compared to 42.2% at 31 December 2023.
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 was broadly neutral to the
Group's income statement and capital position. The Transaction was
completed in March 2024.
A.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 and geopolitical uncertainty.
The loan credit losses for 1Q2024
amounted to €7 mn, compared to €19 mn for 4Q2023 and
to €11 mn for 1Q2023. Further details
regarding loan credit losses are provided in Section A.3.3 'Profit
before tax and non-recurring items'.
A.
Group Financial Results - Underlying Basis
(continued)
A.2 Balance Sheet Analysis (continued)
A.2.5 Loan portfolio quality (continued)
Non-performing exposures
In the second half of 2023 a deep
dive assessment of the Group's loan portfolio was completed
resulting to a total amount of €90 mn classified as unlikely to pay
exposures ('UTPs'). The vast majority of UTPs are customer specific
with idiosyncratic characteristics and are not linked with the
current macroeconomic environment, they adhere to 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
reduced by €18 mn, or 5% in 1Q2024, compared to a net increase of
€7 mn in 4Q2023, to €347 mn at 31 March 2024 (compared €365 mn at 31 December
2023)
As a result, the NPEs account for 3.4% of gross loans as at 31 March 2024,
compared to 3.6% of gross loans as at 31 December 2023.
The NPE coverage ratio stands at
77% at 31 March 2024, compared to 73% at 31 December 2023. 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.
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.
A.
Group Financial Results - Underlying Basis
(continued)
A.2 Balance Sheet Analysis (continued)
A.2.6 Fixed income portfolio
Fixed income portfolio amounts to
€3,743 mn as at 31 March 2024, compared €3,548 mn as at 31 December
2023 and to €2,747 mn as at 31 March 2023, increased by 5% on the
prior quarter and by 36% on prior year. As at 31 March 2024, the
portfolio represents 15% of total assets (net of TLTRO III) and
comprises €3,317 mn (89%) measured at amortised cost and €426 mn
(11%) 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
March 2024 has an unrealised fair value loss of €14
mn, equivalent to c.10 bps of CET1 ratio
(compared to an unrealized fair value gain of €3 mn as at 31 December 2023) due to
an increase in the bond yields.
A.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.
REMU completed disposals of €17 mn
in 1Q2024 (compared to €74 mn in 4Q2023
and to €38 mn in 1Q2023), resulting in a
profit on disposal of c.€2 mn for 1Q2024
(compared to a profit of c.€3.5 mn
for 4Q2023 and to a profit of
€2 mn in 1Q2023).
Asset disposals are across all property classes, with over 55%
gross sale value in 1Q2024 relating to land.
During the quarter ended 31 March
2024, REMU executed sale-purchase agreements (SPAs) for disposals
of 113 properties with contract value of €23 mn (including transfer
of €3 mn),
compared to SPAs for disposals of 138 properties with contract
value of €43 mn for 1Q2023.
In addition, REMU had a strong
pipeline of €48 mn by contract value as at
31 March 2024, of which €23 mn related to
SPAs signed (compared to a pipeline of €40 mn as at 31 December 2023, of which €29 mn related to SPAs
signed).
REMU on-boarded €5 mn of assets in
1Q2024 (compared to additions of €3 mn in 4Q2023 and €2 mn in
1Q2023), via the execution of debt for asset swaps and repossessed
properties.
As at 31 March 2024, repossessed
properties held by REMU had a carrying value of €836 mn, compared to
€862 mn as at 31 December 2023 and
€1,013 mn as at 31 March
2023.
Assets held by REMU
Repossessed Assets held by REMU (Group)
€
mn
|
|
|
1Q2024
|
4Q2023
|
1Q2023
|
qoq
+%
|
yoy
+%
|
Opening balance
|
|
|
862
|
947
|
1,079
|
-9%
|
-20%
|
On-boarded assets
|
|
|
5
|
3
|
2
|
48%
|
137%
|
Sales
|
|
|
(17)
|
(74)
|
(38)
|
-77%
|
-54%
|
Net impairment loss
|
|
|
(10)
|
(14)
|
(8)
|
-31%
|
12%
|
Transfers
|
|
|
(3)
|
-
|
(22)
|
-
|
-86%
|
Closing balance
|
|
|
836
|
862
|
1,013
|
-3%
|
-17%
|
A.
Group Financial Results - Underlying Basis
(continued)
A.2 Balance Sheet Analysis (continued)
A.2.7 Real Estate Management Unit (REMU)
(continued)
Analysis by type and country of repossessed
properties
|
Cyprus
|
Greece
|
Total
|
31 March 2024 (€ mn)
|
|
|
|
Residential properties
|
49
|
11
|
60
|
Offices and other commercial
properties
|
104
|
12
|
116
|
Manufacturing and industrial
properties
|
35
|
16
|
51
|
Hotels
|
15
|
0
|
15
|
Land (fields and plots)
|
391
|
4
|
395
|
Golf courses and golf-related
property
|
199
|
0
|
199
|
Total
|
793
|
43
|
836
|
|
Cyprus
|
Greece
|
Total
|
31 December 2023 (€ mn)
|
|
|
|
Residential properties
|
50
|
12
|
62
|
Offices and other commercial
properties
|
110
|
13
|
123
|
Manufacturing and industrial
properties
|
36
|
16
|
52
|
Hotels
|
17
|
0
|
17
|
Land (fields and plots)
|
405
|
4
|
409
|
Golf courses and golf-related
property
|
199
|
0
|
199
|
Total
|
817
|
45
|
862
|
A.
Group Financial Results - Underlying Basis
(continued)
A.3 Income Statement Analysis
A.3.1 Total income
€
mn
|
1Q2024
|
4Q2023
|
1Q2023
|
qoq
+%
|
yoy
+%
|
Net interest income
|
213
|
220
|
162
|
-3%
|
31%
|
Net fee and commission
income
|
42
|
46
|
44
|
-10%
|
-5%
|
Net foreign exchange gains and net
gains on financial instruments
|
7
|
8
|
13
|
-12%
|
-44%
|
Net insurance result
|
10
|
16
|
10
|
-37%
|
4%
|
Net gains/(losses) from
revaluation and disposal of investment properties and on disposal
of stock of properties
|
1
|
3
|
2
|
-81%
|
-65%
|
Other income
|
3
|
3
|
3
|
-8%
|
1%
|
Non-interest income
|
63
|
76
|
72
|
-18%
|
-12%
|
Total income
|
276
|
296
|
234
|
-7%
|
18%
|
Net Interest Margin
(annualised)
|
3.70%
|
3.66%
|
2.91%
|
4
bps
|
79
bps
|
Average interest earning
assets
(€ mn)
|
23,171
|
23,858
|
22,638
|
-3%
|
2%
|
p.p. =
percentage points, bps = basis points, 100 basis points (bps) = 1
percentage point
|
Net interest income (NII) for
1Q2024 amounted to €213 mn compared to €220 mn for 4Q2023, down 3%
qoq, declining less than expected. The reduction qoq reflects a
modest decline in Euribor, marginally higher cost of deposits and
also hedging activity. Net interest income was up by 31% yoy on the
back of higher interest rates on liquid assets and loans partially
offset by a moderate increase in time and notice deposit
pass-through and funding costs, following the issuance of
€350 mn senior preferred notes in July
2023.
Quarterly average interest earning assets
(AIEA) for 1Q2024 amounted to
€23,171 mn, down 3% qoq mainly due to the repayment of
€1.7 bn TLTRO in March 2024. Quarterly
average interest earning assets was up 2% yoy driven mainly by the
increase in liquid assets as a result of the increase in deposits
by c.€0.3 bn.
Net interest margin (NIM) for
1Q2024 amounted to 3.70% (compared to 3.66% for 4Q2023), up 4 bps
qoq, benefitting from the reduction of quarterly average interest
earning assets following the repayment of €1.7 bn TLTRO. When disregarding the impact of TLTRO, NIM is
revised to 3.90% for 1Q2024, compared to 4.00% in the previous
quarter. The reduction of 8 bps qoq relating to modest decline in
Euribor and marginally higher cost of deposits.
Non-interest income for
1Q2024 amounted to €63 mn (compared to €76 mn for 4Q2023, and to
€72 mn in 1Q2023 down 18% qoq and 12% yoy) comprising
net fee and commission income of €42 mn, net foreign exchange gains
and net gains on financial instruments of €7 mn, net insurance
result of €10 mn, net gains/(losses) from revaluation and disposal
of investment properties and on disposal of stock of properties of
€1 mn and other income of €3 mn. The qoq reduction is mainly due to
lower net insurance result and net fee and commission income. The
yoy decrease relates to lower net foreign exchange gains and net
gains on financial instruments.
Net fee and commission income for 1Q2024 amounted to €42 mn
compared to €46
mn in prior quarter, down 10% qoq due to lower non-transactional
fees and seasonally lower transactional fees. Net fee and
commission income was down 5% yoy reflecting mainly lower non-card
transactional fees.
Net foreign exchange gains and net gains on financial
instruments amounted to €7 mn
for 1Q2024 (comprising net foreign exchange gains of c.€6.5
mn and net gains on financial instruments of
c.€0.5 mn),
broadly flat on prior quarter. Net foreign exchange gains and net
gains on financial instruments were reduced by 44% yoy, impacted
mainly by lower gains on financial instruments. Net foreign exchange gains and net gains on financial
instruments are considered volatile profit contributors.
A.
Group Financial Results - Underlying Basis
(continued)
A.3 Income Statement Analysis (continued)
A.3.1 Total income (continued)
Net insurance result amounted
to €10 mn for 1Q2024, compared to €16 mn for 4Q2023, down
37% qoq, reflecting the improved experience variance in life
insurance business in prior quarter. Net insurance result was
broadly flat yoy.
Net gains/(losses) from revaluation and disposal of
investment properties and on disposal of stock of
properties of €1
mn for 1Q2024 (comprising net gains on disposal of stock of properties and
investment properties of c.€2 mn, and net
loss from revaluation of investment
properties of €1 mn) was down by 81% qoq and 65%
yoy. REMU profit remains
volatile.
Total income amounted to €276
mn for 1Q2024 (compared to €296 mn for 4Q2023, down 7% qoq) due to lower
net interest income and non interest income as explained above.
Total income improved by 18% yoy driven by strong net interest
income benefitting from favourable interest rate outlook,
resiliently low time and notice deposit pass-through and a slow
change in deposit mix towards time and notice accounts.
A.
Group Financial Results - Underlying Basis
(continued)
A.3. Income Statement Analysis (continued)
A.3.2 Total expenses
€
mn
|
1Q2024
|
4Q2023
|
1Q2023
|
qoq
+%
|
yoy
+%
|
Staff costs
|
(48)
|
(51)
|
(46)
|
-6%
|
5%
|
Other operating
expenses
|
(33)
|
(42)
|
(34)
|
-24%
|
-3%
|
Total operating expenses
|
(81)
|
(93)
|
(80)
|
-14%
|
2%
|
Special levy on deposits and other levies/contributions
|
(11)
|
(13)
|
(11)
|
-8%
|
4%
|
Total expenses
|
(92)
|
(106)
|
(91)
|
-13%
|
2%
|
Cost to income ratio
|
33%
|
36%
|
39%
|
-3
p.p.
|
-6
p.p.
|
Cost to income ratio excluding
special levy on deposits and other
levies/contributions
|
29%
|
32%
|
34%
|
-3
p.p.
|
-5
p.p.
|
p.p. = percentage
points, bps = basis points, 100 basis points (bps) = 1 percentage
point
|
Total expenses for 1Q2024
were €92 mn (compared to €106 mn for 4Q2023 and to
€91 mn for 1Q2023 down 13% qoq and broadly
flat yoy), 52% of which related to staff
costs (€48 mn), 36% to other operating expenses (€33 mn) and 12% to
special levy on deposits and other levies/contributions (€11 mn).
The qoq reduction relates to quarterly seasonality, mainly on other
operating expenses.
Total operating expenses amounted to €81 mn for 1Q2024 (compared to €93 mn for 4Q2023,
down 14% qoq) driven mainly by seasonally lower other operating
expenses. Total operating expenses were broadly flat on prior
year.
Staff costs for 1Q2024 were
€48 mn (compared to €51 mn for 4Q2023, down 6% qoq) mainly due to
lower performance-related pay accrual and termination costs this
quarter. Staff costs were 5% higher compared to prior year, mainly
as a result of salary increments and higher cost of living
adjustments (COLA) and employer's contributions.
The performance-related pay
accrual relates to the Short-Term Incentive Plan ('STIP') and the Long-Term
Incentive Plan ('LTIP'). 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. The LTIP is a share-based
compensation plan and provides for an award in the form of ordinary
shares of the Company based on certain non-market performance and
service vesting conditions.
The LTIP was approved by the 2022
AGM, which took place on 20 May 2022. The LTIP involves the
granting of share awards and is driven by scorecard achievement,
with measures and targets set to align pay outcomes with the
delivery of the Group's strategy. Currently, under the plan, the
employees eligible for LTIP awards are the members of the Extended
EXCO, including the executive directors. The LTIP stipulates that
performance will be measured over a 3-year period and sets
financial and non-financial objectives to be achieved. At the end
of the performance period, the performance outcome will be used to
assess the percentage of the awards that will vest. 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).
In April 2024, 403,990 share awards were granted
to 21 eligible employees, comprising the Extended Executive
Committee of the Group. The awards granted in April 2024 are
subject to a three-year performance period 2024-2026 (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 March 2024, the Group
employed 2,847 persons compared to 2,830 persons as at 31 December
2023.
Other operating expenses for
1Q2024 amounted to €33 mn, compared to €42 mn for 4Q2023, driven mainly by quarterly seasonality on
lower marketing and other professional fees. Other operating
expenses remained broadly flat yoy.
A.
Group Financial Results - Underlying Basis
(continued)
A.3 Income Statement Analysis (continued)
A.3.2 Total expenses (continued)
Special levy on deposits and other
levies/contributions for 1Q2024
amounted to €11 mn compared to €13 mn for 4Q2023, down 8% qoq
reflecting mainly the net impact of a levy
in the form of annual guarantee fee relating to the income tax
legislation for conversion of DTA to DTC of c.€5
mn recognised in 4Q2023 (see Section A.2.1
'Capital Base') partially offset by the contribution of the Bank to
the Deposit Guarantee Fund (DGF) of c.€4
mn which relates to 1H2024 and was recorded in 1Q2024
(in line with IFRSs). Special levy on deposits
and other levies/contributions remained broadly flat
yoy.
The cost to income ratio
excluding
special levy on deposits and other
levies/contributions for 1Q2024 was
29% compared to 32% for 4Q2023, and 34% for 1Q2023 down 3 p.p. qoq
and 5 p.p. yoy, benefitting from strong income and continued focus
on costs.
A. Group Financial Results - Underlying Basis
(continued)
A.3 Income Statement Analysis (continued)
A.3.3 Profit before tax and non-recurring
items
€
mn
|
1Q2024
|
4Q2023
|
1Q2023
|
qoq+%
|
yoy
+%
|
Operating profit
|
184
|
190
|
143
|
-3%
|
28%
|
Loan credit losses
|
(7)
|
(19)
|
(11)
|
-64%
|
-39%
|
Impairments of other financial and
non-financial assets
|
(8)
|
(15)
|
(11)
|
-45%
|
-22%
|
Provisions for pending
litigations, claims, regulatory and other matters (net of
reversals)
|
(10)
|
(8)
|
(6)
|
24%
|
55%
|
Total loan credit losses, impairments and
provisions
|
(25)
|
(42)
|
(28)
|
-40%
|
-12%
|
Profit before tax and non-recurring items
|
159
|
148
|
115
|
7%
|
39%
|
Cost of risk
|
0.27%
|
0.73%
|
0.44%
|
-46
bps
|
-17
bps
|
p.p. = percentage
points, bps = basis points, 100 basis points (bps) = 1 percentage
point
|
Operating profit for 1Q2024
amounted to €184 mn, compared to €190 mn for 4Q2023 (down 3% qoq)
as the reduction in total income was partially offset by a
reduction in total expenses. Operating profit was up 28% yoy
reflecting mainly the significant increase in net interest
income.
Loan credit losses for 1Q2024
were €7 mn compared to €19 mn for 4Q2023 and
€11 mn for 1Q2023, down
64% qoq and 39% yoy, indicative of the robust loan portfolio
performance and stable economic environment. Loan credit losses for
1Q2024 include releases on Stage 1&2 driven by enhanced IFRS 9
model which allowed the removal of conservative management
overlays, partially offset by a one-off charge on a small part of
the NPE legacy portfolio (see Section F6 'Credit losses to cover
credit risk on loans and advances to customers'). Additionally,
4Q2023 loan credit losses included a charge of c.€6 mn 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 1Q2024 is
equivalent to 27 bps, compared to a cost of risk of 73 bps for
4Q2023 and 44 bps for 1Q2023, down 46 bps qoq and 17 bps
yoy.
At 31 March 2024, 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
I. 'Definitions and Explanations' for definition)
totalled €267 mn (compared to €267 mn at 31
December 2023 and to €282 mn at 31 March 2023) and accounted for
2.6% of gross loans (broadly flat on prior quarter and on prior
year).
Impairments of other financial and non-financial
assets for 1Q2024 amounted to €8 mn
and relate mainly to REMU stock properties due to the ageing of the
stock, compared to €15 mn for 4Q2023, down by €7 mn on prior quarter as there were higher impairments
on specific, large, illiquid REMU stock
properties in 4Q2023. Impairments of other financial and
non-financial assets was reduced by 22% on prior year.
Provisions for pending litigations, claims, regulatory and
other matters (net of
reversals) for 1Q2024 amounted to
€10 mn, compared to €8 mn for 4Q2023 and to €6 mn for 1Q2023. The qoq and yoy
increase is driven mainly by additional provisions as a result of
the progress of cases on existing litigations and a one-off
provision charge on tax related matters.
Profit before tax and non-recurring items
for 1Q2024 totalled to €159 mn, compared to €148 mn for
4Q2023 and to €115 mn for
1Q2023.
A.
Group Financial Results - Underlying Basis
(continued)
A.3 Income Statement Analysis (continued)
A.3.4 Profit after tax
(attributable to the owners of the Company)
€
mn
|
1Q2024
|
4Q2023
|
1Q2023
|
qoq
+%
|
yoy
+%
|
Profit before tax and non-recurring items
|
159
|
148
|
115
|
7%
|
39%
|
Tax
|
(25)
|
(10)
|
(18)
|
148%
|
40%
|
Profit attributable to
non-controlling interests
|
(1)
|
0
|
(1)
|
-
|
5%
|
Profit after tax and before non-recurring items (attributable
to the owners of the Company)
|
133
|
138
|
96
|
-4%
|
38%
|
Advisory and other transformation
costs - organic
|
-
|
-
|
(1)
|
-
|
-100%
|
Profit after tax (attributable to the owners of the
Company)
|
133
|
138
|
95
|
-4%
|
40%
|
p.p. = percentage
points, bps = basis points, 100 basis points (bps) = 1 percentage
point
|
The tax charge for 1Q2024 amounted to
€25 mn compared to €10 mn for 4Q2023, down 148% qoq due
to the recognition of deferred tax asses relating to temporary
differences between tax and accounting treatment in the previous
quarter. The tax charge increased by 40% yoy, reflecting mainly
higher profitability.
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 assessment of the impact of Pillar Two tax currently
estimated to be in the range of up to 2% of profit before
tax. However, the actual impact will
depend on the Group's consolidated income statement variables at
the time of implementation of the relevant legislation. 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 upon the enactment of relevant
legislation.
Profit after tax and before non-recurring items (attributable
to the owners of the Company) for
1Q2024 is €133 mn, compared to €138 mn for 4Q2023 and
€96 mn for 1Q2023.
Advisory and other transformation costs -
organic for 1Q2024 are nil, flat
qoq and compared to €1 mn for 1Q2023.
Profit after tax
attributable to the owners of the Company for
1Q2024 amounts to €133 mn, corresponding to a ROTE of 23.6%,
compared to €138 mn for 4Q2023 and €95 mn
for 1Q2023 (compared to a ROTE of 25.6%
for 4Q2023 and 21.3% for 1Q2023). ROTE on 15% CET1 ratio for 1Q2024
increases to 29.1%, compared to a ROTE of 28.8% for 4Q2023 and
21.9% for 1Q2023, calculated on the same basis. The adjusted
recurring profitability used for the Group's distribution policy
(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 which is paid semi-annually) amounted to
€133 mn for 1Q2024 compared to
€125 mn for 4Q2023
and €96 mn for
1Q2023.
B. Operating Environment
Despite headwinds from
persistently high interest rates, economic weakness in Europe, and
rising geopolitical tensions, growth in Cyprus in 2023 averaged
2.5% which surpassed most peers and the Eurozone average as a
whole and grew further by 3.3% in the
first quarter of 2024. Accommodation,
which is tourist driven, continued to reflect the recovery from the
Covid collapse, and the respective contribution to the overall
growth of the economy was 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. The
information and communication technology sector in particular, is
growing strongly, and financial services are becoming more
diversified. Growth in 2024 is expected to be around 3% (as
projected by Ministry of Finance) aided by rising real incomes,
foreign direct investment flows and the flow of investment funds
from EU Recovery and Resilience Program.
Labour markets have strengthened
and expected to remain strong in the medium term. Employment growth
slowed to 1.5% in 2023 from 2.9% the year before and the
unemployment rate dropped to 6.0% in the fourth quarter of 2023,
seasonally adjusted, from 7.0% in the fourth quarter
2022.
Headline inflation measured by the
Harmonised Index of Consumer Prices, dropped to 2.0% in the first
quarter of 2024, in Cyprus, compared with 3.9% yearly average in
2023 and 8.1% in 2022. At the same time, core inflation, which
excludes food and energy prices, was modestly higher, at 2.7% in
the first quarter of 2024, 3.8% yearly average in 2023 and 5.0% in
2022. In the Euro area, headline inflation was 2.6% in the first
quarter of 2024 and 5.4% yearly average in 2023. Core inflation in
the Euro area was 3.1% in the first quarter of 2024 from 4.9%
yearly average in 2023. The decline in headline inflation was
driven by falling energy prices and tighter monetary policy with
core inflation more persistent in comparison. Higher commodity
prices and higher energy costs, which might be the consequence of
war related factors, entail the risk that inflation may prove more
persistent than initially anticipated.
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 increased by an estimated 22.6% reaching an
estimated €3.0 billion for the year, 11% higher than total receipts
in the respective period in 2019. Tourist arrivals in the first
quarter of 2024 continued to rise modestly by 5.4% from the same
period a year earlier.
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
decrease in government expenditure. The result was a reduction in
the budget deficit to -1.8% of GDP, from a deficit of -5.7% of GDP
in 2020. In 2022 the budget surplus rose to 2.7% of GDP and 3.1% of
GDP in 2023. Gross debt was 114.9% of GDP in 2020, and was
dropping since, successively, to 85.6% and then 77.3% of GDP in
2022 and 2023 respectively. The budget balance is forecast to
remain in surplus at 2.9% of GDP in 2024 according to the Ministry
of Finance Stability Programme 2024-2027, and gross debt will
continue to decline below 60% of GDP in 2026. Debt affordability
metrics are favourable and are expected to remain solid in the
medium term, 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 11 April 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. Monetary policy remains
restrictive and ECB staff have revised down their growth projection
in the Euro area for 2024, to 0.6%. Growth is below potential and
there is the expectation that the ECB will start cutting its
interest rates in June.
Banks are well capitalized and
remain resilient under stress tests. Despite higher interest rates,
asset quality has not deteriorated. Non-performing exposures (NPE)
were €1.9 billion or 7.9% of gross loans at the end of December
2023, compared with 9.5% of gross loans a year earlier, at the end
of December 2022, according to the Central Bank of Cyprus. The NPE
ratio in the non-financial companies' segment was 6.6% at the end
of December 2023 and that of households was 10.2%. About 45.0% of
total NPEs are restructured facilities and the coverage ratio was
54.9%.
Risks remain to the downside. In
the short-term, a slowing of economic activity in main tourism
markets and an escalation of regional conflicts could slow Cyprus's
efforts to reorient its services exports.
Β. Operating environment (continued)
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.
In December 2023, Fitch Ratings has 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.
DBRS Ratings GmbH (DBRS Morningstar)
confirmed the Republic of Cyprus' Long-Term
Foreign and Local Currency - Issuer Ratings at BBB (high) in March
2024. DBRS Ratings had upgraded the long-term foreign and local
currency issuer ratings of the Republic of Cyprus from BBB to BBB
(high) in September 2023. The rating action is stable. The upgrade
was 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.
C. 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.
FY2023 Distribution at 30%
payout ratio
The Group's strong financial
performance in 2023 facilitated a rapid capital build-up, unlocking
c.480s bps organic capital generation during the year and as a
result, accelerating shareholder value. In March 2024, the Company
obtained the approval of the ECB to pay a cash dividend and to
conduct a share buyback (together the 'Distribution'). The
Distribution corresponds to a 30% payout ratio on FY2023 adjusted
recurring profitability and amounts to €137 mn in total, comprising
a cash dividend of €112 mn and a share buyback of up to €25 mn. The
payout ratio for FY2023 of 30% is in line with the updated
Distribution Policy (refer to A.2.1 'Capital Base') and represents
a material increase compared to the previous year (at 14% payout
ratio).
Following ECB approval, the Board
of Directors of the Company has resolved to propose to the AGM that
will be held on 17 May 2024 for approval, a final cash dividend of
€0.25 per ordinary share in respect of earnings for the year ended
31 December 2023, a five-fold increase compared to
€0.05 in prior year. Subject to approval at the AGM, the dividend will be paid
in cash on 14 June 2024 to those shareholders on the register on 26
April 2024 ('Record date') with an Ex-dividend date of 25 April
2024. Further in April 2024 the Group
launched its inaugural programme to buy back ordinary shares in the
Company for an aggregate consideration of up to €25 mn (the
'Programme'). The purpose of the Programme is to reduce the
Company's share capital and therefore shares purchased under the
Programme will be cancelled. The Company has entered into
non-discretionary agreements with Numis Securities Limited (trading
as 'Deutsche Numis') and The Cyprus Investment and Securities
Corporation Ltd ('CISCO') acting as joint lead managers, to conduct
the Programme and to repurchase Shares on the Company's behalf and
to make trading decisions under the Programme independently of the
Company in accordance with certain pre-set parameters. The
Programme takes place on both the London Stock Exchange and the
Cyprus Stock Exchange and may continue until 14 March 2025 subject
to market conditions, the ongoing capital requirements of the
business and early termination rights customary for a transaction
of this nature. The implementation of the
share buyback programme complies with the Company's general
authority to repurchase the Company's ordinary shares as approved
by shareholders at the Company's AGM on 26 May 2023, which is
subject to renewal at the AGM scheduled to take place on 17 May
2024, and with the terms of the approval received from the ECB. The
maximum number of shares that may be repurchased under the ECB
Approval is 1.6% of the total outstanding shares as at 31 December
2023 (i.e. up to 7,343,249 Shares).
Financial performance
The Group is a leading, financial
and technology hub in Cyprus. During the quarter ended
31 March 2024, the Group
generated a profit after tax of €133 mn,
corresponding to a ROTE of 23.6%, delivering a ROTE of over 20% for
five consecutive quarters. This performance was underpinned by
strong net interest income and a well-disciplined cost base and
demonstrates that the Group remains well on track of its 2024
targets it set in February 2024. The
Group's tangible book value per share improved by 26% yoy to
€5.23.
Interest rate
environment
The structure of the Group's
balance sheet is highly liquid, and hence
benefitted immediately from the high interest rate
environment. As at 31 March 2024, cash
balances with ECB amounted to c.€7.2 bn
whereas the Group's loan portfolio is mainly floating rate, with
almost half of the loan portfolio being Euribor based. Net interest
income for the quarter ended 31 March 2024 stood at
€213 mn (after peaking
in the previous quarter), declining less than expected, on the back
of favourable interest rate outlook, resiliently low time and
notice deposit pass-through and slower than anticipated change in
deposit mix towards time and notice accounts. The modest reduction
on prior previous quarter is as a result of modest Euribor declines
and hedging activity and marginally higher cost of
deposits.
C. Business Overview (continued)
Interest rate
environment (continued)
Overall, the Group intends to
increase its hedging position in FY2024 by further
€4-5 bn compared to
FY2023 (with average duration of 3-4 years), subject to market
conditions, via hedging 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 the first quarter of 2024, the
Group carried out hedging of
€2.1 bn, on track to
meet its 2024 target of €4-5
bn. The increase was mainly attributed to the
hedging of non rate sensitive deposits through receive fixed rate
swaps, investing in fixed rate bonds, entering into reverse repos
and offering fixed rate loans. Simultaneously, about a quarter 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 €20 mn
compared to prior quarter.
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 1Q2024 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 quarter ended 31 March 2024, new lending was
strong at €676 mn, up 46% on prior
quarter, driven mainly by business demand. Gross performing loan book increased
by 2% on prior quarter to €10 bn as new lending was ahead of
ongoing repayments and benefitted also from the acquisition of a
portfolio of performing and restructured gross loans of
c.€58 mn (with
reference date as of 31 December 2022).
Fixed income portfolio continued
to grow in 1Q2024 to €3,743 mn, and
currently represents 15% 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 March 2024 has an unrealised fair value loss of
€14 mn, equivalent to c.10 bps of CET1 ratio (compared to an
unrealized fair value gain of €3 mn as at 31 December 2023) due to
an increase in the bond yield.
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 quarter ended 31 March 2024, non-interest
income amounted to €63 mn, covering almost 80% of the Group's total
operating expenses.
In the first quarter of 2024 net
fee and commission income of €42 mn was
down by 10% compared to the previous quarter, due to lower
non-transactional fees and seasonally lower transactional
fees. 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 quarter ended 31 March
2024, JCC's net fee and commission income contributed 11% of total
non-interest income and amounted to c.€7 mn, up 9% 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 quarter ended 31 March 2024 contributed
c.15% of non-interest income and amounted to €10 mn, flat yoy;
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, c.2,100 companies are registered in the platform and
over €500 mn cash were exchanged via the
platform since 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 c.100
retailers were onboarded in fashion, technology and beauty sectors
and over 150k 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.
C. Business Overview (continued)
Lean operating
model (continued)
In 2023 the Group completed a
small-scale, targeted VEP through which 50 full-time employees were
approved to leave at a total cost of c.€7.5 mn, recorded in staff costs in
FY2023. During the quarter ended 31 March 2024, there was further
branch footprint as the Group reduced the number of branches by 5
to 55, a reduction of 8% on prior quarter.
The Group's total operating
expenses for the quarter ended amounted to €81 mn, broadly flat yoy despite
inflation. The cost to income ratio excluding special levy on deposits and other
levies/contributions for the quarter ended 31 March 2024 was
reduced to 29%, 5 p.p. down compared to 1Q2023, on the back of strong total income and disciplined
cost management.
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 March 2024, the Group's digital
community has increased to more than 459K active subscribers, both
on Internet Banking and the BoC Mobile App, improving by 7% yoy.
Likewise, the BoC Mobile App, had more than 420K active subscribers
as at 31 March 2024 and increased by 11.2% yoy.
During 1Q2024, the Group continued
to enrich and improve its digital portfolio with new innovative
services to its customers. Two new QuickPay features 'Split the
Bill" and "Request Payments" were launched in the BOC Mobile App empowering users
to share the cost with others or request payments by adding just
the contact number and the relevant amount. Customers can track
payments, send reminders and cancel a request anytime.
Additionally, the ability to get a Car Loan for used cars have been
added in QuickCar Loans.
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
2024, over 9k applications were processed, granting €23 mn new
loans in 1Q2024.
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 the 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 first quarter of 2024 amounted to €144k, compared to
€62.5k in prior year, reflecting 457 policies in
1Q2024 compared to 213 policies during the same period last
year.
In addition, 84.6% of individual
customers were digitally engaged as at 31 March 2024 (up by
4.2 p.p. from
72.4% in June 2020), choosing digital channels over branches to
perform their transactions. Furthermore, digital account openings
increased by 67% in 1Q2024 to 4,171 from 2,502 during the same period last year and new debit cards
increased by 133% yoy to 4,617 in 1Q2024 compared to 1,979 during
the same period last year.
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 March 2024, the Group's
NPE ratio stood at 3.4%, in line with its target of an NPE ratio of
c.3% by end-2024. The Group's priorities remain intact, maintaining high quality
new lending with strict underwriting standards and preventing asset
quality deterioration.
C. Business
Overview (continued)
Capital market
presence
In April 2024, the Bank
successfully launched and priced an issuance of
€300 mn green senior preferred notes
('Green Notes'). The Green Notes were priced at par with a fixed
coupon of 5% per annum, payable in arrear, until the Option
redemption date i.e. 2 May 2028. The maturity date of the Green
Notes is 2 May 2029; however, the Bank may, at its discretion,
redeem the Green Notes on the Optional Redemption Date subject to
meeting certain conditions (including applicable regulatory
consents) as specified in the Terms and Conditions. If the Green
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 + 197.1 bps, payable quarterly in arrear.
The issuance was met with strong
demand, attracting interest from more than 120 institutional
investors, with a final orderbook over 4 times over-subscribed at
€1.3 bn and final pricing 50 basis points tighter than the initial
pricing indication. The transaction represents the Bank's inaugural
green bond issuance in line with the Group's Beyond Banking
approach, aimed at creating a stronger, safer and future-focused
Βank and leading the transition of Cyprus to a sustainable future.
An amount equivalent to the net proceeds of the Green Notes will be
allocated to Eligible Green Projects as described in the Bank's
Sustainable Finance Framework, which include Green Buildings,
Energy Efficiency, Clean Transport and Renewable Energy.
Post this issuance, the Bank
finalises its MREL build-up and creates a comfortable buffer over
the final requirements of 25% of RWAs (or
30.4% of risk weighted assets taking into account the expected
prevailing CBR as at 31 December 2024) and
5.91% of LRE which the Bank must meet by 31 December
2024.
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 2024, 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).
In line with the Group's Beyond
Banking approach and its commitment to create a stronger, safer and
future-focused organisation the Bank proceeded, in 2024, with the
issuance of an inaugural green bond. An amount equivalent to the
net proceeds of the notes will be allocated to eligible green
projects as described in the Bank's sustainable finance
framework, which includes green buildings, energy efficiency, clean
transport and renewable energy.
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 2024, 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 actions 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.
C. Business
Overview (continued)
Enhancing organisational
resilience and ESG (Environmental, Social and Governance)
agenda (continued)
Environmental Pillar (continued)
The Group 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.7% in
Scope 1 and Scope 2 GHG emissions in 1Q2024 compared to 1Q2023 due
to new solar panels connected to energy network in 2022 and early
2023 as well as branch and building rationalisation as part of the
digitalization journey. The Bank achieved an increase of 24% in
renewable energy production, from 52,274 Kwh to 64,664 Kwh, in
1Q2024 compared to 1Q2023.
The Group 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 loan and investment portfolio as well
as Insurance associated GHG emissions 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 loan portfolio to be aligned with the
climate scenario and effectively be associated with lower
transition risks, the baseline as at 31 December 2022 of 53.5
kgCO2e/m2 should be reduced by 43% by 31
December 2030. The carbon intensity of the Mortgage loan portfolio
as at 31 December 2023 was estimated at 50.73
kgCO2e/m2 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 loans and effectively limit the level of climate
transition risk that is exposed to. 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 (annual) impact assessment have
been incorporated in the Materiality assessment of C&E risks as
well as informed the Bank's Business Strategy.
The Bank offers a range of
environmentally friendly products to manage transition risk and
help its customers become more sustainable. Specifically, the Bank
offers loans for energy upgrades of homes, installation of solar
panels, acquisition of new hybrid or electric car as well as
financing of renewable energy projects. In addition, following the
Energy performance certificate gathering exercise,
in 2024, the Bank
identified a pool of €265.7 mn gross loans, as at 31 March 2024,
financing properties with EPC Category A. The gross amount of
environmentally friendly loans (including financing properties with
EPC Category A) as at 31 March 2024 was €291.3 mn compared to
€263.6 mn as at 31 December 2023.
During 1Q2024, in order to enhance
the awareness and skillset on ESG matters, the Group performed
relevant trainings to control functions and plans to perform
trainings to the Board of Directors and Senior Management as well
as to other members of staff.
C. Business
Overview (continued)
Enhancing organisational
resilience and ESG (Environmental, Social and Governance)
agenda (continued)
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 55% 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.
The ReInHerit program facilitating
innovation and research cooperation between European museums and
heritage was successfully concluded In February 2024. The physical
attendees of Cultural foundation events reached 4,062 in
1Q2024.
The IDEA Innovation Centre,
invested c.€4 mn in start-up business creation since its
incorporation, supported creation of 95 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 1Q2024, the Bank's employees attended 8,812 hours of
trainings. In addition, in 2024 the Group announced 2 full scholarships for a master's degree in "MSc
in Governance, Risk & Compliance" offered by
EIMF. Moreover, the Group continued its
emphasis on staff wellness during 2024 by offering webinars, team
building activities and family events with sole purpose to enhance
mental, physical, financial and social health, attended by c.250
employees through its Well at Work program.
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 with 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 43% of the Board members
being female as at 31 March 2024. 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 March 2024, in Group's management
bodies, following the appointment of two female General Managers in
Eurolife and General Insurance of Cyprus. As at 31 December 2024,
there is a 40% representation of women at key positions below the
Extended EXCO level (defined as positions between Assistant Manager
and Manager).
D.
Strategy and Outlook
The vision of the Group is to
create a lifelong partnership with its customers, guiding and
supporting them in an evolving world.
The strategic pillars of the Group
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.
The Group's net interest income
was targeted to exceed €670 mn for FY2024 with a quarterly
declining trend. The main drivers for this guidance
were:
· Forward curves as of January 2024 indicated that the ECB
deposit facility rate and 6m Euribor averaged 3.4% and 3.2%
respectively for 2024
· Time
and notice deposit pass-through to increase to an average of 40% in
2024.
· Gradual change in deposit mix towards time and notice
deposits to c.45% by 31 December 2024;
· Low
single-digit loan growth
· Fixed income portfolio 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 the April 2024
issuance in order to meet the 2024 MREL requirement.
In the first quarter of 2024, the
interest rate outlook was more favourable than initially
anticipated with average market forward rates for April 2024
indicate that ECB depo rate is expected to average to 3.7% for 2024
whilst 6m Euribor rate to average to 3.5% in 2024. On the other
hand, time and notice deposit pass-through remained resiliently low
in 1Q2024 as they averaged to 22% (compared to 18% in 4Q2023)
reflecting a marginally higher cost of deposits. Simultaneously,
the deposit mix towards time and notice accounts has not changed
materially compared to prior quarter. All the above contribute to a
strong net interest income in 1Q2024, demonstrating that the Group
is on a path to exceed its 2024 NII target, with the current
forward curves could potentially improve the Group's net interest
income for FY2024 by c.€40 mn, compared to the expectations
announced in February 2024.
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. In the first quarter of 2024, the Group carried out
additional hedging of €2.1 bn, on track to meet its
2024 target of €4-5 bn (with average duration of 3-4 years), through receive
fixed rate swaps, investing in fixed rate bonds, entering into
reverse repos and offering fixed rate loans. Simultaneously, about
a quarter 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
€20 mn compared to prior quarter. Post
1Q2024,the NII sensitivity is expected to decrease further by
c.€20 mn by the
end of 2024.
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 expected at c.40% for 2024, reflecting
mainly lower income on gradually declining interest
rates.
In terms of asset quality, the NPE
ratio target by end-2024 is expected to stand
at c.3% and
below 3% by end-2025. The cost of risk for
2024-2025 is expected to trend towards normalised levels of 40-50
bps.
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, REMU
portfolio is expected to reduce to c.€0.5 bn by end-2025.
D.
Strategy and Outlook (continued)
Overall, the Group continues to
expect that to 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 is
expected to exceed 16% on 15% CET1 ratio (excluding amounts
reserved for distribution), reflecting lower interest
rates.
The Group aims to provide
sustainable shareholder returns. Distributions 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, including cash dividends and share
buybacks.
A summary of the targets as
announced in February 2024 is shown below:
Key
metrics
|
1Q2024
|
FY2024
(February
2024)
|
Net
interest income
Average
ECB Deposit facility rate
|
€ 213 mn
4.0%
|
>€670
mn
3.4%
|
Cost to
income ratio1
|
29%
|
c.40s
|
Return
on tangible equity
|
23.6%
(or
29.1% on 15% CET1 ratio)
|
>17%2
On 15%
CET1 ratio
|
NPE
ratio
|
3.4%
|
c.3%
|
Cost of
risk
|
27
bps
|
Trending towards normalised levels of 40-50 bps
|
Capital
|
c.90
bps CET1 generation3
|
+200-250 bps CET1 generation3
|
Distributions
|
Building prudently and progressively to 30-50% payout
ratio4; including cash dividends and buybacks
|
1. Excluding special levy on deposits
and other levies/contributions
2. Excluding amounts reserved for
future distributions and after deducting the excess CET1 capital on
a 15% CET1 ratio from the tangible book value
3. Yoy increase in CET1 ratio
pre-distributions
4. Calculated on adjusted recurring profitability: 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
distribution is subject to regulatory approval
|
The
Financial targets will reviewed
with the
publication of 1H2024 Financial results.
E.
Financial
Results - Statutory Basis
Interim Consolidated Income Statement
The following financial
information for the first three months of 2024 and 2023 within
Section E corresponds to the condensed consolidated financial
statements prepared in accordance with the International Financial
Reporting Standards as adopted by the European
Union.
|
Three
months
ended
31 March
|
2024
|
2023
|
€000
|
€000
|
Interest
income
|
258,617
|
181,828
|
Income
similar to interest income
|
27,029
|
9,373
|
Interest
expense
|
(49,255)
|
(24,557)
|
Expense
similar to interest expense
|
(23,141)
|
(4,393)
|
Net interest
income
|
213,250
|
162,251
|
Fee and
commission income
|
44,080
|
46,962
|
Fee and
commission expense
|
(2,063)
|
(2,751)
|
Net
foreign exchange gains
|
6,747
|
8,112
|
Net gains
on financial instruments
|
892
|
5,928
|
Net gains
on derecognition of financial assets measured at amortised
cost
|
2,062
|
255
|
Net
insurance finance income/(expense) and net reinsurance finance
income/(expense)
|
(330)
|
1,298
|
Net
insurance service result
|
16,417
|
12,320
|
Net
reinsurance service result
|
(6,172)
|
(4,064)
|
Net
losses from revaluation and disposal of investment
properties
|
(1,094)
|
(443)
|
Net gains
on disposal of stock of property
|
1,648
|
2,013
|
Other
income
|
2,935
|
2,917
|
Total operating
income
|
278,372
|
234,798
|
Staff
costs
|
(47,903)
|
(45,637)
|
Special
levy on deposits and other levies/contributions
|
(11,577)
|
(11,088)
|
Provisions for pending litigations, claims, regulatory and
other matters (net of reversals)
|
(9,795)
|
(6,315)
|
Other
operating expenses
|
(32,948)
|
(35,159)
|
Operating profit before
credit losses and impairment
|
176,149
|
136,599
|
Credit
losses on financial assets
|
(9,266)
|
(15,499)
|
Impairment net of reversals on non-financial
assets
|
(8,550)
|
(8,033)
|
Profit before tax
|
158,333
|
113,067
|
Income
tax
|
(24,929)
|
(17,786)
|
Profit after tax for the
period
|
133,404
|
95,281
|
|
|
|
Attributable
to:
|
|
|
Owners of
the Company
|
132,826
|
94,728
|
Non-controlling interests
|
578
|
553
|
Profit for the
period
|
133,404
|
95,281
|
|
|
|
Basic profit per share
attributable to the owners of the Company (€
cent)
|
29.8
|
21.2
|
Diluted profit per share
attributable to the owners of the Company (€
cent)
|
29.7
|
21.2
|
E.
Financial
Results - Statutory Basis (continued)
Interim Consolidated Statement of Comprehensive
Income
|
Three
months
ended
31 March
|
2024
|
2023
|
€000
|
€000
|
Profit for the
period
|
133,404
|
95,281
|
Other comprehensive income (OCI)
|
|
|
OCI that may be reclassified in the consolidated income
statement in subsequent periods
|
(139)
|
(1,930)
|
Fair value reserve (debt instruments)
|
(142)
|
(1,912)
|
Net losses on investments in debt
instruments measured at fair value through OCI (FVOCI)
|
(142)
|
(1,762)
|
Transfer to the consolidated
income statement on disposal
|
-
|
(150)
|
|
|
|
Foreign currency translation reserve
|
3
|
(18)
|
Profit/(loss) on translation of net investment in foreign
subsidiaries
|
4
|
(33)
|
(Loss)/profit on hedging of net investments in foreign
subsidiaries
|
(1)
|
15
|
|
|
|
OCI not to be reclassified in the consolidated income
statement in subsequent periods
|
844
|
(24)
|
Fair value reserve (equity instruments)
|
241
|
-
|
Net gains on investments in equity
instruments designated at FVOCI
|
241
|
-
|
|
|
|
Property revaluation reserve
|
(86)
|
26
|
Deferred tax
|
(86)
|
26
|
|
|
|
Actuarial gains/(losses) on the defined benefit
plans
|
689
|
(50)
|
Remeasurement gains/(losses) on
defined benefit plans
|
689
|
(50)
|
Other comprehensive income/(loss) for the period net of
taxation
|
705
|
(1,954)
|
Total comprehensive income for the period
|
134,109
|
93,327
|
|
|
|
Attributable to:
|
|
|
Owners of the Company
|
133,552
|
92,768
|
Non-controlling
interests
|
557
|
559
|
Total comprehensive income for the period
|
134,109
|
93,327
|
E.
Financial
Results - Statutory Basis (continued)
Interim Consolidated Balance Sheet
|
31 March
2024
|
31
December 2023
|
Assets
|
€000
|
€000
|
Cash and balances with central
banks
|
7,217,046
|
9,614,502
|
Loans and advances to
banks
|
383,707
|
384,802
|
Reverse repurchase
agreements
|
707,526
|
403,199
|
Derivative financial
assets
|
63,529
|
51,055
|
Investments at FVPL
|
120,455
|
135,275
|
Investments at FVOCI
|
438,265
|
443,420
|
Investments at amortised
cost
|
3,317,166
|
3,116,714
|
Loans and advances to
customers
|
10,027,893
|
9,821,788
|
Life insurance business assets
attributable to policyholders
|
691,047
|
649,212
|
Prepayments, accrued income and
other assets
|
575,409
|
584,919
|
Stock of property
|
803,646
|
826,115
|
Investment properties
|
62,321
|
62,105
|
Deferred tax assets
|
201,996
|
201,268
|
Property and equipment
|
284,057
|
285,568
|
Intangible assets
|
46,609
|
48,635
|
Total assets
|
24,940,672
|
26,628,577
|
Liabilities
|
|
|
Deposits by banks
|
395,790
|
471,556
|
Funding from central
banks
|
310,308
|
2,043,868
|
Derivative financial
liabilities
|
6,587
|
17,980
|
Customer deposits
|
19,259,888
|
19,336,915
|
Insurance contract
liabilities
|
689,747
|
658,424
|
Accruals, deferred income, other
liabilities and other provisions
|
505,972
|
469,265
|
Provisions for pending
litigations, claims, regulatory and other matters
|
135,839
|
131,503
|
Debt securities in
issue
|
672,542
|
671,632
|
Subordinated
liabilities
|
308,841
|
306,787
|
Deferred tax
liabilities
|
32,464
|
32,306
|
Total liabilities
|
22,317,978
|
24,140,236
|
Equity
|
|
|
Share capital
|
44,620
|
44,620
|
Share premium
|
594,358
|
594,358
|
Revaluation and other
reserves
|
90,201
|
89,920
|
Retained earnings
|
1,651,697
|
1,518,182
|
Equity attributable to the owners of the
Company
|
2,380,876
|
2,247,080
|
Other equity
instruments
|
220,000
|
220,000
|
Non‑controlling interests
|
21,818
|
21,261
|
Total equity
|
2,622,694
|
2,488,341
|
Total liabilities and equity
|
24,940,672
|
26,628,577
|
G.
Additional Risk
and Capital Management disclosures (continued)
G.2 Capital
management
The primary objective of the
Group's capital management is to ensure compliance with the
relevant regulatory capital requirements and to maintain healthy
capital adequacy ratios to cover the risks of its business, support
its strategy and maximise shareholders' value.
The capital adequacy framework, as
in force, was incorporated through the Capital Requirements
Regulation (CRR) and Capital Requirements Directive (CRD) which
came into effect on 1 January 2014 with certain specified
provisions implemented gradually. The CRR and CRD transposed the
new capital, liquidity and leverage standards of Basel III into the
European Union's legal framework. CRR establishes the prudential
requirements for capital, liquidity and leverage for credit
institutions. It is directly applicable in all EU member states.
CRD governs access to deposit-taking activities and internal
governance arrangements including remuneration, board composition
and transparency. Unlike the CRR, member states were required to
transpose the CRD into national law and national regulators were
allowed to impose additional capital buffer
requirements.
On 27 June 2019, the revised rules
on capital and liquidity (Regulation (EU) 2019/876 (CRR II) and
Directive (EU) 2019/878 (CRD V)) came into force. As an amending
regulation, the existing provisions of CRR apply, unless they are
amended by CRR II. Certain provisions took immediate effect
(primarily relating to Minimum Requirement for Own Funds and
Eligible Liabilities (MREL)), but most changes became effective as
of June 2021. The key changes introduced consist of, among others,
changes to qualifying criteria for Common Equity Tier 1 (CET1),
Additional Tier 1 (AT1) and Tier 2 (T2) instruments, introduction
of requirements for MREL and a binding Leverage Ratio requirement
(as defined in the CRR) and a Net Stable Funding Ratio
(NSFR).
The amendments that came into
effect on 28 June 2021 are in addition to those introduced in June
2020 through Regulation (EU) 2020/873, which among others, brought
forward certain CRR II changes in light of the COVID-19 pandemic.
The main adjustments of Regulation (EU) 2020/873 that had an impact
on the Group's capital ratio relate to the acceleration of the
implementation of the new SME discount factor (lower RWAs),
extending the IFRS 9 transitional arrangements and introducing
further relief measures to CET1 allowing to fully add back to CET1
any increase in ECL recognised in 2020 and 2021 for non-credit
impaired financial assets and phasing-in this starting from 2022
(phasing-in at 25% in 2022, 50% in 2023 and 75% in 2024) and
advancing the application of prudential treatment of software
assets as amended by CRR II (which came into force in December
2020).
In October 2021, the European
Commission adopted legislative proposals for further amendments to
the CRR, CRD 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
includes:
·
a proposal for a Regulation (sometimes known as
'CRR III') to make amendments to CRR with regard to (amongst other
things) requirements on credit risk, credit valuation adjustment
risk, operational risk, market risk and the output
floor;
·
a proposal for a Directive (sometimes known as
'CRD VI') to make amendments to CRD with regard to (amongst other
things) requirements on supervisory powers, sanctions,
third-country branches and ESG risks; and
·
a proposal for a Regulation to make amendments to
CRR and the BRRD with regard to (amongst other things) requirements
on the prudential treatment of G-SII groups with a multiple point
of entry resolution strategy and a methodology for the indirect
subscription of instruments eligible for meeting the MREL
requirements.
The 2021 Banking Package is
subject to amendment in the course of the EU's legislative process.
In addition, in the case of the proposed amendments to CRD and the
BRRD, their terms and effect will depend, in part, on how they are
transposed in each member state.
In December 2023 the preparatory
bodies of the Council and European Parliament endorsed the
amendments to the Capital Requirements Regulation and the Capital
Requirements Directive and the legal texts have now been published
on the Council and the Parliament websites. In April 2024, the
European Parliament has voted to adopt the amendments to the
Capital Requirements Regulation and the Capital Requirements
Directive and the texts must now also be confirmed by the Council,
after which they will be published in the EU's official journal. It
is expected that the provisions will come into force on 1 January
2025; and certain measures are expected to be subject to
transitional arrangements or to be phased-in over time.
The Regulatory CET1 ratio of the
Group as at 31 March 2024 stands at 17.1% and the Total Capital
ratio at 22.0%. Including profits for the three months ended 31
March 2024 and an accrual for a distribution at a payout ratio of
50% of the Group's adjusted recurring profitability for the period,
which represents the top-end range of the Group's approved
distribution policy in line with the principles of Commission
Delegated Regulation (EU) (241/2014) for foreseeable dividends and
charges, the CET1 ratio and Total Capital ratio of the Group stand
at 17.6% and 22.5% respectively, as further described in Section
'Distributions' in Section 'A. Group Financial Results - Underlying
Basis'.
G.
Additional Risk
and Capital Management disclosures (continued)
G.2 Capital
management (continued)
The Group's minimum capital
requirements are presented below:
Minimum CET1 Regulatory Capital
Requirements
|
31 March
2024
|
31
December
2023
|
Pillar I - CET1
Requirement
|
4.50%
|
4.50%
|
Pillar II - CET1
Requirement
|
1.55%
|
1.73%
|
Capital Conservation Buffer
(CCB)*
|
2.50%
|
2.50%
|
Other Systematically Important
Institutions (O-SII) Buffer**
|
1.875%
|
1.50%
|
Countercyclical Buffer
(CcyB)
|
0.49%
|
0.48%
|
Minimum CET1 Regulatory Requirements
|
10.91%
|
10.72%
|
*
Fully phased-in as of 1 January 2019
** Increasing by 0.0625%. every year thereafter, until being
fully implemented on 1 January 2026 at 2.00%.
Minimum Total Capital Regulatory
Requirements
|
31 March
2024
|
31
December
2023
|
Pillar I - Total Capital
Requirement
|
8.00%
|
8.00%
|
Pillar II - Total Capital
Requirement
|
2.75%
|
3.08%
|
Capital Conservation Buffer
(CCB)*
|
2.50%
|
2.50%
|
Other Systematically Important
Institutions (O-SII) Buffer**
|
1.875%
|
1.50%
|
Countercyclical Buffer
(CcyB)
|
0.49%
|
0.48%
|
Minimum Total Capital Regulatory
Requirements
|
15.61%
|
15.56%
|
*
Fully phased-in as of 1 January 2019
** Increasing by 0.0625% every year thereafter, until being
fully implemented on 1 January 2026 at 2.00%.
The minimum Pillar I total capital
requirement ratio of 8.00% may be met, in addition to the 4.50%
CET1 requirement, with up to 1.50% by AT1 capital and with up to
2.00% by T2 capital.
The Group is also subject to
additional capital requirements for risks which are not covered by
the Pillar I capital requirements (Pillar II add-ons). Applicable
Regulation allows a part of the said Pillar II Requirements (P2R)
to be met also with AT1 and T2 capital and does not require solely
the use of CET1.
The capital position of the Group
and BOC PCL as at 31 March 2024 exceeds both their Pillar I and
their Pillar II add-on capital requirements. However, the Pillar II
add-on capital requirements are a point-in-time assessment and
therefore are subject to change over time.
The CBC, in accordance with the
Macroprudential Oversight of Institutions Law of 2015, sets, on a
quarterly basis, the CcyB rates in accordance with the methodology
described in this law. The CcyB for the Group as at 31 March 2024
has been calculated at approximately 0.49% (31 December 2023:
0.48%).
On 30 November 2022, the CBC,
following the revised methodology described in its macroprudential
policy, decided to increase the CcyB rate from 0.00% to 0.50% of
the total risk exposure amount in Cyprus of each licensed credit
institution incorporated in Cyprus. The new rate of 0.50% became
applicable as from 30 November 2023. Moreover, on 2 June 2023, the
CBC, announced its decision to raise the CcyB rate to 1.00% of the
total risk exposure amount in Cyprus to be observed as from 2 June
2024. Based on the above, the CcyB for the Group is expected to
increase further.
In accordance with the provisions
of this law, the CBC is also the responsible authority for the
designation of banks that are Other Systemically Important
Institutions (O-SIIs) and for the setting of the O-SII Buffer
requirement for these systemically important banks. BOC PCL has
been designated as an O-SII and since November 2021 the O-SII
Buffer had been set to 1.50%. This buffer was phased-in gradually,
having started from 1 January 2019 at 0.50%. The O-SII Buffer as at
31 December 2022 stood at 1.25% and was fully phased-in on 1
January 2023 and as at 31 December 2023 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 was revised to 2.25% (from 1.50%), to be phased-in annually
by 37.5 bps to 1.875% on 1 January 2024 and by another 37.5 bps to
2.25% on 1 January 2025.
In April 2024, following a
revision by the CBC of its policy for the designation of credit
institutions that meet the definition of O-SII institutions and the
setting of an O-SII buffer to be observed, the Group's O-SII buffer
has been reduced to 2.00% on 1 January 2026 (from the previous
assessment of 2.25% on 1 January 2025) to be phased-in by 6.25 bps
annually to 1.9375% on 1 January 2025 and 2.00% as of 1 January
2026 from the current level of 1.875%.
G.
Additional Risk
and Capital Management disclosures (continued)
G.2 Capital
management (continued)
As at 31 March 2024, the Group's
minimum phased-in CET1 capital ratio requirement was set at
approximately 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 approximately 0.49%.
As at 31 March 2024, the Group's minimum phased-in Total Capital
ratio requirement was set at approximately 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 approximately 0.49%. The
ECB has also provided revised lower non-public guidance for an
additional Pillar II CET1 buffer (P2G). From 2 June 2024 both CET1
and Total Capital minimum requirements are expected to increase by
approximately 0.50% as a result of the increase in the CcyB
described above.
The Group is subject to a 3%
Pillar I Leverage Ratio requirement.
The above minimum ratios apply for
both BOC PCL and the Group.
The EBA final guidelines on SREP
and supervisory stress testing and the Single Supervisory
Mechanism's (SSM) 2018 SREP methodology provide that the own funds
held for the purposes of Pillar II Guidance (P2G) cannot be used to
meet any other capital requirements (Pillar I requirement, P2R or
the Combined Buffer Requirement (CBR)), and therefore cannot be
used twice.
The regulatory capital position of
the Group and BOC PCL as at the reporting date (after applying the
transitional arrangements) is presented below:
Regulatory capital
|
Group
|
BOC PCL
|
31 March
20241
|
31
December
20232
|
31 March
20241
|
31
December
20232
|
€000
|
€000
|
€000
|
€000
|
Common Equity Tier 1
(CET1)3
|
1,803,347
|
1,798,015
|
1,770,437
|
1,766,707
|
Additional Tier 1 capital
(AT1)
|
220,000
|
220,000
|
220,000
|
220,000
|
Tier 2 capital (T2)
|
300,000
|
300,000
|
300,000
|
300,000
|
Transitional total regulatory capital
|
2,323,347
|
2,318,015
|
2,290,437
|
2,286,707
|
Risk weighted assets - credit
risk4
|
9,220,413
|
9,013,267
|
9,180,411
|
9,005,552
|
Risk weighted assets - market
risk
|
-
|
-
|
-
|
-
|
Risk weighted assets - operational
risk
|
1,327,871
|
1,327,871
|
1,292,350
|
1,292,350
|
Total risk weighted assets
|
10,548,284
|
10,341,138
|
10,472,761
|
10,297,902
|
|
|
|
|
|
Transitional
|
%
|
%
|
%
|
%
|
Common Equity Tier 1 (CET1) ratio
|
17.1
|
17.4
|
16.9
|
17.2
|
Total capital ratio
|
22.0
|
22.4
|
21.9
|
22.2
|
Leverage ratio
|
8.2
|
7.6
|
8.1
|
7.5
|
1. Profits for the three months ended 31 March 2024 are not
included. The CET1 ratio, the Total Capital ratio and the Leverage
ratio as at 31 March 2024 stand at 17.6%, 22.5% and 8.4%
respectively for the Group and at 17.4%, 22.4% and 8.3%
respectively for BOC PCL, when including the profits for the
quarter ended 31 March 2024 and an accrual for a distribution at a
payout ratio of 50% of the Group's adjusted recurring profitability
for the period, which represents the top-end range of the Group's
approved distribution policy in line with the principles of
Commission Delegated Regulation (EU) (241/2014) for foreseeable
dividends and charges. As per the latest SREP decision, any
distribution is subject to regulatory approval. Such distribution
accrual does not constitute a binding commitment for a distribution
payment nor does it constitute a warranty or representation that
such a payment will be made.
2. Includes profits for the year ended 31 December 2023 and a
deduction for the distribution in respect of 2023 earnings of €137
million, following approval received by the ECB in March 2024 and
relevant recommendation by the Board of Directors to the
shareholders for a final cash dividend of €112 million and in
principle approval by the Board to undertake a share buyback of
ordinary shares of the Company for an aggregate consideration of up
to €25 million and in compliance with the terms of the ECB
approval. Similarly, for BOC PCL amounts include profits for the
year ended 31 December 2023 and a deduction for the distribution in
respect of 2023 earnings following approval received by the ECB in
March 2024 and relevant recommendation by the Board of Directors to
the shareholders for a final cash dividend of €137
million.
3. CET1 includes regulatory deductions, comprising, amongst
others, intangible assets amounting to
€21,230 thousand for the Group
and €15,212 thousand for
BOC PCL as at 31 March 2024 (31 December 2023: €24,337 thousand for
the Group and €16,861 thousand for BOC PCL). As at 31 March 2024 an
amount of €17,017 thousand, for the Group and €12,840 thousand for
BOC PCL, relating to intangible assets, is considered prudently
valued for CRR purposes and is not deducted from CET1 (31 December
2023: €15,337 thousand for the Group and €12,643 thousand for BOC
PCL).
4. Includes Credit Valuation Adjustments (CVA).
|
G.
Additional Risk
and Capital Management (continued)
G.2 Capital
management (continued)
The capital ratios of the Group and
BOC PCL as at the reporting date on a fully loaded basis are
presented below:
Fully loaded
|
Group
|
BOC PCL
|
31 March
20241,3
|
31
December
20232,3
|
31 March
20241,3
|
31
December
20232,3
|
%
|
%
|
%
|
%
|
Common Equity Tier 1
ratio
|
17.1
|
17.3
|
16.9
|
17.1
|
Total capital ratio
|
22.0
|
22.4
|
21.9
|
22.2
|
Leverage ratio
|
8.2
|
7.6
|
8.1
|
7.5
|
1 Profits for the three months ended 31 March 2024 are not
included. The CET1 ratio, the Total Capital ratio and the Leverage
ratio as at 31 March 2024 stand at 17.6%, 22.5% and 8.4%
respectively for the Group and at 17.4%, 22.4% and 8.3%
respectively for BOC PCL, when including the profits for the
quarter ended 31 March 2024 and an accrual for a distribution at a
payout ratio of 50% of the Group's adjusted recurring profitability
for the period, which represents the top-end range of the Group's
approved distribution policy in line with the principles of
Commission Delegated Regulation (EU) (241/2014) for foreseeable
dividends and charges. As per the latest SREP decision, any
distribution is subject to regulatory approval. Such distribution
accrual does not constitute a binding commitment for a distribution
payment nor does it constitute a warranty or representation that
such a payment will be made.
2 Includes profits for the year ended 31 December 2023 and a
deduction for the distribution in respect of 2023 earnings of €137
million, following approval received by the ECB in March 2024 and
relevant recommendation by the Board of Directors to the
shareholders for a final cash dividend of €112 million and in
principle approval by the Board to undertake a share buyback of
ordinary shares of the Company for an aggregate consideration of up
to €25 million and in compliance with the terms of the ECB
approval. Similarly, for BOC PCL amounts include profits for the
year ended 31 December 2023 and a deduction for the distribution in
respect of 2023 earnings following approval received by the ECB in
March 2024 and relevant recommendation by the Board of Directors to
the shareholders for a final cash dividend of €137
million.
3 IFRS 9 fully loaded as applicable.
|
During the three months ended 31
March 2024, the regulatory CET1 was mainly affected by movement in
risk-weighted assets. Including the profits for the three months
ended 31 March 2024, net of a distribution at the top-end range of
the Group's distribution policy, the CET1 ratio, on a transitional
basis, increases to 17.6%.
A charge of 32 bps is deducted
from own funds in relation to ECB expectations for NPEs. In
addition, a prudential charge in relation to the onsite inspection
on the value of the Group's foreclosed assets is being deducted
from own funds since June 2021, the impact of which is 10 bps on
the Group's CET1 ratio as at 31 March 2024. Furthermore, 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 March
2024 the impact of these requirements was 41 bps on the Group's
CET1 ratio compared to 24 bps on 31 December 2023. The
above-mentioned requirements are within the capital plans of the
Group and incorporated within its capital projections.
Capital requirements of
subsidiaries
The insurance subsidiaries of the
Group, the General Insurance of Cyprus Ltd and Eurolife Ltd, comply
with the requirements of the Superintendent of Insurance including
the minimum solvency ratio. The regulated Cyprus Investment Firm
(CIF) of the Group, The Cyprus Investment and Securities
Corporation Ltd (CISCO), complies with the minimum capital adequacy
ratio requirements. In 2021 the new prudential regime for
Investment Firms ('IFs') as per the Investment Firm Regulation (EU)
2019/2033 ('IFR') on the prudential requirements of IFs and the
Investment Firm Directive (EU) 2019/2034 ('IFD') on the prudential
supervision of IFs came into effect. Under the new regime CISCO has
been classified as a Non-Systemic 'Class 2' company and is subject
to the new IFR/IFD regime in full. The payment services subsidiary
of the Group, JCC Payment Systems Ltd, complies with the regulatory
capital requirements.
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 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 were immediately effective.
In January 2024, BOC PCL 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 (30.4% of risk-weighted assets when taking into
account the expected prevailing CBR as at 31 December 2024 which
needs to be met with own funds on top of the MREL) and 5.91% of
Leverage Ratio Exposure (LRE) (as defined in the CRR) and must be
met by 31 December 2024.
BOC PCL must comply with the MREL
requirement at the consolidated level, comprising BOC PCL and its
subsidiaries.
G.
Additional Risk
and Capital Management disclosures (continued)
G.2 Capital
management (continued)
In April 2024, BOC PCL proceeded
with an issue of €300 million green senior preferred notes (the
'Notes'). The Notes comply with the MREL criteria and contribute
towards BOC PCL's MREL requirement.
The MREL ratio as at 31 March
2024, calculated according to the SRB's eligibility criteria
currently in effect and based on internal estimate, stood at 29.3%
of RWAs (including capital used to meet the CBR) and at 12.5% of
LRE (based on the regulatory Total Capital as at 31 March 2024).
The CBR stood at 4.86% as at 31 March 2024 (compared to 4.48% as at
31 December 2023), reflecting the increase of the O-SII buffer from
1.50% to 1.875% on 1 January 2024. The CBR is expected to increase
further in June 2024 as a result of the increase of CcyB to
approximately 1.00% and the phasing-in of O-SII buffer from 1.875%
to 1.9375% on 1 January 2025 and to 2.00% on 1 January
2026.
The MREL ratio expressed as a
percentage of RWAs (including capital used to meet the CBR) and the
MREL ratio expressed as a percentage of LRE as at 31 March 2024
stand at 29.8% and 12.7% respectively when including the profits
for the quarter ended 31 March 2024 and an accrual for a
distribution at a payout ratio of 50% of the Group's adjusted
recurring profitability for the period. When accounting for the
Notes issued in April 2024, the MREL ratio expressed as a
percentage of RWAs (including capital used to meet the CBR) and the
MREL ratio expressed as a percentage of LRE improve to 32.7% and
14.0% respectively.
G.3
Internal Capital
Adequacy Assessment Process (ICAAP), Internal Liquidity Adequacy
Assessment Process (ILAAP) and Pillar II Supervisory Review and
Evaluation Process (SREP)
The Group prepares annual ICAAP
and ILAAP packages. Both reports for 2023 have been completed and
submitted to the ECB at the end of March 2024 following approval by
the Board of Directors. The 2023 ICAAP indicated that the
Group has sufficient capital and available mitigants to support its
risk profile and its business and to enable it to meet its
regulatory requirements, both under baseline and stressed
conditions scenarios. The 2023 ILAAP indicated that the Group
maintains liquidity resources which are adequate to ensure its
ability to meet obligations as they fall due under ordinary and
stressed conditions.
The Group undertakes quarterly
reviews of its ICAAP results as well as on an ad-hoc basis if
needed, which are submitted to the ALCO and the RC, considering the
latest actual and forecasted information. During the quarterly
review, the Group's risk profile is reviewed and any material
changes/developments since the annual ICAAP exercise are assessed
in terms of capital adequacy.
The Group undertakes quarterly
reviews of its ILAAP results through quarterly liquidity stress
tests which are submitted to the ALCO and the RC, where actual and
forecasted information is considered. Any material changes since
the year-end are assessed in terms of liquidity and
funding.
The ECB, as part of its
supervisory role, has been conducting the SREP and other
inspections (onsite/ off-site/ targeted reviews/ deep-dives) on the
Group. SREP is a holistic assessment of, amongst other things, the
Group's business model, internal governance and institution-wide
control arrangements, risks to capital and adequacy of capital to
cover these risks and risks to liquidity and adequacy of liquidity
resources to cover these risks. The objective of the SREP is for
the ECB to form an up-to-date supervisory view of the Group's risks
and viability and to form the basis for supervisory measures and
dialogue with the Group. As a result of these supervisory
processes, additional capital and other requirements could be
imposed on the Group, including a revision of the level of Pillar
II add-ons, as the Pillar II add-on capital requirements are a
point-in-time assessment and therefore subject to change over
time.
G.4 Liquidity
regulation
The Group has to comply with
provisions on the Liquidity Coverage Ratio (LCR) under CRD IV/CRR
(as supplemented by Delegated Regulation (EU) 2015/61),
with the limit set at 100%. The Group has to also comply with the Net Stable Funding
Ratio (NSFR) calculated as per the CRR II, with the limit set at
100%.
The LCR is designed to promote the
short-term resilience of a Group's liquidity risk profile by
ensuring that it has sufficient high-quality liquid resources to
survive an acute stress scenario lasting for 30 days. The NSFR has
been developed to promote a sustainable maturity structure of
assets and liabilities.
As at 31 March 2024, the Group was
in compliance with all regulatory liquidity requirements. As at 31
March 2024, the Group's LCR stood at 315% (compared to 359% as at
31 December 2023), the reduction of which was mainly driven by the
repayment of the TLTRO of an amount of €1,700 thousand. As at 31
March 2024 the Group's NSFR was 155% (compared to 158% as at 31
December 2023).
G.
Additional Risk
and Capital Management disclosures (continued)
G.5 Liquidity
reserves
The below table sets out the
Group's liquidity reserves:
Composition of the liquidity reserves
|
31 March
2024
|
31
December 2023
|
Internal Liquidity
Reserves
|
Liquidity reserves as per
LCR Delegated Regulation (EU)
2015/61 LCR
eligible
|
Internal Liquidity Reserves
|
Liquidity reserves as per LCR Delegated Regulation
(EU)
2015/61
LCR eligible
|
Level 1
|
Level
2A &
2B
|
Level
1
|
Level
2A
& 2B
|
€000
|
€000
|
€000
|
€000
|
€000
|
€000
|
Cash and balances with central
banks
|
6,999,096
|
6,999,096
|
-
|
9,428,052
|
9,428,052
|
-
|
Placements with banks
|
233,321
|
-
|
-
|
214,588
|
-
|
-
|
Liquid investments
|
3,912,374
|
3,307,976
|
368,887
|
3,299,967
|
2,801,667
|
354,128
|
Available ECB Buffer
|
1,609,933
|
-
|
-
|
92,088
|
-
|
-
|
Total
|
12,754,724
|
10,307,073
|
368,887
|
13,034,695
|
12,229,719
|
354,128
|
Internal Liquidity Reserves
present the total liquid assets as defined in the Liquidity Policy.
Liquidity reserves as per LCR Delegated Regulation (EU) 2015/61
present the liquid assets as per the definition of the
aforementioned regulation i.e., High-Quality Liquid Assets
(HQLA).
Balances in Nostro accounts and
placements with banks are not included in Liquidity reserves as per
LCR, as they are not considered HQLA (they are part of the LCR
Inflows).
Liquid investments under the
Liquidity reserves as per LCR are shown at market values reduced by
standard weights as prescribed by the LCR regulation. Liquid
investments under Internal Liquidity Reserves include additional
unencumbered liquid bonds. Liquidity investments under Internal
Liquidity Reserves are shown at market values net of haircuts based
on the ECB haircut methodology for the ECB eligible bonds, while
for the non-ECB eligible bonds, a more conservative internally
developed haircut methodology is applied.
Current available ECB buffer is
not part of the Liquidity reserves as per LCR.