The Interim Financial Report relates to Bank of Cyprus Holdings Public Limited Company (the Company) and together with its subsidiaries the Group, which was listed on the London Stock Exchange ('LSE') and the Cyprus Stock Exchange ('CSE') as at 30 June 2024.

 

Activities

The Company is the holding company of the Group and of Bank of Cyprus Public Company Ltd ('BOC PCL' or the 'Bank'). The principal activities of BOC PCL and its subsidiary companies involve the provision of banking, financial, and insurance services and the management and disposal of property predominately acquired in exchange of debt.

 

All Group companies and branches are set out in Note 38 to the Consolidated Condensed Interim Financial Statements. The Group has established branches in Greece. There were no acquisitions of subsidiaries and no material disposals of subsidiaries during the six months ended 30 June 2024. Information on Group companies and acquisitions and disposals during the period are detailed in Note 38 to the Consolidated Condensed Interim Financial Statements.

 

 

Group financial results on the underlying basis

Commentary on underlying basis

The financial information presented in this section provides an overview of the Group financial results for the six months ended 30 June 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 their presentation with items of a similar nature.

 

Reconciliations between the statutory basis and the underlying basis to facilitate the comparability of the underlying basis to the statutory information, are included in section 'Reconciliation of the Interim Consolidated Income Statement for the six months ended 30 June 2024 between the statutory basis and the underlying basis' and 'Alternative Performance Measures Disclosures' of the Interim Financial Report 2024.

 

The main financial highlights for the six months ended 30 June 2024 are set out below:

Interim Consolidated Income Statement on the underlying basis

€ million	Six months ended 30 June
	20241	20231
Net interest income	420	358
Net fee and commission income	86	90
Net foreign exchange gains and net gains on financial instruments	13	21
Net insurance result	23	25
Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties	2	5
Other income	5	12
Total income	549	511
Staff costs	(96)	(93)
Other operating expenses	(71)	(69)
Special levy on deposits and other levies/contributions	(19)	(18)
Total expenses	(186)	(180)
Operating profit	363	331
Loan credit losses	(16)	(24)
Impairments of other financial and non‑financial assets	(25)	(30)
Provisions for pending litigations, claims, regulatory and other matters (net of reversals)	(3)	(14)
Total loan credit losses, impairments and provisions	(44)	(68)
Profit before tax and non‑recurring items	319	263
Tax	(48)	(40)
Profit attributable to non‑controlling interests	(1)	(1)
Profit after tax and before non‑recurring items (attributable to the owners of the Company)	270	222
Advisory and other transformation costs ‑ organic	-	(2)
Profit after tax (attributable to the owners of the Company)	270	220
1.     The financial information is derived from and should be read in conjunction with the accompanied Consolidated Condensed Interim Financial Statements.

 

 

 

 

Group financial results on the underlying basis (continued)

Interim Consolidated Income Statement on the underlying basis (continued)

Key Performance Ratios	Six months ended 30 June
	2024	2023
Net interest margin (annualised)	3.66%	3.17%
Net interest margin (annualised) excluding TLTRO III	3.79%	3.48%
Cost to income ratio	34%	35%
Cost to income ratio excluding special levy on deposits and other levies/contributions	30%	32%
Operating profit return on average assets (annualised)	2.8%	2.6%
Basic profit per share attributable to the owners of the Company (€)1	0.61	0.49
Return (annualised) on tangible equity (ROTE)	23.7%	24.0%
Return (annualised) on tangible equity (ROTE) on 15% CET1 ratio2	29.6%	25.3%
Tangible book value per share3 (€)	5.27	4.34
1.     The diluted earnings per share attributable to the owners of the Company as at 30 June 2024 amounted to €0.60. 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 shareholders' equity. 3.     Tangible book value per share is calculated based on number of shares in issue at the end of the period, excluding treasury shares.

 

Interim Consolidated Balance Sheet on the underlying basis

€ million	30 June 20241	31 December 20231
Cash and balances with central banks	7,287	9,615
Loans and advances to banks	384	385
Reverse repurchase agreements	1,015	403
Debt securities, treasury bills and equity investments	3,959	3,695
Net loans and advances to customers	10,085	9,822
Stock of property	764	826
Investment properties	56	62
Other assets	1,916	1,821
Total assets	25,466	26,629
Deposits by banks	405	472
Funding from central banks	-	2,044
Customer deposits	19,723	19,337
Debt securities in issue	971	672
Subordinated liabilities	313	307
Other liabilities	1,425	1,309
Total liabilities	22,837	24,141
Shareholders' equity	2,387	2,247
Other equity instruments	220	220
Total equity excluding non‑controlling interests	2,607	2,467
Non‑controlling interests	22	21
Total equity	2,629	2,488
Total liabilities and equity	25,466	26,629
1.         The financial information is derived from and should be read in conjunction with the accompanied Consolidated Condensed Interim Financial Statements.

Group financial results on the underlying basis (continued)

Interim Consolidated Balance Sheet on the underlying basis (continued)

Key Balance Sheet figures and ratios	30 June 2024	31 December 2023
Gross loans (€ million)	10,318	10,070
Allowance for expected loan credit losses (€ million)	251	267
Customer deposits (€ million)	19,723	19,337
Loans to deposits ratio (net)	51%	51%
NPE ratio	2.8%	3.6%
NPE coverage ratio	85%	73%
Leverage ratio	10.1%	9.1%

 

Capital ratios and risk weighted assets	30 June 2024 (Regulatory)1	31 December 2023 (Regulatory)2
Common Equity Tier 1 (CET1) ratio (transitional)	18.3%	17.4%
Total capital ratio (transitional)	23.3%	22.4%
Risk weighted assets (RWAs) (€ million)	10,580	10,341
1.     Includes reviewed profits for the six months ended 30 June 2024 net of distribution accrual (refer to section '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 'Capital Base').

 

Group financial results on the underlying basis (continued)

Reconciliation of the Interim Consolidated Income Statement for the six months ended 30 June 2024 between the statutory basis and the underlying basis

€ million	Underlying basis	Other	Statutory basis
Net interest income	420	-	420
Net fee and commission income	86	-	86
Net foreign exchange gains and net gains on financial instruments	13	-	13
Net gains on derecognition of financial assets measured at amortised cost	-	1	1
Net insurance result*	23	-	23
Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of property	2	-	2
Other income	5	-	5
Total income	549	1	550
Total expenses	(186)	(3)	(189)
Operating profit	363	(2)	361
Loan credit losses	(16)	16	-
Impairment of other financial and non-financial assets	(25)	25	-
Provisions for pending litigations, claims, regulatory and other matters (net of reversals)	(3)	3	-
Credit losses on financial assets and impairment net of reversals of non-financial assets	-	(42)	(42)
Profit before tax and non-recurring items	319	-	319
Tax	(48)	-	(48)
Profit attributable to non-controlling interests	(1)	-	(1)
Profit after tax (attributable to the owners of the Company)	270	-	270

 

* Net insurance result per underlying basis comprises the aggregate of captions 'Net insurance finance income/(expense) and net reinsurance finance income/(expense)', 'Net insurance service result' and 'Net reinsurance service result' per the statutory basis.

  

The reclassification differences between the statutory basis and the underlying basis are explained below:

 

·      'Net gains on derecognition of financial assets measured at amortised cost' of €1 million under the statutory basis comprise net gains on derecognition of loans and advances to customers included in 'Loan credit losses' under the underlying basis as to align their presentation with the loan credit losses on loans and advances to customers.

 

·      'Provisions for pending litigations, claims, regulatory and other matters (net of reversals)' amounting to €3 million presented within 'Operating profit before credit losses and impairment' under the statutory basis, are presented under the underlying basis in conjunction with loan credit losses and impairments.

 

·      'Credit losses on financial assets' and 'Impairment net of reversals of non-financial assets' under the statutory basis include: i) credit losses to cover credit risk on loans and advances to customers of €17 million, which are included in 'Loan credit losses' under the underlying basis, and ii) credit losses of other financial assets of €0.3 million and impairment net of reversals of non-financial assets of €25 million, which are included in 'Impairment of other financial and non-financial assets' under the underlying basis, as to be presented separately from loan credit losses.

 

Balance Sheet Analysis

Capital Base

Total equity excluding non-controlling interests totalled €2,607 million as at 30 June 2024 compared to €2,467 million as at 31 December 2023. Shareholders' equity totalled to €2,387 million as at 30 June 2024 compared to €2,247 million as at 31 December 2023.

 

The regulatory Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at 18.3% as at 30 June 2024 compared to 17.4% as at 31 December 2023. Throughout this Interim Management Report, the regulatory capital ratios as at 30 June 2024 include reviewed profits for the six months ended 30 June 2024 in line with the ECB Decision (EU) (2015/656) on the recognition of interim or year-end profits in CET1 capital in accordance with Article 26(2) of the CRR, 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, (such ratios are referred to as regulatory). 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 26 basis points as at 30 June 2024, compared to 32 basis points as at 31 December 2023. 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 7 basis points on Group's CET1 ratio as at 30 June 2024 (compared to 12 basis points on Group's CET1 ratio as at 31 December 2023). In addition, the Group is subject to increased capital requirements in relation to its real estate repossessed portfolio, which follow a SREP provision to ensure minimum capital levels retained on long-term holdings of real estate assets, with such requirements being dynamic by reference to the in-scope REMU assets remaining on the balance sheet of the Group and the value of such assets. As at 30 June 2024, the impact of these requirements was 47 basis points on Group's CET1 ratio, compared to 24 basis points 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 23.3% as at 30 June 2024 compared to 22.4% as at 31 December 2023.

 

The Group's capital ratios are above the Supervisory Review and Evaluation Process (SREP) requirements.

 

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 effective from June 2024, increasing the CcyB to 1.00%. As a result, the CcyB for the Group as at 30 June 2024 amounted to approximately 0.94%.

 

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 basis points 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 basis points annually, to 1.9375% on 1 January 2025 and 2.00% as of 1 January 2026 from the current level of 1.875%.

 

As at 30 June 2024, the Group's minimum phased-in CET1 capital ratio requirement is set at 11.36%, 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 0.94%. Likewise, the Group's minimum phased-in Total Capital ratio requirement is set at 16.06%, 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 0.94%. The ECB has also provided revised lower non-public guidance for an additional Pillar II CET1 buffer (P2G) compared to previous year.

 

Balance Sheet Analysis (continued)

Capital Base (continued)

Own funds held for the purposes of P2G cannot be used to meet any other capital requirements (Pillar I, Pillar II requirements or the combined buffer requirement), and therefore cannot be used twice.

 

The Group'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 approximately 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 approximately 0.48%. Following the annual SREP performed by the ECB in 2022, ECB had also maintained the non-public guidance for an additional Pillar II CET1 buffer (P2G) for 2023 unchanged compared to 2022.

 

Distributions

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 million in total, comprising a cash dividend of €112 million and a share buyback of up to €25 million. The proposed final dividend of €0.25 per ordinary share was declared at the Annual General Meeting ('AGM') which was held on 17 May 2024. The dividend was paid in cash on 14 June 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 million (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 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 approximately 130 basis points on CET1 ratio as at 31 December 2023.

 

Distribution policy

The Group aims to provide a sustainable return to shareholders. Distributions are expected to be in the range of 30-50% payout ratio of the Group's adjusted recurring profitability, including cash dividends and buybacks, with any distribution being subject to regulatory approval. 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. In line with the Group's distribution policy, the Group is committed to delivering sustainably growing distributions through a combination of cash dividend and share buybacks while maintaining a robust capital base to support profitable growth and prudently prepare for upcoming potential regulatory changes. Supported by its continued progress towards its strategic targets, the Group intends to move towards the top-end of the 30%-50% range of its distribution policy (i.e 50% payout ratio) for 2024, subject to required approvals. Any proposed distribution quantum, as well as envisaged allocation between dividend and buyback, will take into consideration market conditions as well as the outcome of its ongoing capital and liquidity planning exercises at the time. Given the strong capital generation, the Group's distribution policy is expected to be reviewed with the full year 2024 financial results in the context of prevailing market conditions.

Balance Sheet Analysis (continued)

Capital Base (continued)

Share Capital

As at 30 June 2024, there were 444,812,058 issued ordinary shares with a nominal value of €0.10 each, compared to 446,199,933 issued ordinary shares as at 31 December 2023. The reduction since the beginning of the year relates to the share buyback programme that was launched in April 2024. For further details please refer to section 'Distributions' above.

 

Other equity instruments

At 30 June 2024, the Group's other equity instruments relate to Additional Tier 1 Capital Securities (the 'AT1 securities') and amounted to €220 million (31 December 2023: €220 million).

 

The Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities constitute unsecured and subordinated obligations of the Company, are perpetual and are issued at par. They carry an initial coupon of 11.875% per annum, payable semi-annually and resettable on 21 December 2028 and every five years thereafter.

 

The Company will have the option to redeem these 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.

 

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 million per year.

 

The Group estimates that such fees could range up to approximately €5 million per year (for each tax year in scope i.e. since 2018) although the Group understands that such fee may fluctuate annually as to be determined by the Ministry of Finance.

 

Regulations and Directives

The 2021 Banking Package (CRR III and CRD VI and BRRD)

In October 2021, the European Commission adopted legislative proposals for further amendments to the Capital Requirements Regulation (CRR), CRD 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. In December 2023, the preparatory bodies of the Council and European Parliament endorsed the amendments to the CRR and the CRD and the legal texts were published on the Council and the Parliament websites. In April 2024, the European Parliament voted to adopt the amendments to the CRR and the CRD, Regulation (EU) 2024/1623 (known as CRR III) and Directive (EU) 2024/1619 (known as CRD VI) were published in the EU's official journal in June 2024, with entry into force 20 days from the date of the publication. Most provisions of the CRR III will become effective on 1 January 2025 with certain measures subject to transitional arrangements or to be phased in over time. Member states shall adopt and publish, by 10 January 2026, the laws, regulations and administrative provisions necessary to comply with CRD VI and shall apply most of those measures by 11 January 2026. 

 

 

 

Balance Sheet Analysis (continued)

Regulations and Directives (continued)

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 RWAs (or 30.3% of RWAs 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. For further details, please refer to section 'Funding and Liquidity' below.

 

The MREL ratio as at 30 June 2024, calculated according to the SRB's eligibility criteria currently in effect and based on internal estimate, stood at 33.4% of RWAs (including capital used to meet the CBR) and at 14.0% of LRE (based on the regulatory Total Capital as at 30 June 2024). The CBR stood at 5.31% as at 30 June 2024 (compared to 4.48% as at 31 December 2023), reflecting the increase of the CcyB from approximately 0.49% to approximately 0.94% in June 2024.

 

The CBR is expected to increase further as a result of 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.

 

Throughout this Interim Management Report, the MREL ratios as at 30 June 2024 include profits for the six months ended 30 June 2024 in line with the ECB Decision (EU) (2015/656) on the recognition of interim or year-end profits in CET1 capital in accordance with Article 26(2) of the CRR, 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.

 

Funding and Liquidity

Funding

Funding from Central Banks

Following the repayment of €1.7 billion under the seventh TLTRO III operation in March 2024 and €0.3 billion under the eighth TLTRO III operation in June 2024, the Group's funding from central banks was reduced to nil as at 30 June 2024, compared to €2,044 million as at 31 December 2023.

 

 

Balance Sheet Analysis (continued)

Funding and Liquidity (continued)

Funding (continued)

Deposits

Customer deposits totalled €19,723 million at 30 June 2024, compared to €19,337 million at 31 December 2023 up by 2% since the beginning of the year. Customer deposits are mainly retail-funded and approximately 57% of deposits are protected under the deposit guarantee scheme as at 30 June 2024.  

 

The Bank's deposit market share in Cyprus reached 37.5% as at 30 June 2024, compared to 37.7% as at 31 December 2023. Customer deposits accounted for 77% of total assets and 86% of total liabilities at 30 June 2024 (compared to 73% of total assets and 80% of total liabilities as at 31 December 2023). The increase since the beginning of the year relates to the repayment of €2.0 billion TLTRO and the 2% increase in customer deposits.   

 

The net loans to deposits (L/D) ratio stood at 51% as at 30 June 2024, compared to 51% as at 31 December 2023 on the same basis, flat since the beginning of the year.

 

Subordinated liabilities

At 30 June 2024, the carrying amount of the Group's subordinated liabilities amounted to €313 million, compared to €307 million 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 30 June 2024, the carrying value of the Group's debt securities in issue amounted to €971 million, compared to €672 million at 31 December 2023 and relate to senior preferred notes. The increase of 45% since the beginning of the year relates to the issuance of €300 million green senior preferred notes ('Green Notes') in April 2024.

 

In April 2024, the Bank successfully launched and priced an issuance of €300 million green senior preferred 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 plus 197.1 basis points, payable quarterly in arrear.

 

The issuance was met with strong demand, attracting interest from more than 120 institutional investors, with a final orderbook over four times over-subscribed at €1.3 billion 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 bank 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 finalized its MREL build-up and created a comfortable buffer over the final requirements of 25% of RWAs (or 30.3% of RWAs taking into account the prevailing CBR as at 31 December 2024) and 5.91% of LRE which the Bank must meet by 31 December 2024. For further details, please refer to section 'Minimum Requirement for Own Funds and Eligible Liabilities (MREL)'.

 

 

Balance Sheet Analysis (continued)

Funding and Liquidity (continued)

Funding (continued)

Debt securities in issue (continued)

In July 2023, the Bank successfully launched and priced an issuance of €350 million of senior preferred notes (the 'Notes'). The Notes were priced at par with a fixed coupon of 7.375% per annum, payable annually in arrear, until the Optional Redemption Date i.e. 25 July 2027. The maturity date of the Notes is 25 July 2028; however, the Bank may, at its discretion, redeem the Notes on the Optional Redemption Date subject to meeting certain conditions (including applicable regulatory consents) as specified in the Terms and Conditions. If the Notes are not redeemed by the Bank, the coupon payable from the Optional Redemption Date until the Maturity Date will convert from a fixed rate to a floating rate and will be equal to 3-month Euribor + 409.5 basis points, payable quarterly in arrear. The Notes comply with the criteria for the Minimum Requirement for Own Funds and Eligible Liabilities ('MREL') and contribute towards the Bank's MREL requirements.

 

In June 2021, the Bank executed its inaugural MREL transaction issuing €300 million of senior preferred notes (the 'SP Notes'). The SP Notes were priced at par with a fixed coupon of 2.50% per annum, payable annually in arrears and resettable on 24 June 2026. The maturity date of the SP Notes is 24 June 2027 and the Bank may, at its discretion, redeem the SP Notes on 24 June 2026, subject to meeting certain conditions as specified in the Terms and Conditions, including applicable regulatory consents. The SP Notes comply with the criteria for MREL and contribute towards the Bank's MREL requirements.

 

Liquidity

At 30 June 2024, the Group Liquidity Coverage Ratio (LCR) stood at 304% compared to 359% at 31 December 2023, well above the minimum regulatory requirement of 100%. The LCR surplus as at 30 June 2024 amounted to €7.5 billion, compared to €9.1 billion at 31 December 2023 as the issuance of €300 million of the green senior preferred notes in April 2024 and the increase in customer deposits partially offset the impact from the repayment of the remaining TLTRO III of €300 million in June 2024.

 

At 30 June 2024, the Group Net Stable Funding Ratio (NSFR) stood at 156% (compared to 158% at 31 December 2023), well above the minimum regulatory requirement of 100%.

 

Loans

Group gross loans totalled €10,318 million at 30 June 2024, compared to €10,070 million at 31 December 2023.

 

New lending granted in Cyprus totalled €1,227 million for the six months ended 30 June 2024 compared to €1,118 million for the six months ended 30 June 2023, driven mainly by corporate demand. New lending in the six months ended 30 June 2024 comprised €568 million of corporate loans, €402 million of retail loans (of which €236 million were housing loans), €120 million of SME loans and €137 million of shipping and international loans.

 

At 30 June 2024, the Group net loans and advances to customers totalled €10,085 million compared to €9,822 million at 31 December 2023.

 

The Bank is the largest credit provider in Cyprus with a market share of 43.2% at 30 June 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 approximately €58 million 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.

 

 

Balance Sheet Analysis (continued)

Loan portfolio quality

The Group has continued to make steady progress across all asset quality metrics. The Group's priorities focus mainly on maintaining high quality new lending with strict underwriting standards and preventing asset quality deterioration.

 

The loan credit losses for the six months ended 30 June 2024 totalled €16 million, compared to €24 million for the six months ended 30 June 2023. Further details regarding loan credit losses are provided in section 'Profit before tax and non-recurring items'.

 

Non-performing exposures

The high interest rate environment as well as inflationary pressures are expected to weigh on customers behaviour. Despite these elements, 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 €71 million to €294 million at 30 June 2024, compared to €365 million at 31 December 2023.

 

As a result, the NPEs reduced to 2.8% of gross loans as at 30 June 2024, compared to 3.6% of gross loans as at 31 December 2023.

 

The NPE coverage ratio stands at 85% at 30 June 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 €14.7 billion or 98% to approximately €0.3 billion and the NPE ratio by approximately 60 percentage points from 63% to below 3%.

 

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 with facilities backed by primary residence with Open Market Value up to €250 thousand;

·      borrowers that had a fully completed application to Estia Scheme and were assessed as eligible but not viable with a primary residence of up to €350 thousand Open Market Value; and

·      all applicants that were approved under Estia Scheme but their inclusion was terminated.

 

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.

 

 

Balance Sheet Analysis (continued)

Fixed income portfolio

Fixed income portfolio amounts to €3,828 million as at 30 June 2024, compared to €3,348 million as at 31 December 2023. As at 30 June 2024, the portfolio represents 15% of total assets and comprises €3,429 million (90%) measured at amortised cost and €399 million (10%) 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 30 June 2024 has an unrealised fair value loss of €29 million.

 

Reverse repurchase agreements

Reverse repurchase agreements amount to €1,015 million as at 30 June 2024, compared to €403 million as at 31 December 2023. The increase since the beginning of the year relates to the additional hedging activities the Group is carrying out in order to reduce its net interest income sensitivity. The average yield of reverse repurchase agreements is approximately 3.0% per annum and the average duration is estimated at approximately 2.5 years.

 

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 approximately €1.0 billion and exceed properties on-boarded in the same period of €0.5 billion.

 

During the six months ended 30 June 2024, the Group completed disposals (and transfers) of repossessed properties of €57 million (compared to €68 million in the six months ended 30 June 2023), resulting in a profit on disposal of approximately €3 million for the six months ended 30 June 2024 (compared to a profit of approximately €4 million for the six months ended 30 June 2023). Asset disposals are across all property classes, with almost two thirds in gross sale value in the six months ended 30 June 2024 relating to land.

 

During the six months ended 30 June 2024, the Group executed sale-purchase agreements (SPAs) for disposals of 258 properties with contract value of €65 million (including transfers of €3 million), compared to SPAs for disposals of 273 properties with contract value of €78 million for the six months ended 30 June 2023.

 

In addition, the Group had a pipeline of €49 million by contract value as at 30 June 2024, of which €18 million related to SPAs signed (compared to a pipeline of €66 million as at 30 June 2023, of which €38 million related to SPAs signed).

 

The Group on-boarded €14 million of assets in the six months ended 30 June 2024 (compared to additions of €6 million in the six months ended 30 June 2023), via the execution of debt for asset swaps and repossessed properties.

 

As at 30 June 2024, repossessed properties held by the Group had a carrying value of €790 million, compared to €862 million as at 31 December 2023.

 

 

 

 

Income Statement Analysis

Total income

Net interest income (NII) for the six months ended 30 June 2024 amounted to €420 million compared to €358 million for the six months ended 30 June 2023. The yearly increase is mainly attributed to higher interest rates on liquid assets and loans, partially offset by a moderate increase in time and notice cost of deposits and funding costs, as well as higher cost of hedging.

 

Quarterly average interest earning assets (AIEA) for the six months ended 30 June 2024 amounted to €23,064 million, broadly flat year-on-year.

 

Net interest margin (NIM) for the six months ended 30 June 2024 amounted to 3.66% (compared to 3.17% for the six months ended 30 June 2023), up 49 basis points year-on-year, supported mainly by the higher interest rate outlook compared to the prior year.

 

Non-interest income for the six months ended 30 June 2024 amounted to €129 million (compared to €153 million for the six months ended 30 June 2023), comprising net fee and commission income of €86 million, net foreign exchange gains and net gains on financial instruments of €13 million, net insurance result of €23 million, net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of €2 million and other income of €5 million. The year-on-year reduction is mainly due to lower net foreign exchange gains and net gains on financial instruments, as well as lower net fee and commission income.

 

Net fee and commission income for the six months ended 30 June 2024 amounted to €86 million compared to €90 million in prior year, mainly due to lower transactional fees.

 

Net foreign exchange gains and net gains on financial instruments amounted to €13 million for the six months ended 30 June 2024, compared to approximately €5.5 million for the six months ended 30 June 2023. The year-on-year decrease is driven by lower foreign exchange gains on FX swaps and lower revaluation gains in financial instruments. Net foreign exchange gains and net gains on financial instruments are considered volatile profit contributors.

 

Net insurance result amounted to €23 million for the six months ended 30 June 2024, compared to €25 million for the six months ended 30 June 2023, due to negative claim experience in the non-life insurance business, arising from the severe weather-related events occurred in the first quarter of 2024, partly offset by better claims experience and reduction in loss component of the insurance contracts (in line with IFRS 17) in the life insurance business.

 

Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of €2 million for the six months ended 30 June 2024 (comprising net gains on disposal of stock of properties and investment properties of approximately €3 million, and net loss from revaluation of investment properties of approximately €1 million) compared to €5 million for the six months ended 30 June 2023. REMU profit remains volatile.

 

Total income amounted to €549 million for the six months ended 30 June 2024, compared to €511 million for the six months ended 30 June 2023, with the increase driven by higher net interest income as explained above.

 

Total expenses

Total expenses for the six months ended 30 June 2024 were €186 million (compared to €180 million for the six months ended 30 June 2023), 52% of which related to staff costs (€96 million), 38% to other operating expenses (€71 million) and 10% to special levy on deposits and other levies/contributions (€19 million). The increase year-on-year is mainly due to higher staff costs.

 

Total operating expenses amounted to €167 million for the six months ended 30 June 2024, compared to €162 million for the six months ended 30 June 2023, up 4% year-on-year, mainly due to higher staff costs.

 

 

 

 

 

 

Income Statement Analysis (continued)

Total expenses (continued)

Staff costs for the six months ended 30 June 2024 were €96 million (compared to €93 million for the six months ended 30 June 2023) and include approximately €5 million performance-related pay accrual (compared to approximately €3.5 million performance-related pay accrual and approximately €2.8 million termination cost in the six months ended 30 June 2023). Net of these accruals, staff costs increased by 5% year-on-year, reflecting salary increments and higher cost of living adjustments (COLA) as well as higher 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 30 June 2024, the Group employed 2,860 persons compared to 2,830 persons as at 31 December 2023.

 

Other operating expenses for the six months ended 30 June 2024 amounted to €71 million, compared to €69 million for the six months ended 30 June 2023, impacted mainly by inflationary pressures and marketing expenses.

 

Special levy on deposits and other levies/contributions for the six months ended 30 June 2024 amounted to €19 million compared to €18 million for the six months ended 30 June 2023, driven mainly by the increase of deposits of €0.55 billion year-on-year.

 

The cost to income ratio excluding special levy on deposits and other levies/contributions for the six months ended 30 June 2024 was 30% compared to 32% for the six months ended 30 June 2023, benefitting from higher income.

 

Profit before tax and non-recurring items

Operating profit for the six months ended 30 June 2024 amounted to €363 million, compared to €331 million for the six months ended 30 June 2023, up by 9% year-on-year reflecting mainly the significant increase in net interest income.

 

Loan credit losses for the six months ended 30 June 2024 were €16 million compared to €24 million for the six months ended 30 June 2023, supported by the continued robust performance of the credit portfolio and improved macroeconomic assumptions. Additional information on the drivers of the loan credit losses for the six months ended 30 June 2024 is disclosed in Note 32.4 of the Consolidated Condensed Interim Financial Statements.

 

 

 

 

Income Statement Analysis (continued)

Profit before tax and non-recurring items (continued)

Cost of risk for the six months ended 30 June 2024 is equivalent to 31 basis points, compared to a cost of risk of 48 basis points for the six months ended 30 June 2023.

 

At 30 June 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 'Alternative Performance Measures Disclosures' section of the Interim Financial Report for the definition) totalled €251 million (compared to €267 million at 31 December 2023) and accounted for 2.4% of gross loans (compared to 2.7% as at 31 December 2023).

 

Impairments of other financial and non-financial assets for the six months ended 30 June 2024 amounted to €25 million, compared to €30 million for the six months ended 30 June 2023, and relate mainly to REMU stock properties.

 

Provisions for pending litigations, claims, regulatory and other matters (net of reversals) for the six months ended 30 June 2024 amounted to €3 million, compared to €14 million for the six months ended 30 June 2023. The decrease related primarily to a release of a provision on a claim following the closing of the investigation by the Commission of the Protection of Competition.

 

Profit before tax and non-recurring items for the six months ended 30 June 2024 totalled to €319 million, compared to €263 million for the six months ended 30 June 2023.

 

Profit after tax (attributable to the owners of the Company)

The tax charge for the six months ended 30 June 2024 amounted to €48 million compared to €40 million for the six months ended 30 June 2023.  

 

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 have been 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 legislation and has performed an assessment of the potential impact of Pillar Two income taxes with the current estimate being a charge of approximately 1.5% on profit before tax as at 30 June 2024. Because of the calculation complexity resulting from these rules and as the final legislation has yet to be enacted, the impact of this reform has been estimated to range up to 2% of profit before tax and will be further refined upon the enactment and implementation of relevant legislation.

 

Profit after tax and before non-recurring items (attributable to the owners of the Company) for the six months ended 30 June 2024 is €270 million, compared to €222 million for the six months ended 30 June 2023.

 

Advisory and other transformation costs - organic for the six months ended 30 June 2024 are nil, compared to €2 million for the six months ended 30 June 2023.

 

Profit after tax attributable to the owners of the Company for the six months ended 30 June 2024 amounts to €270 million, corresponding to a ROTE of 23.7%, compared to €220 million for the six months ended 30 June 2023 (and a ROTE of 24.0%). ROTE on 15% CET1 ratio for the six months ended 30 June 2024 increases to 29.6%, compared to 25.3% for the six months ended 30 June 2023. 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 €257 million for the six months ended 30 June 2024, compared to €201 million for the six months ended 30 June 2023.

 

 

Operating Environment

Real GDP increased by 3.4% seasonally adjusted in the first quarter of 2024. Overall growth in the quarter returned to about the long-term average and contributions from the economic sectors returned to their long-term trends. This was true mainly for trade, transport and accommodation, information and communications, professional and administrative services, and also the public related sectors of public administration, education and health.  For 2024, the economy is expected to increase by approximately 2.9% according to the Ministry of Finance (based on May 2024 projections).

 

Short-term risks are mostly external and to the downside, including a downturn in major tourism markets, an escalation of regional conflicts, and delays in the implementation of the Recovery and Resilience Plan. In the medium-term, risks are from climate change and from possible further deterioration in the global geopolitical outlook. The digital and green transitions remain key challenges.

 

The unemployment rate, after rising in 2020 and the first half of 2021, has been declining and dropped to 6.0% in the fourth quarter of 2023 and to 5.7% in the first quarter of 2024, seasonally adjusted. The unemployment rate was 6.5% in the Euro area in the first quarter of 2024.

 

In January-June 2024, harmonised inflation was 2.3% in Cyprus and core inflation was 2.5%. In the Euro area, harmonised inflation was 2.5% and core inflation was 2.9%. The decline in the harmonised inflation was driven by the non-core components of energy and food, while core inflation, defined as total index less energy and food, was stickier.

 

Tourist arrivals for the period January-June 2024 were broadly at the same levels as in prior year. Likewise, receipts in January-May 2024, demonstrated a small increase of 3% compared to the same period the year before.

 

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 has dropped successively to 85.6% and 77.3% of GDP in 2022 and 2023 respectively. The budget balance is forecasted to remain in surplus at 2.9% of GDP in 2024 according to the Ministry of Finance Strategic Framework of Fiscal Policy 2025-2028, and gross debt is expected to 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.

 

Cypriot banks are well capitalized and remain resilient. Despite the high interest rates, asset quality has not deteriorated. Non-performing exposures (NPEs) are by now largely outside of bank balance sheets, but their resolution is critical for private sector balance sheets. As at 31 May 2024, NPEs in the Cyprus banking system were €1.8 billion or 7.4% of gross loans, compared with 7.9% of gross loans at the end of December 2023, and 9.5% at the end of December 2022, according to the Central Bank of Cyprus. The NPE ratio for the Cyprus banking sector in the non-financial companies' segment was 6.3% at the end of May 2024 and that of households was 9.2%. About 44% of total NPEs are restructured facilities and the coverage ratio was 54% as at 31 May 2024.

 

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.

 

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 June 2024, Fitch Ratings upgraded Cyprus' long-term foreign currency issuer default rating to BBB+ from BBB whilst maintaining its outlook on Cyprus positive. The upgrade relates mainly to the reduced vulnerabilities to financial shocks, the continued strengthening of the banking sector's credit profile, the deleveraging of the private sector, the reduction of Cyprus public debt, as well as its strong GDP growth.   

 

In addition, in June 2024, S&P Global Ratings upgraded Cyprus' long-term local and foreign currency sovereign credit ratings to BBB+ from BBB, whilst maintaining its outlook on Cyprus positive. This one-notch upgrade of Cyprus' rating reflects the progress Cyprus has made in recent years to address fiscal imbalances, amid resilient growth, as well as the strengthening financial position of Cypriot banks.

 

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.

 

DBRS Ratings GmbH (DBRS Morningstar) confirmed 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 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.

 

 

Business Overview

Credit ratings

The Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. In July 2024, Moody's Investors Service upgraded the Bank's long-term deposit rating to Baa1 from Baa3 and revised the outlook to stable. The upgrade by two notches reflects the ongoing improvements of the Bank's solvency profile, the increased protection afforded to the Bank's depositors, and its strengthened capital. This is the highest long-term deposit rating for the Bank since 2011. The stable outlook balances potential further asset quality improvements against lower normalised profitability metrics, a broadly stable operating environment, and stable funding, liquidity and capital metrics. Additionally in July 2024, Fitch Ratings upgraded long-term issuer default rating to BB+ from BB, whilst maintaining the positive outlook. The one-notch upgrade reflects a combination of Fitch's improved assessment of the Cypriot operating environment, reduced private sector indebtedness, expectation of continued economic growth, the Bank's strengthened capitalisation and reduced exposure to legacy net problem assets. In June 2024, 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 was driven by the reduction of economic imbalances, strengthened capitalisation, supportive economic conditions and the solid profitability stemming from improved efficiency and contained cost of risk.

 

Financial performance

The Group is a leading, financial and technology hub in Cyprus. During the six months ended 30 June 2024, the Group generated a profit after tax of €270 million, corresponding to a ROTE of 23.7%, demonstrating the sustainability of its business model. This strong performance was supported by a resiliently strong net interest income, continuous management of its cost base despite inflation and a low cost of risk, and was feeding through into strong growth of the Group's tangible book value per share. Since June 2023, the Group's tangible book value per share improved by 21% to €5.27 based on share in issue (excluding treasury shares), accelerating shareholder value creation. 

 

Interest rate environment

The structure of the Group's balance sheet remains highly liquid. As at 30 June 2024, cash balances with ECB amounted to approximately €7.3 billion, 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 six months ended 30 June 2024 stood at €420 million, up 17% year-on-year due to higher interest income on loans and liquid assets, underpinned by high interest rates, all of which served to more than offset the higher cost of deposits, and funding costs and the continued hedging activity to reduce NII sensitivity.

 

Overall, the Group intends to increase its hedging position during the year ended 31 December 2024 by €4-€5 billion compared to the year ended 31 December 2023(with average duration of 3-4 years), subject to market conditions, via receive fixed interest rate swaps, further investment in fixed rate bonds, additional reverse repos and continuing offering of fixed rate loans.

 

In the first half of 2024, the Group carried out hedging of approximately €3.4 billion, on track to meet its 2024 target of €4-€5 billion. The increase was mainly attributed to the hedging through receive fixed interest 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 basis points) by approximately €27 million since 31 December 2023.

 

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 the six months ended 30 June 2024 via prudent underwriting standards. Growth in new lending in Cyprus has been focused on selected industries in line with the Bank's target risk profile. During the six months ended 30 June 2024, new lending remained strong at €1.2 billion, up 10% on prior year, driven mainly by business demand. Gross performing loan book increased by 3% since the beginning of the year to approximately €10.1 billion; loan growth is subdued by repayments.

 

 

Business Overview (continued)

Financial performance (continued)

Growing revenues in a more capital efficient way (continued)

Fixed income portfolio continued to grow in the six months ended 30 June 2024 to €3,828 million, and currently represents 15% of total assets. 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 30 June 2024 has an unrealised fair value loss of €29 million, equivalent to approximately 30 basis points of CET1 ratio (compared to an unrealized fair value gain of €3 million as at 31 December 2023) due to increases 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 six month ended 30 June 2024, non-interest income amounted to €129 million, covering almost 77% of the Group's total operating expenses.

 

In the first six months of 2024, net fee and commission income amounted to €86 million and was down by 4% compared to the previous year, due to 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. JCC's net fee and commission income contributed 11% of total non-interest income and amounted to approximately €14 million for the six months ended 30 June 2024, up 3% year-on-year, backed by strong transaction volume. In the context of its wider strategic evaluation, the Group is undertaking a strategic review which may result in a potential disposal of part or all of its holding in JCC, although no decision has been taken at this stage.

 

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 six months ended 30 June 2024 contributed approximately 18% of non-interest income and amounted to €23 million; 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, approximately 2,200 companies are registered in the platform and over €600 million 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 approximately 130 retailers were onboarded in fashion, technology, beauty, small appliances, personal care devices and toy sectors, and over 160 thousand products were embedded in the Product 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.

 

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 approximately €7.5 million, recorded in staff costs in the year ended 31 December 2023. Since the beginning of the year, there was further branch footprint rationalization as the Group reduced the number of branches by 5 to 55, a reduction of 8%.

 

The Group's total operating expenses for the six months ended 30 June 2024 amounted to €167 million, up 4% on prior year, impacted mainly by inflationary pressures on staff costs. The cost to income ratio excluding special levy on deposits and other levies/contributions for the six months ended 30 June 2024 stood at 30%, down 2 percentage points compared to prior year, supported by strong income. In August 2024, a reward programme through Antamivi Reward scheme was launched in the context of the new loyalty scheme 'Pronomia' to reward the Group's performing borrowers, which is expected to impact total operating expenses by approximately €3 million in the second half of 2024.

 

Business Overview (continued)

Financial performance (continued)

Lean operating model (continued)

Transformation plan

The Group's focus continues on deepening the relationship with its customers as a customer centric organisation. The Group 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 30 June 2024, the Group's digital community has increased to 467 thousand active subscribers, both on Internet Banking and the BoC Mobile App, improving by 7% year-on-year. Likewise, the BoC Mobile App, had 429 thousand active subscribers as at 30 June 2024 and increased by 10% year-on-year.

 

During the second quarter of 2024, the Group continued to enrich and improve its digital portfolio with new innovative services to its customers. The Bank's loyalty scheme 'pronomia' was launched, rewarding customers with several benefits, such as additional Antamivi points, lower interest rates and no initial bank fees on new loans and discounts on new insurance policies. Additionally, the ability to request replacement of a card that was lost or stolen has been added in both the BoC Mobile App and Internet Banking. Furthermore, the ability to provide the beneficiary details for dividend payments was given to the Bank's shareholders. In July 2024, Bank of Cyprus is the first bank in Cyprus that enabled instant payments via digital channels, providing the ability to the customer to make credit transfers in Euros making the funds available in the beneficiary customer's account within 10 seconds. Instant transfers are applicable for credit payments up to €50 thousand within Cyprus and up to €25 thousand outside Cyprus (to 36 countries in the SEPA Zone).

 

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 seven thousand applications were processed, granting €52 million new loans in the six months ended 30 June 2024, equivalent to an increase of 12% compared to the six months ended 30 June 2023.

 

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 BoC Mobile App at lower rates than branch prices. Digital insurance sales for the six months ended 30 June 2024 amounted to €291 thousand, compared to €159 thousand for the six months ended 30 June 2023, reflecting 925 policies in the six months ended 30 June 2024 compared to 541 policies for the six months ended 30 June 2023.

 

Lastly, digital account openings increased by 53% in the six months ended 30 June 2024 to 8,291 from 5,423 in the six months ended 30 June 2023 and new debit cards increased by 97% year-on-year to 8,865 in the six months ended 30 June 2024, compared to 4,492 during the same period last year.

 

Asset quality

Balance sheet de-risking was largely completed in 2022; as at 30 June 2024, the Group's NPE ratio stood at 2.8%, already achieving the 2024 NPE ratio target. The Group's priorities remain intact, maintaining high quality new lending with strict underwriting standards and preventing asset quality deterioration.

 

 

Business Overview (continued)

Financial performance (continued)

Capital market presence

In April 2024, the Bank successfully launched and priced an issuance of €300 million green senior preferred notes ('Green Notes'). With this issuance, the Bank finalised its MREL build-up and creates a comfortable buffer over the final requirements of 25% of RWAs (or 30.3% of RWAs 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 Bank 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 reduction of approximately 18% in Scope 1 and Scope 2 GHG emissions in 2023 compared to the baseline of 2021.

 

 

Business Overview (continued)

Financial performance (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 approximately 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 approximately 22% in Scope 1 - Stationary Combustion GHG emissions and approximately 5% in  Scope 2 GHG emissions in the six months ended 30 June 2024 compared to the six months ended 30 June 2023 due to new solar panels connected to energy network in 2023 as well as branch rationalisation as part of the digitalization journey. The Bank achieved an increase of 16% in renewable energy production, from 128,780 Kwh to 149,031 Kwh, in the six months ended 30 June 2024 compared to the six months ended 30 June 2023.

 

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 30 June 2024 is estimated at 49.11 kgCO2e/m2 achieving approximately 8% reduction compared to baseline, due to increased installation of solar panels in residential properties in 2023. A Variable 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. The Bank is in the process to launch in the third quarter of 2024, a Fixed Green Housing product aligned with Green Loan Principles (GLPs) of the Loan Market Association (LMA) which is expected to contribute significantly to the environmentally friendly portfolio of the Bank by the end of 2024. 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.

 

In 2024, the Bank introduced the syndicated Synesgy solution (ESG Due Diligence process) across the Cypriot Banking system 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, through the Synesgy platform, applied at the individual company level 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 €307.3 million gross loans, as at 30 June 2024, associated (financing or collateralized) with properties with EPC Category A. The gross amount of environmentally friendly loans (including loans associated with properties with EPC Category A) as at 30 June 2024 was €339.8 million compared to €272.0 million as at 31 December 2023.

Business Overview (continued)

Financial performance (continued)

Enhancing organisational resilience and ESG (Environmental, Social and Governance) agenda (continued)

 

Environmental Pillar (continued)

During the six months ended 30 June 2024, 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.

 

Social Pillar

At the centre of the Group's leading social role lie its contributions to the Bank of Cyprus Oncology Centre (with an overall amount of approximately €70 million 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 Cultural Foundation premises and museums were closed from March to June 2024 for renovation purposes so to launch the new exhibition 'Cyprus Insula'. The physical attendees of Cultural foundation events remain unchanged from the first quarter of 2024 (4,062 attendees).

 

The IDEA Innovation Centre, invested approximately €4 million in start-up business creation since its incorporation, supported creation of 95 new companies to date, provided support to more than 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 the                  six months ended 30 June 2024, the Bank's employees attended 23,482 hours of trainings. 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 approximately 750 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 Group's aspiration to achieve a representation of at least 30% women in Group's management bodies (Defined as the EXCO and the Extended EXCO) by 2030, has been reached earlier with 33% representation of women, as at 31 December 2023, in Group's management bodies. Women representation in Group management bodies continues to be 33% as at 30 June 2024. During the transitional phase of the Board's composition in the six months ended 30 June 2024 two male members, highly experienced in the areas of ESG and technology, were appointed leading to the female representation, as at 30 June 2024, being at 37.5%. The Bank is in the process to appoint new members in the Board which will lead to female representation of 42%.

 

 

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.

 

During the first half of 2024, the Group continued to deliver strong financial and operational results, demonstrating the sustainability of its business model. Capitalising on its strong performance in the first half of 2024 the Group has upgraded its 2024 and 2025 financial targets.

 

Components of Upgraded Financial Targets

On the back of a more favourable interest rate environment and positive deposit behaviour, the net interest income for 2024 is upgraded from over €670 million to approximately €800 million. This is mainly due to the fact that the interest rate environment turned out to be more resilient than initially anticipated, with the pace of rate cuts being prolonged. According to market projections of July 2024, the ECB deposit facility rate and 6-month Euribor are expected to average to 3.8% and 3.6% respectively for 2024, vis-à-vis 3.4% ECB deposit facility rate and 3.2% 6-month Euribor anticipated in February 2024. Other drivers of the upgrade of net interest income guidance include:

·      Cost of deposits to average to approximately 35 basis points in 2024, facilitated by the highly liquid banking sector in Cyprus

·      Gradual change in deposit mix towards time and notice deposits to approximately 43% by 31 December 2024;

·      Low single-digit loan growth, in 2024-2025, supported by GDP growth; loan growth subdued by repayments;

·      Hedging activity to continue in 2024 to meet target of €4-€5 billion; already carried out €3.4 billion as at 30 June 2024;

·      Fixed income portfolio to continue to grow, subject to market conditions, so that it represents approximately 17% of total assets by the end of 2024 (compared to 16% previously guided), 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 of green senior preferred notes.

 

Going forward, the net interest income for 2025 is expected to be lower than 2024 but to remain strong, exceeding €700 million based on projections of the ECB deposit facility rate and 6-month Euribor to average to approximately 3.0% respectively, reflecting mainly projected lower interest rates and higher cost of deposits compared to 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. The Group reiterated its expectation to continue covering around 70-80% of the Group's total operating expenses, supported by a growing net fee and commission income in line with economic growth for 2024-2025.

 

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 revised downwards to below 35% for 2024 (compared to approximately 40% previously guided) reflecting mainly the higher income on the back of the improved interest rate environment. For 2025, the cost to income ratio excluding special levy on deposits or other levies/contributions is set at below 40%, reflecting mainly lower income on gradually declining interest rates.

 

Strategy and Outlook (continued)

On asset quality, the Group's NPE ratio decreased to 2.8% as at 30 June 2024 indicating that is already aligned with the 2024 NPE ratio target. In this respect, the Group aims at an NPE ratio below 3% by end-2024 and below 2.5% by end-2025. Additionally, due to the continued strong credit portfolio performance, the cost of risk target is revised downwards and is currently expected to be approximately 40 basis points for 2024 and within the normalised range of 40-50 basis points for 2025.

 

Upgraded ROTE Targets

Overall, the Group expects to deliver a ROTE of over 19% (on a reported basis) which is translated into a ROTE of over 24% on 15% CET1 ratio for 2024. For 2025, the Group expects to deliver a reported ROTE in the range of mid-teens, corresponding to high-teens ROTE on 15% CET1 ratio. This strong performance for 2024 and 2025 will facilitate rapid capital build-up, with the CET1 generation expected to exceed 300 basis points per annum on a pre-distribution level.

 

Distributions

The Group aims to provide a sustainable return to shareholders. Distributions are expected to be in the range of 30%-50% payout ratio of the Group's adjusted recurring profitability, including cash dividends and buybacks, with any distribution being subject to regulatory approval. 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. In line with the Group's distribution policy, the Group is committed to delivering sustainably growing distributions through a combination of cash dividend and share buybacks while maintaining a robust capital base to support profitable growth and prudently prepare for upcoming potential regulatory changes. Supported by its continued progress towards its strategic targets, the Group intends to move towards the top-end of the 30%-50% range of its distribution policy (i.e. 50% payout ratio) for 2024, subject to required approvals. Any proposed distribution quantum, as well as envisaged allocation between dividend and buyback, will take into consideration market conditions as well as the outcome of its ongoing capital and liquidity planning exercises at the time. Given the strong capital generation, the Group's distribution policy is expected to be reviewed with the full year 2024 financial results in the context of prevailing market conditions.

 

Proposal to enhance the Group's market visibility and improve liquidity via ATHEX listing

In the context of evaluating how best to position the Group to achieve its long-term strategic targets and deliver sustainable value to shareholders, the Board has been assessing how to enhance the liquidity of the ordinary shares of the Group which are currently listed on the London Stock Exchange (LSE) and Cyprus Stock Exchange (CSE). Following extensive communication with the Group's stakeholders, the Board has reached the view that  listing the ordinary shares on the Athens Stock Exchange ('ATHEX') in conjunction with a delisting from the LSE, will yield a number of long-term strategic and capital market benefits. These include enhancing the Group's profile among the relevant investor base focused on the region, enabling investors to directly compare performance with regional banking peers, attracting long-term institutional holders within the more focused market ecosystem of ATHEX and providing scope for inclusion among indices over time. Taking into account these benefits, the Board of the Group believes that listing the ordinary shares on ATHEX and delisting the ordinary shares from the LSE has the potential to enhance the liquidity of the ordinary shares and may improve the market visibility of the Group for the benefit of shareholders. The ordinary shares of the Group will continue to be listed on the
CSE. An Extraordinary General Meeting will be convened to propose a resolution to shareholders to consider the proposed listing on ATHEX; further details will be announced in due course. The effectiveness of the listing on ATHEX will also be subject to and conditional upon, being approved by the ATHEX Listings Committee. Subject to shareholder approval, necessary regulatory approvals and market conditions, the Board expects the listing and delisting to take place in autumn 2024.

 

 

 

 

Going concern

The Directors have made an assessment of the ability of the Group, the Company and BOC PCL to continue as a going concern for a period of 12 months from the date of approval of the Consolidated Condensed Interim Financial Statements.

 

The Directors have concluded that there are no material uncertainties which would cast a significant doubt over the ability of the Group, the Company and BOC PCL to continue to operate as a going concern for a period of 12 months from the date of approval of the Consolidated Condensed Interim Financial Statements.

 

In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including projections of profitability, cash flows, capital requirements and capital resources, liquidity and funding position, taking also into consideration the Group's Financial Plan approved by the Board in February 2024 (the 'Plan') and the operating environment, as well as any reforecast exercises performed. The Group has sensitised its projection to cater for a downside scenario and has used reasonable economic inputs to develop its medium‑term strategy. The Group is working towards materialising its Strategy.

 

Capital

The Directors and Management have considered the Group's forecasted capital position, including the potential impact of a deterioration in economic conditions. The Group has developed capital projections under a base and an adverse scenario and the Directors believe that the Group has sufficient capital to meet its regulatory capital requirements throughout the period of assessment.

 

Funding and liquidity

The Directors and Management have considered the Group's funding and liquidity position and are satisfied that the Group has sufficient funding and liquidity throughout the period of assessment. The Group continues to hold a significant liquidity buffer at 30 June 2024 that can be easily and readily monetised in a period of stress.

 

Principal risks and uncertainties ‑ Risk management and mitigation

As part of its business activities, the Group faces a variety of risks. The Group identifies, monitors, manages and mitigates these risks through various control mechanisms. Credit risk, liquidity and funding risk, market risk (arising from adverse movements in foreign currency exchange rates, interest rates, security prices and property prices), insurance and re‑insurance risk and operational risk, are some of the key significant risks the Group faces. In addition, key risks facing the Group include geopolitical risk, legal risk, regulatory compliance risk, information security and cyber risk, digital transformation and technology risks, climate related and environmental risks, and business model and strategic risk.

 

Information relating to the principal risks the Group faces and risk management is set out in Notes 32 to 35 of the Consolidated Condensed Interim Financial Statements and in the 'Risk and Capital Management Report', both of which form part of the Interim Financial Report for the six months ended 30 June 2024. In addition, in relation to legal risk arising from litigations, investigations, claims and other matters, further information is disclosed in Note 28 of the Consolidated Condensed Interim Financial Statements.

 

Additionally, the Group is exposed to the risk of changes in the value of property which is held either for own use or as stock of property or as investment property. Stock of property is predominately acquired in exchange for debt and is intended to be disposed of in line with the Group's strategy. Further information is disclosed in Note 20 of the Consolidated Condensed Interim Financial Statements.

 

Details of the financial instruments and hedging activities of the Group are set out in Note 17 of the Consolidated Condensed Interim Financial Statements. Further information on financial instruments is also presented in Notes 32 and 33 of the Consolidated Condensed Interim Financial Statements.

 

The Group's activities are mainly in Cyprus therefore the Group's performance is impacted by changes in the Cyprus operating environment, as described in the 'Operating environment' section of this Interim Management Report and changes in the macroeconomic conditions and geopolitical developments as described in the 'Risk and Capital Management Report' which forms part of the Interim Financial Report for the six months ended 30 June 2024.

 

In addition, details of the significant and other judgements, estimates and assumptions which may have a material impact on the Group's financial performance and position are set out in Note 6 of the Consolidated Condensed Interim Financial Statements.

Principal risks and uncertainties ‑ Risk management and mitigation (continued)

As the war in Ukraine and the military conflict in the Middle east continue, considerable uncertainly is added to the outlook for the global economy and the impact will largely depend on how these conflicts are resolved. The Group has limited direct exposure to both Ukraine and Russia as well as to Israel, and is continuously  monitoring the current affairs and remains vigilant to take precautionary measures as required.

 

The risk factors discussed above and in the reports referenced above should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. There may be risks and uncertainties of which the Group is not aware of, or which the Group does not consider significant, but which may become significant. There are challenging conditions in global markets due to the high interest rate environment, inflationary pressures, the geopolitical developments, the growing threat from cyberattacks and other unknown risks. As a result the precise nature of all risks and uncertainties that the Group faces cannot be predicted with accuracy as many of these risks are outside of the Group's control.

 

Events after the reporting date

 

Share repurchase programme

During the period from 1 July 2024 to 6 August 2024, 464 thousand shares were further purchased under the share repurchase programme launched in April 2024, at a total cost of €1,920 thousand. As at 6 August 2024, the Company holds 44 thousand shares, all arising from the share repurchase programme.

 

Proposal to list to Athens Stock Exchange and delist from London Stock Exchange

The Board has been assessing how to enhance the liquidity of the ordinary shares of the Group which are currently listed on the London Stock Exchange ('LSE') and the Cyprus Stock Exchange ('CSE'). Following extensive communication with Group's stakeholders, the Board has reached the view that listing the ordinary shares on the Athens Stock Exchange ('ATHEX') in conjunction with a delisting from the LSE will yield a number of long-term strategic and capital market benefits. The ordinary shares of the Group will continue to be listed on the CSE. An Extraordinary General Meeting will be convened to propose a resolution to shareholders to consider the proposed listing on ATHEX. The effectiveness of the listing on ATHEX will also be subject to and conditional upon, being approved by the ATHEX Listings Committee.

 

No other significant non-adjusting events have taken place since 30 June 2024.

 

Distributions

Based on the 2023 SREP decision, effective from 1 January 2024, any equity dividend distribution is subject to regulatory approval, both for the Company and BOC PCL. The requirement for approval does not apply if the distributions are made via the issuance of new ordinary shares to the shareholders which are eligible as Common Equity Tier 1 Capital nor to the payment of coupons on any AT1 capital instruments issued by the Company or BOC PCL.

 

In March 2024, the Company obtained the approval of the European Central Bank to pay a cash dividend and to conduct a share buyback (together the 'Distribution') in respect of earnings for the year ended 31 December 2023. The Distribution amounted to €137 million in total, comprising a cash dividend of €112 million and a share buyback of up to €25 million as described in Note 26 of the Consolidated Condensed Interim Financial Statements. The AGM, on 17 May 2024, approved a final cash dividend of €0.25 per ordinary share in respect of earnings for the year ended 31 December 2023.

 

In April 2023, the Company obtained the approval of the European Central Bank to pay a dividend in respect of earnings for the year ended 31 December 2022. The AGM, on 26 May 2023, declared a final cash dividend of €0.05 per ordinary share in respect of earnings for the year ended 31 December 2022. The dividend amounted to €22 million in total.

 

 

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Interim Financial Report in accordance with International Accounting Standard (IAS) 34 on 'Interim Financial Reporting' as adopted by the European Union, the Transparency (Directive 2004/109/EC) Regulations 2007, as amended, Part 2 (Transparency Requirements) of the Central Bank (Investment Market Conduct) Rules 2019 and the applicable requirements of the Disclosure Guidance and Transparency Rules of the UK's Financial Conduct Authority.

 

Each of the Directors, whose names and functions are listed on page 1, confirms that to the best of each person's knowledge and belief:

·      the Consolidated Condensed Interim Financial Statements, prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU, give a true and fair view of the assets, liabilities and financial position of the Group at 30 June 2024, and its profit for the period then ended; and

·      the Interim Financial Report includes a fair review of:

a.       important events that have occurred during the first six months of the year, and their impact on the Consolidated Condensed Interim Financial Statements;

b.       a description of the principal risks and uncertainties for the next six months of the financial year;

c.       details of any related party transactions that have materially affected the Group's financial position or performance in the six months ended 30 June 2024; and

d.       any changes in the related parties' transactions described in the last annual report that could have a material effect on the financial position or performance of the Group in the first six months of the current financial year.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included in the Company's website. Legislation in Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Efstratios‑Georgios Arapoglou

Chairman

 

Panicos Nicolaou

Chief Executive Officer

 

 

07 August 2024

 

 

Risk and Capital Management Report

30 June 2024