Bank of Cyprus Holdings

Ladies and gentlemen, thank you for standing by. I'm Mirto, your course co-operator. Welcome and thank you for joining the Bank of Cyprus conference call to present and discuss the group financial results for the nine-month ended 30th September 2021. All participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a question and answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Mr. Panikos Nikolaou, Chief Executive Officer, Ms. Eliza Livariotou, Executive Director of Finance, and Mr. Dimitris Dimitriou, Chief Risk Officer. Mr. Nikolaou, you may now proceed.

Thank you. Good morning, everyone. Thank you for joining our 9-month Financial Results Conference call. I'm joined by Eliza Livariotou, Executive Director of Finance, Dimitris Dimitriou, Chief Risk Officer, and Anita Bablu, Manager, Investor Relations. After my introductory remarks, Elisa will go into more detail on our financial performance, and then we will turn to Q&A. Slide four summarizes the key highlights of the third quarter. I will briefly go over this. I will start with the macro. The strong recovery in economic activity continues, and GDP has recovered to pre-pandemic levels. GDP grew by 5.3% in the third quarter and is expected to grow by around 5.5% for the full year 2021. We continue to support the domestic economy and extended 1.3 billion of new loans in the first nine months of the year, an increase of 35% compared to the same period last year. We continue to execute on our strategic priorities demonstrated by the improvement in our performance. During the first nine months of the year, we recorded a profit after tax of $20 million, impacted by NP sales and restructuring expenses. Recurring profit, a more indicative measure of our performance, totaled $64 million year-to-date, of which $13 million in the third quarter. More specifically, in the third quarter, we generated a total income of $139 million, down 8% quarter-on-quarter, impacted mainly by Helix 2 completion in June 2021. Net fees and commissions remained strong in the quarter and amounted to $44 million, representing 32% of our total income. Following the quarterly decrease in our total income, our first income ratio increased to 64% for the quarter, while operating expenses remain flat at 89 million in the quarter. Our capital position remains strong and comfortable in excess of our regulatory requirements. As of 30 September 2021, our capital ratios on a traditional basis were 20.4% for the total capital ratio and 15.3% for City 1 ratio, both pro forma for Helix 3. Debos is increasing the quarter by 2% to $17.1 billion, and will continue to operate with a significant liquidity surplus of almost $6 billion and an LCR of 294%. The third quarter of 2021 is an important milestone for Bank of Cyprus. Following the agreement for the sale of around 600 million MPs in Project Helix 3, we achieved a single-digit MP ratio for the first time since the financial crisis of 2013, achieving it a year early compared to our 2022 target. Performa for Helix 3, our stock of MPs are now less than 900 million and 400 million on a net basis. Overall, Performa for Helix 3, our MP ratios are now reduced to 8.6% and 3.6% on a net basis. The performance of the loans under expired moratorium remains solid. 96% of performing loans whose payment deferrals have expired presented no arrears. This is a better performance than expected now, nearly 11 months after deferral expiry, and bodes well for future trends. Overall, we are pleased with the progress we have achieved to date, and we are well on track with achieving our medium-term targets. Reflecting on how we managed the bank over this very challenging pandemic period, we are pleased about the progress achieved in delivering against our strategic goals, but also acknowledge where the challenges have been. I'm now moving on to slide five. Firstly, asset quality has been much better than some had feared. we reduced the NP ratio to SQL digit from just over 30% two years ago. We saw the cost of risk normalized in line with our medium-term expectations. Capital ratios have been preserved and modestly increased. Activity has bounced back from the pandemic lows with new lending this year at over 80% of pre-COVID levels, and we are confident about the continued momentum in volume growth. We have taken pricing actions which, alongside the recovering activity, have seen strong growth in fees, now 15% higher than in 2019. We must, however, acknowledge the challenges. Our net interest income has declined, mostly due to the NP reduction, but also reflecting the interest rate environment. We have managed costs tightly. While expenses were 10% lower in absolute terms, the efficiency ratio has been negatively impacted by revenue pressures. Slide 6 provides an overview of the microeconomic conditions. As I mentioned in my opening remarks, the economy continued to grow in the third quarter by 5.3%, facilitated by rebound in touring, trade, and manufacturing sectors. GDP is expected to grow by 5.5 this year, recovering to pre-pandemic levels by the end of the year. This strong growth is expected to continue in 2022. Leading economic indicators show continuing upward trend, giving confidence about healthy consumption and business activity into the next year. With the additional implementation of the Cyprus Recovery and Resilience Plan, Growth is expected to be sustained at three pandemic levels. 2021 tourist activity has recovered significantly year on year and the tourist season was extended until late October. Tourist arrivals showed steady monthly recovery and October arrivals reached 90% of October 19 levels. We remain cautiously optimistic for next year. Slide seven, new lending. Loan demand remains strong across all business lines, with 1.3 billion of new lending in the first nine months of the year, up 35% year-on-year. New lending continues to be carefully considered against robust assessments every year. We have high quality origination via prudent underwriting standards and we make meticulous assessments of the repayment capability of our customers. Slides 8 to 10 present a short summary of Helix 3 and the progress on our delisting strategy today. Earlier this month, we reached an agreement for the sale of a portfolio of MPs with gross value of $568 million, as well as real estate properties with book value of $120 million. This is a profitable and capital-accredited transaction allowing us to reduce the MP stock by 40% and the revenue stock by 10%. Overall, by completion, Helix 3 is expected to add 67 basic points of capital and 21 million on the group's income statement. We are reaching the end of a long journey that started in 2014. Our track record is excellent. Overall, since the peak, we have now reduced the stock of MPs by 14.1 billion, or 94%, to less than 1 billion, and the NP ratio by 54 percentage points, from 63% to less than 9%, vastly through organic reductions of over 9 billion. We remain on track to deliver an NP ratio of 5% in the middle term. by continuing to deliver recurring organic NP reduction and managing the post-pandemic NP inflow. Turning now to slide 11, where we provide an update of the performance of loans that were under expired payment deferrals. The performance of the moratorium portfolio remains strong and significantly better than expected. Nearly 11 months after the deferral expiry, it bodes well for the future trends. As shown on the slide, 4.7 billion loans of the performing loans under expired moratorium had installment due by 22nd of November. 96% of these performing loans present no arrears and roughly 590 million have been restructured. Arrears remain low at 186 million or 4%, out of which 178 million of these are in arrears of less than 30 days. The trends remain strong for both the portfolio of loads under expired payments deferred to individuals and businesses. We, of course, acknowledge that the acceptance in the market remains, particularly following the emergence of the new variant, and we'll continue to closely monitor the sectors vulnerable to pandemic, as we always do. I will now hand over to Elisa to take you through our financial performance in the third quarter before opening to Q&A. Elisa?

Thank you, Benito. So good morning from me too. I'll start with slide 13 on the income statement. Net interest income was at 71 million euros for the third quarter, down 6% of Q&Q, reflecting the completion of Helix 2 in June. The net interest margin for the quarter fell to 134 basis points, impacted by the reduction in NII following Helix 2 completion, and the 3 percentage points increase in the average interest earning assets that are held in liquid assets form. Non-interest income for the third quarter amounted to 68 million euros compared to 76 in the previous quarter. The Q and Q decrease is mainly due to lower insurance income. We shall discuss this further on slide 17. Total operating expenses remain flat at 89 million for Q3 and total loan credit losses, provisions and impairment were at 26 million euros for the third quarter as compared to 24 million in Q2, as our cost of risk stood at 78 basis points. Profit after tax and before non-recurring items amounted to 13 million euros in Q3 and 64 million for the nine months. We achieved the return on tangible equity before non-recurring items of 3.3% for Q3 and 5.2% for the nine months of 2021. The overall result was a profit after tax of 19 million euros for the quarter and 20 million for the nine months of the year. Moving now on slide 14, the drivers of NIM. As I previously mentioned, our NIM in the quarter decreased to 134 basis points and was negatively impacted by the reduction in NII following the direct cognition of NTEs as well as the increase in liquid assets. Our NII reduced by 5 million or 6% Q&Q, reflecting the 8 million euro NII lost on the deconsolidation of Helix 2. We are encouraged by the non-legacy loan Zinc evolution, which was up 2 million euros, reflecting stable yields of 287 basis points. Our interest expense decreased due to higher wholesale funding costs following the issuance of 300 million senior nodes in June 2021. Our TLTRO3 borrowing stands at 3 billion euros. We have already recorded an NII benefit of 7 million for the 12 months to June 2021, and the potential NII benefit for the 12 months from June 21 to June 22 is currently estimated at around 15 million euros provided that the bank meets the net lending thresholds and this accrues through NII over the respective period. Whilst, as you can see, individual category spreads were relatively stable, the largest driver of the overall decline in the net interest margin was the changing mix of our balance sheet towards liquid assets. On slide 15, you can see that over one-third of our balance sheet is balanced with central banks, and over half of our average interest earning assets are in liquid form. The increase in liquid assets reflects the continuing de-risking, which replaces MPEs with liquid assets, our participation in the CLPRO program, and the strong deposit trends. On slide 16, you can see our deposit balances rose again in the quarter, and now represent almost 76% of our total liabilities. Our loan-to-deposit ratio is down to 57%. While these are welcome trends from the franchise perspective, they did have a dilutive impact on our reported margins. Now moving to slide 17 on non-interest. In the third quarter, non-interest income amounted to 68 million euros, down 10% Q and Q, mostly impacted by lower net insurance income. Net fee and commission income remained strong at 44 million euros in the third quarter. Net fees and commissions for the nine months increased to €128 million above pre-pandemic levels, supported by the introduction of liquidity fees to a wider customer group and the introduction of a revised price list in February 2021. Net insurance incomes stood at €12 million, down by 36% on the previous quarter, impacted by seasonality and higher claims, as well as the discount rate volatility. Net and other income increased to €10 million, up 15% Q&Q, mainly due to the increase in dividend income. Moving now to insurance on slide 18. The underlying operating performance of our insurance companies continued growing into Q3. Net insurance income for our life insurance, EuroLife, amounted to €23.6 million for the first nine months of the year, broadly flat year-on-year, as it was positively impacted by higher gross return premiums offset by the discount rate volatility. Net insurance income for EuroLife contributes 12% to total non-interest income. For our general insurance business, net insurance income amounted to 19 million euros for the first nine months of the year and remained broadly flat year-on-year, contributing 9% to total non-interest income. Looking now at expenses on slide 19, total operating costs for the third quarter were 89 million euros. And despite the fact that operating expenses remain flat Q&Q, our cost-to-income ratio for the quarter increased to 64%, reflecting lower total income merely impacted by Helix 2 completion. Beyond this year, we expect our cost-to-income ratio to decline through specific initiatives, including exit solutions to release FTEs. and further branch rationalization. And over the medium term, this is expected to increase to mid 50s. The group's medium term guidance of total operating expenses below 350 million euros remains unchanged. Now let's turn to capital on slide 22. The C1 ratio and total capital ratios as of 30th September stood up 15.3% and 20.4% respectively. During the third quarter, we generated around 40 basis points over capital through operating profits, 10 basis points from the reduction in RWA, and around 10 basis points from Helix 3. These were partially offset by expected loan credit losses and impairments of around 30 basis points. Our CET1 ratio on a fully loaded basis was at 13.3% as of December and 13.9% pro forma for Helix 3. I'll now give you an update regarding the changes in our capital requirements. Minimum capital requirement for 2022 for CET1 and total capital ratio is expected to increase to 10.09% and 15.02% respectively. following a 27 basis point add-on in P2R due to ECB's prudential provisioning expectations and 25 basis points phasing in of the OSII buffer. Taking it in turn, the P2R add-on is dynamic and can be reduced during 2022 on the basis of Inscope NPEs and the level of provisioning. It is important to also note that the P2G reduction more than offset the increase in P2R for the 51 ratio. The second component is the total OSII buffer. This is the other systemically important institutions buffer, which is now reduced by 50 basis points to 1.5%. And here, hence, there will be a 25 basis point phasing in, in each January of 2021, sorry, 2022 and 2023, instead of 50 basis points as per the previous level. Now, moving to asset quality on slide 24. During the first nine months of 2021, gross MPEs were reduced by 2.2 billion euros to less than one billion and to 0.4 billion on a net basis pro forma for Helix 3. The reduction comprised of Helix 2 relating to 1.3 billion gross loans, Helix 3 covering 0.6 billion of gross loans, and organic reduction of around 300 million. Performa for Helix 3, the gross MPE ratio is reduced to 8.6% and 3.6% on a net basis. The balanced MPE coverage ratio would maintain that 60% Performa for Helix, and when taking into account tangible collateral or fair value, MPEs are fully covered. The coverage of re-performing MPEs is relatively lower at 22%, reflecting the lower risk associated with this stock of MPEs. whereas coverage of the current piece increased to 69%. Moving to slide 26, as shown on the left graph, 71% of our loan book is classified in stage one, 20% in stage two. The coverage of these two stages amounted to 1.2% and 2.9% respectively, whilst the coverage of stage three loans stood at 43.1%, pro forma for Helix 3. We're pleased with the performance of the moratorium book, as only 8 million euro of loans have migrated to stage three during the quarter. In addition, during Q3, there was an overall net transfer of around 150 million euros of loans from stage two to stage one, reflecting the improved macro assumptions. Now moving to cost of risk on slide 27. The cost of risk for the nine months was at 66 basis points, And for the third quarter, cost of risk was at 78 basis points of gross low. The stronger-than-expected economic performance allowed us to reverse part of our COVID-19 overlays, amounting to 62 basis points. This reversal partly offset the impact of model recalibration affected in the third quarter to address modeling improvements relating to the new default definition and updated curing and default experience. Overall, we currently expect the cost of risk for the full year to be in line with cost of risk for the first nine months of the year. And we will, of course, continue to closely monitor the factors that are vulnerable to COVID-19. Now, let's have a quick look at our asset disposal engine, Renew, on slide 28. For the first time since the beginning of 2017, the value of Renew sales have exceeded the value of properties onboarded. Performa for Helix 3, we completed disposals of 212 million euros for the nine months, up 280% year-on-year, reducing the revenue stock by 14%. And with that, I hand back to Panikos for his closing remarks.