Bank of Cyprus Holdings

Ladies and gentlemen, thank you for standing by. I am Gailey, your chorus call operator. Welcome and thank you for joining the Bank of Cyprus conference call to present and discuss the group financial results for the quarter ended 31st March 2022. 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. Elisa Livadiotou, Executive Director, Finance, Mr. Dimitris Dimitriou, Chief Risk Officer. Mr. Nikolaou, you may now proceed.

Thank you. Good morning, everyone. Thank you for joining our first quarter of 2022. Financial Results Conference Call. I'm joined by Elisa Libaviodou, Executive Director of Finance and Legacy, Dimitris Dimitriou, Chief Risk Officer, and Anita Bablou, Manager, IR and ESG. After my introductory remarks, Elisa will go into more detail on our financial performance, and then we'll turn to Q&A. Of course, we remain available for questions both during this conference call and afterwards. I will start by highlighting some of the key messages for the quarter on slide four. First, we see healthy loan growth momentum and extended a record of 618 million of new loans. Our net performing book grew by further 2% this quarter and reached 9.55 billion compared to 9 billion 15 months ago. Second, we delivered a healthy profit after tax before non-recurring items of $27 million, with an underlying return on tangible equity of 6.7%, converging to our medium-term target of over 10%. A main component of this performance is our non-interest income that amounted to $75 million in the first quarter, representing over 50% of total income, driven by higher fees and commissions and higher insurance-related income. Our insurance business recorded a 24% increase year-on-year, and is a key contributor to income growth. Third, our capital position remains robust. As of the 31st of March, our capital ratios on a traditional basis were 20.3% for total capital and 15.2% for CT1. Both perform for trade and remain well above our targets of maintaining a capital at the rate of 13.5% to 14.5% for the period 2022 to 2025. Fourth, the process of balance sheet risk is now largely complete. During the quarter, we reduced our pro forma NP ratio to 6.5% and to 2.7% on a net basis. We remain well on track to achieve our target NP ratio of 5% by the end of this year and to less than 3% By 2025, our quarterly cost of risk increased modestly to 44 basic points in the quarter, but remained well within our normalized target range. And finally, as we look ahead, the group has set the foundations to enhance its organizational resilience and ESG agenda and continue to work towards building a forward-looking organization with a clear strategy supported by effective corporate governance aligned with ESG agenda priorities. In 2022, the company received a rating of AA by MSCI and we are working hard to improve this rating further. Our transformation plan is already in progress and aims to enable the shift to a modern banking organization. The banks' digital infrastructure initiatives provide alternative solutions to our customers to carry out their daily banking transactions. Our active digital users continue to increase. Since the beginning of the year, active digital users have increased by 3% to 393,000, whilst our active mobile users have increased by 5% to 335,000. Moving now to slide five, clearly, A lot has changed since we communicated our medium-term guidance in February this year, and so I wanted to share with you our thoughts on how this will likely impact the bank. As you are all aware, the macro environment is one of the high inflation and some slowdown in near-term growth, offset by a large positive change in the shape of most interest rate curves. For Bank of Cyprus, the net effect is positive for both earnings and capital. Our income will clearly benefit from higher net interest margins from next year, more than offsetting an expected slowdown in volumes and fees. Higher inflation may lead to modestly higher costs, albeit there are already plans in place to mitigate the impact. In the near term, we expect some upward pressure on cost of risk, but the normal cost of risk target remains unchanged to 40 to 50 basis points. Together, however, we expect this to add to our ROT per annum, which in turn means we now expect to reach double-digit ROT a year earlier in 2024. Higher levels of profitability will be positive for our CT1 ratio, which we expect to be further boosted by next year following the implementation of IFRS 17. Specifically, we estimate the adoption of IFRS 17 in January 2023 to have a day-one benefit on group tangible equity of circa 50 million, enhancing group situation by 15 basis points. The above put us in a stronger position from which to build a sustainable dividend. We are increasingly confident in resuming meaningful dividends earlier, subject, of course, to regulatory approvals. Moving now to slide six, which provides further details for our performance in the quarter. I will briefly go over this. The CPU economy had a strong start for the year with GDP growing by 5.6% in Q1. However, it is clear that the events in Ukraine will have an impact for the whole 2022. We expect the economy to grow by 2.7%. During the first quarter of the year, we generated a total income of $163 million, up 7% year-on-year, driven mainly by a 13% year-on-year increase in net fee and commission income and higher insurance-related income, partly offset by 7% lower NII reflecting the impact of NP tax. Despite inflationary pressure, we have managed to keep our total operating expenses, excluding levies and contributions, broadly flat in the quarter at 86 million, reflecting our ongoing efforts to contain costs. The cost-to-income ratio stood at 59%, one percentage point down year on year. The reported result for the quarter was a net profit of 21 million compared to 8 million a year earlier. Deposits increasing by 1% to $17.7 billion and will continue to operate with a significant liquidity surplus that now totals $6.4 billion. Slide 7 provides an overview of microeconomic conditions. The escalating geopolitical risk following the outbreak of the Russian-Ukrainian war, the sanctions imposed on Russia, have profoundly changed the global microeconomic outlook and increased uncertainly in a very short time span. In Cyprus, GDP continued to grow in the first quarter by 5.6%. However, the growth is now anticipated to slow down, and the Ministry of Finance recently downgraded GDP forecast to 2.7% in 2022. before accelerating again in 2023, underpinned by the implementation of the recovery and resilience plan that is expected to support the domestic activity and employment. As in many other countries, consumer inflation in Cyprus has accelerated significantly from the third quarter of 2021 as a result of supply chain disruptions and higher energy and other commodity prices. In April, inflation accelerated to 8.6% after rising by 5.7% in the first quarter. Russian and Ukrainian tourists accounted for just over a fifth of tourist arrivals in 2019, the last pre-pandemic year, but despite the loss of tourists from these countries, other tourist arrivals in 2022 are expected to be higher than the 2021 level. Now turning to slide eight, Slide 8 provides an overview of the direct and indirect effects of the Russia-Ukraine war. The direct impact of the group is expected to be limited as the group does not have any banking operations in Russia or Ukraine following their sale in 2014 and 2015, respectively. The group has only a very small net exposure of 5 million in Russia, which is being run down. We have no exposure to Russian bonds or banks, which are subject to sanctions. In terms of assets, again, the group has limited direct exposure to loans related to Russia, Ukraine, and Belarus, representing only around 1% of net loans as of the 31st of March 2022. The net book value of this portfolio is around 100 million, out of which 90 million are performing. The portfolio is granular and secure mainly by real estate property in Cyprus. Customer deposits related to Russian, Ukrainian and Belarusian customers account for 6% of total customer deposits as of 31 March. This exposure is not material in the context of the group's strong liquidity position. Finally, only around 3% of our net fee and commission income is derived from Russian, Ukrainian and Belarusian beneficial owners. Focusing now on the internal exposure, we are aware of the challenges that the current economic landscape entails and the increasing uncertainty. However, at this stage, it is considered that the main impact on the Cypriot economy is expected to come from high inflation and a consequential slowdown in economic activity with the tourist sector to be likely most impacted. Cyprus is not an importer of Russian oil or gas. although, of course, it is indirectly affected by the intensifying rising pressures in the international energy markets. Cyprus mainly imports oil from other countries, such as Greece, Italy, and Netherlands. Professional services account for around 10% of GDP, of which some relate to Russia or Ukraine, and thus expected to be adversely impacted. There is, however, no crediting exposure, and the sector is not levered. While Russian gross FDI flows in and out of Cyprus may be quite large, these are often reflecting the typical setup of special purpose entities with limited actual impact on the Cypriot economy, hence likely to have a limited impact on domestic activity levels. Shipping in Cyprus is mostly German dominated, hence it is expected that there will be no impact on these sectors from any sanctions on Russian ships. Overall, the group expects limited impact from its direct exposure, while any direct impact will depend on the duration and severity of the crisis and likely reflect European and global trends. The group will continue to closely monitor the situation, taking all necessary and appropriate measures to minimize the impact on its operation and financial performance, as well as to manage all related risks and comply with the cost with all applicable sanctions. Turning now to slide nine of new lending. As I have mentioned earlier, new lending granted in Cyprus reached a record of 618 million for the first quarter, up by 31% on the previous quarter and 25% year-on-year, reaching higher levels than the equivalent period pre-pandemic. The quarterly increase is driven by increased activity essentially across all sectors, mainly shipping and international and corporate. New learning continues to be carefully considered against robust assessment criteria and 99% of new exposure in Cyprus since 2018 is performing. We have high quality origination supported by prudent underwriting standards and we make meticulous assessment of the repayment capability of our customers. As at the 31st of March, the outstanding performing loan book grew by a further 2% in the quarter to $9.55 billion. Only 11% of this loan book is restructured. I will now hand over to Elisa to take you through our financial results for the year. Elisa?

Thank you, Banikos, and Kai from me, too. So starting from slide 11 on the income statement, net interest income was broadly flat this quarter at 71 million euros and down 7% year-on-year, reflecting mainly foregone interest on the MPE sale, what we call Helix 2, which amounted to around 7 million euros per quarter, as well as the trends which here seem close to stabilizing. Non-interest income for the first quarter amounted to 75 million euros, compared to €81 million in the previous quarter, impacted mainly by higher revaluation gains in financial instruments in the prior quarter. Total operating expenses, €86 million for Q1, down 2% Q1-Q, and up 4% year-on-year, despite higher levels of inflation. Provisions and impairments for the quarter of €17 million, comprise loan credit losses of €12 million and impairments of €5 million. Provisions and impairments decreased by 26% from the fourth quarter, mainly due to higher impairment losses on revenue properties in the fourth quarter of 2021. Cost of risk increased by 9 basis points Q&Q to 44 basis points following the update in the macroeconomic outlook to reflect the geopolitical risks. Compared to Q1, our cost of risk was down 22 basis points due to lower COVID-19 related charges. Profit after tax and before non-recurring items amounted to 27 million euros for Q1, with an underlying return on tangible equity of 6.7%, both similar to the prior quarter. Restructuring and other costs of 4 million euros for Q1 include 3 million relating to a small voluntary staff exit plan in a subsidiary entity. The overall result was a profit after tax of 21 million euros for the quarter, compared to $10 million in the previous quarter and $8 million in Q1 2021. Now moving to slide 12 on the drivers of NIM. Our net interest margin in the first quarter decreased slightly to 132 basis points, still negatively impacted by the reduction in NII following the NP phase. We are encouraged by the non-legacy loan income evolution, which is stabilizing, with yields of 292 basis points, stable over the past two quarters and volumes growing over recent quarters. Our interest expense decreased in this quarter following the redemption of the old Tier 2 notes of 43 million euros, which had a coupon rate of 9.925 in January 2022. Our Tier 3 borrowing stands at 3 billion euros. Approximately 15 million potential NII benefit is being recognized in the income statement over the period June 2021 to June 2022. While, as you can see, individual category spreads were relatively stable, the largest driver of the overall decline in net interest margin was the changing mix of our balance sheet towards more liquid assets. Let's now turn to slide 13, where we discuss in more detail our gearing to higher interest rates. As shown on the graph, we have used conservative interest rate assumptions in setting our business plan back in mid-February 2022. We expect to observe an immediate NII benefit from the increase in ECB deposit rate as our balance sheet is highly geared to liquid assets. Specifically, around €9.3 billion is held in cash balances with the ECB. Based on current market forward rates, the ECB deposit rate is expected to increase from minus 50 basis points to plus 65 basis points in 2023, significantly higher compared to our planning assumptions of minus 40 basis points at the same period. However, as approximately 35% of net loans as of 31st March are floored to zero, the NII benefit when rates turn positive is expected to be even higher. This benefit is expected to be partly offset by higher wholesale funding costs and assumed partial pass-through to deposit, including the reduction in liquidity fees. Overall, the rising interest rates facilitate faster growth in net interest income with an overall net NII uplift potential of 80 to 100 million per annum starting in 2023. It's important to flag that this uplift incorporates assumptions about the pass-through of the increasing rates to deposit, including this liquidity fee. Slide 14. In Q1, non-interest income amounted to 75 million euros, down 8% Q1Q, mostly impacted by lower FX and other income, as well as lower med insurance income, and up 24% year-on-year, as Q1 was impacted by the lockdown. Q1 of 2021, that is. Net fee and commission income was flat at 44 million this quarter, and net fee and commission income was driven by the introduction of revised price lists in February this year and the extension of liquidity fees to a wider customer group in March 2022, offset by seasonally lower transactional volume. Net insurance income amounted to 16 million euros, down 11% on the previous quarter, impacted by a lower level of positive changes on invalidation assumptions, and seasonally lower premiums, partially offset by lower insurance claims. Net effects and other income was reduced to 10 million euros, down 33% Q and Q, mainly due to higher revaluation gains from financial instruments in the previous quarter. Now moving to insurance on slide 15. The underlying operating performance of our insurance companies continued growing into the first quarter. Net insurance income for our life insurance company, EuroLife, amounted to €9.6 million for the first quarter, up 29% year-on-year. And for our general insurance business, net insurance income amounted to €6.7 million for Q1, up 17% Q&Q. Both increases were driven by higher growth rates and premiums, partially offset by increased costs and claims. Overall, the insurance business is a valuable and growing revenue stream for the group, as net insurance income contributes more than 20% of the group's non-NII. However, we believe it can deliver more. We are aiming to enhance its value by growing the business even further, supported by digitization and our lean operating models. Based on current expectations, the IFRS 17 implementation on the 1st of January 2023 is expected to have a positive impact of around 50 million euro on the group's tangible equity and has enhancing the group CT1 ratio by around 50 basis points. Moving now to costs on slide 16, total operating expenses for the courser amounted to 86 million euro down 2% Q and Q. Staff costs were broadly flat Q and Q and year on year, resulting from the combined impact of the small targeted voluntary staff exit plans in the previous quarter and the renewal of the collective agreement and despite Q1 inflation. Other operating costs for the quarter stood at 36 million euro, down 3% Q and Q, mainly due to lower marketing costs and up 11% year on year, reflecting subdued spending during Q1 2021 lockdown. The cost-to-income ratio, excluding the special levy on deposits and other levies, for the first quarter was at 59%, compared to 57% in the fourth quarter and 60% in Q1 2021. The Q and Q increase of 2 percentage points was driven by the Q and Q increase in total income. Branch footprint rationalization continues, facilitated by the ongoing digital transformation of the bank. We're aiming to achieve a 25% reduction compared to December 21, as more of our customers become digitally engaged. By the end of July, the branch network will be almost half the size it was in 2018. Additionally, in 2022, we aim to substantially streamline our workforce with a target to reduce the number of employees by approximately 15%. Now moving to capital on slide 19. Our CT1 and total capital ratios at 31st March stood at 15.2% and 20.3% respectively, both from pro forma for loans held for sale. During the first quarter, we have generated around 50 basis points of organic capital through operating profit, which was largely offset by expected loan credit losses and impairment of around 20 basis points and other movements of a further 20 basis points. The phasing in of IFRS 9 reduced the opening ratio by around 60 basis points. Our CT1 on a fully loaded basis was at 13.9% as of 31st March, or 14.5% on a pro forma basis. The minimum requirement for 2022 for the CT1 and total capital ratios is set at 10.08% and 15.01% respectively. The group continues to monitor opportunities for the optimization of its capital position, including the AT1 capital. Moving now to slide 23, which provides an overview of the asset quality. The NPE ratio was reduced to 6.5% for Pharma for Health for Sale and 2.7% on a net basis. as we make progress towards our target of reaching 5% by the end of the year. The bank's NPE coverage ratio was stable at 60% pro forma for Helix, and when taking into account tangible collateral and fair value, NPEs are more than fully covered. The coverage of the re-performing NPEs is relatively low at 30%, reflecting the lower risk associated with this stock of NPEs. whereas coverage of core MPs increased to 68%. And finally, on slide 26, covering cost of risk, our cost of risk for Q1 was at 44 basis points compared to 66 basis points in the previous year, reflecting mainly lower COVID-19-related charges and normalization of cost of risk as balance sheet de-risking is largely complete. The cost of risk for Q1 of 44 basis points includes 20 basis points reflecting the update in the macro outlook and management overlays on sectors such as tourism and private individuals expected to be impacted by the crisis in Ukraine and the heightened inflationary pressures. And with that, I hand back to Banikos for his closing remarks.