Bank of Cyprus Holdings

Ladies and gentlemen, thank you for standing by. I am Yota Yokoro's co-operator. Welcome and thank you for joining the Bank of Cyprus conference call to present and discuss the preliminary full year 2023 financial results conference call. All participants will be in a 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. Mr. Nikolaou, you may now proceed.

Good morning, everyone. Thank you for joining our Financial Disrupts Conference call for the year ended 51st of December, 2023. I am joined by Elisa Livaviadou, Executive Director of Finance, and Anita Pavlov, Manager, IR, and ESG. After my introductory remarks, Elisa will go into more detail on our financial performance, and then will be happy to take your questions, both during this conference call and afterwards. I would like to start by briefly reminding you of our powerful equity story and our current strength on slide number four. We are a big financial group across banking and other financial services in Cyprus, which is a highly liquid and concentrated banking sector. And we operate in a supportive macroeconomic environment. The typical economy remains strong, delivering good growth, proving once again its flexible and resilient characteristics. We are one of the most leaked parks in Europe and hence enjoy the benefits of fast and steep interest rate rises in 2023. At the same time, we have been undertaking proactive actions to position ourselves against a more normalized rate environment in the years to come. We have strong leaders under our control. Our diversified business model, our ongoing focus on cost control, our robust asset quality and now a strong capital position. All support us for continuing to deliver shares of the value. We remain confident that under a more normalized integrated environment of around 2% to 2.5%, we can produce sustainable mid-teens over the medium term. Let's now get to slide number five, which shows another view of the macroeconomic environment. In an environment of weak European growth and geopolitical turbulence, The macroeconomic outlook of Cyprus continues to stand out. The economy expanded by 2.3% in the four quarters, and for 2023 overall, delivered growth of 2.5%, outpacing the Eurozone average. Based on the latest position of the Ministry of Finance, economic growth is expected to be around 2.9% for 2024. Tourist activity continues to improve with arrivals for 2023 now back to their pre-COVID levels. Tourist resits for January to November 2023 were 11% higher than the corresponding 2019 levels, indicating high spending levels by tourists. The unemployment rate decreased to 6% in the third quarter and is expected to grow further to 5.8% for 2024. As in many other countries, consumer inflation continues to be tested by energy prices, but has now come under control. In Cyprus, inflation stood at 2% in January 2024 and is expected to average around 2.5% for the whole year of 2024. Slide 6 highlights the group's strong financial performance for the year, supported by the high interest rate environment. Net interest income for 2023 has more than doubled compared to prior years, benefiting from the steep rise in interest rates and our high liquidity. But I want to also draw your attention to other metrics. We have diversified sources of income, and non-NII is an important revenue driver, covering around 90% of expenses in 2023. Cost to income at 31% reflects both strong revenues and disciplined cost management. Asset quality remains strong with our MP ratio at 3.6%, in line with our 2023 target, and our cost of risk at 62 basic points was in the middle range of our guidance range of 50 to 80 basic points. Let's now turn to slide number seven. The strong performance has led to accelerated shareholder value creation. Our situation increased by 350 basis points to 18.7% pre-distribution, all 16.5% when accruing at the top of our individual distribution policy of 30% to 50% payout ratio in accordance with commission-delegated regulations. This reflects strong organic carbon generation of around 418 basis points in the year. Earnings per share was at 1 euro and 9 cents, a tangible book value hit by 24% before distributions. We reconfirmed our distribution policy. We are targeting a payout ratio between 30% to 50% of adjusted decay profitability, building progressively through the years. We have begun our engagement with regard to shareholder returns for 2023, and any return will be in line with that being the point. We looked after our shareholders in due course when we received the final ECB approval. Looking now in more detail of the quarterly evolution on slide number eight, we delivered a rate of 25.6% in the fourth quarter, the fourth consecutive quarter of returns over 20%. This was supported by strong American income, which grew by 3% in the fourth quarter to $220 million. We believe that this now will be weak. Slide 9 shows how our performance is tracking against the 2023 targets. We provided guidance for 2023 in the middle term at our 2023 investor update event in June. And I'm pleased to share with you that 2023 actual financial performance exceeded all of our targets. Our guidance was for NII to exceed $650 million. We delivered an NII of $792 million for the bulk of high GDP deborahs, averaging 3.3%, and well-managed double parts through and mixed. The cost-to-income ratio of 31% came ahead of our sub-40s guidance, mainly due to better revenues. As already mentioned, NP ratio at 3.6% was in line with our target, and our cost of risk at 62 basis points was in the middle range of our guidance of 50 to 18 basis points. And our ROCTA of almost 25% clearly met our over 17% guidance. Moving now to the outlook for 2024 on slide number 10. We are reiterating our target for 2024 and 2025 of over 17% and over 16% based on a 15% CTR rate. And most importantly, we do so while we are incorporating conservative assumptions for rates, normalizing around 2% to 2.5% in 2025. Starting with ECB rate development, we expect a higher average ECB rate in 2024 of 3.4% but now expect a faster normalization at 2.7 and 2% by the fourth quarter of 2024 and the fourth quarter of 2025, respectively. Our guidance for 2024 is as follows. We are updating our expectations from above 625 million to above 670 million. Elisa will discuss in more detail the drivers on the next slides. We maintain our first three calculations around 40%, and we reconfirm our current guidance of over 70% on the 15% CT1 ratio. On the quality, we expect to continue improving the MP ratio to around 50% ERN, and in terms of risk, trending towards the normal level of 40 to 50 basis points. On capital, we expect significant CT1 generation in the range of 200 to 250 basis points, previously used for 2024. Our aim to provide sustainable shareholder returns is reiterated. Debit agents are expected to build prudently and progressively over time towards a payout ratio in the range of 30% to 50% of the group's adjusted gain profitability. And importantly, we reiterate our 2025 guidance for a rate of above 60% based on a normalized rate environment of 2.2%. The path of rate normalization seems very volatile currently, but we want to reiterate our commitment that Ambaro Cyprus can sustainably deliver mid-teens rotating and normalized rate environment of 2% to 2.5%. I will now hand over to Elisa to take us through our NIA guidance for 2024 in more detail.

Thank you, Michael, and good morning from me, too. So starting on slide 11, we have seen a rapid increase in interest rates in 2023, and recent market expectations have been extremely volatile in respect of the path of rate cuts. 2024 is expected to be a transition year, a year marked by a declining interest rate environment. Currently, market expectation is for rates to normalize by 2025. Yearly bull rates have already started to move in anticipation of these moves, with six-month URI for expected shortage at 3.2% in 2024. As you can see on the charts on this page, the current rate outlook is more conservative compared to market expectations in November 23 at the time of our third quarter results. You can also see how it compares to our rate assumptions at the time of our investor update event in June last year. We think this is an appropriately conservative scenario, which is how we run the bank. As a result, we would expect NII to decline in 2024 to a level above €670 million, higher than our previous guidance, or above €625 million. We expect quarterly NII to decline during 2024 and start stabilizing towards the year end. I will explain the main drivers of this. Higher deposit costs. Term deposit pass-through increased slowly during 2023, to 18% in the fourth quarter. But we expect it to continue to increase to an average of 40% as deposit balances reprice to the higher front book rates. We expect rate cuts to pass on gradually to new deposits. Hence, we expect a slow and gradual repricing of the deposit back book in 2025. We continue to allow for a change in deposit mix, with time and notice deposits increasing from 32% in December 23 to around 45% of the total by December 24. On the lending side, we expect single-digit loan growth in 24 and 25, supported by economic growth. Almost half of our loan book is Uribor linked, and this will be priced to lower rates. Also, expanding costs will increase to reflect the full-year impact of the 2020 EMERI issuance and further plan the issuance in order to meet the 2024 EMERI requirement. Finally, we will continue the structural staging activities to reduce the NII sensitivity. This will come at a cost in 2024, but will support future revenues. While continuing to carefully grow our fixed income portfolio to around 16% of total assets with NII benefiting also from the rollover of the portfolio to higher rates. Let me now touch on the bank's NII sensitivity on slide 12. As you know, we are structurally rate sensitive on the asset side, but over the last year, we have reduced this rate sensitivity, and we plan to continue to do so in 24 by converting some of our assets from variable to fixed. The NII sensitivity to 100 basis points rate drop has reduced by 16 million euros during the year from 34% to 14%, and reflects the following actions. About one-fifth of the group's loan portfolio is linked with the bank's base rate, which provides a natural catch against the cost of deposits. We added more fixed-rate loans by granting around 245 million of such loans. We increased the investment in fixed-rate bonds by 54% to 3.1 billion euros, We entered in reverse repos of 400 million euros. And finally, we entered and received fixed interest rate swaps totaling 950 million euros. We expect to continue careful further hedging of the balance sheet in 24 to reduce the NII sensitivity by a further 30 to 40 million euros. Specifically, we intend to add another 4 to 5 billion euro structural hedging positions with expected average duration of three to four years, depending on market conditions. These actions will have a cost on the 24 NII, but will support future revenues, and most importantly, will result in lower rate flexibility. Slide 15 shows the income statement of the group. I will not go through every line here, as we'll be discussing the drivers of our profitability in the following slides, but I would like to highlight the tax of 487 million for the year, corresponding to earnings per share of one euro and nine cents. Slide 16 strikes the main drivers for the strong NII, which more than doubled in 23. For QNII at 220 million euro is, we believe, the peak. As already discussed, we expect continued increase in deposit costs, while the repricing of loans will start reflecting lower URIBOR rates. On slide 19, you can see that deposits remain broadly flat on the prior quarter, but increased by 2% year-on-year to $19.3 billion. We are encouraged that the shift in deposit mix towards time-managed deposits is progressing more slowly than we expected. In Q4, it was around 32% of the total. And if you look at the breakdown of our $19.3 billion deposit base, you can see on the bottom left chart that almost 80% of our deposits are from Cypriot residents. Additionally, deposit pass-through levels were well managed, facilitated by the very liquid Cypriot banking sector. This is evidenced by the evolution of our cost of deposits, which remained low at 24 basis points, corresponding to a pass-through of 18% on time and notice deposits in Q4, up from 15% in Q3. We expect the cost of term deposits to continue to increase from 74 basis points in the fourth quarter as deposit balances reprice to the higher front book prices. We expect rate cuts to be passed on gradually to new deposits. Hence, we expect slow re-typing of the deposit back book in 2025. Overall, we assume an average term deposit pass-through of 40% in 2024. Now let's move to new lending on slide 20. During 2023, we granted €2 billion worth of loans driven mainly by corporate demand. The cross-performing loan book remained broadly flat at €9.8 billion, both Q and Q and year on year, as repayment had offset new lending. Going forward, we expect some recovery on the loan book as repayment stabilized with low single-digit loan growth assumed 4, 24, and 25, supported by GDP growth. Towards that goal, in December 23, we agreed to acquire a small portfolio with cost of value of 58 million euros. Completion is expected in the first half of 24. Now turning to the fixed income portfolio on slide 21, as of 31st December, the portfolio amounted to 3.5 billion euros, up by 42% on the prior year. representing 14% of total assets net of TLTRO. The majority of the portfolio is measured at amortized cost and is held to maturity. Hence, no fair value gains or losses are recognized by the group's income statement or equity. The mark-to-market positive impact of the amortized cost portfolio amounts to 3 million euros as of December 31st, reflecting a reduction in bond yields. We expect to continue to carefully expand our income portfolio in 2024 so that it represents around 16% of our total assets. Moving now to non-interest income on slide 22. On this slide, we would like to highlight that non-interest income is an important driver to the group's profitability, covering almost 90% of OPEX for 23. Going forward, we expect it to continue contributing significantly in the coming years at around 70% to 80% of total OPEX. Net fee and commission income continued to grow by 6% year-on-year, driven by higher credit card commissions and transactional fees. We expect net fee and commission income to grow broadly in line with economic growth in both 2024 and 2025. The net insurance result was also ahead compared to the prior year due to improved experience variances and the reduction in the lost component of the insurance recognized up front in the life insurance business. I would also like to remind you that FX gains are volatile profit contributors. Now, moving to slide 28, which provides an overview of operating expenses. Our cost-to-income ratio of 31% in 2023 was supported by strong revenues and disciplined cost management. Total OPEX rose by 5% year-on-year, driven by the termination cost of €7.5 million, variable pay of €11 million, and the cost of the customary reward program of 2.5 million euros. Excluding these items, costs were slightly down by 1% year-on-year. On a quarterly basis, our cost-to-income ratio increased to 32%, driven by seasonally higher expected expenses. Now let's move to slide 13, capital. The bank's capital position remains robust. During 2023, we saw a rapid capital buildup, unlocking around 480 basis points of organic capital generation, driving our total capital ratio and CP1 ratio to 23.7 and 18.7, respectively, predistributions. Accruing for a dividend at the top end of our dividend policy of 50%, in line with the regulatory framework, our total capital ratio stood at 21.5%, In our CP1, at 16.5%. Let me remind you that this level of dividend accrual does not constitute an approval by the regulator for a dividend, nor a decision by the bank with respect to the 2023 dividend payment. Further details on capital requirements are set out on slide 56. Moving now to slide 32, an asset quality. The NP ratio stood at 3.6% at year end, or 1% on a net basis. In line with our 2023 target, our MPE coverage improved to 73%. When including tangible collateral, MPEs are fully covered. During Q4, we recognized €53 million as unlikely to pay exposure with the completion of our assessment. Most of these UTPs are not macro-related and continue to present no arrears. We expect to reduce our MPE ratio to around 3% by year 2024 Our MPE ratio started off below 3% by end 2025 is reaffirmed. Now turning to slide 33 and cost of risk. Q4 cost of risk was partly flat on the prior quarter at 73 basis points, averaging 62 basis points for the year. This cost of risk includes 19 basis points relating to the classification of specific customers with the idiosyncratic characteristics of UTPs, even though they adhere to their payment schedule and present no areas. Going forward, cost of risk is expected to trend towards the normalized level of 40-50 basis points in 2024 and 2025. Additionally, we incurred impairments and other provisions of €15 million in Q4, relating mostly to REMU stock properties on specific large liquid assets. Moving on to real estate on slide 34, REMU, as you know, is our engine to manage the stock of properties acquired from defaulted borrowers. As you can see, REMU stock properties reduced by €217 million on the prior year to €862 million as of December. With balance sheet derifting completed, The inflows are expected to remain at extremely low levels and our focus will be on delivering sales. We remain on track to achieve our 2025 target of reducing the revenue stock to around half a billion euros. And we continue to sell on average close to 90% of independent pieces of open market value or 106% of book value. The prospect for the real estate market in Cyprus remains strong. Based on data by the Central Bank of Cyprus published in October, property prices rose by 7.6% year-on-year in the first quarter. It's important to note that these prices remain below their 2010 peak level. So now I'm back to Panikos for our closing remarks.