Bank of Cyprus Holdings

Ladies and gentlemen, thank you for standing by. I am Vassilios, your chorus call operator. Welcome and thank you for joining the Bank of Cyprus conference call to present and discuss the third quarter 2024 financial results conference call. All participants will be in a listen-only mode as 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 Results Conference call for the period ended 30 September 2024. I am joined by Elisa Libadziodou, Executive Director, Finance, and Anita Bablu, Manager, IR and ESG. After my introductory remarks, Elisa will go into more detail on our financial performance, and then we 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 core strengths of slide number three. We are the leading 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 microeconomic environment. The Cypriot economy remains strong, delivering good growth, proving once again its flexible and resilient characteristics. We have strong levers under our control, our diversified business model, our robust asset quality, and our strong capital position. All support our commitment for attractive shareholder returns by continuing to deliver sustainable meetings on reported equity over the immediate term in a normalized interest rate environment. To demonstrate that, we are targeting distribution for 2024 at the top end of our payout range at 50% market conditions alone. Slides 4 and 5 show an overview of the microeconomic environment. We operate in a strong, diversified, mainly service-based economy that exhibits continuing growth. Based on the latest projections of the Ministry of Finance, economic growth is now expected to be around 3.7% is 2024, outperforming significantly Eurozone average. This is underpinned by strong tourist activity, lower unemployment, improved public debt to GDP, and an accelerated inflation. Let me now deep dive into each element. Tourist activity in the first nine months of 2024 remains strong and similar to prior year's levels, despite the geopolitical uncertainties. Likewise, tourist resits for the period January-August 2024 were 5% higher compared to the corresponding period in 2023. Public debt to GDP continued to improve to 71% as Q2 and remains well below the euro area average with the latest projections indicating that by 2026 public debt to GDP will be below 60%. The unemployment rate decreased to below 5% in the second quarter, and it is considered that the economy operates at almost full employment. Lastly, inflation has now come under control. In Cyprus, inflation stood at 1.6% in September 2024 and is expected to average around 2.2% for the year. The strength of the Cypriot economy is reflected in its credit rating, with the country receiving investment-grade ratings by four credit rating agencies. Let's now turn to slide six, which shows a snapshot of the Q3 financial results. Our strong performance continued in the third quarter. Net interest income for Q3 remains strong and similar to Q2, despite the beginning of PCB rate cuts. Our cost to income ratio was higher at 35% this quarter, reflecting the impact of the full cost of a small-scale voluntary exit plan but the year-to-date ratio remains on track against our 2024 target of below 35%. Because of risk, it became better than expected and remains well below our normalized provisional range, reflecting the continued robust credit portfolio performance in the third quarter. Overall, the group generated a profit after tax of $131 million. Moving now to slide 7. For the 7 consecutive quarters we delivered a roster of over 20% despite a strong growth in the equity base. Our earnings per share at 29 cents has driven strong growth in our tangible book value up 20% year-on-year to €5.56. We have delivered on shareholder remuneration. We started with a symbolic dividend payout from 2022 earnings and then proceeded with a more meaningful 13% payout ratio from 2023 earnings, equivalent to an 8% yield. This distribution corresponded to a 5-fold increase in cash dividend, which, as mentioned, we have already paid, and a share buyback of $25 million, currently around 80% complete. For this year, we are targeting a 50% payout ratio out of 2024 earnings, which corresponds to a more than 10% distribution yield, based on current share price. It is important to mention that the current regulatory approval requirement for dividend payments is expected to be lifted in January 2025, based on our draft SHREP letter. Turning now to slide 8, which demonstrates that we track well against the 2024 targets we gave in August. It is clear that the key financial metrics of net international income, efficiency, and asset quality are all well ahead of the accurate 2024 targets we communicated in August 2024. All in all, we generated a ROTE of almost 23% and a CTO and generation of 355 base points on a pre-distribution level. We have left our targets unchanged for 2024, but to be clear, we expect to beat them. Let's now turn to slide 9. Since we updated our guidance in August 2024, the interest rate environment has changed considerably, with current forward curves anticipating a faster pace of interest rate cuts compared to what we expected last quarter. Currently, the market expects the ACB rate at six-month URIBOT average to around 2.2%, reflecting a decline of around 115 basic points on a yearly basis. Using the sensitivity analysis, we estimate that 100 basic points parallel decrease in rates will reduce net income by 89 million. The rate sensitivity will obviously have the biggest impact on our 2025 NII But there are obviously other positive and negative factors, and we will provide you with more precise guidance at our full year results. That said, drivers that may have a negative impact on the net income evolution for 2025 include the speed in deposit pricing, the change in the mixed-dollar-term deposits, and the full impact of the ember issuance. As we are back in a new rate reduction cycle, we are looking to manage the pricing of deposits, but this will not take place overnight. On the other hand, the profile of our deposit book is better than what we anticipated in terms of volume, mix, and pricing, and this is expected to support NIIN going forward. Other positive factors include long volume growth, increased hedging, as well as the expansion and rollover of our fixed income portfolio. As shown on slide 10, despite the lower rate expectation, we reiterate our target of high-teens rated based on 15% CTO and ratio for 2025, with our mid-teens rated rates based on reported equities achievable, albeit impacted by the growing equity base. As previously communicated, we expect to review our distribution policy with the full year 2024 financial results in the context of prevailing market conditions with a view towards converting closets to peer European banks. And as I mentioned earlier, the current regulatory approval requirement for dividend payments is expected to be lifted in January 2025 based on our draft share letter. We remain confident the group's ability to deliver sustainable meetings rather over the middle term in a normalized inter-race environment. We will update our digital financial targets and we will review our distribution policy alongside our full year 2024 financial results. I will now hand over to Elisa to take you through our financial results for the period in more detail.

Thank you, Banikos, and good morning from me too. Let's now provide more details to the nine months that 2024 highlights with slide 12. As the largest financial group in Cyprus, we extended 1.7 billion of new loans in the nine months, an increase of 9% on the prior year, while maintaining robust underwriting standards, and our gross performing loan book of 10 billion grew by 3% year-to-date. During the first nine months of the year, we recorded a profit after tax of €401 million, equivalent to earnings per share of 90 cents against 78 cents for the corresponding period last year. Our resilient NII, diversified business model, ample liquidity, and healthy asset quality have been pivotal in achieving this strong profitability. On the other hand, our cost base was impacted by inflationary pressures, In the small-scale voluntary staff exit plan, but our cost-to-income ratio for the nine months remained low at 32%. On asset quality, our MTE ratio decreased further to 2.4% and coverage increased to 96%, following the agreement of a small MTE sale in the third quarter. We are now broadly aligned with the EU banking average. We maintained high liquidity this quarter with cash balances with central banks representing almost 30% of the group's total assets. Our customer deposits exhibited an increase of 4% and 1% on a yearly and quarterly basis, respectively, to 20 billion euro. Moving on to capital metrics, our regulatory CET1 and total capital ratios stood at 18.6 and 23.7, respectively. including Q3 profitability net over 50% distribution accrual, the CC1 and total capital ratios increased further to 19.1% and 24.3% respectively. Since the beginning of the year, we have generated 355 basis points of organic capital, achieving early our target to deliver over 300 basis points before distributions. In the third quarter, we successfully executed our plan to list on the Advent Stock Exchange in conjunction with the delisting from the LSE. As stated previously, we expect the Apex listing to improve the liquidity of the bank's shares as well as the bank's market visibility, making the shares more accessible to a new pool of investors. Slide 13 now shows a detailed income statement of the group. I will not go through every line here, since I will be discussing the drivers of our profitability in the following slides. So let's start with net interest income evolution and its key drivers on slide 15. Our net interest income for the nine months stood at €624 million, up 9% year-on-year, benefiting from higher rates, high liquidity, and a well-managed cost of deposits. On a quarterly basis, our net interest income was largely unchanged versus prior quarter at 204 million euro, declining by only 1% Q and Q, as ACB deposit rate cut in June was largely offset by the increase within the quarter, following the continued increase in customer deposits. We expect a further modest decline in the fourth quarter, reflecting the further rate cuts in September and October. The NIM and NII dynamics are explained by a number of factors. Firstly, the effective yield on liquids, which has decreased by 26 basis points, mainly reflecting the lower ECB depo rate. Secondly, the gradual repricing of the loan portfolio. If you remember, 50% of our loan book is linked to Euribor and the ECB MRO rate. The effective yield on the performing book declined modestly by 4 basis points. Thirdly, better than expected deposit trends facilitated by the very liquid Cypriot banking sector. This is evidenced by the evolution of our cost of deposits, which remained low at 37 basis points. And lastly, our cost of wholesale funding, which reflects the full impact of the issuance of green senior preferred notes at the end of April at a coupon rate of 5% per annum. Now turning to slide 16 on our hedging activity. Since 2023, we have been taking actions to position our balance sheet towards a declining interest rate environment and to reduce our NII's and CDVD via hedging. In the first nine months of 2024, we added €4 billion of hedging. Overall, since 2023, the group has carried out hedging of €8.4 billion, representing around 35% of the group's interest-earning assets. These hedging actions include received fixed interest rate swaps, further investment in fixed rate bonds, and reverse repos. We believe that the hedging we have carried out so far will support future revenues and, most importantly, will result in lower rate sensitivity. As of 30th September, the hedging carried an average yield of 2.9%. 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 NII sensitivity to a parallel shift in interest rates by 100 basis points by almost 40 million since December 2022. On slide 17, you can see that deposits increased by 1% on the quarter and 4% on the prior year to 20.0 billion euros. We are encouraged that the shift in deposit mix towards time and notice deposits remain flat Q&Q at 33% of the total. And if you look at the breakdown of our 20 billion deposit base, you can see on the bottom left chart that 81% of our deposits are from Cypriot residents. Additionally, deposit costs remain well managed, remaining low at 37 basis points. This reflects the very liquid Cypriot banking sector as well as our market position and strong franchise. As a reminder, the sensitivity to each 10 basis points change in cost of deposits is equivalent to around 20 million euros of NII impact, while the percentage point change in the deposit mix impacts NII by around 2 million euros. Moving to slide 18 on new lending. The group extended 1.7 billion euro of new loans in the first nine months of 24, up 9% on the prior year, whilst maintaining strict lending criteria. As a result, the cross-performing loan book has now grown by 3% since the beginning of the year to 10 billion euro, in line with our target. We have, of course, maintained our strong underwriting standards, as 99% of new exposures written since 2016 remain performing. Slide 19 shows our progress on the fixed income portfolio. As of 30th September, our fixed income portfolio stood at €4.1 billion, up by 16% on the prior year, representing 16% of total assets. The majority of the portfolio is measured at amortized cost and is held to maturity. Hence, no fair value of gains or losses are recognized in the group's income statement or equity. The portfolio is characterized of high quality with average maturity of three to four years and is highly diversified. Slide 20 provides a summary of known NII. On this slide, we would like to highlight that non-interest income remains an important driver of the group's profitability, covering more than 75% of total operating expenses for the third quarter. Net fee and commission income remained broadly flat on the prior quarter, and FX and other income benefited by one-off revaluation gains of €5.5 million on financial instruments. I would also like to remind you that FX gains are volatile profit contributors. Similarly, our net insurance result was also broadly flat on the prior quarter. Now, insurance companies, EuroLife and GI, are respectively key leading players in the life and general insurance business in Cyprus and have been providing recurring and improving income. EuroLife's regular income was up 12% in the nine months, while general insurance growth rates and premiums rose by 2% over the same period, both reflecting increased business volumes. Moving now to slide 26, which provides an overview of operating expenses. This quarter, our cost base saw an increase of 14% on the prior quarter, primarily impacted by the small-scale targeted voluntary SPAC exit plan announced in Q3, as well as higher professional fees on asset listing and market expenses on the new reward scheme to reward performing borrowers. As a result, our cost-to-income ratio stood at 35% for the first quarter. Overall, our cost-to-income ratio for the nine months remained low at 32%, supported by strong revenues, partially offset by higher cost base impacted by inflation. We remain on track to deliver on our sub-35% cost-to-income ratio for the full year. Turning now to slide 27 on cost of risk. The continued robust performance of the credit portfolio, along with the improved microeconomic assumptions in the first nine months of the year, drove our cost of risk down to 29 basis points. On a quarterly basis, cost of risk stood at 26 basis points, down 8 basis points Q&Q. Additionally, we incurred impairments of around 14 million euros in the third quarter relating to the revenue stock properties due to impairments on large specific illiquid properties. During Q3, there was a reversal in provision for pending litigation claims and other matters of €4 million, relating mainly to the progress of cases on existing litigation. Let's now move to slide 29 and capital. The bank's capital position remains robust. Our regulatory CT1 and total capital stood at 18.6 and 23.7, respectively. On a pre-distribution level, our CT1 ratio increased further to 20.9%, reflecting organic CT1 generation of 365 basis points, already above our full-year target to deliver over 300 basis points CT1 generation pre-distributions per annum. As mentioned earlier, for 2024, we are now targeting a distribution at 50% payout ratio, at the top end of our distribution policy. And we are delighted that the current regulatory requirement for dividends is expected to be lifted in January 2025, based on our draft SHREP letter. Moving now to slide 30 in asset quality, we have achieved our 2024 NPE target. The NPE ratio decreased to 2.4% as of 30 September pro forma for the NPE sales agreement, which places us in line with the EU sector. Our MPE coverage improved to 96% when including tangible collateral, MPEs are fully covered. Slide 31 on our real estate management unit. REMU is our engine to manage the stock of properties acquired from defaulted borrowers. As you can see, REMU repossessed stock decreased by almost 100 million euros during the first nine months of the year to 764 million euros as of September. With balance sheet derisking 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 500 million euros. And we continue to sell on average close to independently assessed open market values and above book values. I would now like to hand back to Banikos for his closing remarks.