Bank of Cyprus Holdings

Ladies and gentlemen, thank you for standing by. I am Jota, your course call operator. Welcome and thank you for joining the Bank of Cyprus conference call to present and discuss the preliminary full year 2024 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 Results Conference call for the year ended 31st of December 2024. I am joined by Elisa Libadiotou, Executive Director of Finance, and Anita Pavlou, Manager, IEA, and ESG. After my introductory remarks and updated financial targets, 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 on slide number four. We are the leading financial group across banking in Cyprus, which is a highly liquid and concentrated banking sector. And we operate in a supportive macroeconomic environment. The Cypriot economy remains strong, delivering good growth, proving once again its flexible and resilient characteristics. We are managing the headwinds from the normalization of interest rates, while simultaneously investing in new growth initiatives, leveraging on our key strengths 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 high-team growth on a 15% C2R ratio in a normalized 2% interest rate environment. Slides 5 and 6 show an overview of the microeconomic environment. We operate in a strong, diversified, mainly service-based economy that exhibits continuing growth. The economy expanded by 2.9% in Q4 and for 2024 overall delivered growth of 3.4%. This is underpinned by a record year for tourist activity, lower unemployment, improved public debt to GDP, and lower inflation. Going forward, based on the latest projections of the Ministry of Finance, economic growth is expected to be around 3.3% for 2025, once again outpacing the Eurozone average. Economic trends are expected to remain strong in 2025, with an employment rate remaining broadly stable year-on-year at 4.8% and inflation continuing to improve modestly to 2% from the current 2.3% levels. Public debt to GDP continued to decline to 68% as of November 2024 and remains well below the euro area average with the latest projections indicating that by 2026 public debt to GDP will be below 60%. This stress of the situation economy is reflected in its credit rating with recent sovereign ratings upgrades by the major rating agencies to three notches above investment grade. Let's now turn to slide seven, which shows the Bank of Cyprus' place at the center of this economy, supporting the wider ecosystem. We are the leading bank in Cyprus, with around three-quarters of the population being customers of the bank. We have a leading market position in both loans and deposits, with market shares of 43% and 57%, respectively, as of the end of 2024. We have a profitable life and non-life insurance subsidiaries with high market shares, and we hold a 75% stake in the leading payment solution provider, indicating our diversified business model and holistic offering. Slide 8 is a summary of our key achievements for 2024. Our key milestones in 2024 included a 50% distribution payout of 2024 earnings, total accumulated distribution of $400 million over the last three years, Routed in excess of 20% for a second consecutive year, a record net profit of over 500 million. Further improvements in our asset quality with MP ratio below 2% and full compliance with our MR requirements. Importantly, we also moved our listing from London to Athens, improving our stock liquidity and visibility. Moving now to slide nine, 2024 saw significant shareholder value creation. Our strong rotation of over 20% delivered 400 basic points of capital generation on a pre-distribution level. Our 241 million distribution takes a cumulative distribution to 400 million since 2022, representing a quarter of our market capitalization. This is well in excess of the target we had originally set ourselves at our summer 2023 investor update in both size and timing. And our book value per share again rose and is now almost 50% higher than it was two years ago. Let's now turn to slide 10, shareholders and distributions, a key focus area for us. We have delivered on our promise of shareholders and distributions. To remind you, a year ago we indicated a distribution payout ratio of between 30% and 50% for 2024. And at the time, we still require ECB approval from distributions. During the course of last year, we raised that commitment to 50%, and today we are delivering on that for 2024, offering our investors a 12% distribution yield based on the share price as of the end of 2024. And we no longer require ECB approval from distributions. We are also today raising our distribution period policy to a raise between 50% and 70%, reflecting the studies as they progress to achieve the profitability profile and middle-term growth outlook of the bank. We will also consider the introduction of interim dividends. We recognize how important capital returns are for our shareholders, and we remain fully committed to generous shareholders and distributions continuing to offer an attractive yield in a sector context. Looking at slide 11, at the start of 2024, we set ourselves several targets for the year, which we subsequently upgraded during the summer. I am delighted to report that we have exceeded every target we set ourselves, including Orote and Capital Generation. So looking forward on slide 12, I'd like to share with you our priorities for the group, both for 2025 and beyond. My priorities for the group are to navigate the normalization of interest rates, grow the business, strengthen the franchise investing in new business initiatives with no compromise to our risk appetite, and, of course, maintaining our efficiency mindset. Our guiding light is return on equity, which we expect to be in the mid-teens on a reported capital basis and high-teens based on a 15% central ratio in 2025. This is assuming normalized rates of 2%. For 2025, we expect to deliver organics into a current generation of around 300 basis points, which in turn will support a distribution payout of between 50% and 70%. Supporting the ROTE are our expectations around income and costs, which I will run through over the next few slides. We are also assuming a cost of risk towards the lower end of our 40 to 50 basis points normalized range, with our loan book continuing to demonstrate robust credit quality. Beyond 2025, we expect to stabilize and grow the business, and we will confirm our commitment to high-tech profitability of 15% CTO in 2026 and beyond, a level we believe we can sustain in a 2% rate environment. Looking at our net interest income expectations on slide 13, as we have indicated for some time, we expect net interest income to decline in 2025 to below $700 million, largely as a result of lower interest rates. We expect some stabilization into 2026, with net interest income exceeding $350 million for 2026, based on our max expectations that race will remain broadly stable at around 2%. Within that, we expect deposit volumes and costs to remain broadly unchanged, and we will continue to grow our fixed income portfolio and hedging activities subject, of course, to market conditions. Supporting NII, we expect improved loan growth momentum, which I will come back to. Note that this guidance is after factoring higher expected wholesale funding costs from our 2024 EMR issuance. Moving now to slide 14. One increasingly important offset to rate-driven margin pressure will be an expanding loan book, which we expect to grow around 4% per annum, a similar rate to 2024. There will be two key elements to that. Domestically, 3% economic growth will support bodily telecorporeal loan demand, helped further by a gradual recovery of loan repayments in a normalized intraday environment. Internationally, we are focusing on expanding our corporate business in Greece in selective sectors in line with the bank's target risk profile and overall expect that portfolio to grow to around 1.5 billion in the medium term. Moving to slide 15. While there are downward pressures on net interest income, we are refocusing our efforts on growing our non-net interest income revenue sources. Slide 15 gives the flavor of our initiatives around growing our fee and commission line where we expect high transactional volumes, growth in digital sales through our Genius platform, and growing assets under management in our private and affiliate banking business, and increased fees from the FX platform eFX Convert. As a result, we expect fee and commission income to grow around 4% per annum. In addition, as shown on slide 16, we expect good growth from our two insurance businesses, EuroLife and Unigest. In each business, we have strong market shares and generate the highest profitability in their sector. We target a growth of over 6% per regular income for your life and approximately 6% in premium income for your guests in the middle term. Finally, moving to slide 17, for several years we have maintained our focus on careful cost management and that will remain the case going forward. Clearly, helped by the rate cycle, our cost-to-income ratio has declined 15% since 2020. While we expected fall in net interest income, we placed upward pressure on the cost-to-income ratio for 2025. We remain focused on ensuring we remain very cost-efficient. And a ratio of around 40% will, we believe, place us amongst the leading group of banks across Europe. Importantly, and incorporated into our existing plans, are high levels of continual investments in the business. These will be offset by savings and optimization achieved by the continuing digital transformation of our business and the embracing of new technology to improve efficiencies. So hopefully that gives you a flavor of what to expect from us, both in 2025 and beyond. I will now hand over to Elisa, who will run through you our 2024 results in more detail.

Thank you, Banikos, and good morning from me too. Let's now provide more details to the full year 2024 highlights on slide 19. As the largest financial group in Cyprus, we extended a record 2.4 billion of new loans in 2024, an increase of 20% on the prior year, while maintaining robust underwriting standards. Our gross performing loan book of €10.2 billion grew 4% in a year. During 2024, we recorded a profit after tax of €508 million, equivalent to earnings per share of 114 cents, being 5% higher compared to the prior year. Our resilient NII, diversified business model, ample liquidity and healthy asset quality have been pivotal in achieving this strong profitability. Our cost base was impacted by inflationary pressures on staff costs and higher IT, marketing, and professional fees, delivering a cost-to-income ratio at 34% for the full year. On asset quality, our MPE ratio decreased further to 1.9% in Q4, and we are now fully covered following an additional agreement for a small MPE sale in the fourth quarter. We maintained high liquidity this quarter with cash balances with central banks, representing almost 30% of the group's total assets. And our customer deposits grew 6% and 3% on a yearly and quarterly basis, respectively, to $20.5 billion. Now, focusing on capital metrics, a regulatory CT1 and total capital ratio stood at 19.2% and 24.0% respectively. And as mentioned earlier, we are proposing today a distribution at a targeted 50% payout ratio, mainly via cash dividend supplemented by a share buyback. Slide 20 shows the snapshot of the fourth quarter performance driven by gradual declines in net interest income, reflecting the lower interest rate, higher cost-to-income ratio mainly due to seasonally higher expenses, and the contained cost of risk well below our normalized provisioning range. on the back of robust credit performance. Well, in all, we concluded with a return on tangible equity of 17.1% in Q4. Let us now discuss net interest income on slide 23. Our net interest income for the full year stood at €822 million, up 4% year-on-year, benefiting from higher rates, higher liquidity, and a well-managed cost of deposits. On a quarterly basis, net interest income was modestly down 3% as the impact of lower ECB deposit rates was largely offset by the continuing increase in liquidity through the stop of deposits and the decline in loan yields of 34 basis points, reflects only partly the 60 basis points decline in your report, with the full impact evident in Q1. we expect 2025 NII to be lower than 700 million euro, reflecting lower rates and the slower repricing of deposits. Let's now turn to slide 24 and our hedging activity. Here I'd like to highlight our significant hedging efforts undertaken over the last couple of years that have reduced our NII sensitivity to 100 basis points parallel shifting rate by 43 million euro since December 2022. We added €4.5 billion of hedging in 2024, adding a total of €9.0 billion, or 37% of the group's interest-earning assets. We plan an additional €1 billion of hedging activity in 2025, subject to market conditions. These hedging actions include received fixed interest rate swaps, further investment in fixed-rate bonds, and reverse repos. As of 31st December 2024, hedging carried an average yield of 2.9%, which means the hedge is already in Q1 a net revenue contributor. 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. On slide 25, you can see that those deposits increased by 3% on the prior quarter and 6% on the prior year to €20.5 billion. We are encouraged that the shifting deposit mix towards time and notice deposits remain flat quarter on quarter at 33% of the total. And if you look at the breakdown of our €20.5 billion deposit base, you can see on the bottom left chart that 80% of our deposits are from Cypriot residents. Overall, deposit costs remain low at 34 basis points in Q4. This reflects the very liquid Cypriot banking sector, cautious depositor behavior, as well as our strong franchise and market position. As a reminder, the sensitivity to each 10 basis points change in the cost of deposit is equivalent to 21 million euro NII impact, while the percentage point change in the deposit mix impacts NII by 2 million euro per annum. Moving now to slide 26 and our lending activity. We are encouraged by the solid growth in new lending, achieving a record €2.4 billion in new loans in 2024, driven mainly by corporate and international demand. The gross performing loan book was up 4% year-on-year to €10.2 billion, showing encouraging momentum that we expect to continue into 2025 and beyond. Importantly, we have of course maintained our strong underwriting standards as 99% of new exposures written since 2016 remain performing today. Slide 27 shows our progress on the fixed income portfolio. As of 31st December, our fixed income book stood at €4.2 billion, up by 19% on the prior year, representing 16% of total assets. The majority of the portfolio is measured at amortized cost and it 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 comprised of high-quality assets with average maturity of three to four years and is highly diversified. We aim to grow the fixed income further in the years to come so that it becomes to represent around 20% of our total assets in the medium term subject to market conditions. Slide 28 provides a summary of the non-interest income. In 2024, the group's non-NII fell by 9%, mainly due to higher claims and recalibrations of some of our insurance models, subdued transactional fees, and the revenue loss that occurred in the last quarter relating to specific large illiquid revenue properties with the idiosyncratic characteristics. Despite this, non-interest income remains an important contributor to the group profitability and covered almost 75% of its total OPEX during 2024. I would also like to remind you that both FX and REMU gains are volatile profit contributors. Separately, our insurance businesses remain a valuable revenue stream for the group, despite the yearly lower insurance income in 2024. They are capital-light businesses, and the net insurance result contributes to 17% of the group's non-NII. Slide 34 provides an overview of operating expenses. Our cost-to-income ratio of 34% in 2024 was supported by strong revenue. Total OPEX rose by 8% year-on-year, driven by salary increments and inflationary pressures and staff costs, variable pay of around 11 million euros to incentivize individual performance, and higher OPEX reflecting higher professional fees on the ethics listing, higher IT, and marketing expenses. Additionally, in 2024, we completed a small-scale targeted voluntary exit plan, whereby 57 full-time employees were approved to leave at a total cost of 9.5 million euros. On a quarterly basis, our cost-to-income ratio increased to 38%, driven by higher seasonally expenses. Given the revenue normalization, we expect an increase in the cost-to-income ratio in 2025 to around 40%. Now turning to cost of risk on slide 35, the continued robust performance of the credit portfolio, along with the improved macroeconomic assumptions in 2024, drove our cost of risk down to 30 basis points. On a quarterly basis, cost of risk stood at 32 basis points. Additionally, we incurred impairments of 17 million euro in the fourth quarter relating to revenue stock properties due to impairments on large specific illiquid properties. During Q4, there was also a provision of 13 million euro relating mainly to the progress and final resolution on specific existing litigations and other matters. Now, moving to capital on slide 37. The bank's capital position remains robust. Strong capital generation drove our CT1 and total capital ratios to 19.2 and 24.0%, respectively, net of the distribution at the 50% payout ratio. And we reconfirm that the regulatory requirement for dividends was lifted in January 2025 based on our final SHREP letter. TRR3 became effective on the 1st of January 2025. The implementation of CRR3 is expected to have a positive impact on the group on its initial application. Moving now to slide 38 and asset quality, we have achieved our 2024 NPE target early and reduced the NPE ratio to below 2% as of 31st December pro forma for the NPE sales agreement and we are fully covered. We're encouraged by the fact that NPE inflows remain limited. Slide 39 now on the real estate management unit. REMU is our engine to manage the stock of properties acquired from defaulted borrowers. As you can see, the REMU repossessed stock decreased by 200 million euros year-on-year to 660 million as of 31st December, and we remain well on track to achieve our 2025 target of around half a billion euros. And we carry REMU stock at a conservative value as it represents 72% of the current open market value. It's important to note that we continue to sell on average close to independently assessed open market value and above book value. I would like now to hand back to Panikos for his closing remarks.