Bank of Cyprus Holdings

Ladies and gentlemen, thank you for standing by. I am Jota, your chorus call operator. Welcome and thank you for joining the Bank of Cyprus conference call to present and discuss the first quarter 2025 financial results. 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 quarter-ended 31st of March, 2025. I am joined by Elisa Livadiodou, Executive Director of Finance, and Anita Bablou, 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 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. Global uncertainties have increased, and I will go over this in more detail, but the important message is that Cypriot economy remains strong, has proven in the past it is flexible, resilient, and able to outgrow Europe, which is likely to continue and underpin our equity story. We are managing the headwinds from the normalization of interest rates while substantially 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-tech on a 15% CTO ratio in a normalized 2% CTO. 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 3.4% in 2024, and the projection from the Ministry of Finance, made in March, expected over 3% growth for this year. More recent forecasts by the IMF downgrade the growth to 0.8% for the euro area. For Cyprus, forecasts for economic growth remain robust and above eurozone average, despite a moderate downward adjustment due to trade tensions between 0.1% and 0.3%. The Cyprus economy has proven resilient over recent years, outperforming the euro area every year since 2018. with low unemployment, low inflation, and strong public finances. This is supported by strong tourism activity, with revenues from tourists in the first two months of this year up 35% from the same period last year. Public debt to GDP further declined to 65% as of the end of 2024, and remains well below the euro-euro average. Combined with surplus fiscal balances, the sovereign is in a good position to support the economy. This range of the shifted economy is reflected in its credit rating, with recent sovereign rating upgrades by the major rating agencies to three notches above investment grade. Clearly, the current environment is uncertain. On slide 7, you can see that Cyprus is very well positioned to cope with the current economic uncertainty, given that trade and tourism with the U.S. is very limited. And Bank of Cyprus is similarly well positioned, with a well-diversified law portfolio, very strong capital liquidity, and a strong track record of risk management. Slide 8 shows the snapshot for the first quarter performance. Driven by a gradual decline in interest income, reflecting the lower interest rates, our profit declined from this time last year, although it was up on the prior quarter. Our cost-income ratio remains among the lowest of any bank in Europe, and our cost of risk remains slightly below our full-year guidance, despite reflecting more conservative macroeconomic assumptions. Moving now to slide 9. The first quarter saw the continuation of significant shareholder value creation. Our order was over 18%, delivering over 100 basic points of organic carbon generation in the quarter, on a pre-distribution level, while our tangible book value per share rose up 15% year-on-year. Last year we distributed 241 million to our shareholders, and for 2025 our distribution policy will be a 50-70% payout ratio. The Board will also consider the introduction of interest dividends this year. Looking at slide 10, you can see how our QR performance compares to our 2025 targets we announced in February 2025. On every metric, we are exceeding our expectations, and we are confirming our full year guidance for this year, despite lower than previously expected interest rates, as Elisa will explain later. Let's now turn to slide 11. which shows how Bank of Cyprus is placed 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 38%. We have a profitable life and non-life insurance subsidiaries with high market shares, and we hold a 75% stake in the leading payment solutions provider, indicating our diversifying business model a holistic effect. Turning now to slide 12, in April, we announced the planned acquisition of a Registrar Cyprus for 29.5 million in cash. Subject to regulatory approvals, we expect the transaction to be completed in the second half of this year. The acquisition is entirely consistent with the group's strategy of developing further our presence in the important issuer market and increasing the contribution from non-net-interest income sources. We look forward to welcoming our new colleagues from Ethnic Issuer Cyprus to the Bank of Cyprus. I will now hand over to Elisa, who will run through our Q&A results in more detail.

Thank you, Panikos, and good morning from me too. Let's turn to slide 13 to start with a summary of our key highlights in the first quarter of the year. These include record new lending of 842 million euros, driving a 3% rise in our performing loan book since December 24. A strong return on tangible equity of 18.3% and low cost-to-income ratio of 34%. Further improvements in our asset quality with our MPE ratio remaining below 2% and cost of risk of 39 basis points, strong capital ratios and capital generation, including a distribution accrual at the top end of our 50% to 70% range, and a clear commitment to shareholder distributions. Together, these give us confidence in our outlook, both for the remainder of this year and beyond. Let's now discuss net interest income on slide 16. Our NII for the first quarter stood at €186 million, corresponding to a net interest margin of 3.13%, down 21 basis points on the previous quarter. The quarterly reduction mainly reflects the repricing of liquid assets and variable rate loans at lower rates, with the cost of deposits modestly lower at 33 basis points. Overall, our NII evolution suggests a controlled decline as the rate cycle normalizes. As already mentioned by Banikos, we confirm our NII targets, expecting net interest income to decline in 2025 to below €700 million and in 2026 to stabilize at over €650 million. We are taking into account latest market rate expectations for ECB deposit rates, averaging 1.8% for 2026, some 20 to 30 basis points lower than previously expected. There are some positive offsets, such as the better depositor behavior and higher deposit volume, and better asset pricing, including our hedging activities during this volatile period. Now, moving to our hedging activity on slide 17. Here I want to remind you of our significant hedging efforts undertaken over the last couple of years that have reduced our MII sensitivity to 100 basis point parallel shifting rates by 52 million euros since December 2022. We have added around 0.8 billion of hedging in the first quarter of the year, adding to a total of 9.7 billion euros or 40% of the group's interest earning assets. These hedging actions include the receipt of fixed interest rate swaps and further investment in fixed rate bonds. In Q1, hedging was carried out at an average yield of 2.8%, meaning that hedging is already a net revenue contributor. In total for 2025, we plan for 1 billion hedging activities through IRFs subject to market conditions. 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. It is in part for these reasons that we remain confident in our NII guidance. On slide 18, you can see that our deposit base continues to increase, up 1% on the prior quarter and up 7% on the prior year to €20.7 billion. Also, we are encouraged that the proportion of time and notice deposits remain flat on a quarterly and annual basis at 33% of the total. And if you look at the breakdown of our 20.7 billion deposit base, you can see on the bottom left chart that 80% of our deposits are from Cypriot residents. Additionally, we have seen deposit costs declining from the peak in 2024 and now stand at 33 basis points for Q1, And overall, the well-managed deposit costs reflect the very liquidity of the banking sector, cautious depositor behavior, as well as our strong franchise and market position. Moving to slide 19 on lending activity. The group extended record new lending of €842 million in the first quarter, which is usually a strong quarter, representing an increase of 16% on the prior quarter and 25% on the prior year, driven mainly by corporate, housing and international demand. The gross performing loan book was up 3% Q&Q to €10.45 billion, tracking in line with the 4% growth target for the full year. We are pleased to see our international loan book expanding by 34% year-on-year to €1 billion, in line with our strategic plan to reach €1.5 billion in the medium term. Of course, we have and we will continue to maintain strong underwriting standards, and therefore 99% of new exposures written since 2016 remain performing. Slide 20 shows our progress of the fixed income portfolio. As of 31st March, our fixed income portfolio stood at €4.5 billion, up by 21% on the prior year, representing 17% of total assets. The majority of the portfolio is measured at amortized cost and is held to maturity. Hence, no mark-to-market impact is recognized in the income statement or equity. The portfolio comprises of high-quality assets with average maturity of three to four years and is highly diversified. We aim to grow the fixed income portfolio further in the years to come so that it comes to represent around 20% of our total assets in the medium term, subject to market conditions. Slide 21 now provides a summary of non-interest income. In the first quarter, non-NII expanded by 10% year-on-year, reflecting higher non-transactional fees and higher contributions from the insurance companies, driven by positive claims experience of non-life insurance and increased new life insurance business volumes. Non-interest income was broadly flat on the prior quarter, reflecting seasonally lower fees, partly offset by higher insurance and positive revenue contributions. Overall, non-interest income remains an important contributor to group profitability and covers almost 80% of Q1 OPEX. I would also like to remind you that both FX and revenue gains are volatile profit contributors. Separately, our insurance businesses remain a valuable and recurring revenue stream for the group. More details about our insurance results can be found in the next pages. In summary, EuroLife recorded a net insurance result of €6.8 million in the quarter, an increase of 17% compared to the previous year, driven by increased new business. In NonLife, net insurance result was at €5.1 million, up 27% year-on-year. In total, the net insurance result contributes 17% of the group non-NII. Insurance is an important driver of our diversification, and as already mentioned, we have further strengthened our customer franchise and market position with the FNG Insurance Cyprus acquisition. Moving now to operating expenses on slide 27. Our cost-to-income ratio of 34% in Q1 was higher than last year, reflecting the impact of falling net interest income. Staff costs were up 5% both on a quarterly and an annual basis, mainly reflecting step-up adjustments, which typically take place in the first quarter of the year, including salary increments, cost of living adjustments, and higher employers' contributions. Other OPEX rose by 14% year-on-year, reflecting inflation, higher IT, and other professional expenses. The year-on-year growth of other OPEX is expected to slow down in the second half of the year. Against the prior quarter, total operating expenses were down 14%, mainly reflecting seasonally lower other OPEX. Turning now to slide 28 and cost of risk, our underlying credit quality remains strong, with NPEs remaining low. In response to the current global economic uncertainties, however, we have recognized conservative macro assumptions with the most material adjustments applied on the adverse scenario of our cost of risk calculation, which resulted in a cost of risk of 39 basis points for Q1, up by 7 basis points on the prior quarter. Additionally, we incurred impairments of €10 million in Q1, in line with the REMU disposal acceleration strategy. Now moving to capital, on slide 30, the bank's capital position remains robust. Our regulatory CET1 and total capital ratios stood at 19.7 and 24.8% respectively. When including quarterly profitability and post-distribution accrual at the top end of our distribution policy, in line with Commission-delegated regulation, our CT1 and total capital ratio improved further to 19.9% and 25.0% respectively. As I mentioned at the full year, in the first quarter, the CRR3 became effective. The result was a positive impact of around 100 basis points on CT1 by a reduction in our operational risk-weighted assets. The 19.9 CT1 ratio is after a distribution accrual at the top end of our 50% to 70% distribution payout range. Let me remind you that, as usual, this level of distribution accrual does not constitute a decision by the bank with respect to distribution payments for 2025. Finally, the acquisition of Ethniki Insurance Cyprus is expected to have a negative impact of around 15 basis points upon completion. Moving now to slide 31 in asset quality. As of 31st March, the group's asset quality remains healthy with an NPE ratio at 1.8% and a coverage ratio above 100%. NPE inflows remain limited. And moving to slide 32 on our real estate management unit, REMU is our engine to manage the stock of properties acquired from defaulted borrowers. As you can see, the REMU stock decreased to $634 million as of 31st March, and we carry our REMU stock at conservative valuation. Overall, it is carried on the balance sheet at 71% of the current open market value. We note that in April we have completed the sale of a large plot of land, further reducing the Renew stock to €575 million. We are very pleased with our sales performance to date, which positions us well towards achieving the year-end target of around €500 million. It is important to note that we continue to sell on average close to independently assessed open market value and above book value. I will now like to hand back to Panikos for his closing remarks.