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.

Thank you, Elisa. Moving now to slide number 33. The global uncertainties have increased, but we are in a strong position to face them. Our priorities remain unchanged, being centered on prudent capital management, driving new growth initiatives focused on loan book growth, non-intellectual income diversification, maintaining cost discipline while preventing the business and protecting the fundamentals of our asset quality. This is to ensure we maintain a strongly capitalized and highly profitable organization, generating high-tech resources of 50% synchronization and delivering attractive returns to shareholders. This concludes our presentation and we will now open the floor for your questions.

Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their telephone. If you wish to remove yourself from the question queue, then you may press star and two. Please use your handset when asking your question for better quality. Anyone who has a question may press star and one at this time. One moment for the first question, please. The first question comes from the line of Buluguris Alexandros with Euroc Securities. Please go ahead.

Good morning. Many thanks for the presentation. I have three questions, if I may. The first is regarding the key insurance, Cyprus. If we could have a bit of color on what kind of contribution it could give, I assume more in 2026, given that it will be completed later in the year, in your fee line, what kind of impact should we expect? The second question is regarding the potential assumption that you mentioned in the first quarter, Is that a one-off? Could we expect more later in the year? Or was that related to the macro environment and the uncertainty that you took a one-off prudential provision? That's the second question. And the third, regarding the NII sensitivity, a quick question. Is that linear, the sensitivity? So if rates move lower than 100 bps that you mentioned, so from below 1%, would it be similar? sensitivity or it increases the higher the declining rates. Thank you.

Thank you. Thank you, Alexandros. On a single insurance, this is a small strategic acquisition. We expect to increase our premium 15% by 15% and the net insurance results which is included on the non-NII by 10% coming from the insurance business. As you mentioned, this would be reflected most probably in 2026 results. On potential, if I understand well your question, you're referring to cost of risk, right? Yes. So generally the cost of risk, I will say that the 59 basic points overall are still lower than our guidance, which is 40 to 50. The asset quality is very robust, nothing of concern. Cypriot economy, as you know, is altered from the EU consistently since 2018. But given geopolitics, we adopted a more conservative macro assumptions on our adverse scenario, which resulted in seven basic points, one off for this quarter, and 239 basic points. If we exclude these seven basic points, Because of this, it's 32 basic points, which is the same as we had in Q4 last year.

On NII sensitivity, this is the balance, the sensitivity of the balance of the additives, so the static sensitivity, Alex. Now, in the scenario where there is a very steep shift either way, The sensitivity applies beginning to end, but in the interim there may be a difference in how quickly this comes through because of the mismatch of, not mismatch, the time lag needed for deposit repricing and loan repricing also. So the sensitivity is linear on a static basis, on a like-for-like basis.

Okay, clear. Thank you.

And by the way, sorry, just one last point to add, that because our loans are flowed to zero, it decreases significantly when it reaches zero, when rates reach zero.

Of course, yes, thank you. Thank you, Elisa.

The next question comes from the line of Alonso Alfredo with Deutsche Bank. Please go ahead.

Hello, good morning. Congratulations for the results and thanks for taking my questions. I have a follow-up on your NII comments. Considering how your moving parts are, how much of the loan book has already been repriced so far and how much positive impact would you expect from the deposits ahead? Because there might be a difference in the timing for the repricing. And on top of that, Do you expect the term deposit mix versus current to start declining soon? Because we've seen that being pretty stable so far. And on another issue, on capital, we see a strong capital generation in the quarter above probably the target. Would you expect to beat your four-year guidance for capital generation? And moreover, could this lead to increasing capital distribution? given the large buffer that you have versus capital requirements. Thank you.

Thank you, Alfredo. Starting from the last question about capital, yes, high capital is a good thing, especially if this is combined also with high returns. So I would start by saying that as a bank, we have a track record of increasing payouts, and this gives you an indication of our approach. However, our current policy, which we have disclosed in February, assumes 50 to 70% payout ratios. As we already said, we want to go to the high end of this ratio this range as soon as possible, and we're also considering introducing interim dividends later in the year. So other than that, nothing changed. We can of course say more and be more transparent about capital later in the year. On the deposits, I will say that Yeah, reality is proven better than what we expected in both terms of volume and cost. Our amazing assumption is that deposit cost will remain flat for the year, despite the fact that we've seen a drop in Q1 2025. Of course, this is positive for us, but we want to wait a little bit until we validate and verify the deposit behavior before we We renew our assumptions on this market, but definitely we expect deposits, both in volume and in cost, to be a positive contributor to our non-II and better than initially projected.

On the loan side, on the repricing, as a reminder, 42% of our loan book is linked to URIBOR, and Most of the Euribor repricings were actually taken in by 31st March. Those that were, when you compare the actual rate versus the loan book, there were only a handful of basis points to go. The rest of our book is repriced immediately, so 23% is on the bank-based rates. which reprises every time there's a base rate change. There's 11% that's on the ECB rate, again, on ECB cuts, and 1 billion of loans, another 10% or so, are fixed rate and therefore don't reprise. Taking all of this into consideration and also what Baniko mentioned earlier on the deposit mix and the deposit cost, we are confirming today, despite the materially lower rates, For the rest of the year, we'll be confirming our guidance on NII and on road tests for both this year, by the way, and next year.

Sorry, I'll follow on this. Given that, could you be considering that NII is close to bottoming up?

No, no. There is more to go. The URI board dropped further in April. So when I said It was fully recognized. I meant the rates as of 31st March. There were further drops after the U.S. cost volatility in April. Those will come through in Q2. I expect that to come through in Q2. In line with our guidance, which already takes in all of this, this will only be rate cuts. They will come through as the rate cuts happen.

Okay, thank you.

The next question comes from the line of Mayher Ben with KPW. Please go ahead.

Hi. Thanks for taking my questions and thanks for the presentation. I have a couple, please. First, on the term deposits or the share of term deposits, you mentioned they've been stable for the past few quarters. Do you expect the share of these to decline going forward? Do you expect that to happen next quarter? Is that more towards the end of the year and into next year events? Same question from the interim dividend. I was just wanting to give some colour on how the mechanics of that are going to work or if it's too early to say perhaps. And then just on capital, do you expect any regulatory headwinds this year? So we had a big benefit from Basel for this quarter. I'm sorry, just one final one. There's really quite a few, but the final one just on line growth, it's very strong. It's growing above guidance. Do you see much scope to raise, or do you expect volumes to slow down toward the second half of this year? Thank you.

Okay, thank you. Thank you, Ben. On DevOps, the mix and basic assumption is that the mix will remain the same, right? The current assumption. And as I said before, we will see the before we review and renew our guidance on the matter of deposits, but definitely we are running better than initially projected. On loan growth, yes, we have a very good quarter, 3% up Q&Q, driven mainly by corporate and international. As we said in the past, international will support the growth of our loan book, And it has been obvious today that year-on-year international is up 54%. We are already to $1 billion, and we are moving fast to the $1.5 billion, which is our medium-term target. Saying that, it's true that we are running better, but we are not in guiding today. Everything is too early in the year to change our basic assumptions, and this is something that we'll consider later in the year, depending on how the market goes.

On dividend and Basel IV, as a reminder, we got 100 basis points of positive Basel IV impact coming through in Q1 on the 1st of January. As you know, Ben, we've always been delivering and over-delivering on our dividend guidance and plans. We were the first to pay, we were the first to reach the 50% guidance last summer, now this year. including this Basel IV positive impact, we are aiming to go as high as possible within our distribution policy range of 50% to 70% as fast as possible. So although we cannot yet be specific, we are increasingly confident given our capital ratios and our Basel IV benefits that came through. And just as a reminder, we also indicated that we plan to consider the commencement of interim dividends also starting from this year, so from the Q2 results.

Great, thank you.

The next question comes from the line of Cunningham Corinne with Autonomous. Please go ahead.

Good morning, everyone. A couple of questions, please. The first one, just on the Basel IV impact, because it's operational, do you see this as permanent, or is there a possibility that this unwinds a bit further down the track? So I guess I'm asking, what's the fully loaded impact there? And then the second question on NII, do you assume that rates start to rise again in 2026 in coming up with your sort of 650 guidance, or that it's loan growth that keeps you above there. Perhaps you can just give us a bit of an idea on the moving parts to maintain that 650 in 2026. Thank you.

Thank you, Corinne. On NII, we don't assume rates to go up in 2026. In fact, on slide 58, you can see the revised curves, and our basic assumption for 2025 is the rate to be at 25% by the end of the fourth quarter. Average rate in 2025 is 2.1, and average rate in 2026 is 1.8. So these are the basic assumptions, and based on these assumptions, we are confirming our existing NII guidance for 2025 and 2026, despite the lower assumptions for the rates. Of course, there are some positives. Is the strongest unexpected loan growth, better deposit volumes, better cost, hedging. So these are the basic parameters on NII. And on Basel IV?

On Basel IV, it's permanent because it came from operational risk, and the way the formula works doesn't erode that into the future. In fact, dynamically, the benefit when you compare Basel III to Basel IV is even bigger, but this kind of basis point remains as a positive benefit.

Thank you very much.

The next question comes from the line of Kantarovits Alex with Romer Capital. Please go ahead.

Yes, hi and congratulations on strong results. If I may ask you, you guide average growth of loan book at 4% for this year and 26-27 and yet your loan intake in Q1 was 2.7%. if I see it correctly. So this implies upside to the full year guidance for 2025. Can you comment on this?

Yes, I have already commented earlier. As I said, we have a strong quarter, 3% on this year. Then basically our supplement is 4%. Yes, we are running better than our initial assumptions, but we are not currently, it's too early for us to change these assumptions, so the basic guidance for 2025 is 4%. This is the assumption that we guide for 2025 and 2026. When we will monitor the progress later in the year, we may come back with a revised update, but for the time being, then basic consumption is 4% for the year.

Okay. Okay, thank you. Thank you.

Once again, to register for a question, please press star and 1 on your telephone. The next question comes from the line of Arelas Theodoros with Pantelakis Securities. Please go ahead.

Yes, hi. Thank you for the opportunity and congratulations for the results. Just a couple of housekeeping questions please. I see that the special levy on deposits is down quarter on quarter and year on year significantly despite deposits going up. So if you can comment on that. The same also for credit losses on loans. They're up quarter on quarter and year on year, but the NPE flow remains negative. So maybe if you can comment on these two. Thank you.

Okay. The difference on the levy is the deposit currency scheme contribution. We didn't have one this year. We don't have visibility for the future, but this is what's driven the top this year versus last year.

On credit losses on the loans, I mean, we have said in a previous question that there is one of charge of seven basic points coming from adopting more conservative assumptions on our other scenario, in respect of the market of the country. But as you already said, and you have seen, the asset quality is very strong, MP flows are close to zero, so nothing of concern. This is mostly a modeling macro assumption. because of the geopolitics and this one off for Q&A.

Very good. Thank you very much.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Nicolaou for any closing comments. Thank you.

Thank you for your questions, for participating in the call. As always, we are available for one-to-one discussions and clarifications for those of you that you think so and you need that. We'll probably see a lot of you to the upcoming conference later in the quarter. Thank you very much. Thank you all. Have a nice day.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling and have a good day.