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 half 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 six-month end of 30 June 2025. I am joined by Elisa Libat-Giorgiou, Executive Director, Finance, and Anita Pavlou, Manager, Strategy, IR, and ESG. After my introductory remarks, Elisa will go into more detail on our financial performance, and then we will be very 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 four. We are the leading bank in Cyprus, which is a highly liquid and concentrated banking sector, and we are placed at the center of this economy, where the microeconomic environment remains supportive and is well positioned to withstand global financial instabilities. We are managing where the headwinds are rising from the normalization of interest rates, while simultaneously investing in new growth initiatives. leveraging the key strengths that are under our control. The sustainability and diversification of our business model, our robust asset quality and strong capital position all support our commitment for attractive shareholder returns by continuing to deliver sustainable high-teens revenue on a 15% CTR ratio in a normalized 2% interest rate environment. And today, we are introducing an interest dividend are 20 cents per ordinary share, representing approximately 40% payout ratio out of the first half earnings. Slides 5 and 6 show an overview of the macroeconomic environment. We operate in a strong, diversified, mainly service-based economy that exhibits continuing growth. The economy expanded by 3% in the first quarter of 2025, and the projection from the Ministry of Finance and Central Bank of Cyprus is for GDP growth to remain at that level for all of 2025, significantly outpacing the Eurozone average. This is supported by strong Turing which is set to surpass 2024 record levels, generating the first five months of the year revenues up 27% compared to prior year. Note, Cyprus stands on solid fiscal ground underpinned by fiscal setbacks since 2022, A significantly improved public debt to GDP, reached at 61%, is well below the Euro area average. The strength of the Zip2D economy is reflected in its credit rating, with recent sovereign rating upgrades by the major rating agencies to three notches above investment grade. Slide 7 shows the snapshots of the second quarter performance. Our net interest income remains resilient despite further reduction in interest rates. underpinned by strong volume growth and favorable deficit behavior. Our cost-to-income ratio was 37%, slightly better than our around 40% target, and our cost of risk at 32 basic points reflects our healthy loan portfolio. All in all, our profitability remains flat on the prior quarter at $118 million. Moving on to slide 8 and the key drivers of Shackle's value creation. We maintain a strong rotor at over 18% on a reported basis despite rate reductions, delivering another 100 basis points of organic capital generation in the quarter on a pre-distribution level, while our tangible book value per share goes up 10% year on year. While commenting on the strength of our capital, Capital generation and operational profitability, and I'm pleased to share with you that in the recent FSM stress test exercise, the bond was placed within the first bucket in accordance with the maximum CET1 depletion, which is expected to lead to a lower P2G from 2026. Looking now at slide number nine, you can see how our performance compared to the 2025 targets were announced in February 2025. on every metric while exceeding our expectations. This strong performance reinforced our confidence that our ROTA on a reported basis will be towards the upper range of our mid-team range in 2025, benefiting from potential upside on NII. Likewise, our ROTA based on 15% CTR ratio is now likely to exceed 5 teams target for the year. Let's now turn to slide 10 and our distribution track record. Today we are pleased to announce the introduction of an interim dividend as part of our distribution strategy. In 2025, the interim dividend is set at 20 cents per ordinary share, equivalent to around 40% payout ratio from past half earnings. Additionally, we are targeting a 70% distribution payout ratio in respect of 2025 earnings, which is at the top end of our distribution policy of 50 to 70%. We also expect that our full year 25 results distribution is likely to exceed the prior year's distribution in quantum, generating an attractive yield. As a reminder, we cumulatively paid out 400 million distributions over recent years ahead of our investors' debt guidance equivalent to 24% of our market caps. I will now hand over to Elisa who will run through our first half results in more detail.

Thank you, Banekoza, and good morning from me too. Let's now turn to slide 12 to provide a summary of our key highlights in the first half of 2025. These include continued growth supported by the resilient economic backdrop with new lending at 1.6 billion euro resulting in our performing loan book growing by 5% since December 2024. A strong ROT of 18.4% ahead of our target and the continued low cost to income ratio of 36%. Further improvements in our asset quality with our MP ratio remaining below 2% and cost of risk at 36 basic points. Strong capital ratios of over 20% driven by strong capital generation including a distribution accrual at the top end of our 50 to 70% range. Turning now to slide 15, discuss net interest income. Our NII for the second quarter stood at €182 million, corresponding to a net interest margin of almost 3%, down 15 basis points on the prior quarter. The quarterly reduction reflects repricing of liquid assets and variable rate loans at lower rates, whereas the cost of deposits also decreased to 29 basis points. Overall, our NII evolution suggests a controlled decline as the pressure from lower rates is mitigated by strong volume growth on both loans and deposits and favorable pricing of deposits. Despite the ECB and URIBO rates being lower compared to February's curves, which are currently expected to average at 2.2% and 2.1% respectively for the full year, We anticipate upside potential to our 2025 NII target of sub-700 million euro. For 2026, our NII target of over 650 million euro remains unchanged. Moving on to the progress of our hedging program now on Flight 16. I want to remind you of our significant hedging efforts undertaken over the last couple of years that have reduced our NII sensitivity to 100 basis points parallel shifting rates by 53 million euros in December 2022. We have added around 0.6 billion of hedging in Q2, adding to a total of 10.3 billion or 42% 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. The hedging was carried out on an average yield of 2.8%, meaning that hedging is already a net revenue contributor. Simultaneously, 22% 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. We will continue to manage our balance sheet dynamically and carry out hedging if deemed appropriate and as the interest rate and outlook evolve. On slide 17 now, you can see that our deposit base continues to increase up 1% on the prior quarter and 6% on the prior year to 20.9 billion euro. And the breakdown of our deposit base on the bottom left chart shows that approximately 80% of our deposits are from Cypriot residents. Also, we are encouraged by the change in our deposit mix, as the proportion of time and notice deposits stood at 30% of the total, down three percentage points since the prior quarter, reflecting the improved deposit pricing. We have seen deposit costs declining from the peak in 2024, and now standing at 29 basis points for the second quarter of the year. Overall, the well-managed deposit costs reflect the very liquid Cypriot banking sector. cautious depositor behavior, as well as our strong franchise and market position. Let's now turn to slide 18, new lending. We are encouraged by the growth in our performing loan book. During the first half, we granted new loans of 1.6 billion euro, up 31% on an annual basis, driven mainly by corporate and international demand. We're pleased to see our international loan book expanding by 16% since December 2024 to 1.1 billion euro on track to reach the 1.5 billion target we set in the medium term. Overall, cross-performing loans have grown by 5% year to date, and we now expect to track ahead of our around 4% loan growth target in 2025. Please note that this year's loan growth is expected to be heavily skewed to the first half with a seasonally slower second half of the year. Of course, maintaining high credit quality is a key priority. We will continue to ensure prudent underwriting standards and we will not sacrifice the quality of our loan book for growth. As a reminder, 99% of new exposures written since 2016 remain performing. Slide 19 shows our progress on the fixed income portfolio. As of 30th June, our fixed income portfolio stood at 4.65 billion euro, representing 17% of the group's 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 20 provides a summary of non-interest income. In the first half, non-interest income expanded by 10% year on year, and all components of non-NII contributed to that growth, including higher non-transactional fees, higher evaluation gains on financial instruments, and elevated revenue gains as revenue accelerated sales in the second quarter. Non-interest income was 5% up on the prior quarter, reflecting a one-off positive revenue contribution. Overall, non-interest income remains an important contributor to profitability and covers 77% of Q2 operating expenses. I'd 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 to the group. More details about our insurance results can be found in the next slides, numbers 21 and 22. In summary, EuroLife recorded a net insurance result of 14 million euro in the first half, with regular income improving by 14% year-on-year, driven by increased new business. In non-life, net insurance result was 10 million euro, up 22% year-on-year. Together, net insurance results contributed 17% of total non-interest income. Lastly, I would like to comment on the recent wildfires which took place in the Limassol District and caused damages to various residential structures. Although too early to determine the full impact, the full financial impact, our current estimates show that the pre-tax cost will not exceed five million euro, but the actual impact will be determined once the assessment of damages and claims is completed. Turning now to slide 23, as part of our strategy to expand our insurance operations and further improve our diversified business model, in July 25, we completed the acquisition of 100% of El Nigi Insurance Cyprus Limited for a cash consideration of 29.3 million euro. The acquisition further strengthens our leading position in the insurance market in Cyprus and will bolster the contribution of our non-NII to the group's revenues. Slide 28 provides an overview of operating expenses. Our cost-to-income ratio of 36% in the first half was higher than last year, reflecting the impact of falling net interest income. Staff costs were up 4% on a yearly basis due to the step-up adjustments which typically take place in the first quarter of the year, including salary increments, cost of living adjustments, and higher employer contributions. On a quarterly basis, staff costs remain broadly flat. Other operating expenses rose by 8% year-on-year, driven by higher IT spending and other professional expenses. This growth rate will slow, and we anticipate that for the full year, other operating expenses increase will be contained to low single-digit levels versus 2024. On a quarterly basis, other OPEX was up 4% due to higher marketing spend. Turning now to slide 29 and cost of risk, Our underlying credit quality remains strong, with MPEs remaining low. Cost of risk in the second quarter remained low at 32 basis points, tracking better than the normalized level of 40 to 50 basis points, demonstrating the continued strong underlying performance of the loan portfolio. Additionally, we incurred impairments of €4 million in Q2, which relates to the revenue properties as a result of the aging of the stock. These impairments were down by six million on the prior quarter, following this significant reduction in the revenue stock achieved in Q2. Let's now move to slide 31 in capital. The bank's capital position remains strong. We continue to build organic capital at over 100 basis points this quarter, totaling 215 basis points for the first half. As of 30 June, our CC1 and total capital ratios were at 20.6 and 25.8% respectively. Let me remind you that the capital ratios are after distribution accrual at a 70% payout ratio, which is at the top end of our distribution policy, and hence the interim dividend at around 40% will only affect our equity and not our capital ratios. As mentioned by Panikos, we participated in the 2025 SSM stress test exercise as one of the other SSM significant institutions. Following the results of the stress test announced last Friday, the group significantly improved on the 2023 previous exercise and was placed within the first packet in accordance with the maximum CT1 depletion in the supervisory stress test exercise. This led to a revision downwards of the P2G effective from January 2026 pursuant to the draft SHREP decision. Additionally, let me update you on our changes in our capital requirements following the draft SHREP decision received in August. We are pleased with the lower P2 requirement reduced by a further 25 basis points to 2.5% effective from January 26. Finally, the acquisition of the SNGI insurance will have a small negative impact on the capital of 15 basis points and will be recognized in the third quarter. Moving now to slide 32 and asset quality. As of 30th June, the group's asset quality remains healthy with an NPE ratio at 1.7% and a coverage ratio above 100%. NPE inflows remain very limited. And moving to REMU now on slide 33, REMU is our engine to manage the stock of properties acquired from defaulted borrowers. The REMU stock decreased to 442 million euro as of 30th June, achieving early our 2025 target of circa half a billion euro, following the sale of our largest property in June 25. Overall, we continue to manage our revenue property prudently as it is carried on the balance sheet at 72% of the current open market value. It is important to note that we continue to sell on average close to independently assessed open market value and above book value. I would now like to hand back to Panikos for his closing remarks.