Bank of Cyprus Holdings

Ladies and gentlemen, thank you for standing by. I am Yota Yokoro's call operator. Welcome and thank you for joining the Bank of Cyprus conference call to present and discuss the first half 2026 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 months ended 30 of June, 2026. As always, I am joined by Aliza Libadiotou, Executive Director of Finance, and Anita Pavlou, Manager, Strategy, IR and ESG. After my introductory remarks, Elisa will go into more detail on our financial performance for the Fed's House, and then we will be happy to take your questions both during this conference call and afterwards. I would like to start with slide number five in our investment case. Today Embark is in a very good shape, demonstrated by our diversified and efficient business model We have a strong domestic franchise and hold leading positions across banking issuers and payment solutions. And we operate in an economy that has shown once again that it is resilient and can deliver robust growth despite ongoing global uncertainty. We are one of the best capitalized banks in the Euro area, have strong capital generation, which enable us to build up an attractive distribution track record. supporting a payout ratio of up to 90% out of 2026 and up to 100% in both 2027 and 2028. Today, we are pleased to announce an interim dividend of 24 cents per ordinary share, an increase of 20% year-on-year representing a payout ratio of 44% out of the first half 2026 earnings. Slides 6 and 7 give a brief overview of the microeconomic environment. The ongoing conflict in the Middle East and Iran continues to shape the microeconomic landscape through elevated global volatility, uncertainty and intensified inflationary pressures. Despite this, the civil economy continues to exhibit resilience to these challenges. We are seeing an all-time low unemployment rate alongside a swift recovery in the tourist sector. Following a setback in tourist arrivals in March and April 2026, where many tourist castles or temporary bookings on hold, May and June have shown strong signs of recovery, with tourist arrivals gradually returning to 2025 record levels. Note that Cyprus stands on strong fiscal ground with continuing budget surpluses and decreasing public debt to GDP to 50% by May 2026, comparing favourably with other European peers. Inflation is rising, mainly due to higher energy prices, and it is expected to reach around 3% in 2026, broadly aligned with the Eurozone average. While GDP growth is forecast to moderate to around 2.5% for 2026, based on recent projections from the central bank of Cyprus, this remains a solid level of economic growth and is significantly higher than the Eurozone average. Let's turn on slide 8, which shows a snapshot of our 2-2 performance. For another quarter, we delivered strong performance across all key metrics. Our net interest income increased to $188 million on the embark of strong volume growth. Our cost-to-income ratio remained low at 36%, supported by continued cost discipline and high revenues, and cost of risk was a net release of 6 basic points. All in all, our profitability for the second quarter increased to 151 million. Moving on to slide 9, a non-distribution track record. Today, we are pleased to announce an interim dividend of 20% per ordinary share, equivalent to 44% payout ratio. This interim dividend represents a 20% year-on-year increase and will be paid in October 2026. Slide 10 shows the key drivers of shareholder value creation. We continue to generate high-team reported ROTE, notwithstanding a high capitalized balance sheet. Our ROTE increased to over 90% in Q2, corresponding to 27.9% ROTE based on 15% Sintiwa ratio. And we continue to deliver strong capital generation of over 100 basis points in Q2, totaling 225 basis points for the first half, while our total shareholder returns is up 10% since the beginning of the year. Looking at slide 11, you can see how our first half 2026 performance compares to the 2026 target set in March 2026 at the investor update. On each metric, we exceed our expectations. Capitalizing on this strong performance as well as the high interest rate expectations, we are confident in achieving a route towards the upper end of the meeting's target range in 2026. and we remain committed to a meaningful distribution with a total payout ratio reaching up to 90% for 2026 and up to 100% annually for 2027 and 2028. This distribution, of course, touches market conditions as well as the outcome of the Group's ongoing capital liquidity planning strategy at the time. Our guidance is built on robust internal assumptions. Given the information we have today, we are confident on delivering on our targets. I will now hand over to Elisa who will run through our full year results in more detail.

Thank you Panikos and good morning from me too. Let's now turn to slide 13 and the summary of our key highlights. These include strong volume growth translating into a 5% increase in our loan book and 3% growth in deposits since December 25. On an annual basis our loan book and deposits increased by 8% and 9% respectively. Our asset quality continues to improve with an NPE ratio declining to 1% and the net release of 12 basis points in cost of risk driven by customer specific reversals. We've had healthy organic capital generation of 225 basis points and ended the quarter with a CQ1 ratio of 20.9% and a total capital ratio of 25.8%. Let's quickly turn to slide 14 now. This is our detailed income statement. I will not go through each line, as we will discuss them later, but you can see that our operating profit was flat year-on-year at €329 million despite the lower average reference rate, while our profit after tax increased by 7% year-on-year to €252 million. Now moving to slide 15, the structure of our balance sheet is simple and is characterized by high liquidity. Our deposit base is twice the size of our loan book, with liquidity gradually being deployed to loan growth and investment in the fixed income portfolio. And as a reminder, on the lending side, over 40% of loans are linked to Euribor. Slide 16. Our NII has grown by 4% in the second quarter to €188 million. This growth reflects higher volumes in both loans and deposits, along with an improvement in margins, which rose by 4 basis points to 285 pips, reflecting the shift in the asset mix. Year-on-year, our NII is flat, despite, as I mentioned above, the lower average reference rate. Strong volume growth, effective hedging, and controlled deposit costs supported these results. We've also seen an increase in average interest-earning assets, driven primarily by a 3% year-to-date rise in deposits. The asset mix is gradually improving, with loans and the fixed-income portfolio both increasing by 3% and 4% Q&Q, respectively. Today, we are upgrading our MII outlook for 26 and we expect to deliver around €750 million compared to the previous guidance of around €720 million that we shared back in March 26, reflecting the strong volume performance in the current rate outlook. Let me unpack the main assumptions driving this upgrade. Firstly, we expect the average ECB deposit rate for 2026 to be at 2.2%, up from our initial expectation of 2.0%. We now incorporate the 25 basis points rate hike in June 26, and based on the current forward curves shown on slide 42, another 25 basis points rate hike is expected to come in Q4. Given our rate sensitivity, every additional 25 basis points increase benefits NII by 15 million euro annually. On the funding side, we've seen a 3% increase year-to-date in deposits and broadly stable pricing, both stronger than we had originally planned for. Although we are pleased with this performance and we will continue to manage both volume and cost, our business plan assumption is that deposit volumes will remain at current levels and pricing will be at around 30 basis points. Finally, while we remain very comfortable with our overall lending volume guidance, with strong growth in the first half of 5%, we will benefit from better lending balance averages in the second half. Moving now to our hedging activity in slide 17. Our significant hedging efforts undertaken over the last couple of years have reduced our MII sensitivity to a 25-bit parallel shifting rate, to €15 million, half the level it was in December 2022, or from 8% of NII back then to around 2% at present. We increased our scheduling by around €400 million in the first half, taking the total to €12.5 billion, covering 47% of the group's interest-earning assets. The yield on new interest rate swaps increased to 2.7% in the second quarter from 2.4% in the previous quarter. We will continue the dynamic management of our balance sheet subject, of course, to market conditions. On slide 18, you can see more details of our deposit trends. Total deposits of 22.8 billion euro were up 3% year-to-date and 9% year-on-year. We have seen deposit costs remaining broadly flat at 28 pips Q and Q, and the share of term deposits remains broadly unchanged on the prior quarter at 30%. The well-managed deposit costs and mix mainly reflect the very liquid Cypriot banking sector, as well as our strong franchise and market position. And our deposit base is mainly retail-funded, with the average ticket size being at around €31,000. Now let's turn to slide 19 and new lending. During Q2, we granted new loans of €812 million above the historical Q2 levels and totalled €1.6 billion for the first half. New lending was supported by housing and international corporate demand. Of course, we have and we will continue to ensure product 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. Looking now to slide 20, we're pleased to see our loan book grow by 5% since the beginning of the year to €11.4 billion, with growth observed across all business lines. Domestic corporate loans were up 4%, Cypriot retail lending was up 3%, with good momentum in both housing and consumer lending, whilst the built-up international loan book added 1.5% to the period's growth. Lending gims have been stable for a while and we know the small increase in Q2 to 436 basis points as interest rates begin to increase. And we remain confident that we will comfortably meet the loan growth guidance of over 5% in 2026, supported both by domestic demand and careful expansion of the international loan book. Class 21 shows our progress on the fixed income portfolio. Our portfolio stood at 5.6 billion euros representing 19% of the group's total assets. The fixed income portfolio comprises of high quality assets with average maturity of 3 to 4 years and is highly diversified. The majority of the portfolio is measured at our price cost and is held to maturity and no mark-to-market impact is recognized in the income statement or equity. The mark-to-market of this portfolio as of June was around a 5 million euro gain. Slide 22 shows non-interest income of €146 million for the first half up 3% year-on-year and comprising recurring non-NII of €132 million and other non-NII of €14 million. Let me try to unpack and share how we look at this important source of revenue that underlines our diversified business model. We have what we consider to be high quality revenues and these are a key area of focus. This includes the fee and commission income, the net insurance result, and the FX customer-related fees. Altogether, this grew by 9% year-on-year, primarily driven by higher net insurance results. Additionally, net fee and commission income was up 3% year-on-year, driven both by transactional and non-transactional fees. On a quarterly basis, recurring RNI was up 3% due to the higher net fee and commission income. Other non-NII items include revenue gains, gains and losses on financial instruments and other income, which are volatile profit contributors. Overall, non-NII remained an important contributor to profitability and covered 78% of half one operating expenses. Our insurance businesses are a valuable and recurring revenue stream for the Group, as presented on slide 23. In summary, our net insurance results amounted to €33 million in half one, up 35% year-on-year, mainly reflecting the contribution of the SNGI insurance cycles, better claims experience, lower losses in onerous contracts in life insurance, as well as higher new business in non-life. Overall, the net insurance results contributed 23% of total non-NIIs, and insurance remains highly profitable, contributing 10% of the group's total profitability. Slide 26 provides an overview of operating expenses. Our cost-to-income ratio for the first half of the year stood at 36%, reflecting continued cost-discipline and higher revenues. On an annual basis, total OPEX increased by 3%, reflecting the increased exit costs, which were mostly recorded in the second quarter. During the first half of 26, the group completed a small-scale targeted voluntary staff exit plan, where 51 employees were approved to leave. Staff costs in half one were up 2% year on year, reflecting the salary increments and the cost of living adjustments which typically take place at the beginning of the year. Other operating expenses remained flat year on year. For the second half of the year, other OPEX is expected to be broadly similar to the second half of 2025 levels. On a quarterly basis, both staff costs and other OPEX were flat. For 2026, we now expect the cost-to-income ratio to remain below 40% versus circa 40% for guidance on the basis of our strong revenue outlook and continuing cost efficiency. Turning now to slide 27, the asset quality. Our underlying credit quality is strong, and we're not seeing any signs of deterioration, evidenced by the low NP ratio at 1.0% and the coverage ratio exceeding 100%. The cost of risk saw a net release of 12 basis points in the first half of 26 driven by customer-specific reversals of 39 basis points. The underlying cost of risk for the first half is estimated at 28 basis points. For the second half of 26, we expect the underlying cost of risk to remain stable to the first half levels, trending below the normalized range of 40 to 50 basis points. Let me also remind you that these are very small figures. Ten basis points cost of risk is €10 million loan credit losses on an annual basis. The revenue repossessed stock decreased further to €341 million as of 30th June. We continue to manage our revenue stock prudently as it is carried on the balance sheet at below 70% of the current open market value. Let's now move to slide 28 and capital. The bank's capital position remains strong. We continue to build organic capital generation of over 100 basis points with Corsair, totaling 225 basis points in the first half. Our C-to-1 ratio and total capital ratio stood at 20.9% and 25.8% respectively, reflecting the accrual for the ordinary dividend at a 70% payout ratio, as well as modest SWA growth. Our 70% dividend accrual represents the top end of our distribution policy for ordinary dividends and hence the interim dividend at 44% payout ratio will only affect our equity and not our capital ratios. I would draw your attention to our intended payout which is unchanged. 70% ordinary dividend and up to 20% top up to be decided with the full year 26 results. We therefore accrued dividend in our capital ratios at 70% during the quarter and any top-up will be accrued at the time it is announced. Also in March 26, we announced the agreement to acquire the performing loans along with the deposits from the Cyprus Development Bank totaling around €150 million and €500 million respectively. The consideration was nearly at par and the capital impact is expected to be modelled at around 35 basis points with the completion of the agreement expected to take place towards the end of the year. I would now like to hand back to Panikos for his closing remarks.

Thank you Alisa. Our diversified and efficient business model, continuous strong credit quality, robust capital liquidity positions and our proven ability to successfully execute our strategy means we are well positioned to achieve the medium-term target we set in March 2026. Our Fed's health performance was strong. The Candidate and Bank proved resilient faced with global volatility, giving us confidence that we will outperform the original target set for our Feds for 2026.

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 Alexandros Boulogouris with Euroc Securities. Please go ahead.

Hi, good morning. Many thanks for the presentation and congratulations on the numbers. Two questions on my end. The first regarding loan growth, we've seen 5% year-to-date, which was close to the annual target approximately. So how should we look at the second half of the year given this significant outperformance? And the second question is regarding cost of risk. Should we assume now from the third quarter onwards 40 bps to be in line with the guidance, which would imply, given the reversals in the first half, about 10-15 bps for the full year? Is that the correct way of thinking about it? Thank you.

Okay, thank you, Alex. First question on loan growth. I would say that it is true that we have guided for over 5% for 2026 and we are already at 5% I do not expect the same performance in the second half mainly because the second half comes with some higher repayments seasonal higher repayments mainly in Q3 but we have a good pipeline and we comfortably exceed the 5% which is our guidance so do not extrapolate 5 times 2 is equal to 10 but certainly will be more than 5% for sure and the level of how far much better than 5% will be mostly dependent on the level of repayment because our clients are cash rich depending on cost of risk I would say that it's better to focus on the underlying cost of risk which is 28 basic points for the first half, and we expect to remain the same for the second half as well. But generally, the absolute numbers are small. So every 10 basis points is around 10 million. So yeah, I think let's focus on the underlying cost of risk, which is around 28 basis points for the second half as well.

Great, thank you.

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

Yes, thank you for this opportunity. Great results. I would like to check temperature on net interest margin. My logic in forecasting was that historically you have a rather tight sensitivity of means to underline interest rates like you did before and your asset mix also moves favorably this margin moved on my population several basis points, quarter to quarter. So if you can help me understand why or give me some ideas how the margin will develop in the second half.

Thank you, Alex. We didn't understand the questions. The line is not very good. You were cut off. But if I understand correctly, you're asking about NIMH? and how that will evolve? Yes, correct, yes. Okay, so on Neem, the second quarter Neem was at 285. This is trending above our guidance for the year given back in March, which was in excess of 2.7%. And there are a few reasons for this. Volumes are better, cost of deposits, is that volume from both loans and deposits. And of course, the rate curves are positive, and given our low funding cost and low pass-through, this is benefiting NIEM. As regards, let's say, outlook on NIEM, I would say to expect it to be broadly at the same levels as in Q2 for the rest of the year, all in our guidance, in our assumptions. we use a cost of deposits of around 30 basis points for the year and this is what's been taken into account into what I said.

Thank you very much.

Thank you.

The next question is from Alfredo Alonso with Deutsche Bank. Please go ahead.

Hello, good morning. Thank you for taking my questions. I have a question on capital. it's a we see a risk where there's continued growing much less than lending it's about 3% versus 8% year-on-year growth it's still mostly due to the REMU and asset quality or there is anything that you are doing on mix or density management and then just a couple of follow-ups one on the on the provisions What are the reasons for the reveals that we are seeing? Could we be expecting more to come in the future? And then, looking into your cost to income guidance, we see that below 40% might imply a deterioration versus the current levels. I think you should not be expecting any kind of deterioration in revenues or costs for what we've been seeing. Thank you for taking my questions.

Okay, on cost, it's not a matter of deterioration. We just had around 40% for the full year. That was the guidance we had back in March. Now, from what we see, we say less than 40%. So usually Q4 is a little bit more we see some pickups in the OPEX, but I don't expect much difference from what we have for the first half on cost. So on provisions, I think that the releases are customer specific and some macro differentiation better than initially projected. As I said before, I think we should focus on the underlying cost of risk which is 28 basis points for the first half and this is what we expect to be for the second half of the year as well.

On capital, so this quarter you are right that the RWA increase let's say in the quarter was lower than the loan growth. First of all let me remind you that half the book roughly 40 something percent of the book is retail lending, retail housing and that's very low in any case. So in terms of RWA density that is helping that aside this quarter we did have some very good credits that were that have attracted lower risk weights because of their ratings and their profiles so idiosyncratically let's say this quarter was the new lending this quarter was exceptionally low in its intensity I wouldn't call this a trend I think you should think about our WA guidance of 3% CAGR as being more representative of where on a long-term basis we will end up. But on a quarter-by-quarter basis, there is some volatility in this just because of the nature of specific credits in the quarter, granted in the quarter.

Thank you. Just one follow-up. On the exits that we've seen in the quarter, how much savings are you expecting from that?

On the staff cost, the staff exit plan?

Yes. I think the total cost was around 9 million, payback 2.3, so we should expect a cost saving around 4 million per annum. This is part of our staff optimisation and cost optimisation plan that we do on an annual basis to create capacity to invest somewhere else and also manage this annual payroll inflation that we have because of the collective agreement. So this is, remember we have 110 people exiting the bank in 2025.

Perfect. Thank you very much.

Thank you.

The next question comes from the line of Miguel Diaz with Wooden Co. Please go ahead.

Hi, hello. Thank you for the presentation and congratulations on the strong results. Just one quick one from me. Operationally, you're doing better than expected, right? So you've raised guidance. So could you please remind us what else you need to see over the coming quarters to unlock the up to 20% dividend top-up.

Okay, thank you. Capital planning involves three things. It involves Interim Dividend, the Ordinance Dividend and the Top-ups. So, today you have seen the first one, which is an Interim Dividend of 24 cents, 20% up versus the interest dividend of last year. So, as per our investor data, the order of the dividend for this year is assumed to be at 70%, which is the top end of our distribution policy, and you have seen this already being accrued in the results. A plus, which reduces the top-up of 30%. So, it is clear that our current financial performance is very strong, and supportive of our story. The distributions we all know are of course subject to market conditions as well as the outcome of the group's ongoing capital liquidity planning. So naturally, this is a board decision and that will be made at the full year end results and not in August. And the board at that time will consider all The next question is from the line of Hugo Cruz with KPW. Please go ahead.

I thank you for the time I still have a few questions so first on asset quality what you know the macro right now is not the best you're printing 28 basis points underlying cost of risk so what would it take for you to go back to your usual guidance of a normalized level at 40 to 50 basis points and then on capital do you do you still see opportunities for more bolt-on acquisitions to deploy capital inorganically? Thank you.

Okay. Thank you, Hugo. Okay. On asset quality, as I said, 28 basics because of the underlying assumptions to go to 40 to 50 basic points which fundamentally what we call a through-the-cycle measure means that the macro needs to deteriorate. But again, the number is very small, so every 10 basis points are around 10 million.

If I may just add, because you commented that the macro is adverse, I would dispute that. I mean, our macro is faring better than Eurozone average. The latest expectations on GDP this year, Hugo, they range between 2.5% to 2.7%. and these are from third-party sources, so I would challenge a bit the comment on the macro is not doing well. In fact, I think we are doing better than we expected and the economy is resilient to the geopolitical challenges we had back in March and April.

And on the second question, on the Bolton acquisitions, yes, we are continually looking for Bolton opportunities and this is a key and an ongoing component of our strategy, especially on the non-NII part. So far, we have been successful with the acquisition of S&G insurance, the investment in wealth, the agreement to buy a good performing book of Cyprus Development Bank, which is expected to conclude by the year end. We continue looking for opportunities. but you know that it has to make financial sense, strategic sense just because we have capital does not mean that we will do any risk acquisition or any acquisition that with financial metrics that do not make sense. So you should expect we are looking for opportunities and we have the capital, the optionality because of the capital and if any opportunity arise we will pursue that as you have seen happening this year and last year.

Thank you.

We have a question from the line of Daniel David with Autonomous Research. Please go ahead.

Good morning, everyone. Congratulations on the results. Maybe a bit of a follow-up from that last question. Just starting on capital, I can see on the slide there's an ambition to get to 15% CT1. I think it says over the medium term. Is the medium term kind of this plan, so out to 2028, or should we be thinking longer term to get down to 15%? And are there any levers you'd pull to get down to 15%? And then finally, just on the M&A and Bolton you were just talking about, would you consider any other geographies outside Cyprus? And if there are, could you maybe give us some ideas of where you think the business could expand and be complementary for Bank of Cyprus? Thanks.

Thank you, David. I mean, as we have communicated to the investors today, yes, our medium-term target is 15% CTR, but by 2028, we will be lower than the levels that we are today, but significantly higher than the 15%. So, you should not expect the 15%. unless there are some inorganic actions that can consume capital. This is a deliberate decision, I recall what I said in the investors' day, because we want our institutions to be attractive and sustainable over a period of time and we want to retain some optionality at least for the short term to invest further in the business and any inorganic actions if any opportunities arise. So I think the other question was on M&A, we can consider market outside Cyprus for sure, especially if this has to do with balance sheet. So asset management issuance, right? It's not a prerequisite to be a CPO risk per se.

Thanks a lot.

As a reminder, if you would like to ask a question, please press star and 1 on your telephone. 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 all for your participation. As always, myself and the team will be happy to take any offline questions or meetings for clarifications. Although it's clear that we are entering the holiday season, so it will not be the easiest thing for everyone. So happy holidays to everyone and thank you all for your time.

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