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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
---|---|---|---|---|---|
Bank Of Cyprus Holdings Public Limited Company | LSE:BOCH | London | Ordinary Share | IE00BD5B1Y92 | ORD EUR0.10 (CDI) |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
1.00 | 0.31% | 327.00 | 326.00 | 328.00 | 328.00 | 325.00 | 326.00 | 81,984 | 16:35:16 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
0 | 0 | N/A | 0 |
TIDMBOCH
RNS Number : 2300K
Bank of Cyprus Holdings PLC
27 August 2019
Announcement
Group Financial Results for the six months ended 30 June 2019
Nicosia, 27 August 2019
Key Highlights for the six months ended 30 June 2019 Good Capital Position * Total Capital ratio of 18.1% pro forma for the disposal of investment in CNP (17.8% as reported) * CET1 ratio of 15.2% pro forma for the disposal of investment in CNP (14.9% as reported) * Project Helix completed, adding 140 bps to capital in 2Q2019 Continuing Progress on Balance Sheet Repair * Completion of sale of EUR2.7 bn NPEs (Project Helix) * NPEs of EUR4.3 bn (EUR2.2 bn net); 71% reduction since 2014; NPE ratio reduced to 33%, coverage increased to 50% * Seventeen consecutive quarters of organic NPE reduction; EUR300 mn NPE reduction in 2Q2019; EUR457 mn in 1H2019 * REMU sales (organic) of EUR110 mn in 1H2019; Completion of sale of Cyreit in 2Q2019 * Management continues to actively explore strategies to further accelerate de-risking including further portfolio sales Strong Liquidity Position * Deposits at EUR16.4 bn at quarter end, broadly flat qoq * Significant liquidity surplus of EUR3.8 bn, reflecting EUR1.2 bn increase on Project Helix completion * Loan to deposit ratio of 67% 2Q2019 Performance Reflects Continued De-risking * Total Income of EUR177 mn, Operating profit of EUR72 mn, Underlying profit after tax, excluding Helix & CNP, of EUR21 mn * Cost of risk of 1.23% reflecting continued de-risking and IFRS 9 model volatility * Agreement for the sale of investment in CNP; net loss of EUR23 mn (+30 bps of capital on completion) * Profit after tax of EUR2 mn for 2Q2019 and EUR97 mn for 1H2019
Outgoing Group Chief Executive Statement
"Our results this quarter reflect continuing progress against our core objective of balance sheet repair.
We completed the sale of c.EUR2.7 bn non-performing loans in Project Helix in June, which added 140 bps of capital. Our on-going organic non-performing exposure (NPE) reduction amounted to EUR300 mn for the quarter, bringing total organic reduction in the first half of 2019 to EUR457 mn, in line with our organic target of c.EUR800 mn for 2019. This was the seventeenth consecutive quarter of organic reductions in NPEs.
Since the peak in 2014, we have now reduced the stock of NPEs by 71% to EUR4.3 bn. This stock of NPEs is now covered by 50% loan credit losses. Overall, since 2014 we have managed a reduction in NPEs of EUR10.7 bn, of which EUR8 bn has been through organic actions.
In June 2019 we agreed the sale of our minority stake in CNP Cyprus Insurance Holdings Ltd (CNP). At completion this is expected to add c.30 bps of capital. The sale enables the Group to focus on its core assets and is in line with the Group's strategy of delivering value for shareholders.
The Bank's capital position remains good. As at 30 June 2019 the CET1 ratio (IFRS 9 transitional) was 15.2% and the Total Capital ratio was 18.1%, both pro forma for the disposal of our investment in CNP, well in excess of our regulatory requirements.
During the quarter our deposits remained broadly flat at EUR16.4 bn and our cost of deposits reduced by 8 bps. Overall our cost of deposits has reduced by 52 bps since January 2018. In the second quarter of 2019 new lending rose 13% from the prior year to EUR548 mn, helping support the continued growth in the Cypriot economy. Overall in the first half of 2019, we lent EUR1.1 bn to customers in Cyprus. Our loan to deposit ratio at the quarter-end stood at 67%. The Bank continues to operate with a significant liquidity surplus, which at the end of the second quarter amounted to EUR3.8 bn.
During the second quarter of the year, the Group generated total income of EUR177 mn and a positive operating result of EUR72 mn. The underlying result after tax is a profit of EUR21 mn, excluding Helix and the CNP disposal. On a reported basis, after the EUR23 mn net loss from the sale of our investment in CNP, the result was a profit after tax for the second quarter of EUR2 mn. The reported profit after tax for the first half of the year amounted to EUR97 mn.
I am extremely proud of the progress the Bank has made since late 2013 when I joined the executive team. The Bank is returning to strength, through a disciplined approach to balance sheet repair and disposal of non-core business. It is now well placed to support the strengthening Cypriot economy, which expanded by 3.3% during the first half of the year. I firmly believe that our new CEO, Panicos Nicolaou, whom I have worked closely with for a number of years, will confidently lead the Bank in its next chapter. I know the management will remain focused on continuing to make the Bank stronger, safer and future- focused."
John Patrick Hourican
Group Chief Executive Designate Statement
"I am excited to be taking over on 1 September. John is leaving, with the Bank being entirely transformed from its position at the time he arrived and we are very grateful for the work he and my fellow executive team have done. There remains more to do and our initial focus will be to continue the good work that he and the team have achieved. The strategy to de-risk the Bank and strengthen the balance sheet remains as important today as it was in 2013.
Together with the continued de-risking of the Bank, my focus will be on ensuring our business model is best placed for the future and we will further rationalise and modernise the Bank and identify ways to reduce the cost of running the Bank. As with all other European banks, the changed interest rate environment presents a challenge to our profitability levels. In response, we will remain focused on actively managing our funding costs and identifying ways to reduce our cost base, while looking for opportunities to enhance our revenue dynamics.
I am fully committed to ensuring Bank of Cyprus continues to play a vital role in supporting the local economy. I am under no illusions about how much there remains to be done, but I am excited at the opportunity and our potential."
Panicos Nicolaou
A. Group Financial Results - Statutory Basis
Interim Consolidated Income Statement for the six months ended 30 June 2019
Six months ended 30 June 2019 2018 (represented) ---------- --------------- EUR000 EUR000 ---------- --------------- Turnover 487,145 521,469 ========== =============== Interest income 251,805 286,581 Income similar to interest income 26,683 26,296 Interest expense (50,415) (78,016) ---------- --------------- Expense similar to interest expense (23,964) (22,777) ---------- --------------- Net interest income 204,109 212,084 ---------- --------------- Fee and commission income 87,467 85,282 ---------- --------------- Fee and commission expense (12,955) (4,946) ---------- --------------- Net foreign exchange gains 14,117 18,039 ---------- --------------- Net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates 12,155 37,378 ---------- --------------- Insurance income net of claims and commissions 30,036 25,094 ---------- --------------- Net (losses)/ gains from revaluation and disposal of investment properties (1,349) 1,165 ---------- --------------- Net gains on disposal of stock of property 17,747 20,266 ---------- --------------- Other income 15,679 11,276 ---------- --------------- 367,006 405,638
---------- --------------- Staff costs (114,244) (104,670) ---------- --------------- Special levy on deposits on credit institutions in Cyprus and contribution to Single Resolution Fund (12,477) (12,073) ---------- --------------- Other operating expenses (112,967) (102,292) ---------- --------------- 127,318 186,603 ---------- --------------- Net gains on derecognition of financial assets measured at amortised cost 5,429 19,381 ---------- --------------- Credit losses to cover credit risk on loans and advances to customers (108,911) (252,953) ========== =============== Credit losses of other financial instruments (7,367) (3,331) ========== =============== Impairment of non-financial instruments (11,585) (10,117) ========== =============== Profit/(loss) before share of profit from associates and remeasurement 4,884 (60,417) ---------- --------------- Remeasurement of investment in associate classified (25,943) - as held for sale ---------- --------------- Share of profit from associates 5,312 4,520 ---------- --------------- Loss before tax from continuing operations (15,747) (55,897) ---------- --------------- Income tax 115,144 (3,890) ---------- --------------- Profit/(loss) after tax from continuing operations 99,397 (59,787) ---------- --------------- Profit after tax from discontinued operations - 4,010 ---------- --------------- Profit/ (loss) for the period 99,397 (55,777) ========== =============== Attributable to: ---------- --------------- Owners of the Company-continuing operations profit/(loss) 97,398 (58,058) ---------- --------------- Owners of the Company-discontinuing operations profit - 4,010 ---------- --------------- Total profit/ (loss) attributable to the owners of the Company 97,398 (54,048) ---------- --------------- Non-controlling interests-continuing operations profit/(loss) 1,999 (1,729) ---------- --------------- Profit/ (loss) for the period 99,397 (55,777) ========== =============== Basic and diluted profit/ (losses) per share attributable to the owners of the Company (EUR cent) - continuing operations 21.8 (13.0) ---------- --------------- Basic and diluted profit/ (losses) per share attributable to the owners (EUR cent) 21.8 (12.1) ========== ===============
Interim Consolidated Balance Sheet as at 30 June 2019
30 June 31 December 2019 2018 (restated) Assets EUR000 EUR000 ----------- ----------------- Cash and balances with central banks 5,261,896 4,610,491 ----------- ----------------- Loans and advances to banks 403,041 472,532 ----------- ----------------- Derivative financial assets 13,651 24,754 ----------- ----------------- Investments 1,588,582 777,104 ----------- ----------------- Investments pledged as collateral 292,317 737,587 ----------- ----------------- Loans and advances to customers 10,949,002 10,921,786 ----------- ----------------- Life insurance business assets attributable to policyholders 438,560 402,565 ----------- ----------------- Prepayments, accrued income and other assets 323,253 256,002 ----------- ----------------- Stock of property 1,430,441 1,426,857 ----------- ----------------- Deferred tax assets 379,126 301,778 ----------- ----------------- Investment properties 141,864 128,006 ----------- ----------------- Property and equipment 292,133 260,723 ----------- ----------------- Intangible assets 173,608 170,411 ----------- ----------------- Investments in associates and joint venture 2,191 114,637 ----------- ----------------- Non-current assets and disposal groups held for sale 197,521 1,470,038 ----------- ----------------- Total assets 21,887,186 22,075,271 =========== ================= Liabilities ----------- ----------------- Deposits by banks 532,023 431,942 ----------- ----------------- Funding from central banks 830,000 830,000 ----------- ----------------- Repurchase agreements 247,813 248,945 ----------- ----------------- Derivative financial liabilities 56,702 38,983 ----------- ----------------- Customer deposits 16,376,686 16,843,558 ----------- ----------------- Insurance liabilities 626,512 591,057 ----------- ----------------- Accruals, deferred income, other liabilities and other provisions 331,408 285,483 ----------- ----------------- Pending litigation, claims, regulatory and other matters 102,375 116,951 ----------- ----------------- Subordinated loan stock 261,417 270,930 ----------- ----------------- Deferred tax liabilities 44,818 44,282 ----------- ----------------- Non-current liabilities and disposal group held for sale 6,760 5,812 ----------- -----------------
Total liabilities 19,416,514 19,707,943 ----------- ----------------- Equity ----------- ----------------- Share capital 44,620 44,620 ----------- ----------------- Share premium 1,294,358 1,294,358 ----------- ----------------- Revaluation and other reserves 213,532 190,411 ----------- ----------------- Retained earnings 670,143 591,941 ----------- ----------------- Equity attributable to the owners of the Company 2,222,653 2,121,330 ----------- ----------------- Other equity instruments 220,000 220,000 ----------- ----------------- Total equity excluding non-controlling interests 2,442,653 2,341,330 ----------- ----------------- Non-controlling interests 28,019 25,998 ----------- ----------------- Total equity 2,470,672 2,367,328 ----------- ----------------- Total liabilities and equity 21,887,186 22,075,271 =========== ================= B. Group Financial Results - Underlying Basis Interim Condensed Consolidated Income Statement ------------------------------------------------------------------------------------------------------------------------------------------- qoq EUR mn 1H2019(1) 1H2018(1,2,3) 2Q2019(1) 1Q2019(1) +% yoy +% --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Net interest income 170 166 85 85 1% 3% Net fee and commission income 75 80 38 37 5% -7% Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates 26 42 16 10 58% -37% Insurance income net of claims and commissions 30 25 18 12 42% 20% Net gains from revaluation and disposal of investment properties and on disposal of stock of properties 16 21 12 4 210% -23% Other income 16 11 8 8 -6% 39% --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Total income 333 345 177 156 14% -4% --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Staff costs (112) (102) (56) (56) 0% 9% Other operating expenses (84) (80) (43) (41) 3% 6% Special levy and contribution to Single Resolution Fund (12) (12) (6) (6) -3% 3% Total expenses (208) (194) (105) (103) 1% 7% --------------------------------- ----------------- ------------------ ----------- ----------- Operating profit 125 151 72 53 39% -17% --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Loan credit losses (87) (85) (40) (47) -14% 3% Impairments of other financial and non-financial assets (10) (13) (9) (1) - -20% Reversal of provisions for litigation, regulatory and other matters 3 6 3 (0) - -54% --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Total loan credit losses, impairments and provisions (94) (92) (46) (48) 2% 3% --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Profit before tax and non-recurring items 31 59 26 5 - -49% --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Tax 0 (4) 2 (2) - -98% (Profit)/loss attributable to non-controlling interests (2) 2 (2) (0) - - --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Profit after tax and before non-recurring items 29 57 26 3 - -51% --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Advisory and other restructuring costs - excluding discontinued operations and NPE sale (Helix) (12) (15) (5) (7) -29% -22% ===================== ================================= ================= ================== =========== =========== ========= Profit/(loss) after tax - Organic 17 42 21 (4) - -61% ===================== ================================= ================= ================== =========== =========== ========= Profit from discontinued operations (UK) - 4 - - - - Profit/(loss) relating to NPE sale (Helix) 0 (105) 4 (4) - - Loss on remeasurement of investment in associate classified as held for sale (CNP) net of share of profit from associates (21) 5 (23) 2 - - Reversal of impairment of DTA and impairment of other tax receivables 101 - - 101 - - --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Profit/(loss) after tax - attributable to the owners of the Company 97 (54) 2 95 -97% - --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Key Performance qoq Ratios(3) 1H2019(1) 1H2018(1,2,3) 2Q2019(1) 1Q2019(1) +% yoy +% --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Net Interest Margin (annualised) 1.88% 1.86% 1.89% 1.88% +1 bps +2bps --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Cost to income ratio 63% 56% 59% 66% -7 p.p. +7 p.p. --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Cost to income ratio excluding special levy and contribution to Single Resolution Fund 59% 53% 56% 62% -6 p.p. +6 p.p.
--------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Operating profit return on average assets (annualised) 1.1% 1.4% 1.3% 1.0% +30 bps -30 bps --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Basic earnings/(losses) per share attributable to the owners of the Company (EUR cent) - Organic 3.72 9.43 4.78 (1.06) 5.84 -5.71 --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- Basic earnings/(losses per share attributable to the owners of the Company (EUR cent) 21.84 (12.12) 0.61 21.23 -20.62 33.96 --------------------- --------------------------------- ----------------- ------------------ ----------- ----------- --------- 1. The interest income, non-interest income, staff costs, other operating expenses and loan credit losses related to Project Helix are disclosed under 'Profit/(loss) relating to NPE sale (Helix)' in the underlying basis. 2. Represented for the disposal of the UK subsidiary 3. Including the impact from IFRIC Presentation of unrecognised interest following the curing of a credit-impaired financial asset (IFRS 9)). This resulted in a reclassification between net interest income and loan credit losses, with no impact on the overall profitability. p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1 percentage point Interim Condensed Consolidated Balance Sheet ================================================================================================================================== EUR mn 30.06.2019 31.12.2018 +% (restated) ======================================================== ========= ===================== ================ ==================== Cash and balances with central banks 5,262 4,610 14% Loans and advances to banks 403 473 -15% Debt securities, treasury bills and equity investments 1,881 1,515 24% Net loans and advances to customers 10,949 10,922 0% Stock of property 1,430 1,427 0% Investment properties 142 127 11% Other assets 1,622 1,531 6% Non-current assets and disposal groups held for sale 198 1,470 -87% ======================================================== ========= ===================== ================ ==================== Total assets 21,887 22,075 -1% ======================================================== ========= ===================== ================ ==================== Deposits by banks 532 432 23% Funding from central banks 830 830 - Repurchase agreements 248 249 0% Customer deposits 16,377 16,844 -3% Subordinated loan stock 261 271 -4% Other liabilities 1,169 1,082 8% ======================================================== ========= ===================== ================ ==================== Total liabilities 19,417 19,708 -1% ======================================================== ========= ===================== ================ ==================== Shareholders' equity 2,222 2,121 5% ======================================================== ========= ===================== ================ ==================== Other equity instruments 220 220 - ======================================================== ========= ===================== ================ ==================== Total equity excluding non-controlling interests 2,442 2,341 4% ======================================================== ========= ===================== ================ ==================== Non-controlling interests 28 26 8% ======================================================== ========= ===================== ================ ==================== Total equity 2,470 2,367 4% ======================================================== ========= ===================== ================ ==================== Total liabilities and equity 21,887 22,075 -1% ======================================================== ========= ===================== ================ ==================== Key Balance Sheet figures and 31.12.2018 + ratios 30.06.2019 ======================================================== ================= ================== ==================== =========== Gross loans (EUR mn) 13,072 13,148 -1% ======================================================== ================= ================== ==================== =========== Allowance for expected loan credit losses (EUR mn) 2,145 2,254 -5% ======================================================== ================= ================== ==================== =========== Customer deposits (EUR mn) 16,377 16,844 -3% ======================================================== ================= ================== ==================== =========== Loans to deposits ratio (net) 67% 65% +2 p.p. ======================================================== ================= ================== ==================== =========== NPE ratio 33% 36% -3 p.p. ======================================================== ================= ================== ==================== =========== NPE coverage ratio 50% 47% +3 p.p. ======================================================== ================= ================== ==================== =========== Leverage ratio 10.5% 10.0% 0.5 p.p. ======================================================== ================= ================== ==================== =========== Capital ratios and risk weighted 30.06.2019 30.06.2019 31.12.2018 + assets Pro forma for CNP ======================================================== ================= ================== ==================== =========== Common Equity Tier 1 (CET1) ratio (transitional for IFRS 9)(1) 15.2% 14.9% 11.9%(2) +300 bps ======================================================== ================= ================== ==================== =========== Total capital ratio 18.1% 17.8% 14.9% +290 bps ======================================================== ================= ================== ==================== =========== Risk weighted assets (EUR mn) 13,724 13,962 15,373 -9%
======================================================== ================= ================== ==================== =========== 1. The CET1 FL ratio as at 30 June 2019 (including the full impact of IFRS 9) amounts to 13.3% and 13.5% pro forma for the sale of the investment in CNP (compared to 11.9% and 13.3% pro forma for Helix for 31 March 2019 and to 10.1% and 13.5% respectively for 31 December 2018). 2. The CET1 ratio transitional also for DTA as at 31 December 2018 stood at 12.1%. p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1 percentage point
Comparative Information
Comparative information was restated following the change in the classification of properties which are leased out under operating leases as investment properties, as disclosed in Note 3.3.1 of the Interim Condensed Consolidated Financial Statements for the six months ended 30 June 2019.
Reclassifications to comparative information were also made to conform to current period presentation as follows:
-- Unrecognised interest on previously credit impaired loans which have cured during the period amounting to c.EUR15 mn was reclassified from 'Net interest income' to 'Credit losses to cover credit risk on loans and advances to customers' in line with an IFRIC discussion, which took place in November 2018 (Presentation of unrecognised interest following the curing of a credit impaired financial asset (IFRS 9)).
-- The results of the discontinued operations in the UK (Bank of Cyprus UK Ltd and its subsidiary, Bank of Cyprus Financial Services Ltd) were represented as discontinued operations (profit after tax for 1H2018: EUR4 mn) (Note 7 of the Interim Condensed Consolidated Financial Statements for the six months ended 30 June 2019).
The changes in presentation did not have a material impact on the profit / (loss) after tax of the Group for the period. However, the net interest margin, the cost to income ratio and the cost of risk ratio were recalculated to account for these representations.
B.1 Reconciliation of Income Statement for the six months ended 30 June 2019 between statutory basis and underlying basis
EUR mn Underlying Helix Investment Tax Other Statutory Basis portfolio in associate related Basis classified items as HFS Net interest income 170 34 - - - 204 =========== =========== ============== ========= ====== ========== Net fee and commission income 75 6 - (6) - 75 =========== =========== ============== ========= ====== ========== Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates 26 - - - - 26 =========== =========== ============== ========= ====== ========== Insurance income net of claims and commissions 30 - - - - 30 =========== =========== ============== ========= ====== ========== Net gains from revaluation and disposal of investment properties and on disposal of stock of properties 16 - - - - 16 =========== =========== ============== ========= ====== ========== Other income 16 - - - - 16 ----------- ----------- -------------- --------- ------ ---------- Total income 333 40 - (6) - 367 =========== =========== ============== ========= ====== ========== Total expenses (208) (23) - - (9) (240) ----------- ----------- -------------- --------- ------ ---------- Operating profit 125 17 - (6) (9) 127 =========== =========== ============== ========= ====== ========== Loan credit losses (87) (17) - - - (104) =========== =========== ============== ========= ====== ========== Impairments of other financial and non-financial instruments (10) - - (8) - (18) =========== =========== ============== ========= ====== ========== Reversal of provisions for litigation, regulatory and other matters 3 - - - (3) - =========== =========== ============== ========= ====== ========== Remeasurement of investment in associate classified as held for sale - - (26) - - (26) =========== =========== ============== ========= ====== ========== Share of profit from associate - - 5 - - 5 ----------- ----------- -------------- --------- ------ ---------- Profit/(loss) before tax and non-recurring items 31 - (21) (14) (12) (16) =========== =========== ============== ========= ====== ========== Tax 0 - - 115 - 115 =========== =========== ============== ========= ====== ========== (Profit) attributable to non-controlling interests (2) - - - - (2) ----------- ----------- -------------- --------- ------ ---------- Profit after tax and before non-recurring items 29 - (21) 101 (12) 97 =========== =========== ============== ========= ====== ========== Advisory and other restructuring costs - excluding discontinued operations and NPE sale (Helix) (12) - - - 12 - ----------- ----------- -------------- --------- ------ ---------- Profit after tax - Organic* 17 - (21) 101 - 97 =========== =========== ============== ========= ====== ========== Profit/(loss) relating to NPE sale (Helix) 0 (0) - - - - =========== =========== ============== ========= ====== ========== Loss on remeasurement of investment in associate classified as held for sale (CNP) net of share of profit from associates (21) - 21 - - - =========== =========== ============== ========= ====== ========== Reversal of impairment of DTA and impairment of other tax receivables 101 - - (101) - - =========== =========== ============== ========= ====== ========== Profit after tax (attributable to the owners of the Company) 97 - - - - 97 =========== =========== ============== ========= ====== ==========
* This is the profit after tax, before the loss on remeasurement of investment in associate classified as held for sale (CNP) net of share of profit from associates and the reversal of impairment of deferred tax assets (DTA) and impairment of other tax receivables.
The reclassification differences between the statutory basis and the underlying basis mainly relate to the impact from 'non-recurring items' and are explained as follows:
Helix portfolio
-- Net interest income of EUR34 mn and fee and commission income of EUR6 mn, relating to the NPE sale (Helix) is disclosed under non-recurring items within 'Profit/(loss) relating to NPE sale (Helix)' under the underlying basis.
-- Total expenses include staff costs of EUR3 mn, operating expenses of EUR12 mn and restructuring costs of EUR8 mn relating to the NPE sale (Helix) and are presented within 'Profit/(loss) relating to NPE sale (Helix)' under the underlying basis.
Investment in associate classified as HFS
-- Loss on remeasurement of investment in associate classified as held for sale (CNP) net of share of profit from associates of EUR21 mn comprises the share of profit from associate of EUR5 mn, which is reported in the 'Share of profit from associates' under the statutory basis and the loss on remeasurement of EUR26 mn, which is classified as 'Remeasurement of investment in associate classified as held for sale' under the statutory basis.
Tax related items
-- Reversal of impairment of the deferred tax asset and impairment of other tax receivables amounting to EUR101 mn included within 'Tax' under the statutory basis is classified as a non-recurring item and disclosed within 'Reversal of impairment of DTA and impairment of other tax receivables' under the underlying basis. Fee and commission expense relating to the revised income tax legislation of EUR6 mn, which has been disclosed within 'Reversal of impairment of deferred tax asset and impairment of other tax receivables' under the underlying basis, is disclosed within the 'Net fee and commission income' under the statutory basis.
-- Impairment of other financial assets of EUR8 mn, which are included in "Credit losses of other financial instruments" under the statutory basis, relate to the impairment of Greek tax receivables and are classified as a non-recurring item and disclosed within 'Reversal of impairment of DTA and impairment of other tax receivables' under the underlying basis.
Other reclassifications
-- Advisory and other restructuring costs of c.EUR12 mn included in "Other operating expenses" under the statutory basis, are separately presented under the underlying basis.
-- Reversal of provisions for litigation, regulatory and other matters amounting to EUR3 mn included in "Other operating expenses" under the statutory basis, are separately presented under the underlying basis.
B.2. Balance Sheet Analysis
B.2.1 Capital Base
Total equity (excluding non-controlling interests) totalled EUR2,442 mn at 30 June 2019, compared to EUR2,443 mn at 31 March 2019 and EUR2,341 mn at 31 December 2018. Shareholders' equity totalled EUR2,222 mn at 30 June 2019, compared to EUR2,223 mn at 31 March 2019 and EUR2,121 mn at 31 December 2018.
The Common Equity Tier 1 capital (CET1) ratio on an IFRS 9 transitional basis stood at 14.9% at 30 June 2019 (and 15.2% pro forma for the sale of investment in CNP Cyprus Insurance Holdings Ltd ("CNP") ("pro forma for CNP"), compared to 13.4% at 31 March 2019 (and 14.9% pro forma for Helix), and to 11.9% at 31 December 2018 (adjusted to take into account the deferred tax assets (DTAs) which were fully phased in as of 1 January 2019). During 2Q2019 the Project Helix was completed, positively impacting CET1 ratio by c.140 bps. During 1Q2019 the CET1 ratio was positively affected by the tax legislation amendments relating to the conversion of deferred tax assets into deferred tax credits (DTC). The CET1 ratio as at 30 June 2019 includes reviewed profits for the six months ended 30 June 2019.
The Group has elected to apply the EU transitional arrangements for regulatory capital purposes (EU Regulation 2017/2395) where the impact on the impairment amount from the initial application of IFRS 9 on the capital ratios is phased-in gradually. The amount added each year decreases based on a weighting factor until the impact of IFRS 9 is fully absorbed back to CET1 at the end of the five years. The impact on the capital ratios for the year 2018 was 5% of the impact on the impairment amounts from the initial application of IFRS 9, increasing to 15% (cumulative) for the year 2019.
The CET1 ratio on a fully-loaded basis amounts to 13.3% at 30 June 2019 and 13.5% pro forma for the sale of investment in CNP, compared to 11.9% at 31 March 2019 (and 13.3% pro forma for Helix), and to 10.1% at 31 December 2018 (and 13.5% pro forma for DTC and Helix). On a transitional basis and on a fully phased-in basis, after the five year period of transition is complete, the impact of IFRS 9 is expected to be manageable and within the Group's capital plans.
As at 30 June 2019, the Total Capital ratio stood at 17.8% (and 18.1% pro forma for CNP), compared to 16.2% at 31 March 2019 (and 17.9% pro forma for Helix), and to 14.9% at 31 December 2018.
The Group's capital ratios are above the minimum CET1 regulatory capital ratio of 10.5% (comprising a 4.5% Pillar I requirement, a 3.0% Pillar II requirement, the Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer of 0.5%) and the overall Total Capital requirement of 14.0%, comprising an 8.0% Pillar I requirement (of which up to 1.5% can be in the form of Additional Tier 1 capital and up to 2.0% in the form of Tier 2 capital), a 3.0% Pillar II requirement (in the form of CET1), the Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer of 0.5%. The ECB has also provided non-public guidance for an additional Pillar II CET1 buffer.
Pillar II add-on capital requirements derive from the context of the Supervisory Review and Evaluation Process (SREP) process, which is a point in time assessment, and are therefore subject to change over time.
In accordance with the provisions of the Macroprudential Oversight of Institutions Law of 2015, the Central Bank of Cyprus (CBC) is also the responsible authority for the designation of banks that are Other Systemically Important Institutions (O-SIIs) and for the setting of the O-SII buffer requirement for these systemically important banks. The Group has been designated as an O-SII and the O-SII buffer currently set by the CBC for the Group is 2%. This buffer is being phased-in gradually, having started from 1 January 2019 at 0.5% and increasing by 0.5% every year thereafter, until being fully implemented (2.0%) on 1 January 2022.
Based on the SREP decisions of prior years, the Company and the Bank were under a regulatory prohibition for equity dividend distribution and therefore no dividends were declared or paid during years 2018 and 2017. Following the 2018 SREP decision, the Company and the Bank are still under equity dividend distribution prohibition. This prohibition does not apply if the distribution is made via the issuance of new ordinary shares to the shareholders which are eligible as CET1 capital. No prohibition applies to the payment of coupons on any AT1 capital instruments issued by the Company or the Bank.
The EBA final guidelines on SREP and supervisory stress testing in July 2018 and the Single Supervisory Mechanism's (SSM) 2018 SREP methodology provide that CET1 held for the purposes of Pillar II add-on capital requirements cannot be used to meet any other capital requirements (Pillar 1, P2R or the combined buffer requirements), and therefore cannot be used twice. Such restrictions are, however, only expected to apply with effect from the 2019 SREP cycle.
Project Helix
In June 2019, the Company completed the sale of a portfolio of loans with a gross book value of EUR2.8 bn (of which EUR2.7 bn related to non-performing loans) (the "Portfolio") secured by real estate collateral to certain funds affiliated with Apollo Global Management LLC, the agreement for which was announced on 28 August 2018 (Project Helix). Cash consideration of c.EUR1.2 bn was received on completion, reflecting adjustments resulting from, inter alia, loan repayments received on the Portfolio since the reference date of 31 March 2018.
Overall, the transaction is capital accretive, with a net positive impact on the Group capital ratios of c.60 bps. The impact from the completion of Project Helix on the CET1 ratio and Total Capital ratio at 30 June 2019 is an increase of c.140 bps.
The participation of the Bank of Cyprus Public Company Limited (the "Bank") in the senior debt in relation to financing the Transaction has been syndicated down from the initial level of EUR450 mn to c.EUR45 mn, representing c.4% of the total acquisition funding.
Agreement for the sale of investment in CNP Cyprus Insurance Holdings Ltd
In June 2019, the Group signed an agreement to sell its entire shareholding of 49.9% in its associate CNP Cyprus Insurance Holdings Limited ("CNP") that had been acquired as part of the acquisition of certain operations of Laiki Bank in 2013 for a cash consideration of EUR97.5 mn. The sale is expected to be completed in the second half of 2019, subject to regulatory approvals. On completion, the sale is expected to have a positive impact of c.30 bps on both the Group's CET1 ratio and Total Capital ratio (based on the financial results as at 30 June 2019) resulting mainly from the release of risk weighted assets.
Additional Tier 1
In December 2018, the Company proceeded with the issuance of EUR220 mn of Additional Tier 1 Capital Securities (AT1). AT1 constitutes an unsecured and subordinated obligation of the Company. The coupon is at 12.50% and is payable semi-annually. The first coupon payment to AT1 holders was made in June 2019 and was recognised in retained earnings.
Legislative amendments for the conversion of DTA to DTC
Legislative amendments allowing for the conversion of specific deferred tax assets (DTA) into deferred tax credits (DTC) were adopted by the Cyprus Parliament on 1 March 2019 and published on the Official Gazette of the Republic on 15 March 2019. The law amendments cover the income tax losses transferred from Laiki Bank to the Bank in March 2013. The introduction of CRD IV in January 2014 and its subsequent phasing-in led to a more capital intensive treatment of this DTA for the Bank. The law amendments have resulted in improved regulatory capital treatment, under Capital Requirements Regulation (EU) No. 575/2013 ("CRR"), of the DTA amounting to c.EUR285 mn or a CET1 uplift of c.190 bps.
Pro forma capital ratios
With the completion of the sale of the investment in CNP, expected in 2H2019, the CET1 ratio (IFRS 9 transitional basis) of 14.9% as at 30 June 2019 improves to 15.2% pro forma for CNP. The Total Capital ratio of 17.8% as at 30 June 2019 improves to 18.1% pro forma for CNP.
Share premium reduction of the Bank
The Bank will proceed (subject to approvals mainly by the Court of Cyprus and the ECB) with a capital reduction process which will result in the reclassification of c.EUR551 mn of the Bank's share premium account balance as distributable reserves which shall be available for distribution to the shareholders of the Bank, resulting in total net distributable reserves of c.EUR1 bn on a pro forma basis (31 December 2018). The reduction of capital will not have any impact on regulatory capital or the total equity position of the Bank or the Group.
The distributable reserves provide the basis for the calculation of distributable items under the CRR, which provides that coupons on AT1 capital instruments may only be funded from distributable items.
B.2.2 Funding and Liquidity
Funding
Funding from Central Banks
At 30 June 2019, the Bank's funding from central banks amounted to EUR830 mn, which relates to ECB funding, (at the same level as at 31 March 2019 and 31 December 2018), comprising solely of funding through the Targeted Longer-Term Refinancing Operations (TLTRO II).
Deposits
Customer deposits totalled EUR16,377 at 30 June 2019, compared to EUR16,298 mn at 31 March 2019 and EUR16,844 mn at 31 December 2018, broadly flat qoq and down by 3% yoy.
The Bank's deposit market share in Cyprus reached 34.7% as at 30 June 2019, compared to 35.2% at 31 March 2019. Customer deposits accounted for 75% of total assets at 30 June 2019.
Upon completion of Project Helix the Loan to Deposit ratio (L/D) was reduced by 7 p.p. to 67%, compared to 74% at 31 March 2019 when ignoring the classification of the Helix portfolio as a disposal group held for sale (and to 72% at 31 December 2018 on the same basis) and compared to a peak of 151% at 31 March 2014.
Subordinated Loan Stock
At 30 June 2019 the Bank's subordinated loan stock (including accrued interest) amounted to EUR261 mn (compared to EUR254 mn at 31 March 2019 and EUR271 mn as at 31 December 2018) and relates to unsecured subordinated Tier 2 Capital Notes of nominal value EUR250 mn, issued by the Bank in January 2017.
Liquidity
At 30 June 2019 the Group Liquidity Coverage Ratio (LCR) stood at 253% (compared to 216% at 31 March 2019 and 231% at 31 December 2018) and was in compliance with the minimum regulatory requirement of 100%. The liquidity surplus at 30 June 2019 increased to EUR3.8 bn, from EUR2.7 bn at 31 March 2019, reflecting a EUR1.2 bn increase of liquidity on Helix completion.
The Net Stable Funding Ratio (NSFR) has not yet been introduced. It will become a regulatory indicator when CRR2 is enforced, currently expected in 2021, with the limit set at 100%. At 30 June 2019, the Group's NSFR, on the basis of Basel standards, stood at 128% (compared to 117% at 31 March 2019 and 119% at 31 December 2018).
B.2.3 Loans
Group gross loans totalled EUR13,072 mn at 30 June 2019 compared to EUR15,882 mn at 31 March 2019 and EUR15,900 mn at 31 December 2018. Gross loans in Cyprus totalled EUR12,945 mn at 30 June 2019. The reduction in gross loans by 17% is attributed mainly to the completion of Project Helix (sale of EUR2.8 bn of gross loans of which EUR2.7 bn related to non-performing loans) and to a lesser extent to the completion of Project Velocity (sale of EUR30 mn gross loans as at the date of disposal, relating wholly to non-performing loans) in 2Q2019.
New loans granted in Cyprus reached EUR1,111 mn for 1H2019, exceeding new lending in 1H2018.
At 30 June 2019, the Group net loans and advances to customers totalled EUR10,949 mn (compared to EUR10,955 mn at 31 March 2019 pro forma for Helix (and Velocity) and EUR10,922 mn at 31 December 2018 on the same basis).
The Bank is the single largest credit provider in Cyprus with a market share of 41.3% at 30 June 2019 compared to 46.7% at 31 March 2019, with the reduction reflecting the derecognition of the Helix portfolio on completion.
B.2.4 Loan portfolio quality
Tackling the Group's loan portfolio quality remains the top priority for management. The Group continues to make steady progress across all asset quality metrics and the loan restructuring activity continues. The Group has been successful in engineering restructuring solutions across the spectrum of its loan portfolio.
Non-performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced by EUR2,961 mn or 41% during 2Q2019, driven mainly by the completion of Project Helix, to EUR4,312 mn at 30 June 2019, accounting for 33% of gross loans compared to 46% at 31 March 2019 and 47% at 31 December 2018 (including the Helix and Velocity portfolios).
The organic reduction of NPEs in 2Q2019 on the residual portfolio was EUR300 mn, in line with an organic target of
c.EUR800 mn for 2019.
The NPE coverage ratio improved to 50% at 30 June 2019 compared to 48% at 31 March 2019 pro forma for Helix and 47% at 31 December 2018 on the same basis. Ignoring the classification of the Helix (and Velocity) portfolios as disposal groups held for sale, the NPE coverage ratio as at 31 March 2019 stood at 53% and at 31 December 2018 stood at 52%.
When taking into account tangible collateral at fair value, NPEs are fully covered.
30.06.2019 31.03.2019 31.03.2019(1) pro forma for Helix % gross % gross % gross EUR loans EUR loans EUR mn loans mn mn ============================== ========= ========== ======== ========== ========= ========== NPEs as per EBA definition 4,312 33.0% 4,611 35.1% 7,273 45.8% Of which, in pipeline to exit: 657 5.0% 871 6.6% 1,084 6.8% -NPEs with forbearance measures, no arrears(2) =============================== ======== ========== ======== ========== ========= ========== 1. Ignoring the classification of the Helix portfolio of EUR1,103 mn (NBV) and of the Velocity portfolio of EUR5 mn (NBV) as disposal groups held for sale as at 31 March 2019. 2. The analysis is performed on a customer basis.
Overall, the Group has recorded organic NPE reductions for seventeen consecutive quarters and expects the organic reduction of NPEs to continue during the coming quarters.
Project Helix
In June 2019, the Group announced the completion of Project Helix, that refers to the sale of a portfolio of loans with a gross book value of EUR2.8 bn (of which EUR2.7 bn related to non-performing loans) (the "Portfolio") secured by real estate collateral to certain funds affiliated with Apollo Global Management LLC, the agreement for which was announced on 28 August 2018.
Following the completion of Project Helix, the Group's gross NPEs are c.70% lower than its peak in 2014. Project Helix reduced the NPE ratio by c.11 p.p. to 33% as at 30 June 2019.
Cash consideration of c.EUR1.2 bn was received on completion, reflecting adjustments resulting from, inter alia, loan repayments received on the Portfolio since the reference date of 31 March 2018.
The participation of the Bank in the senior debt in relation to financing the Transaction has been syndicated down from the initial level of EUR450 mn to c.EUR45 mn, representing c.4% of the total acquisition funding.
The Group remains focused on continuing to improve its asset quality position and to seek solutions, both organic and inorganic, to make the Bank a stronger and safer institution, capable of supporting the local economy.
ESTIA
In July 2018, the Government announced a scheme aimed at addressing NPEs backed by primary residence, known as ESTIA (the 'Scheme'). This Scheme is expected to positively impact c.EUR0.84 bn of retail core NPEs, subject to eligibility criteria and participation rate. The ESTIA eligible portfolio refers to the potentially eligible portfolio following on-going detailed assessment based on the Bank's available data on Open Market Value (OMV) and NPE status. Eligibility criteria relate primarily to the OMV of the residence, total income and net wealth of the household. These will act as a clear definition of socially protected borrowers, acting as an enabler against strategic defaulters. In accordance with the Scheme, the eligible loans are to be restructured to the lower of the contractual balance and the OMV. The Government will subsidise one third of the instalment, of the restructured loan. In July 2019 the Memorandum of Understanding was signed by the banks and the Government for participation in the Scheme, which is underway for official launch in September 2019. According to the timeline provided by the Government, the application submissions will occur from September to mid-November 2019, with evaluation by the banks running concurrently until the end of November 2019. During 4Q2019, the participating banks will offer restructuring solutions to the applicants and simultaneously the applications will be reviewed and approved by the Government, with the process expected to finish by March 2020. The 1(st) payment of the state subsidy installment is expected to occur between December 2019 and April 2020 (please refer to slide 8 of the Results Presentation for the six months ended 30 June 2019).
Project Velocity
In June 2019, the Bank completed the sale of a non-performing loan portfolio of primarily retail unsecured exposures, with a contractual balance of EUR245 mn and a gross book value of EUR34 mn as at 30 September 2018 (known as "Project Velocity" or the "Sale") to APS Delta s.r.o. This portfolio comprised 9,700 heavily delinquent borrowers, including 8,800 private individuals and 900 small-to-medium-sized enterprises. The gross book value of this portfolio as at the date of disposal was EUR30 mn. The Sale was broadly neutral to both the profit and loss account and to capital.
The Group continues to assess the potential to accelerate the decrease in NPEs on its balance sheet through an additional sale of NPEs. To that extent the Group has, during the second half of 2019, embarked on a preparation phase to review the feasibility of NPE reduction structures with the aim of identifying the option that best meets the Group's strategic objectives. The preparation phase involves defining the relevant NPE portfolio, evaluation of real estate collaterals, data remediation and enhancement of data tapes, borrower information memorandums, legal due diligence and transaction structuring options. For the purposes of completing the workstreams outlined above and in order to conclude on the best possible structure, the Group has engaged international advisors, and is proceeding to engage in high level discussions via the signing of confidentiality agreements with various third parties, including financial investors and investment banks, that may be interested in pursuing a possible collaboration with the Group. A range of potential outcomes of this preparation phase is possible, including an outright sale (including the Bank retaining a portion of the related financing). Any potential transaction is expected to involve a portfolio of NPEs in excess of EUR2 bn by gross book value. The Group is not committed to any outcome arising from this preparation phase, which is currently expected to be finalised in the first half of 2020.
B.2.5. Real Estate Management Unit (REMU)
The Real Estate Management Unit (REMU) on-boarded EUR126 mn of assets in 1H2019 (down by 42% yoy), via the execution of debt for asset swaps and repossessed properties. The focus for REMU is increasingly shifting from on-boarding of assets resulting from debt for asset swaps towards the disposal of these assets. The Group completed organic disposals of EUR92 mn in 1H2019 (compared to EUR126 mn in 1H2018), resulting in a profit on disposal of EUR17 mn for 1H2019. During the six months ended 30 June 2019, the Group executed sale-purchase agreements (SPAs) with contract value of EUR110 mn (258 properties), excluding the sale of the Cyreit. In addition, the Group signed SPAs for disposals of assets with contract value of EUR89 mn.
Completion of sale of Cyreit
In November 2018, the Bank signed an agreement for the disposal of its entire holding in the investment shares of the Cyreit Variable Capital Investment Company PLC (Cyreit). During 2Q2019, the Group completed the sale of the Cyreit (21 properties), recognising a loss on disposal of c.EUR1 mn. The total proceeds from the disposal of Cyreit were EUR160 mn.
Completion of Project Helix
With the completion of Project Helix, properties with carrying value of EUR109 mn, which were included in the portfolio for the NPE sale (Helix), were derecognised as of 30 June 2019. As at 31 March 2019, properties with carrying value of EUR98 mn were included in the portfolio for the NPE sale (Helix), compared to EUR74 mn as at 31 December 2018.
Change in classification of properties which are leased out under operating leases
The Group has decided to classify the leased properties acquired in exchange of debt and leased out under operating leases as 'Investment Properties' instead of 'Inventories'. This change has been applied retrospectively, resulting in the restatement of comparatives.
As a result of the above change in classification, properties with carrying value of EUR118 mn were reclassified from the stock of properties (measured at the lower of cost and net realisable value under IAS 2) to investment properties (measured at fair value under IAS 40) as at 30 June 2019 (compared to EUR103 mn as at 31 December 2018). These properties continue to be managed by REMU.
This change in classification had no material impact on the Group's comparative retained earnings and a cumulative impact of EUR1 mn gain has been recognised under 'Net gains from revaluation and disposal of investment properties and on disposal of stock of properties' in 2Q2019.
Assets held by REMU
As at 30 June 2019, assets held by REMU had a carrying value of EUR1,548 mn (comprising properties of EUR1,430 mn classified as 'Inventories' and EUR118 mn as 'Investment Properties'), compared to EUR1,530 mn as at 31 December 2018 (comprising properties of EUR1,427 mn classified as 'Inventories' and EUR103 mn as 'Investment Properties').
In addition to assets held by REMU, properties classified as 'Investment properties' with carrying value of EUR24 mn as at 30 June 2019 and as at 31 December 2018 relate to legacy properties held by the Bank before the set-up of REMU in January 2016.
Assets held by REMU (Group) qoq EUR mn 1H2019 1H2018 2Q2019 1Q2019 +% yoy +% ------ ------ ------ ------ ---- Opening balance 1,530 1,641 1,542 1,530 1% -7% ----------------------------------------------------------------- ------ ------ ------ ------ ---- ------ On-boarded assets (including construction cost) 126 220 81 45 78% -43% ----------------------------------------------------------------- ------ ------ ------ ------ ---- ------ Sales (92) (126) (62) (30) 101% -27% ----------------------------------------------------------------- ------ ------ ------ ------ ---- ------ Transfer to investment properties (Cyreit) - (166) - - - -100% ----------------------------------------------------------------- ------ ------ ------ ------ ---- ------ Impairment loss (10) (9) (8) (2) 3% - ----------------------------------------------------------------- ------ ------ ------ ------ ---- ------ Transfer to non-current assets and disposal groups held for sale (6) (39) (5) (1) - -84% ----------------------------------------------------------------- ------ ------ ------ ------ ---- ------ Foreign exchange and other movements - 3 - - - - ----------------------------------------------------------------- ------ ------ ------ ------ ---- ------ Closing balance 1,548 1,524 1,548 1,542 0% 2% ----------------------------------------------------------------- ------ ------ ------ ------ ---- ------ Analysis by type and country Cyprus Greece Romania Total 30 June 2019 (EUR mn) ------------------------------- ------- ------- -------- ------ Residential properties 167 27 0 194 Offices and other commercial properties 233 40 10 283 Manufacturing and industrial properties 79 37 0 116 Hotels 26 0 - 26 Land (fields and plots) 917 7 3 927 Properties under construction 2 - - 2 ------------------------------- ------- ------- -------- ------ Total 1,424 111 13 1,548 ------------------------------- ------- ------- -------- ------ Cyprus Greece Romania Total 31 December 2018 (EUR mn) ------------------------------- ------- ------- -------- ------ Residential properties 164 25 0 189 Offices and other commercial properties 228 44 7 279 Manufacturing and industrial properties 80 38 0 118 Hotels 35 0 - 35 Land (fields and plots) 896 8 4 908 Properties under construction 1 - - 1 ------------------------------- ------- ------- -------- ------ Total 1,404 115 11 1,530 ------------------------------- ------- ------- -------- ------
B.2.6 Non-core overseas exposures
The remaining non-core overseas net exposures (including both on-balance sheet and off-balance sheet exposures) at 30 June 2019 are as follows:
EUR mn 30 June 2019 31 December 2018 ------------- Greece 152 164 Romania 34 35 Serbia 8 7 Russia 19 23 UK 1 11 --------- ------------- ----------------- Total 214 240 --------- ------------- -----------------
The Group continues its efforts for further deleveraging and disposal of non-essential assets and operations.
In accordance with the Group's strategy to exit from overseas non-core operations, the operations of the branch in Romania were terminated in January 2019, following the completion of deregistration formalities with respective authorities.
During 2Q2019 the Group signed a binding agreement for the disposal of the overseas exposure in Serbia, comprising loans and properties, amounting to EUR8 mn. As at 30 June 2019, this exposure was classified as held for sale.
In addition to the above, at 30 June 2019 there were overseas exposures of EUR311 mn in Greece, relating to both loans and properties, (compared to exposures of EUR157 mn at 31 March 2019 and EUR144 mn at 31 December 2018), not identified as non-core exposures, since they are considered by management as exposures arising in the normal course of business. The qoq increase is mainly driven by new lending to Greek entities investing in Cyprus, granted by the Bank in the normal course of business.
B.3. Income Statement Analysis
B.3.1 Total income
EUR mn 1H2019(1) 1H2018(1,2,3) 2Q2019(1) 1Q2019(1) qoq +% yoy +% --------- ------------- --------- --------- ------ Net interest income 170 166 85 85 1% 3% ---------------------------------------- --------- ------------- --------- --------- ------ -------- Net fee and commission income 75 80 38 37 5% -7% Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries 26 42 16 10 58% -37% Insurance income net of claims and commissions 30 25 18 12 42% 20% Net gains from revaluation and disposal of investment properties and on disposal of stock of properties 16 21 12 4 210% -23% Other income 16 11 8 8 -6% 39% ---------------------------------------- --------- ------------- --------- --------- ------ -------- Non-interest income 163 179 92 71 29% -9% ---------------------------------------- --------- ------------- --------- --------- ------ -------- Total income 333 345 177 156 14% -4% ---------------------------------------- --------- ------------- --------- --------- ------ -------- Net Interest Margin (annualised) 1.88% 1.86% 1.89% 1.88% +1 bps +2 bps ---------------------------------------- --------- ------------- --------- --------- ------ -------- Average interest earning assets(1) (EUR mn) 18,271 18,005 18,149 18,243 -1% 1% ---------------------------------------- --------- ------------- --------- --------- ------ -------- 1. The interest income, non-interest income, staff costs, other operating expenses and loan credit losses related to Project Helix are disclosed under 'Profit/(loss) relating to NPE sale (Helix)' in the underlying basis. 2. Represented for the disposal of the UK subsidiary. 3. Including the impact from IFRIC Presentation of unrecognised interest following the curing of a credit-impaired financial asset (IFRS 9)). This resulted in a reclassification between net interest income and loan credit losses, with no impact on the overall profitability. p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1 percentage point
Net interest income (NII) and net interest margin (NIM) for 1H2019 amounted to EUR170 mn and 1.88% respectively. NII for 2Q2019 amounted to EUR85 mn and remained at the same levels as 1Q2019 and was up by 3% compared to EUR166 mn a year earlier. The NIM for 2Q2019 stood at 1.89% broadly flat qoq and yoy, negatively affected by the continued pressure on lending rates and positively affected by the reduction of cost of deposits.
Average interest earning assets for 1H2019 amounted to EUR18,271 mn, up by 1% yoy. Quarterly average interest earning assets for 2Q2019 amounted to EUR18,149 mn compared to EUR18,243 mn for 1Q2019, down by 1%, primarily driven by the completion of NPE sales.
Non-interest income for 1H2019 amounted to EUR163 mn, comprising net fee and commission income of EUR75 mn, net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries of EUR26 mn, net insurance income of EUR30 mn, net gains from revaluation and disposal of investment properties and on disposal of stock of properties of EUR16 mn and other income of EUR16 mn.
Net fee and commission income for 2Q2019 amounted to EUR38 mn, at similar levels compared to 1Q2019, following the classification of net commission income generated by project Helix to Profit/ (loss) relating to NPE sale.
Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries of EUR26 mn for 1H2019, comprising mainly net foreign exchange gains of EUR14 mn and net gains on revaluation of financial instruments of EUR12 mn, decreased by 37% yoy, mainly due to one-off gain on disposal of bonds during 1Q2018 amounting to EUR19 mn. Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries totalled EUR16 mn for 2Q2019, compared to EUR10 mn for 1Q2019, up by 58% qoq. The increase qoq is driven mainly by one-off revaluation gains on financial instruments.
Net insurance income amounted to EUR30 mn for 1H2019, compared to EUR25 mn for 1H2018, up by 20% yoy, reflecting increased income and positive investment returns. Net insurance income amounted to EUR16 mn for 2Q2019, compared to EUR10 mn for 1Q2019, up by 58% qoq, driven mainly by a one-off amount of c.EUR2.5 mn arising from the reduction of the discount rate, following an improvement in the yield of assets, other revaluation gains and lower insurance claims during the quarter.
Net gains from revaluation and disposal of investment properties and on disposal of stock of properties for 1H2019 amounted to EUR16 mn, comprising net profit from the disposal of stock properties of EUR17 mn (REMU gains) and a valuation loss of EUR1 mn, compared to net gains of EUR21 mn for 1H2018 (mainly net profit from the disposal of stock of properties (REMU gains)). Net gains from revaluation and disposal of investment properties and on disposal of stock of properties for 2Q2019 increased to EUR12 mn from EUR4 mn in the previous quarter, reflecting the disposal of high value REMU properties in this quarter. REMU profit remains volatile.
Total income for 1H2019 amounted to EUR333 mn, compared to EUR345 mn for 1H2018 (down by 4% yoy). Total income for 2Q2019 amounted to EUR177 mn, compared to EUR156 mn in 1Q2019, up by 14% qoq.
B.3.2 Total expenses
EUR mn 1H2019(1) 1H2018(1,2,3) 2Q2019(1) 1Q2019(1) qoq +% yoy +% ----------- --------------- --------- ----------- ------- Staff costs (112) (102) (56) (56) 0% 9% Other operating expenses (84) (80) (43) (41) 3% 6% ------------------------------- ----------- --------------- ------------- ------- ------- -------- Total operating expenses (196) (182) (99) (97) 2% 8% ------------------------------- ----------- --------------- ------------- ------- ------- -------- Special levy and contribution to Single Resolution Fund (SRF) (12) (12) (6) (6) -3% 3% Total expenses (208) (194) (105) (103) 1% 7% ----------- --------------- ------------- ------- ------- Cost to income ratio 63% 56% 59% 66% -7 p.p. +7 p.p. ------------------------------- ----------- --------------- ------------- ------- ------- -------- Cost to income ratio excluding special levy and contribution to SRF 59% 53% 56% 62% -6 p.p. +6 p.p. ------------------------------- ----------- --------------- ------------- ------- ------- -------- 1. The interest income, non-interest income, staff costs, other operating expenses and loan credit losses related to Project Helix are disclosed under 'Profit/(loss) relating to NPE sale (Helix)' in the underlying basis. 2. Represented for the disposal of the UK subsidiary 3. Including the impact from IFRIC Presentation of unrecognised interest following the curing of a credit-impaired financial asset (IFRS 9)). This resulted in a reclassification between net interest income and loan credit losses, with no impact on the overall profitability. p.p. = percentage points, bps = basis points, 100 basis points (bps) = 1 percentage point
Total expenses for 1H2019 were EUR208 mn (compared to EUR194 mn for 1H2018), 54% of which related to staff costs
(EUR112 mn), 40% to other operating expenses (EUR84 mn) and 6% (EUR12 mn) to special levy and contribution to Single Resolution Fund (SRF).
Total operating expenses for 1H2019 were EUR196 mn, increased by 8% yoy, compared to EUR182 mn for 1H2018. Total operating expenses for 2Q2019 were EUR99 mn, increased by 2% qoq, compared to EUR97 mn in 1Q2019.
Staff costs of EUR112 mn for 1H2019 increased by 9% yoy (compared to EUR102 mn in 1H2018) mainly driven by the increase in employer's social insurance contributions from the beginning of the year and the additional contributions to the new general healthcare system which commenced in March 2019. Staff costs for 2Q2019 amounted to EUR56 mn, at the same level as the previous quarter.
The Group employed 4,155 persons as at 30 June 2019 (compared to 4,156 persons as at 31 March 2019 and 4,146 persons as at 31 December 2018), including 108 persons relating to the Helix transaction, whilst full migration and transfer to the buyer is expected to conclude by the end of the year. The staff costs related to these persons are included under 'Profit/(loss) relating to NPE sale (Helix)' in the underlying basis.
Other operating expenses for 1H2019 were EUR84 mn, increased by 6% yoy, mainly due to higher property related costs and higher depreciation / amortization, resulting from increased capital expenditure, following the Digital Transformation Programme. Other operating expenses for 2Q2019 were EUR43 mn, increased by 3% qoq.
The cost to income ratio excluding special levy and contribution to Single Resolution Fund for 2Q2019 was 56%, (compared to 62% for 1Q2019), principally reflecting the increase in non-interest income. Cost management, including containment of staff costs, remains a key focus for this this year and going forward.
B.3.3 Profit before tax and non-recurring items
EUR mn 1H2019(1) 1H2018(1,2,3) 2Q2019(1) 1Q2019(1) qoq +% yoy +% ----------- --------------- --------- --------- ------ Operating profit 125 151 72 53 39% -17% -------------------------------------- ----------- --------------- --------- --------- ------ ------ Loan credit losses (87) (85) (40) (47) -14% 3% Impairments of other financial and non-financial assets (10) (13) (9) (1) - -20% Reversal of provisions for litigation, regulatory and other matters 3 6 3 (0) - -54% -------------------------------------- ----------- --------------- --------- --------- ------ ------ Total loan credit losses, impairments and provisions (94) (92) (46) (48) 2% 3% -------------------------------------- ----------- --------------- --------- --------- ------ ------ Profit before tax and non-recurring items 31 59 26 5 - -49% -------------------------------------- ----------- --------------- --------- --------- ------ ------ 1. The interest income, non-interest income, staff costs, other operating expenses and loan credit losses related to Project Helix are disclosed under 'Profit/(loss) relating to NPE sale (Helix)' in the underlying basis. 2. Represented for the disposal of the UK subsidiary. 3. Including the impact from IFRIC Presentation of unrecognised interest following the curing of a credit-impaired financial asset (IFRS 9)). This resulted in a reclassification between net interest income and loan credit losses, with no impact on the overall profitability.
Operating profit for 1H2019 was EUR125 mn, compared to EUR151 mn for 1H2018, down by 17% yoy, mainly due to the lower volume on loans and pressure on lending rates.
The loan credit losses for 1H2019 totalled EUR87 mn (compared to EUR85 mn for 1H2018 up by 3% yoy), reflecting further balance sheet de-risking. The loan credit losses for 2Q2019 amounted to EUR40 mn, compared to EUR47 mn for 1Q2019, down by 14% qoq.
The annualised loan credit losses charge (cost of risk) for 1H2019, following the completion of NPE sales which led to the reduction of gross loans by EUR2.8 bn, accounted for 1.34% of gross loans, compared to an annualised loan credit losses charge of 1.22% for 1H2018, on the same basis, reflecting further de-risking and IFRS 9 model volatility.
At 30 June 2019, the allowance for expected loan credit losses, including fair value adjustment on initial recognition and credit losses on off-balance sheet exposures totalled EUR2,145 mn (compared to EUR2,227 mn at 31 March 2019 pro forma for Helix and EUR2,254 mn at 31 December 2018 on the same basis) and accounted for 16.4% of gross loans (at similar levels with 31 March 2019 and 31 December 2018 on the same basis).
Impairments of other financial and non-financial assets for 2Q2019 were EUR9 mn, compared to EUR1 mn for 1Q2019, mainly driven by the de-risking of the legacy REMU properties.
Reversal of provisions for litigation, regulatory and other matters for 2Q2019 totalled EUR3 mn, relating to the reversal of provisions of previously provided cases with a favourable outcome.
B.3.4 Profit/(loss) after tax
EUR mn 1H2019(1) 1H2018(1,2,3) 2Q2019(1) 1Q2019(1) qoq +% yoy +% ----------- --------------- --------- --------- ------ Profit before tax and non-recurring items 31 59 26 5 - -49% ---------------------------------------------- ----------- --------------- --------- --------- ------ ------ Tax 0 (4) 2 (2) - -98% (Profit)/loss attributable to non-controlling interests (2) 2 (2) (0) - - ---------------------------------------------- ----------- --------------- --------- --------- ------ ------ Profit after tax and before non-recurring items 29 57 26 3 - -51% ---------------------------------------------- ----------- --------------- --------- --------- ------ ------ Advisory and other restructuring costs - excluding discontinued operations and NPE sale (Helix) (12) (15) (5) (7) -29% -22% Profit after tax - Organic 17 42 21 (4) - -61% ----------- --------------- --------- --------- ------ Profit/(loss) from discontinued operations (UK) - 4 - - - - Profit/ (loss) relating to NPE sale (Helix) 0 (105) 4 (4) - - Loss on remeasurement of investment in associate classified as held for sale (CNP) net of share of profit from associates (21) 5 (23) 2 - Reversal of impairment of DTA and impairment of other tax receivables 101 - - 101 - - ---------------------------------------------- ----------- --------------- --------- --------- ------ ------ Profit/(loss) after tax - attributable to the owners of the Company 97 (54) 2 95 -97% - ---------------------------------------------- ----------- --------------- --------- --------- ------ ------ 1. The interest income, non-interest income, staff costs, other operating expenses and loan credit losses related to Project Helix are disclosed under 'Profit/(loss) relating to NPE sale (Helix)' in the underlying basis. 2. Represented for the disposal of the UK subsidiary. 3. Including the impact from IFRIC Presentation of unrecognised interest following the curing of a credit-impaired financial asset (IFRS 9)). This resulted in a reclassification between net interest income and loan credit losses, with no impact on the overall profitability.
The tax credit for 1H2019 is minimal, positively affected by overprovisions relating to prior years, compared to a tax charge of EUR4 mn a year earlier. The tax credit for 2Q2019 amounted to EUR2 mn compared to a tax charge of EUR2 mn in 1Q2019.
Profit after tax and before non-recurring items for 1H2019 was EUR29 mn, compared to a profit of EUR57 mn for 1H2018, down by 51% yoy. Profit after tax and before non-recurring items for 2Q2019 was EUR26 mn, compared to EUR3 mn in 1Q2019.
Advisory and other restructuring costs - excluding discontinued operations and NPE sale (Helix) for 1H2019 amounted to EUR12 mn, compared to EUR15 mn for 1H2018, down by 22% yoy.
Profit after tax arising from the organic operations of the Group for 1H2019 amounted to EUR17 mn, compared to EUR42 mn for 1H2018, down by 61% yoy. Profit after tax arising from the organic operations of the Group for 2Q2019 amounted to EUR21 mn, compared to a loss of EUR4 mn.
The net result of the sale of the Helix portfolio, comprising the interest income, non-interest income, staff costs, other operating expenses and loan credit losses related to Project Helix, for 2Q2019 was a profit of EUR4 mn, compared to a loss of EUR4 mn for the previous quarter, bringing the net result from the Project for 1H2019 to Nil, compared to a net loss for 1H2018 of EUR105 mn.
Loss on remeasurement of investment in associate classified as held for sale (CNP) net of share of profit from associates totalled EUR21 mn for 1H2019, comprising a loss on remeasurement of investment in associate classified as held for sale of EUR26 mn and a share of profit from associates of EUR5 mn (compared to a share of profit from associates of EUR5 mn in 1H2018). During 2Q2019 the Group announced a binding agreement to sell its entire shareholding of 49.9% in its associate CNP Cyprus Insurance Holdings Limited (CNP) that had been acquired as part of the acquisition of certain operations of Laiki Bank in 2013, for a cash consideration of EUR97.5 mn.
Reversal of impairment of DTA and impairment of other tax receivables totalled EUR101 mn for 1H2019, comprising the positive impact of EUR109 mn following amendments to the Income Tax legislation in Cyprus adopted in March 2019, and an impairment of EUR8 mn relating to Greek tax receivables adversely impacted from legislative changes. The carrying value of the remaining receivable at the quarter end was c.EUR5 mn.
Profit after tax attributable to the owners of the Company for 1H2019 was EUR97 mn, compared to a loss of EUR54 mn for 1H2018. Profit after tax attributable to the owners of the Company for 2Q2019 was EUR2 mn, compared to a profit of EUR95 mn in 1Q2019.
C. Operating Environment
Economic expansion continued into 2019 with real Gross Domestic Product (GDP) increasing by 3.4% in the first quarter and by 3.2% in the second quarter seasonally adjusted, after rising by 3.9% in 2018 and by 4.5% and 4.8% respectively in 2017 and 2016 (Cyprus Statistical Service). The deceleration was driven by slowing activity in the traditional sectors including tourism and construction. From the demand side the slowdown was driven by a deteriorating external balance. Excluding ships registrations, net exports have been contributing negatively to real GDP growth in 2018 and in the first quarter of 2019. Exports and imports of goods and services excluding ships, declined in the first quarter. Regarding exports, both the goods and services components declined, the latter reflecting a poorer tourism performance at the start of the year. Government consumption surged in the quarter. Other than transport equipment which fluctuates with ship registrations, fixed investment was driven by construction related activities.
Total employment increased by 6% in the first quarter (Cyprus Statistical Service) driven by full-time hirings, and the unemployment rate dropped to 7.3% when seasonally adjusted (Eurostat). Consumer inflation remained tamed in the first seven months of the year rising by 0.8% compared with 1.4% for 2018, due in part to low energy prices in world markets, but also limited pricing power in most categories of goods and services with the exception of housing. Tourist arrivals dropped marginally by 0.9% in the first half of the year with the drop of Russian tourists more pronounced at 4.4%, whilst arrivals from the UK were up marginally by 0.4%. In the construction sector, building permits remained strong in the first quarter, particularly for dwellings, with some deceleration in terms of volume. Building permits increased sharply in April in terms of volume, driven by the hotel sector. On the demand side, the volume of retail sales decelerated sharply in the first quarter of the year, rising by 1.9%, compared to a 5.4% overall yearly increase in 2018.
Looking into the medium term, the economy is expected to continue to grow but at a slowing pace, according to forecasts by the IMF and the European Commission. Employment conditions are expected to continue to improve and the unemployment rate is expected to drop further. Price inflation is expected to rise in later years as capacity utilisation will be tightening. The economy will continue to wrestle with legacy problems to some degree, but the real challenge will be the transformation of the economy towards higher value added activities that will support higher productivity growth and improved competitiveness.
The primary challenges therefore will be, to further de-risk the economy by reducing public debt and the remaining stock of non-performing loans; to safeguard fiscal space so as to be able to respond to unforeseen circumstances; and to pursue additional structural reforms especially in the judiciary and public administration domains that will improve the investment environment and in the process induce productivity boosting investments.
Fiscal performance has been strengthening driven by rising public revenues and constrained expenditures. The general government budget surplus rose to 3.5% of GDP in 2018 and remained sizable in the first half of 2019. Public debt remains high and rose further in 2018 to EUR21.3 bn or 102.5% of GDP, as a result of the fiscal burden associated with the resolution of the Cyprus Cooperative Bank (Eurostat). However, a combination of budget surplus, rising expected inflation and low debt service costs, will be supporting an accelerated decline in the public debt to GDP ratio in the medium term.
In the banking sector, funding conditions remained favourable and the stock of NPEs continued to decline. Specifically, the stock of NPEs declined from EUR20.9 bn at the end of December 2017 to EUR10.4 bn at the end of December 2018 after Bank of Cyprus' loans sale and the resolution of the Cyprus Cooperative Bank. The stock of NPEs was EUR10.3 bn at the end of March 2019 and the ratio to gross loans was 30.9%, marginally higher than 30.5% at the end of December 2018, reflecting a further drop in loans outstanding.
Going forward, downside risks derive from the external environment and the structure of the domestic economy which is characterised by a large foreign balance relative to the GDP. The slowing of global trade, uncertainties over Brexit and fragilities in the EU are having an impact. Brexit presents downside risks to the Cyprus economy given close trade and investment links. Economic growth is expected to remain positive, but to soften. Growth in 2019 and 2020 according to the European Commission is expected to be at 2.9% and 2.6%, respectively. Employment is expected to continue to rise, but at a slower pace than in recent years, and the unemployment rate is expected to continue to drop. Investment is expected to be strengthening, but high imports are expected to limit the contribution to growth from the external sector. Exports growth is expected to decelerate relative to 2014 - 2018 against a less favourable international environment.
The sovereign risk ratings of the Cyprus Government improved considerably in the recent period reflecting expectations of a sustained decline in public debt as a ratio to GDP, expected further declines in non-performing exposures and a more stable price environment following a protracted period of deflation and low inflation. In November 2018 Fitch Ratings upgraded its Long-Term Issuer Default ratings for Cyprus to investment grade (BBB-), affirming in April 2019. In September 2018, S&P Global Ratings also upgraded Cyprus to investment grade (BBB-). In July 2018 Moody's Investors Service upgraded Cyprus' sovereign rating to Ba2 from Ba3, affirmed in April 2019. All maintain stable outlook.
D. Business Overview
As the Cypriot operations account for 99% of gross loans and 100% of customer deposits (after the disposal of the UK operations in 2018), the Group's financial performance is highly correlated to the economic and operating conditions in Cyprus and is expected to consequently benefit from the country's recovery. Most recently, at the end of July 2019, Standard and Poor's affirmed their long-term issuer credit rating on the Bank of 'B+' (stable outlook). In March 2019, Fitch Ratings affirmed their long-term issuer default rating of B- (positive outlook). In January 2019, Moody's Investors Service upgraded the Bank's long-term deposit rating to B3 from Caa1, with a positive outlook. The positive outlook reflects expectations of further improvements in the Bank's financial fundamentals, mainly asset quality over the next 12-18 months, in the context of an improved operating environment in Cyprus. The key drivers for the rating actions were the improvement in the Bank's financial fundamentals, mainly in asset quality, and its funding position.
Tackling the Bank's loan portfolio quality is of utmost importance for the Group. The Group has been successful in engineering restructuring solutions across the spectrum of its loan portfolio, and expects the organic reduction of residual NPEs to continue, with a target of c. EUR800 mn for 2019, as portfolio size and business line mix has changed radically upon completion of the Project Helix. In parallel, the Group continues to actively explore strategies to further accelerate de-risking, including further portfolio sales.
The July 2018 foreclosure law amendments have expedited the process and limited options to frustrate execution. Recently, the Cyprus Parliament voted through certain changes to the 2018 law which, in the most part, seek to (a) provide additional checks and balances where banks are seeking to foreclose small loans (<EUR350 thousand) secured by a principal private residence, and (b) extend the foreclosure timetable by extending various notice periods. These amendments have not yet passed into law, as the President of the Republic has referred these to the Supreme Court, based on legal advice from the Attorney General that elements thereof are unconstitutional. Discussions are on-going, including, inter alia, with the Ministry of Finance, the CBC and the Financial Ombudsman, aiming to introduce amendments to the foreclosure and loan restructuring framework that are acceptable to all stakeholders.
The strategic focus of the Group is to reshape its business model to grow in the core Cypriot market through prudent new lending. As at 30 June 2019, the Bank's capital position remains good and is strengthened pro forma for the disposal of investment in CNP. The Group expects to continue to be able to support the recovery of the Cyprus economy through the provision of new lending. Growth in new lending in Cyprus is focused on selected industries that are more in line with the Bank's target risk profile, such as tourism, trade, real estate, professional services, information/communication technologies, energy, education and green projects.
Aiming at supporting investments by SMEs and mid-caps to boost the Cypriot economy, and create new jobs for young people, the Bank continues to provide joint financed schemes. To this end, the Bank continues its partnership with the European Investment Bank (EIB), the European Investment Fund (EIF), the European Bank for Reconstruction and Development (EBRD) and the Cyprus Government.
Management is also placing emphasis on diversifying income streams by optimising fee income from international transaction services, wealth management and insurance. The Group's insurance companies, EuroLife Ltd and General Insurance of Cyprus Ltd operating in the sectors of life and general insurance respectively, are leading players in the insurance business in Cyprus, with such businesses providing a recurring income, further diversifying the Group's income streams. The insurance income net of insurance claims for 1H2019 amounted to EUR30 mn, up by 20% yoy, contributing to 18% of non-interest income.
In order to further optimise its funding structure, the Bank continues to focus on the shape and cost of deposit franchise, taking advantage of the increased customer confidence towards the Bank, as well as improving macroeconomic conditions. The cost of deposits has been reduced by 52 bps to 24 bps over the last 18 months.
In common with other European banks, the changed interest rate environment presents a challenge to the Group's profitability. A key focus for management this year and going forward is the active management of funding costs and on-going running expenses, including the containment of staff costs. The Digital Transformation Programme that started in 2017 is beginning to deliver an improved customer experience (see section below) and the branch network is half the size it was in 2013.
Digital Transformation
As part of its vision to be the leading financial hub in Cyprus, the Bank continues its Digital Transformation Programme in collaboration with IBM, the Bank's Strategic Digital Transformation Partner, which focuses on three strategic pillars: developing digital services and products that enhance the customer experience, streamlining internal processes and introducing new ways of working to improve the workplace environment. In the last few months, various new features were introduced on the new mobile app, such as the ability to apply for e-products, transfer amounts over EUR150 through QuickPay, log-in through biometrics, and view own accounts with UK banks. Also, financial management tools have been introduced that allow our clients to use the 1Bank service to better manage their finances. In addition, Apple Pay was launched that allows Bank of Cyprus Visa cardholders to make secure and fast payments through iOS mobile devices. This has had very positive feedback from customers and rapid adoption. Payments via Android devices are made through the BoC Wallet app. Moreover, the introduction of the 1Bank B2B (business to business) APIs (Application Programming Interfaces) is gaining traction.
Digital Transformation (continued)
These are interfaces that enable businesses to enjoy access to 1Bank functionality directly through their own systems without the need to access the 1Bank website. In addition, the IBU Gateway was introduced that provides 24/7 access to Professional Associates and IBU/Wealth customers to apply for products or services and get a ready-to-sign application form.
The Bank has led the way in Cyprus in establishing an open banking ecosystem, by being the first bank in Cyprus to launch its PSD2 APIs (Payment Service Directive2, Application Programming Interfaces) and also by integrating with nine UK banks allowing customers to view their account balances and transactions from the integrated banks together with their Bank of Cyprus accounts through 1Bank. Building on the success of the integration of the UK banks we are now working on integrating Cypriot banks. Furthermore, several other initiatives are in progress, including enhancing digital channels to improve customer experience, providing online services using digital signatures, automating internal end to end processes using a BPM (Business Process Management) platform and introducing collaboration and knowledge sharing tools across the organisation.
The adoption of digital products and services continues to grow and gain momentum, compared to two years ago, when the digital transformation program began. Today, 75% of transactions involving deposits, cash withdrawals and internal / external transfers, are performed through digital channels (with the corresponding rate two years before reaching 65%). Regarding the use of mobile banking, the number of active users increased by 54% from June-2017, while the average monthly number of log-ins per customer also increased by 44% during the same period. The Bank also monitors the Digital Adoption Rate, which is a composite indicator that demonstrates the digital engagement of customers with the Bank and the overall digital economy. This indicator is currently 66% and moving steadily upwards (compared to 59% two years ago).
E. Strategy and Outlook
The Group remains on track for implementing its strategic objectives aiming to become a stronger, safer and a more focused institution capable of supporting the recovery of the Cypriot economy and delivering appropriate shareholder returns in the medium term.
The key pillars of the Group's strategy are to:
-- Materially reduce the level of delinquent loans -- Further optimise the funding structure -- Maintain an appropriate capital position by internally generating capital -- Focus on the core Cyprus market -- Achieve a lean operating model -- Deliver value to shareholders and other stakeholders KEY PILLARS PLAN OF ACTION 1. Materially reduce the level of delinquent loans * Sustain momentum in restructuring and continue reduction of NPEs * Focus on terminated portfolios (in Recovery Unit) - "accelerated consensual foreclosures" * Real estate management via REMU * Continue to explore alternative measures for accelerating NPE reduction, such as NPE sales, securitisations etc. -------------------------------------------------------------- 2. Further optimise the funding structure * Focus on shape and cost of deposit franchise -------------------------------------------------------------- 3. Maintain an appropriate capital position * Internally generating capital -------------------------------------------------------------- 4. Focus on core Cyprus market * Targeted lending in Cyprus into growing sectors to fund recovery * New loan origination, while maintaining lending yields * Revenue diversification via fee income from international banking, wealth, and insurance -------------------------------------------------------------- 5. Achieve a lean operating model * Implementation of digital transformation program underway, aimed at enhancing productivity through alternative distribution channels and reducing operating costs over time, including containment of staff costs * Post the execution of further NPE reduction, the Bank is focusing on the need to manage costs -------------------------------------------------------------- 6. Deliver value * Deliver appropriate medium term risk-adjusted returns --------------------------------------------------------------
F. Definitions & Explanations
Accelerated Following the Regulation (EU) 2016/445 of the ECB phase-in period of 14 March 2016 on the exercise of options and discretions, the DTA was phasing-in by 60% for 2017, 80% for 2018 and 100% for 2019 (fully phased-in). Allowance for Comprise (i) allowance for expected credit losses expected loan (ECL) on loans and advances to customers, (ii) the credit losses fair value adjustment on initial recognition of loans (previously and advances to customers, (iii) allowance for expected 'Accumulated credit losses for off-balance sheet exposures (contingent provisions') liabilities and commitments) disclosed on the balance sheet within other liabilities, and (iv) accumulated fair value adjustments on loans and advances to customers classified at FVPL. Advisory and Comprise mainly: fees of external advisors in relation other restructuring to: (i) disposal of operations and non-core assets, costs and (ii) customer loan restructuring activities AT1 AT1 (Additional Tier 1) is defined in accordance with Articles 51 and 52 of the Capital Requirements Regulation (EU) No 575/2013. CET1 capital CET1 capital ratio (transitional basis) is defined ratio (transitional in accordance with the Capital Requirements Regulation basis) (EU) No 575/2013. CET1 fully loaded The CET1 fully loaded (FL) ratio is defined in accordance (FL) with the Capital Requirements Regulation (EU) No 575/2013. Contribution Relates to the contribution made to the Single Resolution to SRF Fund. Cost to Income Cost-to-income ratio comprises total expenses (as ratio defined) divided by total income (as defined). Data from the The latest data from the Statistical Service of the Statistical Republic of Cyprus, Cyprus Statistical Service, was Service published on 14 August 2019. ECB European Central Bank Gross loans Gross loans are reported before the fair value adjustment on initial recognition relating to loans acquired from Laiki Bank (calculated as the difference between the outstanding contractual amount and the fair value of loans acquired) amounting to EUR290 mn at 30 June 2019 (compared to EUR445 mn at 31 March 2019, EUR462 mn at 31 December 2018, EUR480 mn at 30 September 2018, EUR514 mn at 30 June 2018 and to EUR566 mn at 31 March 2018). Additionally, gross loans (i) include loans and advances to customers measured at fair value through profit and loss of EUR454 mn at 30 June 2019 (compared to EUR454 mn as at 31 March 2019 and EUR456 mn as at 31 December 2018), and (ii) are reported after the reclassification between gross loans and expected credit losses on loans and advances to customers classified as a disposal group held for sale of Nil as at 30 June 2019 (compared to EUR104 mn at 31 March 2019 and to EUR99 mn at 31 December 2018). Group The Group consists f Bank of Cyprus Holdings Public Limited Company, "BOC Holdings" or the "Company", its subsidiary Bank of Cyprus Public Company Limited, the "Bank" and the Bank's subsidiaries. Leverage ratio The leverage ratio is the ratio of tangible total equity (including Other equity instruments) to total assets as presented on the balance sheet. Loan credit Loan credit losses comprises: (i) credit losses to losses (PL) cover credit risk on loans and advances to customers, (previously (ii) net gains on derecognition of financial assets 'Provision charge') measured at amortised cost and (iii) net gains on loans and advances to customers at FVPL. Loan credit Loan credit losses charge (cost of risk) (year to losses charge date) is calculated as the 'loan credit losses' (as (previously defined) divided by average gross loans (the average 'Provisioning balance calculated as the average of the opening balance charge') (cost and the closing balance). of risk) Market Shares Both deposit and loan market shares are based on data from the Central Bank of Cyprus. The Bank is the single largest credit provider in Cyprus with a market share of 41.3% at 30 June 2019, compared to 46.7% at 31 March 2019, 45.4% at 31 December 2018 and as at 30 September 2018, 38.6% at 30 June 2018 and 37.4% at 31 March 2018. The market share on loans was affected as at 30 June 2019 following the derecognition of the Helix portfolio upon the completion of Project Helix announced on 28 June 2019. The market share on loans was affected during the quarter ended 31 March 2019 following a decrease in total loans in the banking sector of EUR1 bn, mainly attributed to reclassification, revaluation, exchange rate and other adjustments (CBC). The market share on loans was affected as at 30 September 2018 following a decrease in total loans in the banking sector, mainly attributed to EUR6 bn non-performing loans of Cyprus Cooperative Bank (CyCB) which remained to SEDIPES as a result of the agreement between CyCB and Hellenic Bank. The market share on loans was affected as at 30 June 2018 following a decrease in total loans in the banking sector of EUR2.1 bn, due to loan reclassifications, revaluations, exchange rate or other adjustments (CBC). Net fee and Fee and commission income less fee and commission commission income expense divided by total income (as defined). over total income Net Interest Net interest margin is calculated as the net interest Margin income (annualised) divided by the quarterly average interest earning assets. Average interest earning assets exclude interest earning assets of any discontinued operations at each quarter end, if applicable. Interest earning assets include: cash and balances with central banks, plus loans and advances to banks, plus net customer loans and advances, plus investments (excluding equities and mutual funds). Net loans and Loans and advances net of allowance for expected loan advances credit losses (as defined, but excluding credit losses on off-balance sheet exposures). Net loan to Net loan to deposits ratio is calculated as the net deposit ratio loans and advances to customers divided by customer deposits, including net loans and deposits held for sale, where applicable. Net Stable Funding The NSFR is calculated as the amount of "available Ratio (NSFR) stable funding" (ASF) relative to the amount of "required stable funding" (RSF), on the basis of Basel III standards. Its calculation is a SREP requirement. The European Banking Authority (EBA) is working on finalising the NSFR and enforcing it as a regulatory ratio under CRR2, currently expected in 2021. New lending New lending includes the average YTD change (if positive) for overdraft facilities Non-interest Non-interest income comprises Net fee and commission income income, Net foreign exchange gains and net gains on other financial instruments and loss on disposal/dissolution of subsidiaries and associates (excluding net gains on loans and advances to customers at FVPL), Insurance income net of claims and commissions, Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties, and Other income. Non-performing According to the EBA reporting standards on forbearance exposures (NPEs) and non-performing exposures (NPEs), published in 2014, ECB's Guidance to Banks on Non-Performing Loans published in March 2017 and EBA Guidelines on management of non-performing and forborne exposures published in October 2018 and applicable from June 2019, a loan is considered an NPE if: (i) the debtor is assessed
as unlikely to pay its credit obligations in full without the realisation of the collateral, regardless of the existence of any past due amount or of the number of days past due, or (ii) the exposures are impaired, or (iii) there are material exposures which are more than 90 days past due, or (iv) there are performing forborne exposures under probation for which additional forbearance measures are extended, or (v) there are performing forborne exposures under probation that present more than 30 days past due within the probation period. The NPEs are reported before the deduction of allowance for expected loan credit losses (as defined). Non-recurring Non-recurring items as presented in the 'Interim Condensed items Consolidated Income Statement - Underlying basis' relate to: (i) advisory and other restructuring costs, (ii) discontinued operations (UK sale), (iii) profit/(loss) relating to NPE sale (Helix), (iv) loss on remeasurement of investment in associate classified as held for sale (CNP) net of share of profit from associates, and (v) reversal of impairment of DTA and impairment of other tax receivables. NPE coverage The NPE coverage ratio is calculated as allowance ratio (previously for expected loan credit losses (as defined) over 'NPE Provisioning NPEs (as defined). coverage ratio') NPE ratio NPEs ratio is calculated as the NPEs as per EBA (as defined) divided by gross loans (as defined). Operating profit Comprises profit before Total loan credit losses, impairments and provisions (as defined), tax, (profit)/loss attributable to non-controlling interests and non-recurring items (as defined). Operating profit Operating profit return on average assets is calculated return on average as the annualised operating profit (as defined) divided assets by the quarterly average of total assets for the relevant period. Average total assets exclude total assets of discontinued operations at each quarter end, if applicable. Phased-in Capital In accordance with the legislation in Cyprus which Conservation has been set for all credit institutions, the applicable Buffer (CCB) rate of the CCB is 1.25% for 2017, 1.875% for 2018 and 2.5% for 2019 (fully phased-in). Pro forma for Includes the impact from the completion of the sale CNP of the investment in CNP, expected in 2H2019, subject to regulatory approvals. Pro forma for In addition to the impact from Project Helix, this Helix pro forma also included the impact from the agreement for the sale of a portfolio of retail unsecured NPEs, with gross book value EUR33 mn as at 31 March 2019, known as Project Velocity. Profit/(loss) Excludes non-recurring items (as defined) after tax and before non-recurring items Profit/(loss) Profit/(loss) after tax and before 'non-recurring after tax - items' as defined, except for the "Advisory and other Organic restructuring costs - excluding discontinued operations and NPE sale (Helix)". Quarterly average Average of interest earning assets as at the beginning interest earning and end of the relevant quarter. Interest earning assets assets include: cash and balances with central banks, plus loans and advances to banks, plus net customer loans and advances, plus investments (excluding equities and mutual funds). Qoq Quarter on quarter change Special levy Relates to the special levy on deposits of credit institutions in Cyprus. Total Capital Total capital ratio is defined in accordance with ratio the Capital Requirements Regulation (EU) No 575/2013. Total expenses Total expenses comprise staff costs, other operating expenses and the special levy and contribution to the Single Resolution Fund. It does not include 'advisory and other restructuring costs-excluding discontinued operations and NPE sale (Helix)' or any restructuring costs relating to NPE sale (Helix). 'Advisory and other restructuring costs-excluding discontinued operations and NPE sale (Helix)' amount to EUR5 mn for 2Q2019, EUR7 mn for 1Q2019, EUR42 mn for FY2018 (EUR16 mn for 4Q2018, EUR11 mn for 3Q2018, EUR7 mn for 2Q2018 and EUR8 mn for 1Q2018) and EUR29 mn for the year ended 31 December 2017. Restructuring costs relating to NPE sale (Helix) amount to EUR7 mn for 2Q2019, EUR1 mn for 1Q2019, EUR18 mn for FY2018 (EUR1 mn for 4Q2018, EUR5 mn for 3Q2018, EUR6 mn for 2Q2018 and EUR6 mn for 1Q2018) and EURNil for the year ended 31 December 2017. Total income Total income comprises net interest income and non-interest income (as defined). Total loan credit Total loan credit losses, impairments and provisions losses, impairments comprise loan credit losses (as defined), plus (provisions)/reversal and provisions of provisions for litigation, regulatory and other matters plus (impairments)/reversal of impairments of other financial and non-financial assets. Underlying basis Statutory basis adjusted for certain items as detailed in the Basis of Presentation. Write offs Loans together with the associated loan credit losses are written off when there is no realistic prospect of future recovery. Partial write-offs, including non-contractual write-offs, may occur when it is considered that there is no realistic prospect for the recovery of the contractual cash flows. In addition, write-offs may reflect restructuring activity with customers and are part of the terms of the agreement and subject to satisfactory performance. Yoy Year on year change
Basis of Presentation
This announcement covers the results of Bank of Cyprus Holdings Public Limited Company, "BOC Holdings" or "the Company", its subsidiary Bank of Cyprus Public Company Limited, the "Bank" or "BOC PCL", and together with the Bank's subsidiaries, the "Group", for the six months ended 30 June 2019.
At 31 December 2016, the Bank was listed on the CSE and the Athens Exchange. On 18 January 2017, BOC Holdings, incorporated in Ireland, was introduced in the Group structure as the new holding company of the Bank. On 19 January 2017, the total issued share capital of BOC Holdings was admitted to listing and trading on the LSE and the CSE.
Financial information presented in this announcement is being published for the purposes of providing an overview of the Group financial results for the six months ended 30 June 2019. The financial information in this announcement does not constitute statutory financial statements of BOC Holdings within the meaning of section 340 of the Companies Act 2014. The Group statutory financial statements for the year ended 31 December 2018, upon which the auditors have given an unqualified report, were published on 28 March 2019 and are expected to be delivered to the Registrar of Companies of Ireland within 28 days of 30 September 2019. The Board of Directors approved the Group statutory financial statements for the six months ended 30 June 2019 on 26 August 2019.
Statutory basis: Statutory information is set out on pages 4-5. However, a number of factors have had a significant effect on the comparability of the Group's financial position and results. Accordingly, the results are also presented on an underlying basis.
Underlying basis: The statutory results are adjusted for certain items (as described on pages 9-10) to allow a comparison of the Group's underlying performance, as set out on pages 6-8.
The financial information included in this announcement is neither reviewed nor audited by the Group's external auditors.
The Interim Condensed Consolidated Financial Statements for the six months ended 30 June 2019 have not been audited by the Group's external auditors. The Group's external auditors have conducted a review of the Interim Condensed Consolidated Financial Statements in accordance with the International Standard on Review Engagements 2410 'Review of Interim Financial Information performed by the Independent Auditor of the Entity (UK & Ireland)'.
The Interim Financial Report for the six months ended 30 June 2019 is available on the Group's website www.bankofcyprus.com (Investor Relations/Financial Results).
This announcement and the presentation for the Group Financial Results for the six months ended 30 June 2019 have been posted on the Group's website www.bankofcyprus.com (Investor Relations/Financial Results).
Definitions: The Group uses a number of definitions in the discussion of its business performance and financial position which are set out in section F.
The Group Financial Results for the six months ended 30 June 2019 are presented in Euro (EUR) and all amounts are rounded as indicated. A comma is used to separate thousands and a dot is used to separate decimals.
Forward Looking Statements
This document contains certain forward-looking statements which can usually be identified by terms used such as "expect", "should be", "will be" and similar expressions or variations thereof or their negative variations, but their absence does not mean that a statement is not forward-looking. Examples of forward-looking statements include, but are not limited to, statements relating to the Group's near term and longer term future capital requirements and ratios, intentions, beliefs or current expectations and projections about the Group's future results of operations, financial condition, expected impairment charges, the level of the Group's assets, liquidity, performance, prospects, anticipated growth, provisions, impairments, business strategies and opportunities. By their nature, forward-looking statements involve risk and uncertainty because they relate to events, and depend upon circumstances, that will or may occur in the future. Factors that could cause actual business, strategy and/or results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by the Group include, but are not limited to: general economic and political conditions in Cyprus and other European Union (EU) Member States, interest rate and foreign exchange fluctuations, legislative, fiscal and regulatory developments and information technology, litigation and other operational risks. Should any one or more of these or other factors materialise, or should any underlying assumptions prove to be incorrect, the actual results or events could differ materially from those currently being anticipated as reflected in such forward looking statements. The forward-looking statements made in this document are only applicable as from the date of publication of this document. Except as required by any applicable law or regulation, the Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statement contained in this document to reflect any change in the Group's expectations or any change in events, conditions or circumstances on which any statement is based.
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For further information please contact:
Investor Relations
+ 357 22 122239
investors@bankofcyprus.com
The Bank of Cyprus Group is the leading banking and financial services group in Cyprus, providing a wide range of financial products and services which include retail and commercial banking, finance, factoring, investment banking, brokerage, fund management, private banking, life and general insurance. The Bank of Cyprus Group operates through a total of 108 branches in Cyprus. Bank of Cyprus also has representative offices in Russia, Ukraine and China. The Bank of Cyprus Group employs 4,155 staff worldwide. At 30 June 2019, the Group's Total Assets amounted to EUR21.9 bn and Total Equity was EUR2.5 bn. The Bank of Cyprus Group comprises Bank of Cyprus Holdings Public Limited Company, its subsidiary Bank of Cyprus Public Company Limited and its subsidiaries.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
IR PRMATMBITMAL
(END) Dow Jones Newswires
August 27, 2019 02:02 ET (06:02 GMT)
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