Announcement
Group Financial Results for the year ended 31 December 2023
and Updated Financial Targets
Nicosia, 28 March 2024
Key Highlights for the year ended 31 December
2023
Resilient economic outlook
·
Continued strong economic growth; Cyprus' GDP
growth of 2.2%1 for 4Q2023, outperforming the Eurozone
average
·
New lending of €2.0 bn, despite the rising
interest rate environment
·
Gross performing loan book at €9.8 bn, broadly
flat year on year as repayments offset new lending
Delivering ROTE of 24.8% in FY2023
·
NII of €792 mn up 114% year on year; which peaked
at €220 mn in 4Q2023 (up 3% quarter on quarter)
·
Non-NII of €300 mn up 3% year on year, covering
88% of total operating expenses2
·
Total operating expenses2 up 5% year
on year with 2022 efficiency actions partly offsetting inflationary
pressures; cost to income ratio2 reduced to 31% (vs 49%
in FY2022)
·
Profit after tax of €487 mn (vs €57 mn in
FY2022); basic earnings per share of €1.09 for FY2023
Liquid and resilient balance sheet
·
NPE ratio broadly flat on prior quarter at 3.6%
(1.0% on net basis) down 40 bps year on year and in line with
guidance
·
NPE Coverage at 73% up 4 p.p. on prior year; cost
of risk at 62 bps
·
Retail funded deposit base at €19.3 bn, up 2%
year on year and broadly flat compared to prior quarter
·
Highly liquid balance sheet with €9.6 bn placed
at the ECB
Robust capital and shareholder focus
·
Regulatory CET1 ratio and Total Capital ratio of
17.4% and 22.4% respectively, reflecting 30% payout
ratio3 following ECB approval on 2023
distribution
·
Organic capital generation4 of 482 bps
in FY2023, of which 134 bps in 4Q2023
·
Tangible book value per share of €4.93 in 2023,
up 25% year on year
Distribution at 30% payout ratio3
·
Total Distribution of €137 mn
·
Cash dividend5 of €0.25 per ordinary
share; five times higher than prior year (FY2022: €0.05 per
ordinary share)
·
Intention to commence an inaugural share buyback
of up to €25 mn
2024-2025 Targets
·
Reiterated ROTE of over 17%6 for 2024
and over 16%6 for 2025 based on a 15% CET1
ratio
·
Net interest income for 2024 upgraded to over
€670 mn
·
NPE ratio of c.3% by end-2024 and <3% by
end-2025
Distribution policy to build
prudently and progressively towards a 30-50% payout
ratio3 including cash dividends and buybacks
1. Source: Cyprus'
Ministry of Finance
2. Excluding special
levy on deposits and other levies/contributions
3. Calculated based
on the Group's profit after tax before non-recurring items
(attributable to the owners of the Group) taking into account
distributions under other equity instruments such as the annual AT1
coupon
4. Based on profit
after tax (pre-distributions)
5. Subject to
shareholders' approval at the AGM scheduled on 17 May
2024
6. Excluding amounts
reserved for distribution
*Key Highlights are based on the
financial results on an 'Underlying Basis'.
** On 1 January 2023, the Group
adopted IFRS 17 'Insurance contracts which replaced IFRS 4
'Insurance contracts'. 2022 comparative information presented
throughout is on a restated basis unless otherwise stated. Further
information on IFRS 17 is provided in Note 2.2.1 of the
Consolidated Financial Statements for the year ended 31 December
2023.
A. Group Financial Results- Statutory
Basis
Audited Consolidated Income Statement for the year ended 31
December 2023
|
2023
|
2022
(restated)1
|
€000
|
€000
|
Interest
income
|
920,078
|
428,849
|
Income
similar to interest income
|
65,450
|
22,119
|
Interest
expense
|
(146,899)
|
(65,721)
|
Expense
similar to interest expense
|
(46,412)
|
(14,840)
|
Net interest
income
|
792,217
|
370,407
|
Fee and
commission income
|
188,343
|
202,583
|
Fee and
commission expense
|
(7,320)
|
(10,299)
|
Net
foreign exchange gains
|
28,588
|
31,291
|
Net
gains/(losses) on financial instruments
|
12,780
|
(614)
|
Net gains
on derecognition of financial assets measured at amortised
cost
|
6,361
|
5,235
|
Net
insurance finance income/(expense) and net reinsurance finance
income/(expense)
|
960
|
784
|
Net
insurance service result
|
73,528
|
60,530
|
Net
reinsurance service result
|
(21,000)
|
(16,748)
|
Net
gains/(losses) from revaluation and disposal of investment
properties
|
1,043
|
(999)
|
Net gains
on disposal of stock of property
|
8,972
|
13,970
|
Other
income
|
18,337
|
16,681
|
Total operating
income
|
1,102,809
|
672,821
|
Staff
costs
|
(192,266)
|
(285,154)
|
Special
levy on deposits and other levies/contributions
|
(42,380)
|
(38,492)
|
Provisions for pending litigations, claims, regulatory and
other matters (net of reversals)
|
(28,464)
|
(11,880)
|
Other
operating expenses
|
(151,093)
|
(157,916)
|
Operating profit before
credit losses and impairment
|
688,606
|
179,379
|
Credit
losses on financial assets
|
(79,830)
|
(59,087)
|
Impairment net of reversals on non-financial
assets
|
(46,852)
|
(29,549)
|
Profit before tax
|
561,924
|
90,743
|
Income
tax
|
(72,980)
|
(31,312)
|
Profit after tax for the
year
|
488,944
|
59,431
|
Attributable
to:
|
|
|
Owners of
the Company
|
487,207
|
56,565
|
Non-controlling interests
|
1,737
|
2,866
|
Profit for the
year
|
488,944
|
59,431
|
Basic profit per share
attributable to the owners of the Company (€
cent)
|
109.2
|
12.7
|
Diluted profit per share
attributable to the owners of the Company (€
cent)
|
109.0
|
12.7
|
1.
2022 comparative information
has been restated to reflect the impact of IFRS 17. Refer to Note
2.2.1 of the Consolidated Financial Statements for the year ended
31 December 2023 for further details
|
A. Group Financial Results- Statutory
Basis (continued)
Audited Consolidated Balance Sheet as at 31 December
2023
|
31 December
2023
|
31
December 2022
(restated)1
|
1
January 2022 (restated)1
|
Assets
|
€000
|
€000
|
€000
|
Cash and balances with central
banks
|
9,614,502
|
9,567,258
|
9,230,883
|
Loans and advances to
banks
|
384,802
|
204,811
|
291,632
|
Reverse repurchase
agreements
|
403,199
|
-
|
-
|
Derivative financial
assets
|
51,055
|
48,153
|
6,653
|
Investments at FVPL
|
135,275
|
190,209
|
199,194
|
Investments at FVOCI
|
443,420
|
467,375
|
748,695
|
Investments at amortised
cost
|
3,116,714
|
2,046,119
|
1,191,274
|
Loans and advances to
customers
|
9,821,788
|
9,953,252
|
9,836,405
|
Life insurance business assets
attributable to policyholders
|
649,212
|
542,321
|
551,797
|
Prepayments, accrued income and
other assets
|
584,919
|
609,054
|
583,777
|
Stock of property
|
826,115
|
1,041,032
|
1,111,604
|
Investment properties
|
62,105
|
85,099
|
117,745
|
Deferred tax assets
|
201,268
|
227,934
|
265,942
|
Property and equipment
|
285,568
|
253,378
|
252,130
|
Intangible assets
|
48,635
|
52,546
|
54,144
|
Non-current assets and disposal
groups held for sale
|
-
|
-
|
358,951
|
Total assets
|
26,628,577
|
25,288,541
|
24,800,826
|
Liabilities
|
|
|
|
Deposits by banks
|
471,556
|
507,658
|
457,039
|
Funding from central
banks
|
2,043,868
|
1,976,674
|
2,969,600
|
Derivative financial
liabilities
|
17,980
|
16,169
|
32,452
|
Customer deposits
|
19,336,915
|
18,998,319
|
17,530,883
|
Insurance contract
liabilities
|
658,424
|
597,981
|
622,398
|
Accruals, deferred income, other
liabilities and other provisions
|
469,265
|
381,193
|
358,090
|
Provisions for pending litigation,
claims, regulatory and other matters
|
131,503
|
127,607
|
104,108
|
Debt securities in
issue
|
671,632
|
297,636
|
302,555
|
Subordinated
liabilities
|
306,787
|
302,104
|
340,220
|
Deferred tax
liabilities
|
32,306
|
34,634
|
39,817
|
Total liabilities
|
24,140,236
|
23,239,975
|
22,757,162
|
Equity
|
|
|
|
Share capital
|
44,620
|
44,620
|
44,620
|
Share premium
|
594,358
|
594,358
|
594,358
|
Revaluation and other
reserves
|
89,920
|
76,939
|
99,541
|
Retained earnings
|
1,518,182
|
1,090,349
|
1,062,711
|
Equity attributable to the owners of the
Company
|
2,247,080
|
1,806,266
|
1,801,230
|
Other equity
instruments
|
220,000
|
220,000
|
220,000
|
Non‑controlling interests
|
21,261
|
22,300
|
22,434
|
Total equity
|
2,488,341
|
2,048,566
|
2,043,664
|
Total liabilities and equity
|
26,628,577
|
25,288,541
|
24,800,826
|
1. 2022 comparative information has
been restated to reflect the impact of IFRS 17. Refer to Note 2.2.1
of the Consolidated Financial Statements for the year ended 31
December 2023 for further details
|
B.
Group Financial Results - Underlying Basis
Commentary on Underlying Basis
The financial information
presented in this Section provides an overview of the Group
financial results for the year ended 31 December 2023 on the
'underlying basis' which management believes best fits the true
measurement of the performance and position of the Group, as this
presents separately any non-recurring items and also includes
certain reclassifications of items, other than non-recurring items,
which are done for presentational purposes under the underlying
basis for aligning the presentation with items of a similar
nature.
Reconciliations between the
audited statutory basis and the underlying basis to facilitate the
comparability of the underlying basis to the statutory information,
are included in Section B.1 'Reconciliation of consolidated Income
statement for the year ended 31 December 2023 between audited
statutory basis and underlying basis' and will also be available in
the Annual Financial Report for the year ended 31 December 2023
under 'Alternative Performance Measures Disclosures'.
Throughout this announcement,
the capital ratios and MREL ratio
as at 31 December 2023 have been updated from the previously
reported Preliminary Group Financial Results for the year ended 31
December 2023 that were published on 19 February 2024, to take into
consideration the 2023
distribution following the European Central Bank ('ECB') approval
in March 2024. This refers to a cash dividend of
€112 mn and a share
buyback of up to €25 mn (together referred to as the 'Distribution') and
corresponds to an overall 30% payout ratio on FY2023 adjusted
recurring profitability. Following ECB approval, the Board of
Directors of the Company has resolved to propose to the Annual
General Meeting ('AGM') that will be held on 17 May 2024 for
approval, a final cash dividend of €0.25 per ordinary share in
respect of earnings for the year ended 31 December 2023.
Furthermore, the Group intends to commence a programme to buy back
ordinary shares in the Company for an aggregate consideration of up
to €25 mn. As a result, the regulatory CET1 ratio and Total Capital
ratio (both on transitional basis) as at 31 December 2023 stood at
17.4% and 22.4% respectively reflecting the 30% payout ratio for
the year ended 31 December 2023 (compared to the previously
reported of 16.5% and 21.5% respectively). Additionally the MREL
ratio stood at 25.5% of risk weighted assets and LRE at 11.7%,
reflecting the 30% payout ratio for the year ended 31 December
2023, compared to the previously reported of 24.6% and 11.4%
respectively.
Following the intention to
commence this inaugural share buyback, going forward the Group's
distribution policy of building prudently and progressively towards
a payout ratio of 30-50% on adjusted recuring profitability is
updated to include cash dividends and share buybacks.
Throughout this announcement,
financial information in relation to FY2022 and quarterly 2022
financial information has been restated for the effects of
transition to IFRS 17 which was adopted on 1 January 2023 and
applied retrospectively. As a result, 2022 financial information,
ratios and metrics are presented on a restated basis unless
otherwise stated. Further information on the impact of IFRS 17
transition is also in the Note 2.2.1 of the Consolidated Financial
Statements for the year ended 31 December 2023.
Throughout this announcement, the
capital ratios as at 31 December 2022 have been restated in order
to take into consideration the 2022 dividend declaration. This
refers to the proposal by the Board of Directors to the
shareholders of a final dividend in respect of the FY2022 earnings
following the approval by the ECB. The proposed final dividend was
declared at the AGM which was held on 26 May 2023. This dividend
amounted to €22.3 mn in total and had a negative impact of 22 bps
on the Group's CET1 ratio and Total Capital ratio as at 31 December
2022. As a result, the 31 December 2022 capital ratios are
presented as restated for the 2022 dividend unless otherwise
stated.
Transition to IFRS 17
On 1 January 2023 the Group
adopted IFRS 17 'Insurance Contracts' ('IFRS 17') which replaced
IFRS 4 'Insurance contracts'. IFRS 17 is an accounting standard
that was implemented on 1 January 2023, with retrospective
application and establishes principles for the recognition,
measurement, presentation and disclosure of
insurance contracts issued, investment contracts with discretionary
participation features issued and reinsurance contracts held. In
substance, IFRS 17 impacts the phasing of profit recognition for
insurance contracts as profitability is spread over the lifetime of
the contract compared to being recognised substantially up-front
under IFRS 4. This new accounting standard does not change the
economics of the insurance contracts but decreases the volatility
of the Group's insurance companies' profitability.
The Group's total equity as at 31
December 2022 as restated for IFRS 17 compared to IFRS 4, was
reduced by overall €52 mn (predominantly
relating to the life insurance business of the Group) from the
below changes:
·
The removal of the present value of in-force life
insurance contracts ('PVIF') asset including the associated
deferred tax liability, resulting in a reduction of
c.€101 mn in the
Group's total equity.
·
The remeasurement of insurance assets and
liabilities (including the impact of the recognition of the
contractual service margin ('CSM')) resulting in an increase in the
Group's equity by €49 mn.
B.
Group Financial Results - Underlying Basis
(continued)
Commentary on Underlying Basis (continued)
Transition to IFRS 17 (continued)
The estimated future profit of
insurance contracts is included in the measurement of the insurance
contract liabilities as the contractual service margin ('CSM') and
this will be gradually recognised in revenue, as services are
provided over the duration of the insurance contract. A contractual
service margin liability of c.€42 mn was
recognised as at 31 December 2022 (reflected in the impact from the
remeasurement of insurance liabilities mentioned above).
With regards to the Group's income
statement for the year ended 31 December 2022, as restated for IFRS
17, the profit after tax
(attributable to the owners of the Company) was reduced by €14 mn
to €57 mn (vs €71
mn under IFRS 4)
reflecting mainly:
·
Profit is deferred and held as CSM liability as
mentioned above to be recognised in the income statement over the
contract service period.
·
The impact of assumption changes relating to the
future service is also deferred through the CSM liability and is
recognised in the income statement over the contract service
period.
·
There is increased use of current market values in
the measurement of insurance assets and liabilities (for
unit-linked business) and market volatility on unit-linked business
is deferred to the CSM, thereby reducing the volatility in the
income statement.
The transition to IFRS 17 had no
impact on the Group's regulatory capital. However, as a result of
the benefit arising from the remeasurement
of the insurance assets and liabilities, the life insurance
subsidiary distributed €50 mn as dividend
to the Bank in February 2023, which benefited Group regulatory capital by an equivalent amount on the same
date, enhancing CET1 ratio by c.50 bps. Going forward, meaningful
dividend generation from the insurance business is expected to
continue.
B.
Group Financial Results - Underlying Basis
(continued)
|
|
Consolidated Income Statement
|
|
€
mn
|
FY2023
|
FY2022
(IFRS17)1
|
4Q2023
|
3Q2023
|
2Q2023
|
1Q2023
|
qoq
+%
|
yoy
+%
|
Net interest income
|
792
|
370
|
220
|
214
|
196
|
162
|
3%
|
114%
|
Net fee and commission
income
|
181
|
192
|
46
|
45
|
46
|
44
|
4%
|
-6%
|
Net foreign exchange gains and net
gains/(losses) on financial instruments
|
37
|
26
|
8
|
8
|
8
|
13
|
13%
|
46%
|
Net insurance result
|
54
|
44
|
16
|
13
|
15
|
10
|
19%
|
20%
|
Net gains/(losses) from
revaluation and disposal of investment properties and on disposal
of stock of properties
|
10
|
13
|
3
|
2
|
3
|
2
|
28%
|
-23%
|
Other income
|
18
|
17
|
3
|
3
|
9
|
3
|
8%
|
10%
|
Total income
|
1,092
|
662
|
296
|
285
|
277
|
234
|
4%
|
65%
|
Staff costs
|
(192)
|
(181)
|
(51)
|
(48)
|
(47)
|
(46)
|
5%
|
6%
|
Other operating
expenses
|
(149)
|
(144)
|
(42)
|
(38)
|
(35)
|
(34)
|
15%
|
4%
|
Special levy on deposits and other levies/contributions
|
(43)
|
(38)
|
(13)
|
(12)
|
(7)
|
(11)
|
10%
|
10%
|
Total expenses
|
(384)
|
(363)
|
(106)
|
(98)
|
(89)
|
(91)
|
9%
|
6%
|
Operating profit
|
708
|
299
|
190
|
187
|
188
|
143
|
2%
|
137%
|
Loan credit losses
|
(63)
|
(47)
|
(19)
|
(20)
|
(13)
|
(11)
|
-5%
|
34%
|
Impairments of other financial and
non-financial assets
|
(53)
|
(33)
|
(15)
|
(8)
|
(19)
|
(11)
|
97%
|
66%
|
Provisions for pending
litigations, claims, regulatory and other matters (net of
reversals)
|
(28)
|
(11)
|
(8)
|
(6)
|
(8)
|
(6)
|
22%
|
140%
|
Total loan credit losses, impairments and
provisions
|
(144)
|
(91)
|
(42)
|
(34)
|
(40)
|
(28)
|
24%
|
59%
|
Profit before tax and non-recurring items
|
564
|
208
|
148
|
153
|
148
|
115
|
-3%
|
171%
|
Tax
|
(73)
|
(31)
|
(10)
|
(23)
|
(22)
|
(18)
|
-56%
|
133%
|
Profit attributable to
non-controlling interests
|
(2)
|
(3)
|
0
|
(1)
|
0
|
(1)
|
-94%
|
-39%
|
Profit after tax and before non-recurring items (attributable
to the owners of the Company)
|
489
|
174
|
138
|
129
|
126
|
96
|
7%
|
181%
|
Advisory and other transformation
costs - organic
|
(2)
|
(11)
|
-
|
-
|
(1)
|
(1)
|
-
|
-80%
|
Profit after tax - organic (attributable to the owners
of the Company)
|
487
|
163
|
138
|
129
|
125
|
95
|
7%
|
199%
|
Net profit/(loss)/ provisions
relating to NPE sales
|
-
|
1
|
-
|
-
|
-
|
-
|
-
|
-100%
|
Restructuring and other costs
relating to NPE sales
|
-
|
(3)
|
-
|
-
|
-
|
-
|
-
|
-100%
|
Restructuring costs - Voluntary
Staff Exit Plan (VEP)
|
-
|
(104)
|
-
|
-
|
-
|
-
|
-
|
-100%
|
Profit after tax (attributable to the owners of the
Company)
|
487
|
57
|
138
|
129
|
125
|
95
|
7%
|
-
|
|
|
|
|
|
|
|
|
|
|
B.
Group Financial Results - Underlying Basis
(continued)
Consolidated Income Statement- Key Performance
Ratios
|
Key Performance
Ratios
|
FY2023
|
FY2022
IFRS
171
|
4Q2023
|
3Q2023
|
2Q2023
|
1Q2023
|
qoq
+%
|
yoy
+%
|
|
Net
Interest Margin (annualised)
|
3.41%
|
1.65%
|
3.66%
|
3.63%
|
3.43%
|
2.91%
|
3
bps
|
176
bps
|
|
Cost to
income ratio
|
35%
|
55%
|
36%
|
34%
|
32%
|
39%
|
2
p.p.
|
-20
p.p.
|
|
Cost to
income ratio excluding special levy on
deposits and other levies/contributions
|
31%
|
49%
|
32%
|
30%
|
29%
|
34%
|
2
p.p.
|
-18
p.p.
|
|
Operating
profit return on average assets (annualised)
|
2.7%
|
1.2%
|
2.8%
|
2.9%
|
3.0%
|
2.3%
|
-0.1
p.p.
|
1.5
p.p.
|
|
Basic
earnings per share attributable to the owners of the Company
(€)2
|
1.09
|
0.13
|
0.31
|
0.29
|
0.28
|
0.21
|
0.02
|
0.96
|
|
Return on
tangible equity (ROTE)
|
24.8%
|
3.2%
|
25.6%
|
25.6%
|
26.6%
|
21.3%
|
-
|
21.6
p.p.
|
|
Return on
tangible equity (ROTE) excluding amounts reserved for
distribution3
|
25.3%
|
3.3%
|
26.5%
|
25.6%
|
26.7%
|
21.6%
|
0.9
p.p.
|
22.0
p.p.
|
|
Tangible
book value per share (€)
|
4.93
|
3.93
|
4.93
|
4.63
|
4.34
|
4.15
|
0.30
|
1.00
|
|
Tangible
book value per share excluding the cash dividend
|
4.68
|
3.88
|
4.68
|
4.63
|
4.34
|
4.10
|
0.05
|
0.80
|
|
1. On 1 January 2023, the Group
adopted IFRS 17 'Insurance contracts which replaced IFRS 4
'Insurance contracts'. 2022 comparative information presented
throughout is on a restated basis unless otherwise stated. For
further details, please refer to Note 2.2.1 of the Consolidated
Financial Statements for the year ended 31 December
2023.
2. The diluted earnings per share
attributable to the owners of the Company for 4Q2023 amounted to
€0.31 and €1.09 for FY2023
3. Calculated as profit after tax
(attributable to the owners of the Company) (annualised) for the
period divided by the average of shareholder's equity minus
intangible assets and the amounts approved/recommended for
distribution in respect of earnings of the relevant year the
distribution relates to
p.p. = percentage points, bps =
basis points, 100 basis points (bps) = 1 percentage
point
|
|
B.
Group Financial Results- Underlying Basis
(continued)
|
Condensed Consolidated Balance Sheet
|
€
mn
|
|
31.12.2023
|
31.12.2022
IFRS
171
|
+%
|
Cash and balances with central
banks
|
|
9,615
|
9,567
|
0%
|
Loans and advances to
banks
|
|
385
|
205
|
88%
|
Reverse repurchase
agreements
|
|
403
|
-
|
-
|
Debt securities, treasury bills
and equity investments
|
|
3,695
|
2,704
|
37%
|
Net loans and advances to
customers
|
|
9,822
|
9,953
|
-1%
|
Stock of property
|
|
826
|
1,041
|
-21%
|
Investment properties
|
|
62
|
85
|
-27%
|
Other assets
|
|
1,821
|
1,734
|
5%
|
Total assets
|
|
26,629
|
25,289
|
5%
|
Deposits by banks
|
|
472
|
508
|
-7%
|
Funding from central
banks
|
|
2,044
|
1,977
|
3%
|
Customer deposits
|
|
19,337
|
18,998
|
2%
|
Debt securities in
issue
|
|
672
|
298
|
126%
|
Subordinated
liabilities
|
|
307
|
302
|
2%
|
Other liabilities
|
|
1,309
|
1,157
|
13%
|
Total liabilities
|
|
24,141
|
23,240
|
4%
|
|
|
|
|
|
Shareholders' equity
|
|
2,247
|
1,807
|
24%
|
Other equity
instruments
|
|
220
|
220
|
-
|
Total equity excluding non-controlling
interests
|
|
2,467
|
2,027
|
22%
|
Non-controlling
interests
|
|
21
|
22
|
-5%
|
Total equity
|
|
2,488
|
2,049
|
21%
|
Total liabilities and equity
|
|
26,629
|
25,289
|
5%
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Balance Sheet figures and ratios
|
|
31.12.2023
|
31.12.20221
|
+
|
Gross loans (€ mn)
|
|
10,070
|
10,217
|
-1%
|
Allowance for expected loan credit
losses (€ mn)
|
|
267
|
282
|
-5%
|
Customer deposits (€
mn)
|
|
19,337
|
18,998
|
2%
|
Loans to deposits ratio
(net)
|
|
51%
|
52%
|
-1
p.p.
|
NPE ratio
|
|
3.6%
|
4.0%
|
-40
bps
|
NPE coverage ratio
|
|
73%
|
69%
|
+4
p.p.
|
Leverage ratio
|
|
9.1%
|
7.8%
|
+130
bps
|
Capital ratios and risk weighted assets
|
|
31.12.2023
(Regulatory3)
|
31.12.20222
|
+
|
Common Equity Tier 1 (CET1) ratio
(transitional)
|
|
17.4%
|
15.2%
|
+220
bps
|
Total capital ratio
(transitional)
|
|
22.4%
|
20.4%
|
+200
bps
|
Risk weighted assets (€
mn)
|
|
10,341
|
10,114
|
+2%
|
1. On 1
January 2023, the Group adopted IFRS 17 'Insurance contracts which
replaced IFRS 4 'Insurance contracts'.2022 comparative information
presented throughout is on a restated basis unless otherwise
stated. Please refer to 'Note 2.2.1 of the Consolidated Financial
Statements for the year ended 31 December 2023. 2. The capital
ratios have been restated to take into consideration the dividend
in respect of FY2022 earnings. For further details please refer to
section B.2.1.
3. Includes profits for the year
ended 31 December 2023 net of distribution at 30% payout ratio,
following ECB approval in March 2024 (refer to section B.2.1).
p.p. = percentage points, bps = basis points, 100 basis
points (bps) = 1 p.p.
|
B.
Group Financial Results- Underlying Basis
(continued)
B.1 Reconciliation of
Consolidated Income Statement for the year ended 31
December 2023 between the audited
statutory and the underlying basis
€
million
|
Underlying basis
|
Other
|
Statutory
basis
|
Net interest income
|
792
|
-
|
792
|
Net fee and commission
income
|
181
|
-
|
181
|
Net foreign exchange gains and net
gains/(losses) on financial instruments
|
37
|
4
|
41
|
Net gains on derecognition of
financial assets measured at amortised cost
|
-
|
6
|
6
|
Net insurance result*
|
54
|
-
|
54
|
Net gains/(losses) from revaluation
and disposal of investment properties and on disposal of stock of
properties
|
10
|
-
|
10
|
Other income
|
18
|
-
|
18
|
Total income
|
1,092
|
10
|
1,102
|
Total expenses
|
(384)
|
(30)
|
(414)
|
Operating profit
|
708
|
(20)
|
688
|
Loan credit losses
|
(63)
|
63
|
-
|
Impairment of other financial and
non-financial assets
|
(53)
|
53
|
-
|
Provisions for pending litigations,
claims, regulatory and other matters (net of reversals)
|
(28)
|
28
|
-
|
Credit losses on financial assets
and impairment net of reversals of non-financial assets
|
-
|
(126)
|
(126)
|
Profit before tax and non-recurring items
|
564
|
(2)
|
562
|
Tax
|
(73)
|
-
|
(73)
|
Profit attributable to
non-controlling interests
|
(2)
|
-
|
(2)
|
Profit after tax and before non-recurring items (attributable
to the owners of the Company)
|
489
|
(2)
|
487
|
Advisory and other transformation
costs - organic
|
(2)
|
2
|
-
|
Profit after tax (attributable to the owners of the
Company)
|
487
|
-
|
487
|
|
|
|
|
* Net insurance result per
underlying basis comprises the aggregate of captions 'Net insurance finance
income/(expense)
and net
reinsurance finance income/(expense)', 'Net insurance service
result' and 'Net reinsurance service result' per
the statutory basis.
The reclassification differences
between the audited statutory basis and the underlying basis are
explained below:
·
Net gains on loans and advances to
customers at FVPL of €2 million
included in 'Loan credit losses' under the
underlying basis are included in 'Net gains/(losses) on financial
instruments' under the statutory basis. Their classification
under the underlying basis is done to align their presentation with
the loan credit losses on loans and advances to customers at
amortised cost.
·
'Net gains on derecognition
of financial assets measured at amortised
cost' of €6 million under the
statutory basis comprise the below items which are reclassified
accordingly under the underlying basis as follows:
· €8 million net gains on derecognition
of loans and advances to customers included in 'Loan credit losses'
under the underlying basis as to align to the presentation of the
loan credit losses arising from loans and advances to
customers.
· Net losses on derecognition of debt securities measured at
amortised cost of c.€2 million included in 'Net foreign exchange gains and net
gains/(losses) on financial instruments' under the underlying basis
in order to align their presentation with the gains/(losses)
arising on financial instruments.
·
'Provisions for pending litigations, claims, regulatory and
other matters (net of reversals)' amounting to €28 million presented within 'Operating profit before credit losses and
impairment' under the statutory basis, are presented under
the underlying basis in conjunction with loan credit losses and
impairments.
·
'Advisory and other transformation costs -
organic' of approximately €2 million
included in 'Other operating
expenses' under the statutory basis are separately presented
under the underlying basis since they comprise mainly fees to
external advisors in relation to the transformation programme and
other strategic projects of the Group.
B.
Group Financial Results- Underlying Basis
(continued)
B.1 Reconciliation of Income
Statement for the year ended 31
December 2023 between the audited
statutory and the underlying basis (continued)
·
'Credit losses on financial assets' and
'Impairment net of reversals on
non-financial assets' under the statutory basis include: i)
credit losses to cover credit risk on loans and advances to
customers of €73 million, which are included in 'Loan credit losses' under the
underlying basis, and ii) credit losses of other financial assets
of €6.5 million and impairment net of reversals of non-financial
assets of €47 million, which are included in 'Impairment of other financial and
non-financial assets' under the underlying basis, as to be
presented separately from loan credit losses.
B.
Group Financial Results - Underlying Basis
(continued)
B.2 Balance Sheet Analysis
B.2.1 Capital Base
Total equity excluding non-controlling
interests totalled €2,467 mn as at
31 December 2023 compared to €2,342 mn as at 30 September 2023 and
to €2,027 mn as at 31 December 2022. Shareholders' equity totalled to €2,247 mn as at 31 December
2023 compared to €2,114 mn as at
30 September 2023 and
to €1,807 mn as at 31 December
2022.
The regulatory Common Equity Tier 1 capital (CET1) ratio on a
transitional basis stood at 17.4% as at 31 December 2023,
reflecting the 30% payout ratio for the year ended 31 December 2023
(compared to the previously reported of 16.5%), compared to 15.2%
as at 30 September 2023 and 15.2% as at 31 December 2022, as
restated. During FY2023 organic capital generation amounted to 482
bps (of which 134 bps were recorded in 4Q2023). As per the latest
SREP decision, any distribution is subject to regulatory approval.
In March 2024 the Group received regulatory approval from the ECB
for a distribution out of 2023 profits of a total amount of
€137 mn, comprising a cash dividend
of €112 mn and an
inaugural share buyback of up to €25 mn, representing an overall
payout ratio of 30% on FY2023 adjusted recurring
profitability. Throughout this
announcement, the capital ratios as at 31 December 2023 have been
updated from the previously reported Preliminary Group Financial
Results for the year ended 31 December
2023 that were published on 19 February 2024, to take into
consideration the aforementioned 2023 distribution following the
ECB approval in March 2024. From 3Q2023,
the amount corresponding to the Pillar II add-on requirement
relating to ECB's prudential provisioning expectations of 32 bps
(as at 31 December 2023) is
deducted from CET1 capital and therefore has been
eliminated from the Pillar II SREP capital requirements from 1
January 2024. A prudential charge in
relation to the onsite inspection on the value of the Group's
foreclosed assets is being deducted from own funds since June 2021,
the impact of which is 12 bps on Group's CET1 ratio as at 31
December 2023. In addition, the Group is subject to increased
capital requirements in relation to its real estate repossessed
portfolio which follow a SREP provision to ensure minimum capital
levels retained on long-term holdings of real estate assets, with
such requirements being dynamic by reference to the in-scope REMU
assets remaining on the balance sheet of the Group and the value of
such assets. As at 31 December 2023 the impact of these
requirements were 24 bps on Group's CET1 ratio. The above-mentioned
requirements are within the capital plans of the Group and
incorporated within its capital projections.
The Group had 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 was
phased-in gradually, with the impact being fully phased-in (100%)
by 1 January 2023. The final phasing-in of the impact of the
impairment amount from the initial application of IFRS 9 was c.65
bps on the CET1 ratio on 1 January 2023.
The regulatory Total Capital ratio on a transitional basis stood at 22.4%
as at 31 December 2023, reflecting the 30% payout ratio for the
year ended 31 December 2023 (compared to the previously reported of
21.5%), compared to 20.4% as at 30 September 2023 and to 20.4% as
at 31 December 2022, as restated.
The Group's capital ratios are
above the Supervisory Review and Evaluation Process (SREP)
requirements.
The Group's minimum phased-in CET1
capital ratio requirement as at 31 December 2023 was set at
10.72%, comprising a 4.50%
Pillar I requirement, a 1.73% Pillar II requirement, the Capital
Conservation Buffer of 2.50%, the O-SII Buffer of 1.50% and the
CcyB of c.0.48%. The Group's minimum phased-in Total Capital ratio
requirement was set at 15.56%, comprising an 8.00% Pillar I
requirement, of which up to 1.50% can be in the form of AT1 capital
and up to 2.00% in the form of T2 capital, a 3.08% Pillar II
requirement, the Capital Conservation Buffer of 2.50%, the O-SII
Buffer of 1.50% and the CcyB of c.0.48%. Following the annual SREP
performed by the ECB in 2022, ECB has also maintained the
non-public guidance for an additional Pillar II CET1 buffer (P2G)
unchanged compared to 2021.
Following the annual SREP
performed by the ECB in 2023, and based on the final SREP decision received in
November 2023, effective from 1 January 2024, the Group's
minimum phased-in CET1 capital ratio and Total Capital ratio
requirements decreased, when disregarding the phasing in of the
O-SII buffer and CcyB, reflecting the elimination of the Pillar II
add-on relating to ECB's prudential provisioning
expectations, following the Group's
decision to directly deduct from own funds such amount. On 1
January 2024 the Group's minimum phased-in CET1 capital ratio is
set at c.10.91%, comprising
a 4.50% Pillar I requirement, a 1.55% Pillar II requirement, the
Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.875%
and CcyB of c.0.48%. Likewise, the Group's
minimum phased-in Total Capital ratio requirement is set at
c.15.61%, comprising an
8.00% Pillar I requirement, of which up to 1.50% can be in the form
of AT1 capital and up to 2.00% in the form of T2 capital, a 2.75%
Pillar II requirement, the Capital Conservation Buffer of 2.50%,
the O-SII Buffer of 1.875% and the CcyB of c.0.48%. The ECB has
also provided revised lower non-public guidance for an additional
Pillar II CET1 buffer (P2G) compared to previous year. From 2 June
2024 both CET1 capital and Total Capital requirements are expected
to increase by c.0.50% as a result of the increase in the
CcyB.
B. Group Financial Results - Underlying Basis
(continued)
B.2 Balance Sheet Analysis (continued)
B.2.1 Capital Base (continued)
On 30 November 2022, the CBC,
following the revised methodology described in its macroprudential
policy, decided to increase the CcyB from 0.00% to 0.50%
of the total risk exposure amounts in Cyprus of each licensed
credit institution incorporated in Cyprus effective from 30
November 2023. Further, in June 2023, the CBC announced an
additional increase of 0.50% in the CcyB of the total risk exposure
amounts in Cyprus of each licensed credit institution incorporated
in Cyprus to be observed from June 2024, increasing the CcyB to
1.00%.
The Bank has been designated as an
Other Systemically Important Institution (O-SII) by the Central Bank of Cyprus
(CBC) in accordance with the provisions of the Macroprudential
Oversight of Institutions Law of 2015 and the relevant buffer stood
at 1.50%. In October 2023, the CBC concluded its reassessment for
the designation of credit institutions that meet the definition of
O-SII institutions and the setting of O-SII buffer to be observed.
The Group's O-SII buffer has been revised to 2.25% (from 1.50%),
phased in annually by 37.5 bps, to 1.875% on 1 January 2024 and to
2.25% on 1 January 2025.
Own funds held for the purposes of
P2G cannot be used to meet any other capital requirements (Pillar
I, Pillar II requirements or the combined buffer requirement), and
therefore cannot be used twice.
The Group participated in the ECB
Stress Test of 2023, the results of which were published by the ECB
on 28 July 2023. For further information please refer to the 'Risk
and Capital Management Report' of the 'Annual Financial Report
2023.
Resumption of distributions
Following the 2022 SREP decision,
the equity dividend distribution prohibition was lifted for both
the Company and the Bank, with any dividend distribution being
subject to regulatory approval.
In April 2023, the Company
obtained the approval of the ECB to pay a dividend. Following this
approval, the Board of Directors of the Company recommended to the
shareholders a final dividend of €0.05 per ordinary share in
respect of earnings for the year ended 31 December 2022
('Dividend'). The proposed final dividend was declared at the
Annual General Meeting ('AGM') which was held on 26 May 2023. The
Dividend amounted to €22.3 mn in total and was equivalent to a
payout ratio of 14% of the FY2022 Group's adjusted recurring
profitability or 31% based on FY2022 profit after tax (as reported
in the 2022 Annual Financial Report). The Dividend was paid in cash
on 16 June 2023. The Dividend had a negative capital impact of 22
bps on the Group's CET1 ratio and Total Capital ratio as at 31
December 2022. This was the first dividend payment after 12 years
underpinning the Group's position as a strong and well-diversified
organisation, capable of delivering sustainable shareholder
returns.
In March 2024, the Company
obtained the approval of the ECB to pay a cash dividend and to
conduct a share buyback (together the 'Distribution'). The
Distribution corresponds to a 30% payout ratio of FY2023 adjusted
recurring profitability and amounts to €137 mn in total, comprising
a cash dividend of €112 mn and a share buyback of up to €25 mn. The
payout ratio for FY2023 of 30% is in line with the updated
Distribution Policy (see below for further details) and represents
a material increase compared to the previous year (at 14% payout
ratio). Following ECB approval, the Board of Directors of the
Company has resolved to propose to the AGM that will be held on 17
May 2024 for approval, a final cash dividend of €0.25 per ordinary
share in respect of earnings for the year ended 31 December 2023,
representing a five-fold increase compared to prior year. Subject
to approval at the AGM, the dividend will be paid in cash on 14
June 2024 to those shareholders on the register on 26 April 2024
('Record date') with an Ex-dividend date of 25 April 2024. Further
the Board of Directors of the Company confirmed its intention to
commence a programme to buy back ordinary shares in the Company for
an aggregate consideration of up to €25 mn. It is expected that,
once launched, the programme will take place on both the London
Stock Exchange and the Cyprus Stock Exchange. The launch and implementation of the share buyback programme
will comply with the Company's general authority to repurchase the
Company's ordinary shares as approved by shareholders at the
Company's AGM on 26 May 2023, which is subject to renewal at the
AGM scheduled to take place on 17 May 2024, and with the terms of
the approval received from the ECB. The Distribution in respect of
2023 earnings is equivalent to c.135 bps on CET1 ratio.
Distribution policy
The Group aims to provide a
sustainable return to shareholders. In line with the Group's
distribution policy, distributions are expected to build prudently
and progressively over time, towards a payout ratio in the range of
30-50% of the Group's adjusted recurring profitability, including
cash dividends and buybacks. Group adjusted recurring profitability
is defined as the Group's profit after tax before non-recurring
items (attributable to the owners of the Company) taking into
account distributions under other equity instruments such as the
annual AT1 coupon. The distribution policy takes into consideration
market conditions as well as the outcome of capital and liquidity
planning. The distribution level will reflect, amongst other
things, the strength of the Group's capital and capital generation,
the Board of Directors' assessment of the capital required to
implement the Group Strategy and any capital the Group retains to
cover uncertainties (e.g. related to the economic outlook) and any
impact from the evolving regulatory and accounting
environments.
B. Group Financial Results - Underlying Basis
(continued)
B.2 Balance Sheet Analysis (continued)
B.2.1 Capital Base (continued)
Other equity instruments
At 31 December 2023, the Group's
other equity instruments relate to Additional Tier 1 Capital
Securities (the "AT1 securities") and amounted to €220 mn, compared
to €228 mn as at 30 September 2023, down 4% on prior
quarter.
In June 2023, the Company
successfully launched and priced an issue of €220 mn Fixed Rate
Reset Perpetual Additional Tier 1 Capital Securities (the 'New
Capital Securities'). The New Capital Securities constitute
unsecured and subordinated obligations of the Company, are
perpetual and are issued at par. They carry an initial coupon of
11.875% per annum, payable semi-annually and resettable on 21
December 2028 and every 5 years thereafter. The Company will have
the option to redeem the New Capital Securities from, and
including, 21 June 2028 to, and including, 21 December 2028 and on
each interest payment date thereafter, subject to applicable
regulatory consents and the relevant conditions to
redemption.
At the same time, the Company
invited the holders of its outstanding €220 mn Fixed Rate Reset
Perpetual Additional Tier 1 Capital Securities callable in December
2023 to tender their Existing Capital Securities at a purchase
price of 103% of the principal amount, after which
c.€16 mn Existing Capital Securities
remained outstanding. As a result, a cost of c.€7 mn was recorded directly in the
Company's equity in 2Q2023, forfeiting the relevant future coupon
payments. Transaction costs of €3.5 mn in relation to the
transactions were recorded directly in equity in June
2023.
In July 2023, the Company
purchased and cancelled a further c.€7 mn Existing Capital
Securities in the open market. In November 2023, the Board of
Directors resolved to exercise the Company's option to redeem the
remaining c.€8 mn in aggregate principal amount outstanding of the
Existing AT1 Capital Securities on 19 December 2023.
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) became effective
in March 2019. The legislative amendments cover the utilisation of
income tax losses transferred from Laiki Bank to the Bank in March
2013. The introduction of the Capital Requirements Regulation (CRR)
and Capital Requirements Directive (CRD) IV in January 2014 and its
subsequent phasing-in led to a more capital-intensive treatment of
this DTA for the Bank. With this legislation, institutions are
allowed to treat such DTAs as 'not relying on future
profitability', according to CRR/CRD IV and as a result not
deducted from CET1, hence improving a credit institution's capital
position. The Law provides that a guarantee fee on annual tax
credit is payable annually by the credit institution to the
Government.
Following certain modifications to
the Law in May 2022, the annual guarantee fee is to be determined
by the Cyprus Government on an annual basis, providing however that
such fee to be charged is set at a minimum fee of 1.5% of the
annual instalment and can range up to a maximum amount of €10 mn
per year, and also allowing for a higher amount to be charged in
the year the amendments are effective (i.e. in 2022).
The Group estimates that such fees
could range up to c.€5 mn per year (for each tax year in scope i.e.
since 2018) although the Group understands that such fee may
fluctuate annually as to be determined by the Ministry of Finance.
An amount of €5 mn was recorded in
FY2023.
B.2.2 Regulations and Directives
B.2.2.1 The 2021 Banking Package (CRR III and CRD VI and
BRRD)
In October 2021, the European
Commission adopted legislative proposals for further amendments to
the Capital Requirements Regulation (CRR), CRD and the BRRD (the
"2021 Banking Package").
Amongst other things, the 2021 Banking Package would implement
certain elements of Basel III that have not yet been transposed
into EU law. In the case of the proposed amendments to CRD and the
BRRD, their terms and effect will depend, in part, on how they are
transposed in each member state. The European Council's proposal on
CRR and CRD was published on 8 November 2022.
During February 2023, the European
Parliament's ECON Committee voted to adopt Parliament's proposed
amendments to the Commission's proposal. In June 2023, negotiators
from the Council presidency and the European Parliament reached a
provisional agreement on amendments to the Capital Requirements
Regulation and the Capital Requirements Directive.
In December 2023, the preparatory bodies of the
Council and European Parliament have endorsed the amendments to the
Capital Requirements Regulation and the Capital Requirements
Directive. With the decisions taken by the Council and European
Parliament preparatory bodies, the legal texts have now been
published on the Council and the Parliament websites. Although
still subject to legal revision and to the final vote in the
Plenary, no changes in substance are expected until their adoption
by the European Parliament by the second quarter of 2024. It is
expected that they will enter into force on 1 January 2025; and
certain measures are expected to be subject to transitional
arrangements or to be phased in over time.
B.
Group Financial Results - Underlying Basis
(continued)
B.2 Balance Sheet Analysis (continued)
B.2.2 Regulations and Directives (continued)
B.2.2.2 Bank Recovery and Resolution
Directive (BRRD)
Minimum Requirement for Own Funds and Eligible Liabilities
(MREL)
The Bank Recovery and Resolution
Directive (BRRD) requires that from January 2016, EU member states
shall apply the BRRD's provisions requiring EU credit institutions
and certain investment firms to maintain a minimum requirement for
own funds and eligible liabilities (MREL), subject to the
provisions of the Commission Delegated Regulation (EU) 2016/1450.
On 27 June 2019, as part of the reform package for strengthening
the resilience and resolvability of European banks, the BRRD
ΙΙ came into effect and
was required to be transposed into national law. BRRD II was
transposed and implemented in Cyprus law in early May 2021. In
addition, certain provisions on MREL have been introduced in
CRR ΙΙ which also
came into force on 27 June 2019 as part of the reform package and
were immediately effective.
In January 2024, the Bank received
final notification from the SRB regarding the 2024 MREL decision,
by which the final MREL requirement is now set at 25.00% of risk
weighted assets and must be met by 31 December 2024, one year
earlier than the previous decision, in light of the Group's
progress over the years of becoming a strong, well-capitalised with
sustainable profitability organisation.
Furthermore, the binding interim
requirement of 1 January 2022 set at 14.94% of risk weighted assets
and 5.91% of LRE must continue to be met. The own funds used by the
Bank to meet the Combined Buffer Requirement (CBR) are not eligible
to meet its MREL requirements expressed in terms of risk-weighted
assets. The Bank must comply with the MREL requirement at the
consolidated level, comprising the Bank and its
subsidiaries.
The regulatory MREL ratio as at 31
December 2023, calculated according to the SRB's eligibility
criteria currently in effect and based on internal estimate, stood
at 25.5% of risk weighted assets (RWA) and at 11.7% of LRE,
reflecting the 30% payout ratio for the year ended 31 December
2023 (compared to the previously reported
MREL ratio of 24.6% and 11.4% LRE). The
MREL ratio expressed as a percentage of risk weighted assets does
not include capital used to meet the CBR requirement, which
stood at 4.48% on
31 December 2023 (compared to 4.04% as at 30 September 2023 and
3.77% as at 31 December 2022), reflecting the increase on 30
November 2023 of CcyB from 0.00% to 0.50% of the total risk
exposure amounts in Cyprus. CCyB is expected to further increase
from June 2024 as announced by CBC. Additionally, the CBR
requirement is increased further on 1 January 2024 following an
increase in O-SII buffer from 1.50% to 1.875% and subsequently to
2.25% from 1 January 2025, as announced by CBC.
The Bank continues to evaluate opportunities to optimise the
build-up of its MREL.
B.2.3 Funding and Liquidity
Funding
Funding from Central
Banks
At 31 December 2023, the Bank's
funding from central banks amounted to €2,044 mn, which relates to ECB
funding, comprising solely of funding through the Targeted
Longer-Term Refinancing Operations (TLTRO) III, compared to €2,023 mn at 30 September 2023
and to €1,977 mn
at 31 December 2022. The maturity date of
the Bank's funding of €1.7 bn under the seventh TLTRO III operation is in March
2024, whilst the €300 mn under the eighth TLTRO III operation is in June
2024.
Deposits
Customer deposits totalled €19,337
mn at 31 December 2023 (compared to €19,267 mn at 30 September 2023
and to €18,998 mn at 31 December 2022) broadly flat in the fourth
quarter. Customer deposits are mainly retail-funded and 58% of
deposits are protected under the deposit guarantee scheme as at 31
December 2023.
The Bank's deposit market share in
Cyprus reached 37.7% as at 31 December 2023, the same as at 30
September 2023 and to 37.2% as at 31 December
2022.
Customer deposits accounted for 73% of total
assets and 80% of
total liabilities at 31 December
2023 (compared to 75% of total assets and
82% of total liabilities as at 31 December 2022).
The net loans to deposits (L/D)
ratio stood at 51% as at 31 December 2023 (compared to 51% as at 30
September 2023 and to 52% as at 31 December 2022 on the same
basis), flat in the fourth quarter.
B.
Group Financial Results - Underlying Basis
(continued)
B.2 Balance Sheet Analysis (continued)
B.2.3 Funding and Liquidity (continued)
Funding (continued)
Subordinated
liabilities
At 31 December 2023, the carrying
amount of the Group's subordinated liabilities amounted to €307 mn
(compared to €315 mn at 30 September 2023 and to €302 mn at 31
December 2022) and relate to unsecured subordinated Tier 2 Capital
Notes ('T2 Notes').
The T2 Notes were priced at par
with a fixed coupon of 6.625% per annum, payable annually in
arrears and resettable on 23 October 2026. The maturity date of the
T2 Notes is 23 October 2031. The Company will have the option to
redeem the T2 Notes early on any day during the six-month period
from 23 April 2026 to 23 October 2026, subject to applicable
regulatory approvals.
Debt securities in
issue
At 31 December 2023, the carrying
value of the Group's debt securities in issue amounted to €672 mn
(compared to €644 mn at 30 September 2023 and to €298 mn at 31
December 2022) and relate to senior preferred notes. The increase
of 126% since the beginning of the year, relates to the issuance of
€350 mn senior preferred notes in 3Q2023.
In July 2023, the Bank
successfully launched and priced an issuance of €350 mn of senior
preferred notes (the "Notes"). The Notes were priced at par with a
fixed coupon of 7.375% per annum, payable annually in arrear, until
the Optional Redemption Date i.e. 25 July 2027. The maturity date
of the Notes is 25 July 2028; however, the Bank may, at its
discretion, redeem the Notes on the Optional Redemption Date
subject to meeting certain conditions (including applicable
regulatory consents) as specified in the Terms and Conditions. If
the Notes are not redeemed by the Bank, the coupon payable from the
Optional Redemption Date until the Maturity Date will convert from
a fixed rate to a floating rate and will be equal to 3-month
Euribor + 409.5 bps, payable quarterly in arrear. The Notes comply
with the criteria for the Minimum Requirement for Own Funds and
Eligible Liabilities ("MREL") and contribute towards the Bank's
MREL requirements.
In June 2021, the Bank
executed its inaugural MREL transaction issuing
€300 mn of senior preferred notes (the "SP Notes"). The SP Notes
were priced at par with a fixed coupon of 2.50% per annum, payable
annually in arrears and resettable on 24 June 2026. The maturity
date of the SP Notes is 24 June 2027 and the Bank may, at its
discretion, redeem the SP Notes on 24 June 2026, subject to meeting
certain conditions as specified in the Terms and Conditions,
including applicable regulatory consents. The SP Notes comply with
the criteria for MREL and contribute towards the Bank's MREL
requirements.
Liquidity
At 31 December 2023, the Group
Liquidity Coverage Ratio (LCR) stood at 359% (compared to 350% at
30 September 2023 and to 291% at 31 December 2022), well above the
minimum regulatory requirement of 100%. The
LCR surplus as at 31 December 2023 amounted to €9.1 bn (compared to
€8.6 bn at 30 September 2023 and to €7.2 bn at 31 December 2022).
The increase in liquidity surplus in 4Q2023 is due to higher
deposits. When disregarding the TLTRO III,
the Group's liquidity position remains strong with an LCR of 302%
and liquidity surplus of €7.1 bn.
At 31 December 2023, the Group Net
Stable Funding Ratio (NSFR) stood at 158%
(compared to 162% at 30 September
2023 and to 168% at 31 December 2022), well above the minimum regulatory
requirement of 100%.
B.
Group Financial Results - Underlying Basis
(continued)
B.2 Balance Sheet Analysis (continued)
B.2.4 Loans
Group gross loans totalled €10,070 mn at 31
December 2023, compared to €10,167 mn at 30 September 2023 and to €10,217 mn
at 31 December 2022, broadly flat yoy as repayments offset new
lending.
New lending granted in Cyprus
reached €462 mn for 4Q2023 (compared to €445 mn for 3Q2023, €494 mn
for 2Q2023 and to €624 mn for 1Q2023) up by 4% qoq. New lending in
4Q2023 comprised €166 mn of corporate loans, €187 mn of retail
loans (of which €124 mn were housing loans), €43 mn of SME loans
and €66 mn of shipping and international loans. New lending for
FY2023 stood at €2,025 mn, despite the
rising interest rate environment, driven mainly by corporate
demand.
At 31 December 2023, the Group net
loans and advances to customers totalled €9,822 mn (compared to
€9,910 mn at 30 September 2023 and to €9,953 mn at 31 December
2022), broadly flat since the beginning of the year.
The Bank is the largest credit
provider in Cyprus with a market share of 42.2% at 31 December
2023, compared to 42.3% at 30 September 2023 and to 40.9% at 31
December 2022.
In December 2023 the Bank entered
into an agreement with Cyprus Asset Management Company ('KEDIPES')
to acquire a portfolio of performing and restructured loans with
gross book value of c.€58 mn with reference date 31 December 2022
(the 'Transaction'). The Transaction is broadly neutral to the
Group's income statement and capital position. The Transaction was
completed in March 2024.
B.2.5 Loan portfolio quality
The Group has continued to make
steady progress across all asset quality metrics. Today,
the Group's priorities focus mainly on
maintaining high quality new lending with strict underwriting
standards and preventing asset quality deterioration following the
ongoing macroeconomic uncertainty.
The loan credit losses for 4Q2023
amounted to €19 mn broadly flat compared to prior quarter, and
totalled to €63 mn for FY2023, compared to €47 mn for FY2022.
Further details regarding loan credit losses are provided in
Section B.3.3 'Profit before tax and non-recurring
items'.
Non-performing exposures
Following a deep dive assessment
of the Group's loan portfolio in the second half of 2023, a total
amount of €90 mn
was classified as unlikely to pay exposures ('UTPs'). The vast
majority of UTPs are customer specific with idiosyncratic
characteristics and are not linked with the current macroeconomic
environment, they adhere to their payment schedule and present no
arrears. Despite the high interest rates
and inflation, there are no material signs of asset quality
deterioration to date. While defaults have
been limited, the additional monitoring and provisioning for
sectors and individuals vulnerable to the
macroeconomic environment remain in place to ensure that potential
difficulties in the repayment ability are identified at an early
stage, and appropriate solutions are provided to viable
customers.
Non-performing exposures (NPEs) as defined by the European
Banking Authority (EBA) were
increased by €7 mn, or 2% in 4Q2023, compared to a net organic
reduction of €13 mn in 3Q2023,
to €365 mn at 31 December 2023 (compared to €358
mn at 30 September 2023 and €411 mn at 31
December 2022).
As a result, the NPEs account for 3.6% of gross loans as at 31 December
2023, compared to 3.5% at 30 September 2023 and to 4.0% at 31
December 2022.
The NPE coverage ratio stands at
73% at 31 December 2023, compared to 77% at 30 September 2023 and
to 69% as at 31 December 2022. When taking into account tangible
collateral at fair value, NPEs are fully covered.
Overall, since the peak in 2014, the stock of NPEs has been
reduced by €14.6 bn or 98% to
below €0.4 bn and the NPE ratio by 59 p.p. from 63% to below
4%.
B.
Group Financial Results - Underlying Basis
(continued)
B.2 Balance Sheet Analysis (continued)
B.2.5 Loan portfolio quality (continued)
Non-performing exposures (continued)
Mortgage-To-Rent Scheme ("MTR")
In July 2023, the Mortgage-to-Rent
Scheme ('MTR') was approved by the Council of Ministers and aims
for the reduction of NPEs backed by primary residence and
simultaneously protect the primary residence of vulnerable
borrowers. The eligible criteria include:
·
Borrowers that were non-performing as at 31
December 2021, remained non-performing as at 31 December 2022 and
who also received government allowances during the period January
2021 to December 2022, with facilities backed by primary residence
with Open Market Value up to €250k;
·
Borrowers that had a fully completed application
to Estia Scheme and were assessed as eligible but not viable with a
primary residence of up to €350k Open Market Value; and
·
all applicants that were approved under Estia
Scheme but their inclusion was terminated.
Under the MTR, eligible property
owners will voluntarily surrender ownership of their residence
to Cyprus Asset Management Company
('KEDIPES') which has been approved by the Government to provide
and manage social housing and will be exempted from their mortgage
loan, as the state will be covering fully the required rent on
their behalf. KEDIPES will carry out a new valuation and a
technical due diligence for the eligible applicants' property and
if satisfied will approve the application and pay to the banks an
amount equal to 65% of the Open Market Value of the primary
residence in exchange for the mortgage release, the write off of
the NPE loan and the transfer of the property title
deeds.
The eligible applicants will be
able to acquire the primary residence after 5 years at a favourable
price, below the Open Market Value.
The scheme has been launched in
December 2023; it is expected to act as another tool to address
NPEs in the Retail sector.
B.2.6 Fixed income portfolio
Fixed income portfolio amounts to
€3,548 mn as at 31 December 2023, compared €3,489 mn as at 30
September 2023 and to €2,500 mn as at 31 December 2022, increased
by 2% on the prior quarter and by 42% on prior year. As at 31
December 2023, the portfolio represents 14% of total assets (net of
TLTRO III) and comprises €3,117 mn (88%) measured at amortised cost
and €431 mn (12%) at fair value through other comprehensive income
('FVOCI').
The fixed income portfolio
measured at amortised cost is held to maturity and therefore no
fair value gains/losses are recognised in the Group's income
statement or equity. This fixed income portfolio has high average
rating at Aa3. The amortised cost fixed income portfolio as at 31
December 2023 has an unrealised gain of €3
mn, compared to an unrealised loss of €91 mn as at 30 September 2023,
reflecting an improvement in the market value of this portfolio,
following the reduction in bond yields.
B.2.7 Real Estate Management Unit (REMU)
The Real Estate Management Unit
(REMU) is focused on the disposal of
on-boarded properties resulting from debt for asset swaps.
Cumulative sales of repossessed assets since the
beginning of 2019 amount to €0.9 bn and exceed properties
on-boarded in the same period of €0.5 bn.
During the year ended 31 December
2023, the Group completed disposals of €194 mn (compared to
€162 mn in FY2022),
resulting in a profit on disposal of c.€11 mn for FY2023 (compared to a profit of c.€16 mn for FY2022). Asset disposals are
across all property classes, with 47% gross sale value in FY2023
relating to land.
During the year ended 31 December
2023, the Group executed sale-purchase agreements (SPAs) for
disposals of 569 properties with contract value of €213
mn, compared to SPAs for disposals of 674
properties with contract value of €184 mn for FY2022.
B.
Group Financial Results - Underlying Basis
(continued)
B.2 Balance Sheet Analysis (continued)
B.2.7 Real Estate Management Unit (REMU)
(continued)
In addition, the Group had a strong
pipeline of €40 mn by contract value as at
31 December 2023, of which €29 mn related
to SPAs signed (compared to a pipeline of €70 mn as at 31 December 2022, of which €47 mn related to SPAs
signed).
REMU on-boarded €21 mn of assets in
FY2023 (compared to additions of €86 mn in FY2022), via the
execution of debt for asset swaps and repossessed
properties.
As at 31 December 2023, assets held
by REMU had a carrying value of €878
mn, (comprising properties of €826 mn classified
as 'Stock of property' and €52 mn as 'Investment properties') of
which €862 mn are repossessed
properties, compared to €1,116 mn as at
31 December 2022 (comprising properties of
€1,041 mn classified as 'Stock of property' and €75 mn as
'Investment properties').
Assets held by REMU
Assets held by REMU (Group)
€
mn
|
|
FY2023
|
FY2022
|
4Q2023
|
3Q2023
|
qoq
+%
|
yoy
+%
|
Opening balance
|
|
1,116
|
1,215
|
983
|
1,010
|
-3%
|
-8%
|
On-boarded assets
|
|
21
|
86
|
3
|
12
|
-72%
|
-75%
|
Sales
|
|
(194)
|
(162)
|
(93)
|
(30)
|
213%
|
20%
|
Net impairment loss
|
|
(47)
|
(23)
|
(15)
|
(9)
|
76%
|
108%
|
Transfer to/from own
properties
|
|
(18)
|
-
|
-
|
-
|
-
|
-
|
Closing balance
|
|
878
|
1,116
|
878
|
983
|
-11%
|
-21%
|
Analysis by type and country
|
Cyprus
|
Greece
|
Total
|
31
December 2023 (€ mn)
|
|
|
|
Residential properties
|
50
|
12
|
62
|
Offices and other commercial
properties
|
115
|
13
|
128
|
Manufacturing and industrial
properties
|
36
|
16
|
52
|
Hotels
|
17
|
0
|
17
|
Land (fields and plots)
|
416
|
4
|
420
|
Golf courses and golf-related
property
|
199
|
0
|
199
|
Total
|
833
|
45
|
878
|
|
Cyprus
|
Greece
|
Total
|
31
December 2022 (€ mn)
|
|
|
|
Residential properties
|
69
|
21
|
90
|
Offices and other commercial
properties
|
180
|
14
|
194
|
Manufacturing and industrial
properties
|
48
|
19
|
67
|
Hotels
|
24
|
0
|
24
|
Land (fields and plots)
|
502
|
4
|
506
|
Golf courses and golf-related
property
|
235
|
0
|
235
|
Total
|
1,058
|
58
|
1,116
|
B.
Group Financial Results - Underlying Basis
(continued)
B.3 Income Statement Analysis
B.3.1 Total income
€
mn
|
FY2023
|
FY2022
IFRS
171
|
4Q2023
|
3Q2023
|
2Q2023
|
1Q2023
|
qoq
+%
|
yoy
+%
|
Net interest income
|
792
|
370
|
220
|
214
|
196
|
162
|
3%
|
114%
|
Net fee and commission
income
|
181
|
192
|
46
|
45
|
46
|
44
|
4%
|
-6%
|
Net foreign exchange gains and net
gains/(losses) on financial instruments
|
37
|
26
|
8
|
8
|
8
|
13
|
13%
|
46%
|
Net insurance result
|
54
|
44
|
16
|
13
|
15
|
10
|
19%
|
20%
|
Net gains/(losses) from
revaluation and disposal of investment properties and on disposal
of stock of properties
|
10
|
13
|
3
|
2
|
3
|
2
|
28%
|
-23%
|
Other income
|
18
|
17
|
3
|
3
|
9
|
3
|
8%
|
10%
|
Non-interest income
|
300
|
292
|
76
|
71
|
81
|
72
|
8%
|
3%
|
Total income
|
1,092
|
662
|
296
|
285
|
277
|
234
|
4%
|
65%
|
Net Interest Margin
(annualised)
|
3.41%
|
1.65%
|
3.66%
|
3.63%
|
3.43%
|
2.91%
|
3
bps
|
176
bps
|
Average interest earning
assets
(€ mn)
|
23,211
|
22,483
|
23,858
|
23,383
|
22,903
|
22,638
|
2%
|
3%
|
1.
On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts
which replaced IFRS 4 'Insurance contracts'. 2022 comparative
information presented throughout
is on a
restated basis unless otherwise stated. For further details, please
refer to Note 2.2.1 of the Consolidated Financial Statements for
the year ended 31 December 2023. p.p. = percentage points,
bps = basis points, 100 basis points (bps) = 1 percentage
point
|
Net interest income (NII) for
FY2023 amounted to €792 mn compared to €370 mn for FY2022, up 114%
yoy, benefitting from higher interest rates on liquid assets and
loans, growth of fixed income portfolio and well-managed deposit
pass-through, notwithstanding the foregone NII on the NPE sale
Helix 3 portfolio (c.€13 mn in FY2022) and end of TLTRO III
favourable terms (c.€15 mn in FY2022).
Net interest income (NII) for
4Q2023 amounted to €220 mn at its peak level, compared to €214 mn
for 3Q2023, up 3% qoq, attributable to the repricing of loans and
liquid assets to higher rates and the continued low deposit
pass-through at 18% (compared to 15% pass-through for
3Q2023).
Quarterly average interest earning assets
(AIEA) for FY2023 amounted to
€23,211 mn, up 3% yoy driven by the
increase in liquid assets mainly as a result of the increase in
deposits by c.€0.34 bn yoy and the
issuance of senior preferred notes of €0.35 bn.
Quarterly average interest earning assets for 4Q2023 was also up by
2% on prior quarter.
Net interest margin (NIM) for
FY2023 amounted to 3.41% (compared to 1.65% for FY2022), up 176 bps
yoy driven by the higher interest rate environment. Net interest
margin (NIM) for 4Q2023 stood at 3.66% broadly flat qoq.
Non-interest income for
FY2023 amounted to €300 mn (compared to €292 mn for FY2022, up 3%
yoy) comprising net fee and commission
income of €181 mn, net foreign exchange gains and net
gains/(losses) on financial instruments of €37 mn, net insurance
result of €54 mn, net gains/(losses) from revaluation and disposal
of investment properties and on disposal of stock of properties of
€10 mn and other income of €18 mn. The yoy increase relates to
higher net foreign exchange gains and net gains/(losses) on
financial instruments and net insurance result partly offset by
lower net fee and commission income.
Non-interest income for
4Q2023 amounted to €76 mn (compared to €71 mn for 3Q2023, up 8%
qoq) comprising net fee and commission
income of €46 mn, net foreign exchange gains and net gains/(losses)
on financial instruments of €8 mn, net insurance result of €16 mn,
net gains/(losses) from revaluation and disposal of investment
properties and on disposal of stock of properties of €3 mn and
other income of €3 mn. The qoq increase relates mainly to increased
net insurance result.
Net fee and commission income for FY2023 amounted to €181 mn (compared to €192 mn for
FY2022, down 6% yoy); when disregarding the impact of the liquidity
fees and NPE sale-related servicing fee, net fee and commission
income was up 6% yoy, reflecting higher net credit card commissions
and transactional fees.
Net fee and commission income for 4Q2023 amounted to €46 mn, broadly flat qoq.
B.
Group Financial Results - Underlying Basis
(continued)
B.3 Income Statement Analysis (continued)
B.3.1 Total income (continued)
Net foreign exchange gains and net gains/(losses) on
financial instruments of €37 mn
for FY2023 (comprising net foreign exchange gains of c.€28.5
mn and net gains on financial instruments of
c.€8.5 mn),
compared to €26 mn for FY2022 up 46% yoy, due to higher net gains
on financial instruments.
Net foreign exchange gains and net gains/(losses) on
financial instruments amounted to
€8 mn for 4Q2023, flat qoq. Net foreign exchange gains and net gains/(losses) on
financial instruments are considered volatile profit
contributors.
Net insurance result amounted
to €54 mn for FY2023, compared to €44 mn for FY2022, up 20%
yoy, driven mainly by improved experience variance due to better
claims experience and the reduction in the loss component from the
insurance contracts (recognised upfront in line with IFRS 17) in
life insurance business.
Net insurance result amounted
to €16 mn for 4Q2023, compared to
€13 mn for 3Q2023, up 19% qoq driven mainly
by the improved experience variance in life insurance
business.
Net gains/(losses) from revaluation and disposal of investment
properties and on disposal of stock of properties
for FY2023 amounted to
€10 mn (comprising
net gains on disposal of stock of properties of €9 mn, net gains on
disposal of investment properties of €2 mn
and net loss from revaluation of investment
properties of €1 mn), compared to €13 mn
for FY2022. REMU profit remains volatile.
Net gains/(losses) from revaluation and disposal of investment
properties and on disposal of stock of properties
for 4Q2023 amounted to
€3 mn relating
mainly to net gains on disposal of stock of properties,
compared to €2 mn for 3Q2023.
Total income amounted to €1,092
mn for FY2023 (compared to €662 mn for FY2022, up 65% yoy), and to €296 mn
for 4Q2023 (compared to €285 mn for 3Q2023, up 4% qoq), driven by strong
growth in net interest income, as explained
above.
B.
Group Financial Results - Underlying Basis
(continued)
B.3. Income Statement Analysis (continued)
B.3.2 Total expenses
€
mn
|
FY2023
|
FY2022
IFRS
171
|
4Q2023
|
3Q2023
|
2Q2023
|
1Q2023
|
qoq
+%
|
yoy
+%
|
Staff costs
|
(192)
|
(181)
|
(51)
|
(48)
|
(47)
|
(46)
|
5%
|
6%
|
Other operating
expenses
|
(149)
|
(144)
|
(42)
|
(38)
|
(35)
|
(34)
|
15%
|
4%
|
Total operating expenses
|
(341)
|
(325)
|
(93)
|
(86)
|
(82)
|
(80)
|
9%
|
5%
|
Special levy on deposits and other levies/contributions
|
(43)
|
(38)
|
(13)
|
(12)
|
(7)
|
(11)
|
10%
|
10%
|
Total expenses
|
(384)
|
(363)
|
(106)
|
(98)
|
(89)
|
(91)
|
9%
|
6%
|
Cost to income ratio
|
35%
|
55%
|
36%
|
34%
|
32%
|
39%
|
2
p.p.
|
-20
p.p.
|
Cost to income ratio excluding
special levy on deposits and other
levies/contributions
|
31%
|
49%
|
32%
|
30%
|
29%
|
34%
|
2
p.p.
|
-18
p.p.
|
1. On 1 January 2023,
the Group adopted IFRS 17 'Insurance contracts which replaced IFRS
4 'Insurance contracts'. 2022 comparative information presented
throughout is on a restated basis unless otherwise stated. For
further details, please refer to Note 2.2.1 of the Consolidated
Financial Statements for the year ended 31 December 2023.
p.p. = percentage points, bps = basis points, 100 basis points
(bps) = 1 percentage point
|
Total expenses for FY2023
were €384 mn (compared to €363 mn for FY2022, up 6% yoy), 50% of
which related to staff costs (€192 mn), 39% to other operating
expenses (€149 mn) and 11% to special levy on deposits and other
levies/contributions (€43 mn). Total expenses for 4Q2023 were €106
mn compared to €98 mn for 3Q2023, up 9% qoq, impacted by seasonally
higher other operating expenses (as expected) and higher staff
costs on the performance related pay accrual and higher termination
costs.
Total operating expenses amounted to €341 mn for FY2023 (compared to €325 mn for
FY2022, up 5% yoy) with savings from the efficiency actions
undertaken in 2022, partly offsetting inflationary pressures. Total
operating expenses for FY2023 included c.€11 mn performance related pay accrual (both the long-term
incentive Plan ('LTIP') and Short-term Incentive Plan ('STIP')),
c.€7.5 mn
small-scale Voluntary Staff Exit Plan
('VEP') and €2.5 mn cost on the introduction of
a Reward Programme to reward performer
borrowers. When disregarding the aforementioned,
total operating expenses for FY2023 amounted to
c.€320 mn down 1%
on prior year. Total operating expenses
amounted to €93 mn for 4Q2023, compared to €86 mn for 3Q2023, up 9%
qoq.
Staff costs for FY2023 were
€192 mn (compared to €181 mn for FY2022, up 6% yoy) due to the
small- scale VEP of c.€7.5 mn and the
performance related pay accrual of c.€11 mn, partly offset by the savings
of the VEP that took place in 3Q2022. The performance-related pay
accrual relates to the Short-Term Incentive Plan and the
Long-Term Incentive Plan. The Short-Term
Incentive Plan involves variable remuneration to selected employees
and will be driven by both, delivery of the Group's strategy as
well as individual performance. During FY2023 a small-scale,
targeted VEP took place, by which 50 full-time employees were
approved to leave the Group at a total cost of
c.€7.5 mn.
Staff costs for 4Q2023 were €51 mn, up 5% qoq due
to higher performance-related pay accrual and exit cost compared to
prior quarter.
At the Annual General Meeting
which took place in May 2022, a special resolution was approved for
the establishment and implementation of the share based Long-term
Incentive Plan ('LTIP'). In December 2022 the Group granted 819,860
share awards to 22 eligible employees under the LTIP, comprising
the Extended Executive Committee of the Group. The awards granted
in December 2022 are subject to a three year performance period for
2022-2024 (with all performance conditions being non-market
performance conditions). In October 2023, 479,160 share awards were
granted to 21 eligible employees, comprising the Extended Executive
Committee of the Group. The awards granted in October 2023 are
subject to a three-year performance period 2023-2025 (with all
performance conditions being non market performance
conditions).
These shares will then normally
vest in six tranches, with the first tranche vesting after the end
of the performance period and the last tranche vesting on the fifth
anniversary of the first vesting date.
As at 31 December 2023, the Group
employed 2,830 persons compared to 2,913 persons as at 30 September
2023 and to 2,889 persons as at 31 December 2022.
Other operating expenses for
FY2023 amounted to €149 mn, compared to €144 mn for FY2022, driven mainly by inflationary pressures
and higher expenses due to a Reward Programme launched to reward
performing borrowers under Antamivi Reward Scheme.
B.
Group Financial Results - Underlying Basis
(continued)
B.3 Income Statement Analysis (continued)
B.3.2 Total expenses (continued)
Other operating expenses for
4Q2023 amounted to €42 mn, up 15% qoq due to seasonally higher
expenses in professional fees and IT expenses.
Special levy on deposits and other
levies/contributions for FY2023
amounted to €43 mn compared to €38 mn for FY2022, up 10% yoy,
driven by the increase of deposits of €0.34
bn yoy. Special levy on deposits and other levies/contributions for
4Q2023 amounted to €13 mn broadly flat qoq, reflecting mainly the
net impact of a levy in the form of annual guarantee fee relating
to the expected revised income tax legislation of c.€5
mn in 4Q2023 (see Section B.2.1 'Capital Base')
and the contribution of the Bank to the Deposit Guarantee Fund
(DGF) of c.€4 mn which relates to 2H2023
and was recorded in 3Q2023 (in line with
IFRSs).
The cost to income ratio
excluding
special levy on deposits and other
levies/contributions for FY2023 was
31% compared to 49% for FY2022, down 18 p.p. yoy. The yoy decrease
is driven by the higher total income and
disciplined cost management. The cost to
income ratio excluding special levy
on deposits and other levies/contributions for
4Q2023 was 32%, up 2 p.p. qoq.
B.
Group Financial Results - Underlying Basis
(continued)
B.3 Income Statement Analysis (continued)
B.3.3 Profit before tax and non-recurring
items
€
mn
|
FY2023
|
FY2022
IFRS
171
|
4Q2023
|
3Q2023
|
2Q2023
|
1Q2023
|
qoq+%
|
yoy
+%
|
Operating profit
|
708
|
299
|
190
|
187
|
188
|
143
|
2%
|
137%
|
Loan credit losses
|
(63)
|
(47)
|
(19)
|
(20)
|
(13)
|
(11)
|
-5%
|
34%
|
Impairments of other financial and
non-financial assets
|
(53)
|
(33)
|
(15)
|
(8)
|
(19)
|
(11)
|
97%
|
66%
|
Provisions for pending
litigations, claims, regulatory and other matters (net of
reversals)
|
(28)
|
(11)
|
(8)
|
(6)
|
(8)
|
(6)
|
22%
|
140%
|
Total loan credit losses, impairments and
provisions
|
(144)
|
(91)
|
(42)
|
(34)
|
(40)
|
(28)
|
24%
|
59%
|
Profit before tax and non-recurring items
|
564
|
208
|
148
|
153
|
148
|
115
|
-3%
|
171%
|
Cost of risk
|
0.62%
|
0.44%
|
0.73%
|
0.76%
|
0.51%
|
0.44%
|
-3
bps
|
18
bps
|
1. On 1 January 2023,
the Group adopted IFRS 17 'Insurance contracts which replaced IFRS
4 'Insurance contracts'. 2022 comparative information presented
throughout is on a restated basis unless otherwise stated. For
further details, please refer to Note 2.2.1 of the Consolidated
Financial Statements for the year ended 31 December 2023.
p.p. = percentage points, bps = basis points, 100 basis points
(bps) = 1 percentage point
|
Operating profit for FY2023
amounted to €708 mn, compared to €299 mn for FY2022 (up 137%
yoy). The yoy increase is driven by the
significant increase in net interest income. Operating profit for 4Q2023 amounted to €190 mn,
broadly flat qoq.
Loan credit losses for FY2023
were €63 mn of which €19
mn were recorded in 4Q2023, broadly flat on prior
quarter, compared to €47 mn for FY2022 (up 34% yoy) and
include €19 mn
higher loan credit losses on specific customers with idiosyncratic
characteristics assessed as 'Unlikely to pay' ('UTPs) exposures,
even though they adhere to their repayment
schedule and present no arrears.
Cost of risk for FY2023 is
equivalent to 62 bps, in line with 2023 target, compared to a cost
of risk of 44 bps for FY2022, up by 18 bps yoy. Cost of risk for
4Q2023 was 73 bps,
broadly flat qoq.
At 31 December 2023, the allowance
for expected loan credit losses, including residual fair value
adjustment on initial recognition and credit losses on off-balance
sheet exposures (please refer to Section F.
'Definitions and Explanations' for definition) totalled €267 mn (compared to €275 mn at 30 September 2023
and to €282 mn at 31 December 2022) and accounted for 2.7% of gross
loans (flat on prior quarter and compared to 2.8% for 31 December
2022).
Impairments of other financial and non-financial
assets for FY2023 amounted to €53
mn, compared to €33 mn for FY2022, up €20
mn yoy, driven mainly by higher
impairments on specific, large, illiquid REMU stock properties.
Impairments of other financial and non-financial assets for 4Q2023
amounted to €15 mn compared to €8 mn for 3Q2023.
Provisions for pending litigations, claims regulatory and
other matters (net of
reversals) for FY2023 amounted to
€28 mn, compared to €11 mn for FY2022. The yoy increase is driven
mainly by the revised approach on pending litigation fees and
provisions in relation to certain legacy matters
as well in relation to the run-down of legacy and
non-core operations of the Group. Provisions for pending
litigations, claims, regulatory and other matters (net of
reversals) for 4Q2023 amounted to €8 mn compared to €6 mn for
3Q2023.
Profit before tax and non-recurring items
for FY2023 totalled to €564 mn, compared to €208 mn for
FY2022. Profit before tax and non-recurring items for 4Q2023
amounted to €148 mn compared to €153 mn for
3Q2023 (down 3% qoq).
B.
Group Financial Results - Underlying Basis
(continued)
B.3 Income Statement Analysis (continued)
B.3.4 Profit after tax
(attributable to the owners of the Company)
€
mn
|
FY2023
|
FY2022
IFRS
171
|
4Q2023
|
3Q2023
|
2Q2023
|
1Q2023
|
qoq
+%
|
yoy
+%
|
|
Profit before tax and non-recurring items
|
564
|
208
|
148
|
153
|
148
|
115
|
-3%
|
171%
|
|
Tax
|
(73)
|
(31)
|
(10)
|
(23)
|
(22)
|
(18)
|
-56%
|
133%
|
|
Profit attributable to
non-controlling interests
|
(2)
|
(3)
|
0
|
(1)
|
0
|
(1)
|
-94%
|
-39%
|
|
Profit after tax and before non-recurring items (attributable
to the owners of the Company)
|
489
|
174
|
138
|
129
|
126
|
96
|
7%
|
181%
|
|
Advisory and other transformation
costs - organic
|
(2)
|
(11)
|
-
|
-
|
(1)
|
(1)
|
-
|
-80%
|
|
Profit after tax - organic (attributable to the owners
of the Company)
|
487
|
163
|
138
|
129
|
125
|
95
|
7%
|
199%
|
|
Provisions/net profit/(loss)
relating to NPE sales
|
-
|
1
|
-
|
-
|
-
|
-
|
-
|
-100%
|
|
Restructuring and other costs
relating to NPE sales
|
-
|
(3)
|
-
|
-
|
-
|
-
|
-
|
-100%
|
|
Restructuring costs - Voluntary
Staff Exit Plan (VEP)
|
-
|
(104)
|
-
|
-
|
-
|
-
|
-
|
-100%
|
|
Profit after tax (attributable to the owners of the
Company)
|
487
|
57
|
138
|
129
|
125
|
95
|
7%
|
-
|
|
1.
On 1 January 2023, the Group adopted IFRS 17
'Insurance contracts which replaced IFRS 4 'Insurance contracts'.
2022 comparative information presented throughout is on a restated
basis unless otherwise stated. For further details, please refer to
Note 2.2.1 of the Consolidated Financial Statements for the year
ended 31 December 2023. p.p. = percentage points, bps =
basis points, 100 basis points (bps) = 1 percentage
point
|
The tax charge for 4Q2023 is €10 mn down
56% qoq mainly due to the recognition of deferred tax assets
relating to temporary differences between tax and accounting
treatment and totalled to €73 mn for FY2023, compared to €31 mn for
FY2022.
On 22 December 2022, the European
Commission approved Directive 2022/2523 which provides for a
minimum effective tax rate of 15% for the global activities of
large multinational groups (Pillar Two tax). The Directive that
follows closely the OECD Inclusive Framework on Base Erosion and
Profit Shifting should be transposed by the Member States
throughout 2023, entering into force on 1 January 2024. In Cyprus,
the legislation has not been substantively enacted at the balance
sheet date however it is expected to be enacted within 2024. The
Group expects to be in scope of the draft legislation and has
performed an initial assessment of the potential impact of Pillar
Two tax is currently estimated to be in the range of up to 2% of
profit before tax. However, the actual
impact will depend on the Group's consolidated income statement
variables at the time of implementation. Because of the calculation
complexity resulting from these rules and as the final legislation
has yet to be implemented, the effects of this reform are still
being examined and the Group will further refine the quantification
in view of the first accounting recognition of the additional tax
charge in the Group's consolidated accounts in 2024.
Profit after tax and before non-recurring items (attributable
to the owners of the Company) for
FY2023 is €489 mn, compared to €174 mn for FY2022. Profit after tax
and before non-recurring items (attributable to the owners of the
Company) for 4Q2023 is €138 mn, compared to €129 mn for
3Q2023.
Advisory and other transformation costs -
organic for FY2023 are €2 mn,
compared to €11 mn for FY2022, down 80% yoy. Advisory and other
transformation costs - organic for 4Q2023 are nil, flat
qoq.
Profit after tax arising from the
organic operations (attributable to the owners of the
Company) for FY2023 amounted to
€487 mn, compared to €163 mn for FY2022. Profit after tax arising from the
organic operations (attributable to the owners of the Company)
amounted to €138 mn for 4Q2023,
compared to €129 mn for 3Q2023 (up 7% qoq).
Following completion of Helix 3
project, there are no amounts recognised for provisions/net profit/(loss)
relating to NPE sales for
FY2023.
Restructuring and other costs relating to NPE
sales for FY2023 was nil compared to €3 mn for
FY2022 (relating to the agreements for the
sale of portfolios of NPEs).
B.
Group Financial Results - Underlying Basis
(continued)
B.3 Income Statement Analysis (continued)
B.3.4 Profit after tax
(attributable to the owners of the Company)
(continued)
Restructuring costs relating to the Voluntary Staff Exit Plan
(VEP) of €104 mn in FY2022 mainly
related to the Voluntary Staff Exit Plan
(VEP) that took place in 3Q2022. In July
2022 the Group completed a VEP which led to the reduction of the
Group's full-time employees by 16%, at a
total cost of €101 mn, recorded in the consolidated income statement in
3Q2022. The gross annual savings were
estimated at c.€37 mn or 19% of staff costs with a payback period
of 2.7 years.
Profit after tax
attributable to the owners of the Company for
FY2023 amounts to €487 mn, corresponding to a ROTE of 24.8%,
compared to €57 mn for FY2022 (compared to a ROTE of 3.2% for
FY2022). ROTE excluding amounts reserved for the distribution for
FY2023 increases to 25.3%, compared to a ROTE of 3.3% for FY2022,
calculated on the same basis. Profit after tax attributable to the owners of the Company for 4Q2023 amounts
to €138 mn, compared to €129 mn for 3Q2023 (up 7% qoq). ROTE stands
at 25.6% for 4Q2023, flat on prior quarter. The adjusted recurring
profitability (i.e. defined as the Group's profit after tax before
non-recurring items (attributable to the owners of the Company)
taking into account distributions under other equity instruments
such as the annual AT1 coupon) amounted to €132 mn for 4Q2023 compared to €122 mn for 3Q2023 and
totaled €455 mn
for FY2023 compared to €160
mn for FY2022.
B. Operating Environment
War and geopolitics can be very
disruptive to the economy and society. Meantime wars continue to
rage in Ukraine and in the Middle East, adding to uncertainty and
instability. The attacks on merchant shipping in the Red Sea from
the Houthis in Yemen, is a reflection of the uncertainty. The
attacks are forcing many carriers to change route adding days and
costs to shipping which eventually will add to inflationary
pressures, with implications for monetary policy.
The European Commission's Winter
Forecast estimates GDP growth in 2023 at 0.5% in both the EU and
the euro area. Going forward, growth is expected to rebound mildly
in the euro area to 0.8% in 2024 and to 1.5% in 2025. HICP
inflation is forecast to decrease from 5.4% in 2023, to 2.7% in
2024, and 2.2% in 2025, other things being equal. Uncertainty and
downside risks to the economic outlook have increased in recent
months, primarily related to the evolution of the geopolitical
environment.
Real GDP growth in Cyprus averaged
2.5% in the four quarters and was respectively 3.1%, 2.1%, 2.2% and
2.2% in the first, second, third and fourth quarter. Trade,
transport, and accommodation contributed more than half of the
recorded growth in the period. Accommodation, which is tourism
driven, continues to reflect the recovery from the Covid collapse,
and so the respective contribution to the overall growth of the
economy is higher than normal. Other important contributions came
from the sectors of information and communications, industry and
public administration, education and health. Financial services and
professional services made small negative contributions. The former
reflect slower volume growth and continuing deleveraging. The
latter reflects an accumulated weakness related to the Ukraine war
related sanctions.
Private consumption expanded
strongly supported by high employment and rising wages. The
automatic partial indexation of wages (COLA) has somewhat cushioned
the negative impact of elevated prices on consumption. Investment,
particularly in residential construction, has been supported by the
interest-subsidisation scheme for mortgages and an influx of
foreign companies.
In the labour market employment
growth slowed in the first three quarters of 2023, averaging 0.8%
compared with 3.2% and 2.8% respectively in 2021 and
2022. The unemployment rate continued to
decline from 6.8% average in 2022, to 6.0% in the third quarter of
2023, seasonally adjusted.
Inflation measured by the
Harmonised Index of Consumer Prices, decreased to an average of
3.9% in Cyprus and 5.4% in the Euro area in 2023, from 8.1% on
average in 2022 in Cyprus and 8.4% in the Euro Area. Core inflation
(defined as total headline inflation excluding energy and food) for
2023 was 2.8% in Cyprus and 4.9% in the Euro area. The decline in
the headline inflation was driven by the non-core components of
energy and food, while core inflation was stickier. Harmonised
inflation is expected to continue to decelerate in the medium term
falling to around 2.4% and 2.1% respectively in 2024 and 2025
according to the European Commission's winter forecasts assuming
falling energy prices and support measures adopted by the
government.
Tourist activity continued to
improve in 2023 after a strong performance in 2022. Arrivals
increased by 20.1% from a year earlier, reaching 3.8 million
persons, which corresponds to 97% of arrivals in 2019 before Covid.
Likewise, receipts for the year ended 31 December 2023 increased by
an estimated 22.6% reaching almost €3 billion for the year, higher
than total receipts in the respective period in 2019.
In public finances, there have
been significant improvements in budget and debt dynamics including
debt affordability indicators. The recovery in 2021 was underpinned
by a significant increase in general government revenue and a
relative decrease in government expenditure. The result was a
reduction in the budget deficit to 1.9% of GDP, from a deficit of
5.7% of GDP in 2020. In 2022 the budget surplus rose to 2.4% of GDP
and gross debt dropped to 85.6% of GDP from 99.3% of GDP in 2021.
The budget surplus in 2023 is estimated at 2.4% of GDP according to
the Cyprus Ministry of Finance with gross debt falling to 78.4% of
GDP. The budget balance is forecast to remain in surplus at 2.1% of
GDP in 2024 and 2.5% in 2025. Gross debt is set to decline strongly
in relation to GDP, to 71.5% and 66.3% respectively, on the back of
nominal GDP growth and substantial budget surpluses. Debt
affordability metrics are favourable and are expected to remain
solid in 2023-2024, as gross financing needs are moderate, and the
cash buffer gives the government a high degree of financing
flexibility.
The ECB left its Interest rates
unchanged at the latest Governing Council meeting on 7 March 2024.
The minimum refinancing operations rate remained at 4.5%, compared
with zero at the start of the tightening cycle in July 2021, while
the ECB deposit facility rate is at 4.0%, compared with -50 bps in
July 2021. The ECB's policy remains focussed on ensuring that
inflation returns to the 2% medium-term target in a timely manner,
and so interest rates will remain at sufficiently restrictive
levels for as long as necessary.
Non-performing exposures (NPE)
continued their declining trend thanks mostly to sales packages by
the two largest banks. Non-performing loans were 8.3% of gross
loans at the end of November 2023, according to data from the
Central Bank of Cyprus compared with 9.5% at the end of December
2022. The NPE ratio in the non-financial corporations segment was
7.1% and that of households was 10.5%. Private indebtedness
continued to decline with total loans to residents excluding the
government dropping to about 68% of GDP at the end of December
2023. New lending in 2023 remained in line with new lending volumes
in 2022, showing signs of slowing in the last quarter of the year,
particularly in relation to housing loans, reflecting the tighter
monetary conditions prevailing.
C. Operating environment (continued)
Sovereign ratings
The sovereign risk ratings of the
Cypriot government have improved significantly in recent years,
reflecting reduced banking sector risks, improved economic
resilience and consistent fiscal outperformance. Cyprus has
demonstrated policy commitment to correcting fiscal imbalances
through reform and restructuring of its banking system. Public debt
remains high as a share of GDP, but large-scale asset purchases by
the ECB ensure favourable funding costs for Cyprus and ample
liquidity in the government bond market.
In December 2023,
Fitch
Ratings affirmed Cyprus' long-term
foreign currency issuer default rating at ''BBB'' and revised its
outlook from stable to positive. This follows an affirmation of
Cyprus' long-term foreign currency issuer default rating with a
stable outlook in June 2023, and the upgrade in March 2023. The
upgrade and affirmation reflect the improvement in public finances
and government debt, as well as strong GDP growth, the resilience
of the Cypriot economy to external shocks, and the improvement in
the banking sector's asset quality.
In September 2023, Moody's Investors Service upgraded the
long-term issuer and senior unsecured ratings of the Government of
Cyprus to Baa2 from Ba1. The outlook was revised to stable from
positive. This is a two-notch upgrade of Cyprus' ratings,
reflecting broad-based and sustained improvements in the country's
credit profile as a result of past and ongoing economic, fiscal and
banking reforms. Economic resilience has improved and medium-term
growth prospects remain strong. Fiscal strength has also improved
significantly, with a positive debt trend and sound debt
affordability metrics. The stable outlook balances the positive
credit trends with remaining challenges.
In addition, S&P Global Ratings revised its
outlook on Cyprus to positive from stable in September 2023 and
affirmed Cyprus' long-term local and foreign currency sovereign
ratings at BBB. The positive outlook reflects the ongoing
macroeconomic normalisation since the country's financial crisis in
2012-2013, with the government on track to achieve steady fiscal
surpluses and a declining debt-to-GDP ratio in the coming years.
The positive outlook also reflects the significant progress made in
the banking sector.
Also in September 2023,
DBRS Ratings GmbH (DBRS
Morningstar) upgraded the long-term foreign and local
currency issuer ratings of the Republic of Cyprus from BBB to BBB
(high). The rating action is stable. The upgrade is driven by the
recent decline in government debt and the expectation that public
debt metrics will continue to improve over the next few years,
while economic growth is expected to remain among the strongest in
the euro area. The stable outlook balances the recent favourable
fiscal dynamics with downside risks to the economic
outlook.
D.
Business Overview
Credit ratings
The Group's financial performance
is highly correlated to the economic and operating conditions in
Cyprus. In December 2023, S&P
Global Ratings upgraded the long-term issuer credit rating
of the Bank to BB and maintained a positive outlook. The upgrade by
one notch reflects the significant progress Cypriot banks have made
toward rebalancing their funding profiles, reducing the dependence
on non-resident deposits, the improved operating environment and
the profitability prospects due to higher interest rates, improved
efficiency and contained credit losses. In November 2023,
Fitch Ratings upgraded
long-term issuer default rating to BB from B+, whilst maintaining
the positive outlook. The two notch upgrade reflects a combination
of Fitch's improved assessment of the Cypriot operating environment
and continued improvement in the Bank's credit profile,
strengthened capitalisation, reduced stock of legacy problem assets
and structurally improved profitability. In October 2023
Moody's Investors Service
upgraded the Bank's long-term deposit rating to the investment
grade Baa3 from Ba1, while the outlook remained positive. The main
drivers for this upgrade are the continued resilience of the
Cypriot economy and credit conditions and the continued
improvements in Bank's solvency profile, with further gradual
improvements in asset quality and capital metrics, and a
significant strengthening in the Bank's core
profitability.
Financial performance
The Group is a leading, financial
and technology hub in Cyprus. During the quarter ended
31 December 2023, the
Group delivered another strong set of financial results, generating
a ROTE of 25.6%, the fourth consecutive quarter with a ROTE over
20%. Overall, the Group generated €487 mn
profit after tax for the year, corresponding to a ROTE of 24.8%,
surpassing its 2023 targets, supported by
strong net interest income growth, whilst non-interest income
remained a significant contributor to the Group's profitability and
diversified model, covering 88% of total operating expenses. The
Group's efficiency ratio was significantly improved on prior year
reflecting continued revenue growth and disciplined cost management
amidst inflationary pressures. The Group's tangible book value per
share improved by 25% yoy to €4.93. Currently, the Group enters in a declining
interest rate environment with the path of interest rate
normalisation being very volatile. The Group reiterates its
expectation of delivering a ROTE of over 17% based on 15% CET1
ratio (excluding amounts reserved for distribution) for
2024. Ιnterest rates are expected to normalise to around 2.0-2.5% by
2025 and the Group's 2025 ROTE target of over 16% based on 15% CET1
ratio (excluding amounts reserved for distribution) is
reaffirmed.
FY2023 Distribution at 30%
payout ratio
The Group's strong financial
performance in 2023 facilitated a rapid capital build-up, unlocking
c.480s bps organic capital generation during the year and as a
result, accelerating shareholder value. In March 2024, the Company
obtained the approval of the ECB to pay a cash dividend and to
conduct a share buyback (together the 'Distribution'). The
Distribution corresponds to a 30% payout ratio on FY2023 adjusted
recurring profitability and amounts to €137 mn in total, comprising
a cash dividend of €112 mn and a share buyback of up to €25 mn. The
payout ratio for FY2023 of 30% is in line with the updated
Distribution Policy (refer to B.2.1 'Capital Base') and represents
a material increase compared to the previous year (at 14% payout
ratio).
Following ECB approval, the Board
of Directors of the Company has resolved to propose to the AGM that
will be held on 17 May 2024 for approval, a final cash dividend of
€0.25 per ordinary share in respect of earnings for the year ended
31 December 2023, a five-fold increase compared to
€0.05 in prior year. Subject to approval at the AGM, the dividend will be paid
in cash on 14 June 2024 to those shareholders on the register on 26
April 2024 ('Record date') with an Ex-dividend date of 25 April
2024. Further the Board of Directors of the Company confirmed its
intention to commence a programme to buy back ordinary shares in
the Company for an aggregate consideration of up to €25 mn. It is
expected that, once launched, the programme will take place on both
the London Stock Exchange and the Cyprus Stock Exchange. The launch
and implementation of the share buyback programme will comply with
the Company's general authority to repurchase the Company's
ordinary shares as approved by shareholders at the Company's AGM on
26 May 2023, which is subject to renewal at the AGM scheduled to
take place on 17 May 2024, and with the terms of the approval
received from the ECB. The Group's ROTE excluding amount reserved
for the distribution for FY2023 increases to 25.3% (compared to
3.3% for FY2022 calculated on the same basis).
Interest rate
environment
The structure of the Group's
balance sheet is highly liquid, and hence
benefitted immediately from the rises in interest
rates. As at 31 December 2023, cash
balances with ECB (excluding TLTRO III of c.€2.0
bn) amounted to
c.€7.6 bn. The repricing of the references
gradually benefited the interest income on loans as almost half of
the Group's loan portfolio is Euribor based. As a result, the net
interest income for the year ended 31 December 2023 amounted
to €792 mn, more
than double compared to the previous year. This increase was
underpinned by faster and steeper than expected interest rate rises
as well as a resilient low cost of deposits.
D.
Business Overview (continued)
Interest rate
environment (continued)
In a dynamic interest rate
environment, the Group's interest earning assets are in majority
floating rate. Therefore, the Group undertook pro-active solutions
to reduce the net interest income sensitivity by converting some of
its floating assets to fixed rate assets. These actions included:
investing in fixed rate bonds, initiating the use of reverse repos,
offering fixed rate loans and engaging into receive fixed interest
rate swaps. Simultaneously, about one fifth of the Group's loan
portfolio is linked with the
Bank's base rate which provides a natural hedge
against the cost of deposits. Overall, these actions have led to a
reduction in the net interest income sensitivity (to a parallel
shift in interest rates by 100 bps) by €16
mn compared to prior year.
The Group intends to increase its
structural hedging position by further €4-5 bn (with average duration of
3-4 years) by end of 2024, subject to market conditions, via
partial hedge of non-rate sensitive deposits through receive fixed
rate swaps, further investment in fixed rate bonds, additional
reverse repos and continuing offering fixed rate loans. In this
respect, it is expected that NII sensitivity by end-2024 will
decrease further by c.€30-40 mn.
In line with the average market
forward rates for January 2024, the ECB deposit facility rate is
expected to average to 3.4% in 2024 (compared to 3.3% in 2023),
with recent market expectation indicating great volatility in the
path of rate cuts. Nevertheless, ECB deposit facility rate is
expected to normalise by 2025, with ECB deposit facility rate
expected to reduce to 2.7% by 4Q2024 and to 2.0% by 4Q2025. Euribor
rates have already started to move in expectation of these moves,
with 6-month Euribor expected to average to 3.2% in 2024 (compared
to 3.7% in 2023). As a result, the Group's net interest income is
expected to exceed €670 mn (compared to over €625 mn previously
guided in June 2023) with a quarterly declining trend. This updated
guidance incorporates assumptions on deposit pass-through, deposit
mix, loan and fixed income portfolio growth, the impact of
structural hedging and wholesale funding costs. For further
details, please refer to the Section 'E. Strategy and
Outlook'.
Growing revenues in a more
capital efficient way
The Group remains focused on
growing revenues in a more capital efficient way through growth of
high-quality new lending and the growth in niche areas, such as
insurance and digital products that provide further market
penetration and diversify through non-banking
operations.
The Group has continued to provide
high quality new lending in FY2023 via prudent underwriting
standards. Growth in new lending in Cyprus
has been focused on selected industries in line with the Bank's
target risk profile. During the year ended 31 December 2023, new lending remained
strong at €2,025 mn, despite the rising interest rate environment.
Gross performing loan book remained
broadly flat yoy as repayments offset new
lending. Low single-digit loan
growth per annum for 2024 and 2025 is expected.
Fixed income portfolio continued
to grow in 2023 to €3,548 mn, and currently
represents 14% of total assets (net of TLTRO III). This portfolio
is mostly measured at amortised cost and is highly rated with
average rating at Aa3. The amortised cost fixed income portfolio as
at 31 December 2023 has an unrealised gain of €3 mn, compared to an
unrealised loss of €91 mn as at 30 September 2023, reflecting an
improvement in the market value of this portfolio, following the
reduction in bond yields. Careful
expansion of fixed income portfolio is expected, subject to market
conditions, so that fixed income portfolio represents c.16% of
total assets by 31 December 2024.
Separately, the Group focuses to
continue improving revenues through multiple less capital-intensive
initiatives, with a focus on fees and commissions, insurance and
non-banking opportunities, leveraging on the Group's digital
capabilities. During the year ended 31 December 2023, non-interest
income amounted to €300 mn, remaining an important contributor to
the Group's profitability, and covering overall 88% of the Group's
total operating expenses and is
expected to continue covering 70-80% of the Group's
total operating
expenses for 2024-2025.
In 2023, net fee and commission
income is negatively affected by the termination of liquidity fees
in December 2022 and an NPE sale-related servicing fee in
mid-February 2023. When disregarding the aforementioned impact of
the liquidity fees and NPE sale-related servicing fee, net fee and
commission income increased by 6% on prior year, reflecting higher
net credit card commissions and transactional fees. In the following two years, net fee and
commission income is expected to increase broadly in line with
economic growth.
Net fee and commission income is
enhanced by transaction fees from the Group's subsidiary,
JCC Payment Systems Ltd
(JCC), a leading player in the card processing business and payment
solutions, 75% owned by the Bank. During the year ended 31 December
2023, JCC's net fee and commission income contributed 10% of total
non-interest income and amounted to €30 mn,
up 11% yoy, backed by strong transaction
volume.
The Group's insurance companies, EuroLife and GI
are respectively leading players in the life and general insurance
business in Cyprus, and have been providing recurring and improving
income, further diversifying the Group's income streams. The net
insurance result for the year ended 31 December 2023 contributed
18% of non-interest income and amounted to €54 mn, up 20% yoy,
reflecting improved experience variance in life insurance business;
insurance companies remain valuable and sustainable contributors to
the Group's profitability.
D.
Business Overview (continued)
Growing revenues in a more
capital efficient way (continued)
Finally, the Group through the
Digital Economy Platform
(Jinius) ('the Platform') aims to support the national
digital economy by optimising processes in a cost-efficient way,
allow the Bank to strengthen its client relationships, create
cross-selling opportunities as well as to generate new revenue
sources over the medium term, leveraging on the Bank's market
position, knowledge and digital infrastructure. The first
Business-to-Business services are already in use by clients and
include invoice, remittance, tender and ecosystem management.
Currently, over 2,000 companies are registered in the platform and
over €360 mn cash were exchanged via the
platform in 2023 through invoicing and remittance
services.
In February 2024 the
Business-to-Consumer service was launched, a Product Marketplace
aiming to increase the touch points with customers. Currently over
50 retailers were onboarded in fashion, technology sectors and over
100k products were embedded in the Marketplace.
Lean operating
model
Striving for a lean operating model is a key strategic
pillar for the Group in order to deliver shareholder value, without
constraining funding its digital transformation and investing in
the business.
The efficiency actions of the
Group in 2022 to maintain operating expenses under control in an
inflationary environment included further branch footprint
optimisation and substantial streamline of workforce. In 2022 the
Group successfully completed a Voluntary Staff Exit Plan (VEP)
through which 16% of the Group's full-time employees were approved
to leave at a total cost of €101 mn.
Following the completion of the VEP, the gross annual savings were
estimated at c.€37 mn or 19% of staff costs with a
payback period of 2.7 years. Additionally, in January 2022, one of
the Bank's subsidiaries completed a small-scale targeted VEP,
through which a small number of full-time employees were approved
to leave at a total cost of €3 mn. In relation to branch
restructuring, during 2022 the Group reduced the number of branches
by 20 to 60, a reduction of 25%.
In 2023 the Group completed a
small-scale, targeted VEP through which 50 full-time employees were
approved to leave at a total cost of c.€7.5 mn, recorded in staff
costs.
In addition, staff costs for the
year ended 31 December 2023 include c.€11
mn staff cost rewards, namely the Short-term Incentive Plan and the Long-term Incentive Plan.
The Short-term Incentive Plan involves variable remuneration to
selected employees and will be driven by both, delivery of the
Group's strategy as well as individual performance.
At the Annual General Meeting
which took place in May 2022, a special resolution was approved for
the establishment and implementation of the share based Long-term
Incentive Plan ('LTIP'). In December 2022 the Group granted 819,860
share awards to 22 eligible employees under the LTIP, comprising
the Extended Executive Committee of the Group. The awards granted
in December 2022 are subject to a three year performance period for
2022-2024 (with all performance conditions being non-market
performance conditions). In October 2023, 479,160 share awards were
granted to 21 eligible employees, comprising the Extended Executive
Committee of the Group. The awards granted in October 2023 are
subject to a three-year performance period 2023-2025 (with all
performance conditions being non market performance
conditions).
These shares will then normally
vest in six tranches, with the first tranche vesting after the end
of the performance period and the last tranche vesting on the fifth
anniversary of the first vesting date.
The Group's total operating
expenses for the year ended 31 December 2023 amounted to
€341 mn, up by 5% yoy
with savings partly offsetting inflationary pressures. Total
operating expenses excluding exit costs of c.€7.5 mn, variable pay (STIP and LTIP)
of c.€11 mn and
the cost of €2.5
mn for Reward Programme, were reduced by 1% yoy. The cost to income
ratio excluding special levy on deposits
and other levies/contributions for the year ended 31 December 2023
was reduced further to 31%, 18 p.p. down compared to FY2022,
driven mainly by the higher total income and
disciplined cost management. Maintaining cost discipline management
is a key priority. The
cost to income ratio excluding
special levy on deposits and other levies/contributions for 2024 of
c.40% is reaffirmed, reflecting mainly lower income due to lower
rates.
Transformation plan
The Group's focus
continues on deepening the relationship with its
customers as a customer centric organisation. A transformation plan is already in progress
and aims to enable the shift to modern banking by digitally
transforming customer service, as well as internal
operations. The holistic transformation aims to (i) shift to
a more customer-centric operating model by defining customer
segment strategies, (ii) redefine distribution model across
existing and new channels, (iii) digitally transform the way the
Group serves its customers and operates internally, and (iv)
improve employee engagement through a robust set of organisational
health initiatives.
D.
Business Overview (continued)
Lean operating
model (continued)
Digital transformation
In the dynamic world of banking,
the Group stands as a pioneer of digital banking innovation in
Cyprus, reshaping the banking experience into something more
intuitive, more responsive, and more aligned with the contemporary
needs of its customers, consistently pushing the boundaries to
offer unparalleled banking services. The Group aims to continue to
innovate, and simplify the banking journey, providing a unique and
personalised experience to each of its customers.
The Group's digital channels
continue to grow. As at 31 December 2023, the Group's digital
community has increased to more than 450K active subscribers, both
on Internet Banking and the BoC Mobile App, improving by 9.4% yoy.
Likewise, the BoC Mobile App, had more than 410K active subscribers
as at 31 December 2023 and increased by 14.4% since the beginning
of the year. This app is a central pillar in the Group's ongoing
endeavour to constantly refine, expand, and elevate its digital
services, ensuring that every interaction is a testament to its
commitment to digital excellence.
During 4Q2023, the Group continued
to enrich and improve its digital portfolio with new innovative
services to its customers. The redesign of the Home Insurance flow
in Mobile App for improved user experience that will lead to a
substantial increase in user engagement, ultimately translating
into higher adoption rates and amplified sales figures. A new
feature 'View Card Details' was launched in BOC Mobile App empowering users with greater control and
accessibility to their essential payment information. This new
functionality enables users to effortlessly access crucial card
details, including card number, expiry date, and CVV, directly
within BOC mobile
app. Finally, the "Youth Culture Card" was launched, a
collaboration with the esteemed Government Minister of Culture
where the Group introduced the Youth Culture Card, a transformative
initiative aimed at fostering cultural engagement among young
adults. The Youth Culture Card, designed for individuals aged 18
and above, is a prepaid card loaded with €220 in credit, empowering
recipients to immerse themselves in a diverse array of enriching
cultural experiences throughout the year.
One of the Group's latest digital
innovations, Quickloans, accessible through both the BoC Mobile App
and Internet Banking, has transformed the traditional loan process,
enabling customers to obtain a credit facility decision instantly,
without the need to visit a branch. Since the beginning of the year
2023, over 33k applications were processed, granting €100 mn new
loans.
The digital signing feature,
launched in July 2023 further simplified the process
of allowing customers to
apply, sign, and disburse loans up to €15k
and car loans up to €35k efficiently. In collaboration with Genikes Insurance, an
insurance plan purchase was integrated into BOC Mobile App,
enabling customers to access car or home insurance plans through
the app at lower rates than branch prices. Digital insurance sales
for the year ended 31 December 2023 amounted to €415k, compared to
€68k in FY2022, reflecting around 1,400 policies
in 2023 compared to c.230 policies in 2022.
As at 31 December 2023, 95.6% of
the number of transactions involving deposits, cash withdrawals and
internal/external transfers were performed through digital channels
(up by 11.8 p.p. from 83.8% in June 2020). In addition, 84.1% of individual customers were digitally
engaged (up by 11.7 p.p. from 72.4% in June 2020), choosing digital
channels over branches to perform their transactions. Furthermore,
digital account openings increased by 108% in 2023 to 9,715 from
4,667 in 2022 and new debit cards increased by 156% yoy to 11,536
in 2023.
Asset
quality
Balance sheet de-risking was
largely completed in 2022, marked by the completion of Project
Helix 3 in November 2022 which refers to the sale of non-performing
exposures with gross book value of c.€550
mn as at the date of completion. As at 31 December 2023, the
Group's NPE ratio stood at 3.6%, considerably below its 2023 target
of reaching an NPE ratio below 4%. The Group's priorities remain
intact, maintaining high quality new lending with strict
underwriting standards and preventing asset quality deterioration.
The NPE ratio target for the year
ended 31 December 2024 is updated and is currently expected
to stand at c.3% whilst the NPE ratio
target of below 3% by end-2025 is reaffirmed. The cost of risk for
2024-2025 is expected to trend towards normalised levels of 40-50
bps.
Enhancing organisational
resilience and ESG (Environmental, Social and Governance)
agenda
Climate change and transition to a
sustainable economy is one of the greatest challenges. As part of
its vision to be the leading financial hub in Cyprus, the Group is
determined to lead the transition
of Cyprus to a sustainable future. The Group continuously
evolves towards its ESG agenda and continues to progress towards
building a forward-looking organisation embracing ESG in all
aspects of business as usual. In 2023, the Company received a
rating of AA (on a scale of AAA-CCC) in the MSCI ESG Ratings
assessment.
Reaffirming its strong commitment
to sustainability and to the long term value creation for all its
stakeholders, in November 2023, the Bank was the first Bank in
Cyprus to become an official signatory of the United Nations
Principles for Responsible Banking representing a single framework
for a sustainable banking industry developed through a
collaboration between banks worldwide and the United Nations
Environment Programme Finance Initiative (UNEP FI).
D. Business
Overview (continued)
Enhancing organisational
resilience and ESG (Environmental, Social and Governance)
agenda (continued)
The ESG strategy formulated in
2021 is continuously expanding. The Group is maintaining its
leading role in the Social and Governance pillars and focus on
increasing the Group's positive impacts on the Environment by
transforming not only its own operations, but also the operations
of its customers.
The Group has committed to the
following primary ESG targets, which reflect the pivotal role of
ESG in the Group's strategy:
●
Become carbon neutral by 2030
●
Become Net Zero by 2050
●
Steadily increase Green Asset Ratio
●
Steadily increase Green Mortgage Ratio
●
≥30% women in Group's management bodies (defined
as the Executive Committee (EXCO) and the Extended EXCO) by
2030
For the Group to continue its
progress against its primary ESG targets and address the evolving
regulatory expectations, it further enhanced in 2023, its ESG
working plan which was established in 2022. Progress on the ESG
working plan is closely monitored by the Sustainability Committee,
the Executive Committee and the Board Committees on a quarterly
basis.
Environmental Pillar
The Group has estimated the Scope
1 and Scope 2 greenhouse gas (GHG) emissions of 2021 relating to
own operations in order to set the baseline for carbon neutrality
target. The Bank being the main contributor of GHG emissions of the
Group, designed in 2022 the strategy to meet the carbon neutrality
target by 2030 and progress towards Net Zero target of 2050. For
the Group to become carbon neutral by 2030, Scope 1 and Scope 2
emissions should be reduced by 42% by 2030. The Bank, following the
implementation of various energy upgrade action in 2022 and 2023,
achieved a c.18% reduction in Scope 1 and Scope 2 GHG emissions in
2023 compared to the baseline of 2021.
The Group plans to invest in
energy efficient installations and actions as well as replace fuel
intensive machineries and vehicles from 2024 to 2025, which would
lead to c.3-4% reduction in Scope 1 and Scope 2 emissions by 2025
compared to 2021. The Group expects that the Scope 2 emissions will
be reduced further when the energy market in Cyprus shifts further
towards renewable energy. The Bank achieved a reduction of c.8% in
Scope 1 - Mobile and Stationary Combustion GHG emissions and c.11%
in Scope 2 - Purchased electricity GHG emissions in FY2023 compared
to FY2022 due to new solar panels connected to energy network in
2022 and early 2023 as well as buildings abandonment as part of the
digitalization journey. The Group is also considering several other
actions aiming to a further reduction of c.30% in Scope 1 and Scope
2 GHG emissions by 2030 compared to 2022. The Bank achieved an
increase of 65% in renewable energy production, from 173,583 Kwh to
285,907 Kwh, in FY2023 compared to FY2022.
The Group is gradually integrating
climate-related and environmental (C&E) risks into its Business
Strategy. The Bank was the first bank in Cyprus to join the
Partnership for Carbon Accounting Financials (PCAF) in October
2022, and has estimated and published the Financed Scope 3 GHG
emissions associated with its lending portfolio using the PCAF
standards, methodology and proxies. Following the estimation of
Financed Scope 3 GHG emissions of loan portfolio, the Bank
established a decarbonization target on Mortgage loan portfolio.
The decarbonization target on Mortgage portfolio was established by
applying the International Energy Agency's Below 2 Degree Scenario.
For the Bank's Mortgage loan portfolio to be aligned with the
climate scenario and effectively be associated with lower
transition risks, the baseline as at 31 December 2022 of 53.5
kgCO2e/m2 should be reduced by 43% by 31
December 2030. The carbon intensity of the Mortgage loan portfolio
as at 31 December 2023 was estimated at 50.73
kgCO2e/m2 achieving a c.5% reduction compared
to baseline, due to increased installation
of solar panels in residential properties in
2023. A Green Housing product was launched
at the end of 2023 to support the Bank to meet the decarbonization
target on Mortgage loans and effectively limit the level of climate
transition risk that is exposed to. In addition, the Bank has set
lending and investment limits on specific carbon intensive sectors
which are widely considered to be associated with high climate
transition risk. Further, having introduced and implementing a
Business Environment Scan process, the Bank developed
green/transition new lending targets in certain sectors to support
its customer's transition to a low carbon economy and effectively
manage climate transition risks.
D. Business
Overview (continued)
Enhancing organisational
resilience and ESG (Environmental, Social and Governance)
agenda (continued)
Environmental Pillar (continued)
During 2023, the Bank has made
considerable progress in integrating climate-related and
environmental risks into its risk management approach and risk
culture. The Bank revised and enhanced the Materiality assessment
process on C&E risks. The Bank has carried out a comprehensive
identification and assessment of C&E risks as drivers of
existing financial and non-financial risks considering its business
profile and loan portfolio composition. As part of this process,
the Bank has identified the risk drivers, both physical and
transition, which could potentially have an impact on its risk
profile and operations and has assessed the severity of each risk
driver for all the existing categories of risks. The Bank has
implemented an ESG Due Diligence process designed to enhance data
collection, score customers on their performance against various
aspects around C&E risks and provide guidance on remediation
actions. This process involves the utilization of structured ESG
questionnaires applied at the individual company level for
customers of the Corporate Division to derive an ESG score. The
Bank established a structure and detailed Business Environment Scan
process to monitor the impact of C&E risks on its business
environment in the short, medium and long-term. The results of the
preliminary (quarterly) and final (annual) impact assessment have
been incorporated in the Materiality assessment of C&E risks as
well as informed the Bank's Business Strategy.
The Bank offers a range of
environmentally friendly products to manage transition risk and
help its customers become more sustainable. Specifically, the Bank
offers loans for energy upgrades of homes, installation of solar
panels, acquisition of new hybrid or electric car as well as
financing of renewable energy projects. The gross amount of
environmentally friendly loans as at 31 December 2023 was €24.5 mn
compared to €20.9 mn as at 31 December 2022.
During 2023, in order to enhance
the awareness and skillset on ESG matters, the Group performed
relevant trainings to the Board of Directors and Senior Management
as well as to members of control functions and other members of
staff.
Social Pillar
At the centre of the Group's
leading social role lie its investments in the Bank of Cyprus
Oncology Centre (with an overall investment of c.€70 mn since 1998,
whilst 60% of diagnosed cancer cases in Cyprus are being treated at
the Centre), the immediate and efficient response of Bank of
Cyprus' SupportCY network consisting of companies and
organisations, to various needs of the society and in cases of
crises and emergencies, through the activation of programs,
specialized equipment and a highly trained Volunteers Corps, the
contribution of the Bank of Cyprus Cultural Foundation in promoting
the cultural heritage of the island, and the work of IDEA
Innovation Centre. During 2023, SupportCY among other
initiatives responded to more than 30 fire
incidents in Cyprus and Greece, the deadly floods in Greece and
sent support to the earthquake victims in
Syria. The Cultural Foundation undertook a
number of innovative projects such as 'AISTHISEIS' - Multi sensory
museum experience for groups with disabilities, educational
programs for schools approved by the Ministry of education,
sport and youth, aspiring
to bring youth closer to art, literature, museums and culture of
Cyprus as well as exhibitions, events and activities developed to
encourage and promote the island's history.
The ReInHerit program facilitating
innovation and research cooperation between European museums and
heritage continued also into 2023, with 35,154 people participating
in events at the Cultural Foundation between January to December
2023.
The IDEA Innovation Centre,
invested c.€4 mn in start-up business creation since its
incorporation, supported creation of 89 new companies to date,
provided support to 210+ entrepreneurs through its Startup program
since incorporation, and provided education to 7,000 entrepreneurs.
Staff continued to engage in voluntary initiatives to support
charities, foundations, people in need and initiatives to protect
the environment.
The Group has continued to upgrade
its staff's skillset by providing training and development
opportunities to all staff and capitalising on modern delivery
methods. In 2023, the Bank's employees attended 72,888 hours of
trainings. In addition, in 2023 the Group launched the BoC Academy
to offer up-skilling short courses for employees, with 20 members
of staff enrolling on the Academy's programs. In addition, 4 full
MBA scholarships were offered to selected members of staff.
Moreover, the Group continued its emphasis on staff wellness during
2023 by offering webinars, team building activities and family
events with sole purpose to enhance mental, physical, financial and
social health, attended by c.2,000 employees through its Well at
Work program. One of the highlights of 2023, was the successful
launch of the 1st BOC Intrapreneurship Competition "Think Tank".
The vision was to empower creativity, increase engagement, nurture
a Culture of Innovation, and identify our talents. More than 70
ideas were submitted with 9 Think Tank finalists presenting their
ideas to the committee in a final pitching event. The 3 winning
ideas were related with the areas of ESG, Digital Transformation
and New product development.
D. Business
Overview (continued)
Enhancing organisational
resilience and ESG (Environmental, Social and Governance)
agenda (continued)
Governance Pillar
The Group continues to operate
successfully within a complex regulatory framework of a holding
company which is registered in Ireland, listed on two Stock
Exchanges and run in compliance with a number of rules and
regulations. Its governance and management structures enable it to
achieve present and future economic prosperity, environmental
integrity and social equity across its value chain. The Group
operates within a framework with adequate control environment,
which enable risk assessment and risk management based on the
relevant policies under the leadership of the Board of Directors.
The Group has set up a Governance Structure to oversee its ESG
agenda. Progress on the implementation and evolution of the Group's
ESG strategy is monitored by the Sustainability Committee and the
Board of Directors. The Sustainability Committee is a dedicated
executive committee set up in early 2021 to oversee the ESG agenda
of the Group, review the evolution of the Group's ESG strategy,
monitor the development and implementation of the Group's ESG
objectives and the embedding of ESG priorities in the Group's
business targets. The Group's ESG Governance structure continues to
evolve, so as to better address the Group's evolving ESG needs. The
Group's regulatory compliance continues to be an undisputed
priority.
The Board composition of the
Company and the Bank is diverse, with 45% of the Board members
being female as at 31 December 2023. The Board displays a strong
skillset stemming from broad international experience. Moreover,
the Group's aspiration to achieve a representation of at least 30%
women in Group's management bodies (Defined as the EXCO and the
Extended EXCO) by 2030, has been reached earlier with 33%
representation of women, as at 31 December 2023, in Group's
management bodies, following the appointment of two female General
Managers in Eurolife and General Insurance of Cyprus. As at 31
December 2023, there is a 40% representation of women at key
positions below the Extended EXCO level (defined as positions
between Assistant Manager and Manager).
E.
Strategy and Outlook
The vision of the Group is to
create a lifelong partnership with its customers, guiding and
supporting them in an evolving world.
The strategic pillars of the Group
remain intact:
·
Grow revenues in
a more capital efficient way; by
enhancing revenue generation via growth in high quality new
lending, diversification to less capital intensive banking and
other financial services (such as insurance and the digital
economy) as well as prudent management of the Group's
liquidity
·
Achieve a lean
operating model; by ongoing focus
on efficiency through further automations facilitated by
digitisation
·
Maintain robust
asset quality; by maintaining high
quality new lending via strict underwriting criteria, normalising
cost of risk and reducing other impairments
·
Enhance
organisational resilience and ESG (Environmental, Social and
Governance) agenda; by leading the
transition of Cyprus to a sustainable future and building a
forward-looking organisation embracing ESG in all
aspects.
In 2023 there was a fast and steep
increase in interest rates and in conjunction with the Group's
highly liquid balance sheet, resulted in a significant increase in
the net interest income of the Group. During 2023 the Group's net
interest income has more than doubled compared to previous year,
facilitating strong profitability. Overall, the Group delivered a
ROTE of 24.8% (or ROTE excluding distributions of 25.3%) for the
year ended 31 December 2023, exceeding significantly its 2023
targets that were set in June 2023 during the Investor Update
Event.
In line with the average market
forward rates for January 2024, the ECB deposit facility rate is
expected to average to 3.4% in 2024 (compared to 3.3% in 2023),
with recent market expectation indicating great volatility in the
path of rate cuts. Nevertheless, ECB deposit facility rate is
expected to normalise by 2025, with ECB deposit facility rate
expected to reduce to 2.7% by 4Q2024 and to 2.0% by 4Q2025. Euribor
rates have already started to move in expectation of these moves,
with 6-month Euribor expected to average to 3.2% in 2024 (compared
to 3.7% in 2023). As a result, the Group's net interest income is
expected to exceed €670 mn (compared to over €625 mn previously
guided in June 2023) with a quarterly declining trend. The main
drivers for this guidance are:
·
Time and notice deposit pass-through to increase
to an average of 40% in 2024 from 18% in 4Q2023. The interest rate
cuts are expected to pass gradually to new deposits whilst slow
repricing of the back book is expected in 2025;
·
Gradual change in deposit mix towards time and
notice deposits from 32% as at 31 December 2023 to c.45% by 31
December 2024;
·
Low single-digit loan growth whilst loans are
expected to reprice to lower Euribor rates (in anticipation of ECB
deposit facility rate cuts);
·
Fixed income portfolio is expected to continue to
grow, subject to market conditions,
so that it represents c.16% of total assets by
end-2024, benefitting also from rollover to higher rates
and;
·
Higher wholesale funding costs, reflecting the
full year impact of the 2023 senior preferred issuance and any
further planned issuance in order to meet the 2024 MREL
requirement.
Additionally, as the Group's
majority of interest earning assets are floating, the Group is
undertaking solutions in order to reduce its net interest income
sensitivity, converting some of its assets from floating rate to
fixed. During 2023 these actions included: investing in fixed rate bonds,
initiating the use of reverse repos, offering fixed rate loans and
engaging into receive fixed interest rate swaps on the subordinated
debt and debt securities. Simultaneously, about one fifth of the
Group's loan portfolio is linked with Bank's base rate which
provides a natural hedge against the cost of deposits. Overall,
these structural hedging actions have led to a reduction in the net
interest income sensitivity (to a parallel shift in interest rates
by 100 bps) by €16 mn in 2023 compared to prior year. These actions
are expected to continue in 2024 so that the structural hedging
increases by around €4-5 bn by end of 2024, subject to market
conditions, via partial hedge of non-rate sensitive deposits
through receive fixed rate swaps, further investment in fixed rate
bonds, additional reverse repos and continuing offering fixed rate
loans. In this respect, it is expected that NII sensitivity by
end-2024 will decrease further by c.€30-40 mn.
Separately, the Group continues to
focus on improving revenues through multiple less capital-intensive
initiatives, with a focus on net fee and commission income,
insurance and non-banking activities, enhancing the Group's
diversified business
model further. Non-interest income
is an important contributor to the Group's profitability and
historically covered on average
around 80% of its total operating
expenses and this is expected to continue covering around 70-80% of
the Group's total operating expenses for 2024-2025, supported by a
growing net fee and commission income in line with economic
growth.
Maintaining cost discipline
management remains an ongoing focus for the Group. The cost to
income ratio excluding special levy on deposits or other
levies/contributions is reiterated at c.40% for 2024, reflecting
mainly reduced income due to the lower interest rates.
In terms of asset quality, the NPE
ratio target by end-2024 is updated and is currently expected to stand at c.3% whilst the NPE
ratio target of below 3% by end-2025 is reaffirmed. The cost of
risk for 2024-2025 is expected to trend towards normalised levels
of 40-50 bps.
E.
Strategy and Outlook (continued)
Since 2019, the Real Estate
Management Unit (REMU) stock has been consistently reducing, with
properties sold exceeding the book value of properties acquired,
while inflows remain substantially reduced following balance sheet
derisking. Going forward, REMU sales are expected to continue, with
expected inflows to remain at limited levels. Therefore, the target
of REMU portfolio to reduce to c.€0.5 bn by end-2025 is
reiterated.
Overall, the Group continues to
expect that it can deliver a ROTE of over 17% on 15% CET1 ratio
(excluding amounts reserved for distribution) for 2024
corresponding to a CET1 generation of between 200-250 bps
pre-distributions. Additionally, the ROTE target for 2025 of over
16% on 15% CET1 ratio (excluding amounts reserved for distribution)
is reiterated, reflecting lower interest rates (average ECB deposit
facility rate at 2.2% for 2025).
The Group's aim to provide
sustainable shareholder returns is reiterated. Distributions are
expected to build prudently and progressively over time, towards a
payout ratio in the range of 30-50% of the Group's adjusted
recurring profitability, including cash dividends and share
buybacks.
A summary of the targets are shown
below:
Key
metrics
|
FY2024
(June
2023)
|
FY2025
(June
2023)
|
FY2024
(February
2024)
|
Net
interest income
Average
ECB Deposit facility rate
|
>€625 mn
3.1%
|
Lower
than 2024
2.5%
|
>€670
mn
3.4%
|
Cost to
income ratio1
|
c.40s
|
Mid
40s
|
c.40s
|
Return
on tangible equity on 15% CET1 ratio
|
>17%
|
>16%
|
>17%5
|
NPE
ratio
|
<4%
|
<3%
|
c.3%
|
Cost of
risk
|
To
normalise towards 40-50 bps over the medium-term
|
Trending towards normalised levels of 40-50 bps
|
Capital
|
200-250
bps organic capital generation p.a. pre
distributions2
CET1
ratio of c.19% by end-2025
|
200-250
bps CET1 generation pre-distributions3
|
Distributions
|
Building prudently and progressively to 30-50% payout
ratio4; including cash
dividends and buybacks
|
1. Excluding special
levy on deposits and other levies/contributions
2. Based on profit
after tax (pre distributions)
3. Yoy Increase in
CET1 ratio pre-distributions
4. Payout ratio
calculated on adjusted recurring profitability which refers to profit after tax before non-recurring items
(attributable to the owners of the Company) taking into
consideration the distributions from other equity instruments such
as AT1 coupon. Any recommendation for a dividend is subject to
regulatory approval.
5.
Excluding amounts reserved for
distribution
|