TIDMBOCH
RNS Number : 7749I
Bank of Cyprus Holdings PLC
09 August 2023
nterim Financial Report 2023
Bank of Cyprus Holdings
nterim Financial Report
Six months ended 30 June 2023
Contents Page
Board of Directors and Executives 1
Forward Looking Statements and Notes 2
Interim Management Report 3
Risk and Capital Management Report 34
Consolidated Condensed Interim Financial statements
Interim Consolidated Income Statement 72
Interim Consolidated Statement of Comprehensive Income 73
Interim Consolidated Balance Sheet 74
Interim Consolidated Statement of Changes in Equity 75
Interim Consolidated Statement of Cash Flows 77
Notes to the Consolidated Condensed Interim Financial Statements
1. Corporate information 79
2. Unaudited financial statements 79
3. Summary of significant accounting policies 79
4. Going concern 96
5. Economic and geopolitical environment 96
6. Significant and other judgements, estimates and assumptions 97
7. Segmental analysis 104
8. Interest income and income similar to interest income 110
9. Interest expense and expense similar to interest expense 111
10. Net gains/(losses) on financial instruments 111
11. Staff costs and other operating expenses 112
12. Credit losses on financial assets and impairment net of
reversals of non--financial assets 114
13. Income tax 114
14. Earnings per share 116
15. Investments 117
16. Derivative financial instruments 121
17. Fair value measurement 122
18. Loans and advances to customers 128
19. Stock of property 130
20. Prepayments, accrued income and other assets 131
21. Funding from central banks 132
22. Customer deposits 133
23. Debt securities in issue and Subordinated liabilities 134
24. Accruals, deferred income, other liabilities and other provisions 135
25. Share capital 135
26. Dividends 137
27. Provisions for pending litigation, claims, regulatory and
other matters 137
28. Cash and cash equivalents 143
29. Analysis of assets and liabilities by expected maturity 145
30. Risk management -- Credit risk 146
31. Risk management -- Market risk 161
32. Risk management -- Liquidity and funding risk 166
33. Capital management 170
34. Related party transactions 171
35. Group companies 172
36. Investments in associates and joint venture 175
37. Events after the reporting period 176
Independent Review Report to the Bank of Cyprus Holdings Public
Limited Company 177
Alternative Performance Measures Disclosures 179
Board of Directors and Executives
as at 08 August 2023
Board of Directors of Efstratios--Georgios Arapoglou
Bank of Cyprus Holdings CHAIRMAN
Public Limited Company
Lyn Grobler
VICE--CHAIRPERSON
Panicos Nicolaou
Constantine Iordanou
Eliza Livadiotou
Ioannis Zographakis
Maria Philippou
Nicolaos Sofianos
Paula Hadjisotiriou
Executive Committee Panicos Nicolaou
CHIEF EXECUTIVE OFFICER
Dr. Charis Pouangare
DEPUTY CHIEF EXECUTIVE OFFICER & CHIEF OF BUSINESS
Eliza Livadiotou
EXECUTIVE DIRECTOR FINANCE
Demetris Th. Demetriou
CHIEF RISK OFFICER
Irene Gregoriou
EXECUTIVE DIRECTOR PEOPLE & CHANGE
George Kousis
EXECUTIVE DIRECTOR TECHNOLOGY & OPERATIONS
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Company Secretary Katia Santis
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Legal Advisers as to Arthur Cox
matters of Irish Law
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Legal Advisers as to Sidley Austin LLP
matters of English and
US Law
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Legal Advisers as to Chryssafinis & Polyviou LLC
matters of Cypriot Law
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Statutory Auditors PricewaterhouseCoopers
One Spencer Dock
North Wall Quay
Dublin 1
D01 X9R7
Ireland
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Registered Office 10 Earlsfort Terrace
Dublin 2
D02 T380
Ireland
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Forward Looking Statements and Notes
This document contains certain forward--looking statements which
can usually be identified by terms used such as 'expect', 'should
be', 'will be' and similar expressions or variations thereof or their
negative variations, but their absence does not mean that a statement
is not forward--looking. Examples of forward--looking statements
include, but are not limited to, statements relating to the Bank
of Cyprus Holdings Group's (the Group) near term and longer term
future capital requirements and ratios, intentions, beliefs or current
expectations and projections about the Group's future results of
operations, financial condition, expected impairment charges, the
level of the Group's assets, liquidity, performance, prospects, anticipated
growth, provisions, impairments, business strategies and opportunities.
By their nature, forward--looking statements involve risk and uncertainty
because they relate to events, and depend upon circumstances, that
will or may occur in the future. Factors that could cause actual
business, strategy and/or results to differ materially from the plans,
objectives, expectations, estimates and intentions expressed in such
forward--looking statements made by the Group include, but are not
limited to: general economic and political conditions in Cyprus and
other European Union (EU) Member States, interest rate and foreign
exchange rate fluctuations, legislative, fiscal and regulatory developments
and information technology, litigation and other operational risks,
adverse market conditions, the impact of outbreaks and epidemics
or pandemics, such as the COVID--19 pandemic. The Russian invasion
of Ukraine has led to heightened volatility across global markets
and to the coordinated implementation of sanctions on Russia, Russian
entities and nationals. The Russian invasion of Ukraine has caused
significant population displacement, and if the conflict continues,
the disruption will likely increase. The scale of the conflict and
the extent of sanctions, as well as the uncertainty as to how the
situation will develop, may have significant adverse effects on the
market and macroeconomic conditions, including in ways that cannot
be anticipated. This creates significantly greater uncertainty about
forward--looking statements. Should any one or more of these or other
factors materialise, or should any underlying assumptions prove to
be incorrect, the actual results or events could differ materially
from those currently being anticipated as reflected in such forward--looking
statements. Changes in reporting frameworks and accounting standards,
including the recently announced reporting changes and the implementation
of IFRS 17 'Insurance Contracts', may have a material impact on the
way we prepare our financial statements and (with respect to IFRS
17) may negatively affect the profitability of the Group's insurance
business. The forward--looking statements made in this document are
only applicable as at the date of publication of this document. Except
as required by any applicable law or regulation, the Group expressly
disclaims any obligation or undertaking to release publicly any updates
or revisions to any forward--looking statement contained in this
document to reflect any change in the Group's expectations or any
change in events, conditions or circumstances on which any statement
is based.
Non--IFRS performance measures
Bank of Cyprus Holdings Public Limited Company's (the Company) management
believes that the non--IFRS performance measures included in this
document provide valuable information to the readers of the Interim
Financial Report as they enable the readers to identify a more consistent
basis for comparing the Group's performance between financial periods
and provide more detail concerning the elements of performance which
management are directly able to influence or are relevant for an
assessment of the Group. They also reflect an important aspect of
the way in which the operating targets are defined and performance
is monitored by the Group's management. However, any non--IFRS performance
measures in this document are not a substitute for IFRS measures
and readers should consider the IFRS measures as the key measures
of the 30 June position. Refer to 'Alternative Performance Measures
Disclosures' on pages 179 to 191 of the Interim Financial Report
for the six months ended 30 June 2023 for further information, reconciliations
with Consolidated Condensed Interim Financial Statements and calculations
of non--IFRS performance measures included throughout this document
and their reconciliation to the most directly comparable IFRS measures.
The Interim Financial Report for the six months ended 30 June 2023
is available on the Group's website
www.bankofcyprus.com (Group/Investor Relations) (the Group's website).
The Interim Financial Report for the six months ended 30 June 2023
is originally issued in English. The Greek translation of the Interim
Financial Report for the six months ended 30 June 2023 will be available
on the Group's website by 11 August 2023. In case of a difference
or inconsistency between the English document and the Greek document,
the English document prevails.
The Interim Financial Report relates to Bank of Cyprus Holdings
Public Limited Company (the Company) and together with its
subsidiaries the Group, which was listed on the London Stock
Exchange (LSE) and the Cyprus Stock Exchange (CSE) as at 30 June
2023.
Activities
The Company is the holding company of the Group and of Bank of
Cyprus Public Company Ltd (BOC PCL or the Bank). The principal
activities of BOC PCL and its subsidiary companies involve the
provision of banking, financial, and insurance services and the
management and disposal of property predominately acquired in
exchange of debt.
All Group companies and branches are set out in Note 35 to the
Consolidated Condensed Interim Financial Statements. The Group has
established branches in Greece. There were no acquisitions of
subsidiaries and no material disposals of subsidiaries during the
six months ended 30 June 2023. Information on Group companies and
acquisitions and disposals during the period are detailed in Note
35 to the Consolidated Condensed Interim Financial Statements.
Group financial results on the underlying basis
The main financial highlights for the six months ended 30 June
2023 are set out below:
Consolidated Condensed Interim Income Statement on the
underlying basis
EUR million Six months ended
30 June
------------------------
2023(1) 2022(1,2)
(restated)
---------- ------------
Net interest income 358 145
------------------------------------------------------------------ ---------- ------------
Net fee and commission income 90 94
------------------------------------------------------------------ ---------- ------------
Net foreign exchange gains and net gains/(losses)
on financial instruments 21 3
------------------------------------------------------------------ ---------- ------------
Net insurance result 25 24
------------------------------------------------------------------ ---------- ------------
Net gains from revaluation and disposal of investment
properties and on disposal of stock of properties 5 7
------------------------------------------------------------------ ---------- ------------
Other income 12 9
------------------------------------------------------------------ ---------- ------------
Total income 511 282
------------------------------------------------------------------ ---------- ------------
Staff costs (93) (95)
------------------------------------------------------------------ ---------- ------------
Other operating expenses (69) (69)
------------------------------------------------------------------ ---------- ------------
Special levy on deposits and other levies/contributions (18) (17)
------------------------------------------------------------------ ---------- ------------
Total expenses (180) (181)
------------------------------------------------------------------ ---------- ------------
Operating profit 331 101
------------------------------------------------------------------ ---------- ------------
Loan credit losses (24) (23)
------------------------------------------------------------------ ---------- ------------
Impairments of other financial and non--financial
assets (30) (13)
------------------------------------------------------------------ ---------- ------------
Provisions for pending litigations, regulatory
and other matters (net of reversals) (14) (1)
------------------------------------------------------------------ ---------- ------------
Total loan credit losses, impairments and provisions (68) (37)
------------------------------------------------------------------ ---------- ------------
Profit before tax and non--recurring items 263 64
------------------------------------------------------------------ ---------- ------------
Tax (40) (11)
------------------------------------------------------------------ ---------- ------------
Profit attributable to non--controlling interests (1) (1)
------------------------------------------------------------------ ---------- ------------
Profit after tax and before non--recurring items
(attributable to the owners of the Company) 222 52
------------------------------------------------------------------ ---------- ------------
Advisory and other transformation costs -- organic (2) (5)
------------------------------------------------------------------ ---------- ------------
Profit after tax -- organic (attributable to
the owners of the Company) 220 47
------------------------------------------------------------------ ---------- ------------
Provisions/net loss relating to NPE sales - (0)
------------------------------------------------------------------ ---------- ------------
Restructuring and other costs relating to NPE
sales - (1)
------------------------------------------------------------------ ---------- ------------
Restructuring costs -- Voluntary Staff Exit Plan
(VEP) - (3)
------------------------------------------------------------------ ---------- ------------
Profit after tax (attributable to the owners of
the Company) 220 43
------------------------------------------------------------------ ========== ============
(1.) The financial information is derived from and should be read
in conjunction with the accompanied Consolidated Condensed Interim
Financial Statements.
(2.) On 1 January 2023 the Group adopted IFRS 17 'Insurance contracts'
which replaced IFRS 4 'Insurance contracts'. 2022 comparative information
has been restated to reflect the impact of IFRS 17. For further details
refer to Note 3.3.1 of the Consolidated Condensed Interim Financial
Statements.
--------------------------------------------------------------------------------------------
Group financial results on the underlying basis (continued)
Consolidated Condensed Interim Income Statement on the
underlying basis (continued)
Key Performance Ratios Six months ended
30 June
2023 2022(1)
(restated)
------- --------------
Net interest margin (annualised) 3.17% 1.32%
------------------------------------------------------------------- ------- --------------
Cost to income ratio 35% 64%
------------------------------------------------------------------- ------- --------------
Cost to income ratio excluding special levy on
deposits and other levies/contributions 32% 58%
------------------------------------------------------------------- ------- --------------
Operating profit return on average assets (annualised) 2.6% 0.8%
------------------------------------------------------------------- ------- --------------
Basic earnings per share attributable to the owners
of the Company (EUR cent)(2) 49.4 9.5
------------------------------------------------------------------- ------- --------------
Return on tangible equity (ROTE) 24.0% 4.9%
------------------------------------------------------------------- ------- --------------
(1.) On 1 January 2023 the Group adopted IFRS 17 ' Insurance contracts',
which replaced IFRS 4 'Insurance contracts'. 2022 comparative information
has been restated to reflect the impact of IFRS 17. For further details
refer to Note 3.3.1 of the Consolidated Condensed Interim Financial
Statements.
(2.) The diluted earnings per share attributable to the owners of
the Company as at 30 June 2023 amounted to 49.3 cents in Euro (EUR).
--------------------------------------------------------------------------------------------
Consolidated Condensed Interim Balance Sheet on the underlying
basis
EUR million 30 June 31 December
2022(1,2)
2023(1) (restated)
-------------
Cash and balances with central banks 9,127 9,567
---------------------------------------------------------------- ----------- -------------
Loans and advances to banks 432 205
---------------------------------------------------------------- ----------- -------------
Debt securities, treasury bills and equity investments 3,330 2,704
---------------------------------------------------------------- ----------- -------------
Net loans and advances to customers 10,008 9,953
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Stock of property 946 1,041
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Investment properties 74 85
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Other assets 1,790 1,734
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Total assets 25,707 25,289
---------------------------------------------------------------- =========== =============
Deposits by banks 449 508
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Funding from central banks 2,004 1,977
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Customer deposits 19,166 18,998
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Debt securities in issue 292 298
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Subordinated liabilities 309 302
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Other liabilities 1,244 1,157
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Total liabilities 23,464 23,240
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Shareholders' equity 1,984 1,807
---------------------------------------------------------------- ----------- -------------
Other equity instruments 236 220
---------------------------------------------------------------- ----------- -------------
Total equity excluding non--controlling interests 2,220 2,027
---------------------------------------------------------------- ----------- -------------
Non--controlling interests 23 22
---------------------------------------------------------------- ----------- -------------
Total equity 2,243 2,049
---------------------------------------------------------------- ----------- -------------
Total liabilities and equity 25,707 25,289
---------------------------------------------------------------- =========== =============
(1.) The financial information is derived from and should be read
in conjunction with the accompanied Consolidated Condensed Interim
Financial Statements.
(2.) On 1 January 2023 the Group adopted IFRS 17 'Insurance contracts'
which replaced IFRS 4 'Insurance contracts'. 2022 comparative information
has been restated to reflect the impact of IFRS 17. For further details
refer to Note 3.3.1 of the Consolidated Condensed Interim Financial
Statements.
--------------------------------------------------------------------------------------------
Group financial results on the underlying basis (continued)
Consolidated Condensed Interim Balance Sheet on the underlying
basis (continued)
Key Balance Sheet figures and ratios 30 June 31 December
2022(1,2)
2023 (restated)
----------- ---------------
Gross loans (EUR million) 10,277 10,217
-------------------------------------------------------------- ----------- ---------------
Allowance for expected loan credit losses (EUR
million) 288 282
-------------------------------------------------------------- ----------- ---------------
Customer deposits (EUR million) 19,166 18,998
-------------------------------------------------------------- ----------- ---------------
Loans to deposits ratio (net) 52% 52%
-------------------------------------------------------------- ----------- ---------------
NPE ratio 3.6% 4.0%
-------------------------------------------------------------- ----------- ---------------
NPE coverage ratio 78% 69%
-------------------------------------------------------------- ----------- ---------------
Leverage ratio 8.5% 7.8%
-------------------------------------------------------------- ----------- ---------------
Capital ratios and risk weighted assets
-------------------------------------------------------------- ----------- ---------------
Common Equity Tier 1 (CET1) ratio (transitional
for IFRS 9) 16.0%(3) 15.2%
-------------------------------------------------------------- ----------- ---------------
Total capital ratio (transitional) 21.1%(3) 20.4%
-------------------------------------------------------------- ----------- ---------------
Risk weighted assets (EUR million) 10,257 10,114
-------------------------------------------------------------- ----------- ---------------
(1.) On 1 January 2023 the Group adopted IFRS 17 'Insurance contracts'
which replaced IFRS 4 'Insurance contracts'. 2022 comparative information
has been restated to reflect the impact of IFRS 17. For further details
refer to Note 3.3.1 of the Consolidated Condensed Interim Financial
Statements.
(2.) The capital ratios have been restated to take into consideration
the dividend in respect of the FY2022 earnings. More information
is provided in 'Capital Base' under the 'Balance Sheet Analysis'
section below.
(3.) Includes reviewed profits for the six months ended 30 June
2023 and is net of dividend accrual (refer to section 'Balance Sheet
Analysis - Capital Base' below).
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Commentary on underlying basis
The financial information presented in this section provides an
overview of the Group financial results for the six months ended 30
June 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 their presentation with
items of a similar nature.
Reconciliations between the statutory basis and the underlying
basis to facilitate the comparability of the underlying basis to
the statutory information, are included in section 'Reconciliation
of the Interim Condensed Consolidated Income Statement for the six
months ended 30 June 2023 between the statutory and underlying
basis' and in 'Alternative Performance Measures Disclosures' of the
Interim Financial Report 2023.
Throughout the Interim Management Report, financial information
in relation to the year ended 31 December 2022 financial
information has been restated to reflect the transition to IFRS 17
which was adopted on 1 January 2023 and applied retrospectively. As
a result, such 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 provided below
and in Note 3.3.1 of the Consolidated Condensed Interim Financial
Statements for the six months ended 30 June 2023.
Throughout the Interim Management Report, 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 earnings of the year ended 31 December
2022 following the approval by the European Central Bank ('ECB').
The proposed final dividend was declared at the Annual General
Meeting ('AGM') which was held on 26 May 2023. This dividend
amounted to EUR22.3 million in total and had a negative impact of
22 basis points 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. Further details are provided in section 'Capital
Base' below.
Group financial results on the underlying basis (continued)
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 EUR52 million
(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 EUR101 million in the
Group's total equity.
-- The remeasurement of insurance assets and liabilities
(including the impact of the contractual service margin ('CSM'))
resulting in an increase in the Group's equity by EUR49
million.
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 approximately EUR 42 million 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 EUR14
million to EUR57 million (compared to EUR71 million 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 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 EUR 50 million as dividend to
BOC PCL in February 2023, which benefited Group regulatory capital
by an equivalent amount on the same date, enhancing CET1 ratio by
approximately 50 basis points. Going forward, meaningful dividend
generation from the insurance business is expected to continue.
Group financial results on the underlying basis (continued)
Reconciliation of the Consolidated Condensed Interim Income
Statement for the six months ended 30 June 2023 between the
statutory and the underlying basis
EUR million Underlying Other Statutory
basis basis
Net interest income 358 - 358
=========== ====== ==========
Net fee and commission income 90 - 90
=========== ====== ==========
Net foreign exchange gains and net gains/(losses)
on financial instruments 21 - 21
=========== ====== ==========
Net gains on derecognition of financial
assets measured at amortised cost - 6 6
=========== ====== ==========
Net insurance result* 25 - 25
=========== ====== ==========
Net gains from revaluation and disposal
of investment properties and on disposal
of stock of properties 5 - 5
=========== ====== ==========
Other income 12 - 12
----------- ------ ----------
Total income 511 6 517
=========== ====== ==========
Total expenses (180) (16) (196)
----------- ------ ----------
Operating profit 331 (10) 321
=========== ====== ==========
Loan credit losses (24) 24 -
=========== ====== ==========
Impairment of other financial and non-financial
assets (30) 30 -
=========== ====== ==========
Provisions for pending litigations, regulatory
and other matters (net of reversals) (14) 14 -
=========== ====== ==========
Credit losses on financial assets and impairment
net of reversals of non-financial assets - (60) (60)
=========== ====== ==========
Profit before tax and non-recurring items 263 (2) 261
=========== ====== ==========
Tax (40) - (40)
=========== ====== ==========
Profit attributable to non-controlling
interests (1) - (1)
=========== ====== ==========
Profit after tax and before non-recurring
items (attributable to the owners of the
Company) 222 (2) 220
=========== ====== ==========
Advisory and other transformation costs
- organic (2) 2 -
----------- ------ ----------
Profit after tax (attributable to the
owners of the Company) 220 - 220
=========== ====== ==========
* Net insurance result per the 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 statutory basis and
the underlying basis are explained below:
-- Net gains on loans and advances to customers at FVPL of
approximately zero 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 EUR6 million under the statutory basis comprise
net gains on derecognition of loans and advances to customers
included in 'Loan credit losses' under the underlying basis as to
align their presentation with the loan credit losses on loans and
advances to customers.
-- Provisions for pending litigations, regulatory and other
matters amounting to EUR14 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.
Group financial results on the underlying basis (continued)
Reconciliation of the Consolidated Condensed Interim Income
Statement for the six months ended 30 June 2023 between the
statutory and the underlying basis (continued)
-- Advisory and other transformation costs of EUR2 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.
-- 'Credit losses on financial assets' and 'Impairment net of
reversals of non-financial assets' under the statutory basis
include: i) credit losses to cover credit risk on loans and
advances to customers of
EUR30 million, which are included in 'Loan credit losses' under
the underlying basis, and ii) credit losses of other financial
assets of EUR7 million and impairment net of reversals of
non-financial assets of EUR23 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.
Balance Sheet Analysis
Capital Base
Total equity excluding non-controlling interests totalled
EUR2,220 million as at 30 June 2023 compared to EUR2,027 million as
at 31 December 2022. S hareholders' equity totalled EUR1,984
million as at 30 June 2023 compared to EUR1,807 million as at 31
December 2022 .
The Common Equity Tier 1 capital (CET1) ratio on a transitional
basis stood at 16.0% as at 30 June 2023, compared to 15.2% as at 31
December 2022 as restated. During the six months ended 30 June
2023, CET1 ratio was positively affected mainly by pre-provision
income and the EUR50 million dividend distributed to BOC PLC in
February 2023 by the life insurance subsidiary, and negatively
affected by provisions and impairments, as well as the AT1
distributions and refinancing costs and the increase in risk
weighted assets. Throughout the Interim Management Report, the
capital ratios as at 30 June 2023 include reviewed profits for the
six months ended 30 June 2023 and an accrual for an estimated final
dividend at a payout ratio of 30% of the Group's adjusted recurring
profitability for the period, which represents the low-end range of
the Group's approved dividend policy. As per the latest SREP
decision, any dividend distribution is subject to regulatory
approval. Such dividend accrual does not constitute a binding
commitment for a dividend payment nor does it constitute a warranty
or representation that such a payment will be made. 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. For more details please
refer to 'Resumption of dividends' further below. For Capital
Requirements Regulation (CRR) purposes a payout of 50% of the
Group's adjusted recurring profitability for the period, the
high-end of the payout range, is prescribed corresponding to a CET1
ratio of 15.6% as at 30 June 2023.
The Group has elected to apply the EU transitional arrangements
for regulatory capital purposes (EU Regulation 2017/2395) where the
impact on the impairment amount from the initial application of
IFRS 9 on the capital ratios 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 approximately 65 basis points on the CET1
ratio on 1 January 2023. In addition, 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 17 basis points on Group's CET1 ratio as at
30 June 2023.
The Total Capital ratio stood at 21.1% as at 30 June 2023,
compared to 20.4% as at 31 December 2022, as restated. As at 30
June 2023, Existing Capital Securities (for further details refer
to 'Other equity Instruments' section below) of a nominal amount of
approximately EUR8 million are included in Total Capital, the
impact of which is approximately 8 basis points on the Total
Capital ratio. For CRR purposes a payout of 50% of the Group's
adjusted recurring profitability for the period, the high-end of
the payout range, is prescribed corresponding to a Total Capital
Ratio ratio of 20.7% as at 30 June 2023.
The Group's capital ratios are above the Supervisory Review and
Evaluation Process (SREP) requirements.
In the context of the annual SREP performed by the ECB in 2022
and based on the final SREP decision received in December 2022,
effective from 1 January 2023, the Pillar II requirement has been
revised to 3.08%, compared to the previous level of 3.26%. The
Pillar II requirement includes a revised Pillar II requirement
add-on of 0.33% relating to ECB's prudential provisioning
expectations. When disregarding the Pillar II add-on relating to
ECB's prudential provisioning expectations, the Pillar 2
requirement has been reduced from 3.00% to 2.75%.
Group financial results on the underlying basis (continued)
Balance Sheet Analysis (continued)
Capital Base (continued)
The Group's minimum phased-in CET1 capital ratio requirement as
at 30 June 2023 is set at 10.26%, compared to the previous level of
10.10% in 2022, 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 approximately 0.02%. The
Group's minimum phased-in Total Capital ratio requirement is set at
15.10%, compared to the previous level of 15.03% in 2022,
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
approximately 0.02%. The ECB has also maintained the non-public
guidance for an additional Pillar II CET1 buffer (P2G) unchanged
compared to the previous year.
BOC PCL 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 since November 2021 the O-SII buffer
has been set to 1.50%. This buffer was phased-in gradually, having
started from 1 January 2019 at 0.50%. The O-SII buffer was fully
phased-in on 1 January 2023 and now stands at 1.50%.
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.
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.
The new rate of 0.50% must be observed as from 30 November 2023.
Further, in June 2023, the CBC announced a further 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% from June
2024.
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 Interim Financial Report 2023.
Resumption of dividend payments
Following the 2022 SREP decision, the equity dividend
distribution prohibition was lifted for both the Company and BOC
PCL, with any dividend distribution being subject to regulatory
approval.
In April 2023, the Company obtained the approval of the European
Central Bank to pay a dividend. Following this approval, the Board
of Directors of the Company recommended to the shareholders a final
dividend of EUR0.05 per ordinary share in respect of the earnings
of the year ended 31 December 2022 ('Dividend'). The proposed final
dividend was declared at the 'AGM' which was held on 26 May 2023.
This Dividend amounted to EUR22.3 million in total and is
equivalent to a payout ratio of 14% of the year ended 31 December
2022 Group's adjusted recurring profitability or 31% based on the
year ended 31 December 2022 profit after tax (as reported in the
2022 Annual Financial Report). The Dividend was paid in cash on 16
June 2023.
This Dividend resulted in a negative capital impact of 22 basis
points on the Group's CET1 ratio and Total Capital ratio as at 31
December 2022. Throughout the Interim Management Report the capital
ratios as at 31 December 2022 have been restated in order to take
into consideration the dividend payment.
The resumption of dividend payments after 12 years, underpins
the Group's position as a strong and well-diversified organisation,
capable of delivering sustainable shareholder returns.
Dividend policy
In April 2023 the Board of Directors approved the Group dividend
policy. The Group aims to provide a sustainable return to
shareholders. Dividend payments 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. The
dividend policy takes into consideration market conditions as well
as the outcome of capital and liquidity planning.
Group financial results on the underlying basis (continued)
Balance Sheet Analysis (continued)
Capital Base (continued)
Other equity instruments
At 30 June 2023, the Group's other equity instruments relate to
Additional Tier 1 Capital Securities (the 'AT1 securities') and
amounted to EUR236 million.
In June 2023, the Company successfully launched and priced an
issue of EUR220 million 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 five
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.
The net proceeds of the issue of the New Capital Securities were
on-lent by the Company to BOC PCL to be used for general corporate
purposes. The on-loan qualifies as Additional Tier 1 capital for
BOC PCL.
The issue of the New Capital Securities will maintain the
Group's optimised capital structure and contributes to the Group's
Total Capital Ratio by approximately 215 basis points.
At the same time, the Company invited the holders of its
outstanding EUR220 million Fixed Rate Reset Perpetual Additional
Tier 1 Capital Securities callable in December 2023 (the 'Existing
Capital Securities') to tender their Existing Capital Securities at
a purchase price of 103% of the principal amount. The Company
received valid tenders of approximately EUR204 million in aggregate
principal amount, or approximately 93% of the outstanding Existing
Capital Securities, all of which were accepted by the Company. As a
result, a cost of approximately EUR7 million was recorded directly
in the Company's equity during the six months ended 30 June 2023,
forfeiting the relevant future coupon payments. Transaction costs
of EUR3.5 million in relation to the transactions were recorded
directly in equity in June 2023. Existing Capital Securities of
approximately EUR 16 million in aggregate principal amount remain
outstanding as at 30 June 2023. In July 2023, the Company purchased
in the open market Existing Capital Securities of a nominal value
of approximately EUR7 million, further reducing the outstanding
nominal amount of the Existing Capital Securities to approximately
EUR8 million.
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 BOC
PCL 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 BOC PCL. With this
legislation, institutions are allowed to treat such DTAs as 'not
relying on profitability', according to CRR/CRD IV and as a result
not deducted from CET1, hence improving a credit institution's
capital position.
In response to concerns raised by the European Commission with
regard to the provision of state aid arising out of the treatment
of such tax losses, the Cyprus Government has proceeded with the
adoption of modifications to the Law, including requirements for an
additional annual fee over and above the 1.5% annual guarantee fee
already provided for in the Law, to maintain the conversion of such
DTAs into tax credits. In May 2022 the Cyprus Parliament voted
these amendments which became effective at that time. As prescribed
by the amendments in the Law, the annual 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 EUR10
million per year, and also allowing for a higher amount to be
charged in the year the amendments are effective (i.e. in
2022).
Group financial results on the underlying basis (continued)
Balance Sheet Analysis (continued)
Capital Base (continued)
Legislative amendments for the conversion of DTA to DTC
(continued)
In anticipation of modifications to the Law, the Group has since
prior years acknowledged that such increased annual fee may be
required to be recorded on an annual basis until expiration of such
losses in 2028. The Group estimates that such fees could range up
to approximately EUR5 million 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.
Regulations and Directives
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 IV 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. The 2021 Banking Package is subject to amendment in
the course of the EU's legislative process; and its scope and terms
may change prior to its implementation. In addition, in the case of
the proposed amendments to CRD IV 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, and the 2021 Banking
Package is currently in the final stage of the EU legislative
process. It is expected that the 2021 Banking Package 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.
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 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 which also
came into force on 27 June 2019 as part of the reform package and
took immediate effect.
In February 2023, the Bank received notification from the Single
Resolution Board (SRB) of the final decision for the binding
minimum requirement for own funds and eligible liabilities (MREL)
for the Bank, determined as the preferred resolution point of
entry. As per the decision, the final MREL requirement was set at
24.35% of risk weighted assets and 5.91% of Leverage Ratio Exposure
(LRE) (as defined in the CRR) and must be met by 31 December 2025.
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 MREL ratio as at 30 June 2023, calculated according to the
SRB's eligibility criteria currently in effect and based on
internal estimate, stood at 21.5% of risk weighted assets (RWA) and
at 10.2% of LRE. The MREL ratio as at 30 June 2023, includes an
amount of approximately EUR8 million that remained following the
tender offer and open market purchases of the Existing Capital
Securities. The impact of this amount is contributing approximately
8 basis points to the MREL ratio expressed as a percentage of RWA
and approximately 3 basis points to the MREL ratio expressed as a
percentage of LRE. In July 2023 BOC PCL proceeded with an issue of
EUR350 million senior preferred notes (the 'Notes'). The Notes
comply with the MREL criteria and are expected to contribute
towards the Bank's MREL requirements. When accounting for the
Notes, the Bank's MREL ratio improves to 24.9% of RWA and 11.4% of
LRE. For further details, please refer to section 'Debt securities
in issue'.
Group financial results on the underlying basis (continued)
Balance Sheet Analysis (continued)
Regulations and Directives (continued)
Bank Recovery and Resolution Directive (BRRD) (continued)
Minimum Requirement for Own Funds and Eligible Liabilities
(MREL) (continued)
The MREL ratio expressed as a percentage of risk weighted assets
does not include capital used to meet the CBR amount, which stood
at 4.02% on 30 June 2023 (compared to 3.77% as at 31 December
2022), expected to increase further on 30 November 2023 following
increase in CcyB from 0.00% to 0.50% of the total risk exposure
amounts in Cyprus and to 1% from June 2024 as announced by CBC.
The MREL ratios as at 30 June 2023 include profits for the six
months ended 30 June 2023 and an accrual for an estimated final
dividend at a payout ratio of 30% of the Group's adjusted recurring
profitability for the period, which represents the low-end range of
the Group's approved dividend policy. For CRR purposes, a payout
ratio of 50% of the Group's adjusted recurring profitability for
the period, the high-end of the payout range of the Group's
approved dividend policy is prescribed, corresponding to an MREL
ratio expressed as a percentage of RWA of 21.1% and an MREL ratio
expressed as a percentage of LRE of 10.1% as at 30 June 2023 and
pro forma for the Notes issuance, the MREL ratio expressed as a
percentage of RWA stands at 24.5% and the MREL ratio expressed as a
percentage of LRE stands at 11.3%.
When accounting for the Notes issued in July 2023, BOC PCL meets
the final MREL requirement currently set by the SRB well ahead the
compliance date of 31 December 2025. Acknowledging that the MREL
requirement (amount and date) is subject to annual review by the
regulator, BOC PCL continues to evaluate opportunities to optimise
the build-up of its MREL.
Funding and Liquidity
Funding
Funding from Central Banks
At 30 June 2023, the Bank's funding from central banks amounted
to EUR 2,004 million , which relates to ECB funding, comprising
solely of funding through the Targeted Longer-Term Refinancing
Operations (TLTRO) III, compared to EUR 1,977 million at 31
December 2022.
The Bank borrowed an overall amount of EUR3 billion under TLTRO
III by June 2021, despite its comfortable liquidity position, given
the favourable borrowing terms, in combination with the relaxation
of collateral requirements.
Following the changes in the terms of the TLTRO III announced by
the ECB in October 2022, and given the Bank's strong liquidity
position, the Bank proceeded with the repayment of EUR 1 billion
TLTRO III funding in December 2022. The maturity date of the Bank's
funding of EUR 1.7 billion under the seventh TLTRO III operation is
in March 2024, whilst the EUR 300 million under the eighth TLTRO
III operation is in June 2024.
Deposits
Customer deposits totalled EUR19,166 million at 30 June 2023,
compared to EUR18,998 million at 31 December 2022. Customer
deposits are mainly retail-funded and almost 60% of deposits are
protected under the deposit guarantee scheme as at 30 June
2023.
The Bank's deposit market share in Cyprus reached 37.4% as at 30
June 2023, compared to 37.2% as at 31 December 202 2 . Customer
deposits accounted for 75% of total assets and 82% of total
liabilities at 30 June 2023 (flat since 31 December 2022).
The net loans to deposits (L/D) ratio stood at 52% as at 30 June
2023, compared to 52% as at 31 December 2022, remaining broadly
flat.
Subordinated liabilities
At 30 June 2023, the carrying amount of the Group's subordinated
liabilities (including accrued interest) amounted to EUR309
million, compared to EUR302 million at 31 December 2022, and relate
to unsecured subordinated Tier 2 Capital Notes ('T2 Notes').
Group financial results on the underlying basis (continued)
Balance Sheet Analysis (continued)
Funding and Liquidity (continued)
Funding (continued)
Subordinated liabilities (continued)
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 30 June 2023, the carrying value of the Group's debt
securities in issue (including accrued interest) amounted to EUR292
million, compared to EUR298 million at 31 December 2022, and relate
to senior preferred notes.
In June 2021, the Bank executed its inaugural MREL transaction
issuing EUR300 million 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.
In July 2023, the Bank has successfully launched and priced an
issuance of EUR350 million 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 plus 409.5 basis points,
payable quarterly in arrears. The issuance was met with strong
demand, attracting interest from more than 90 institutional
investors, with a peak orderbook of EUR950 million and final
pricing 37.5 basis points tighter than the initial pricing
indication. The Notes comply with the criteria for the Minimum
Requirement for Own Funds and Eligible Liabilities and contributes
towards the Bank's MREL requirements.
Liquidity
At 30 June 2023, the Group Liquidity Coverage Ratio (LCR) stood
at 316%, compared to 291% at 31 December 2022, well above the
minimum regulatory requirement of 100%. The LCR surplus as at 30
June 2023 amounted to EUR7.7 billion, compared to EUR7.2 billion at
31 December 2022. When disregarding the TLTRO III and including the
EUR350 million of the senior preferred notes issued on July 2023,
the Group's liquidity position remains strong with an LCR of 270%
and liquidity surplus of EUR6.1 billion.
At 30 June 2023, the Group Net Stable Funding Ratio (NSFR) stood
at 165%, compared to 168% at 31 December 2022, well above the
minimum regulatory requirement of 100%.
Loans
Group gross loans totalled EUR10,277 million at 30 June 2023 ,
compared to EUR10,217 million at 31 December 2022, remaining
largely flat as ongoing repayments offset new lending.
New lending granted in Cyprus totalled EUR1,118 million for the
six months ended 30 June 2023, compared to EUR1,159 million for the
six months ended 30 June 2022, mainly driven by strong demand for
business loans. New lending in the six months ended 30 June 2023
comprised EUR509 million of corporate loans, EUR370 million of
retail loans (of which EUR227 million were housing loans), EUR125
million of SME loans and EUR114 million of shipping and
international loans.
At 30 June 2023, the Group net loans and advances to customers
totalled EUR10,008 million, compared to EUR9,953 million at 31
December 2022, up by 1% since the beginning of the year.
The Bank is the largest credit provider in Cyprus with a market
share of 42.4% at 30 June 2023, compared to 40.9% at 31 December
2022.
Group financial results on the underlying basis (continued)
Balance Sheet Analysis (continued)
Loan portfolio quality
The Group has continued to make steady progress across all asset
quality metrics. Today, t he 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 the six months ended 30 June 2023
totalled EUR24 million. Further details regarding loan credit
losses are provided in section 'Profit before tax and non-recurring
items'.
The elevated inflation combined with the rising interest rate
environment are expected to weigh on customers behaviour. Despite
these persisting pressures there are no signs of asset quality
deterioration to date. While defaults have been limited, the
additional monitoring and provisioning for sectors and individuals
vulnerable to the deteriorated 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
Non-performing exposures (NPEs) as defined by the European
Banking Authority (EBA) were reduced by EUR40 million (net), to
EUR371 million at 30 June 2023, compared to EUR 411 million as at
31 December 2022 .
As a result, the NPEs account for 3.6% of gross loans as at 30
June 2023, compared to 4.0% at 31 December 2022.
The NPE coverage ratio stands at 78% at 30 June 2023, compared
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 EUR14.6 billion or 98% to below EUR0.4 billion and the
NPE ratio by 59 percentage points, from 63% to below 4%.
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 and
remained non-performing as at 31 December 2022 with facilities
backed by primary residence with open market value up to EUR250
thousand;
-- 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 EUR350 thousand Open Market Value; and
-- All applicants that were approved under Estia Scheme but their inclusion was terminated.
The eligible applicants will be able to reside in their primary
residence as tenants and are exempted from their mortgage loan, as
the state will be covering fully the required rent on their behalf.
The eligible applicants will be able to acquire the primary
residence after five years at a favourable price, below the Open
Market Value.
The scheme has not been launched yet; it is expected to act as
another tool to address NPEs in the Retail sector.
Group financial results on the underlying basis (continued)
Balance Sheet Analysis (continued)
Fixed income portfolio
Fixed income portfolio amounts to EUR3,178 million as at 30 June
2023, compared to EUR2,500 million as at 31 December 2022. As at 30
June 2023, the portfolio represents 13% of total assets (net of
TLTRO III) and comprises EUR2,703 million (85%) measured at
amortised cost and EUR475 million (15%) 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 A1 or at Aa2 when Cyprus government
bonds are excluded. The fair value of the amortised cost fixed
income portfolio as at 30 June 2023 amounts to EUR2,619 million,
reflecting an unrealised fair value loss of EUR 84 million,
equivalent to approximately 80 basis points of CET1 ratio .
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 since the beginning of 2019 amount to
EUR0.8 billion and exceed properties on-boarded in the same period
of EUR0.5 billion.
During the six months ended 30 June 2023, the Group completed
disposals of EUR71 million (compared to EUR 87 million in the six
months ended 30 June 2022 ), resulting in a profit on disposal of
EUR5 million for the six months ended 30 June 2023 (compared to a
profit of approximately EUR 8 million for the six months ended 30
June 2022). Asset disposals are across all property classes, with
almost 45% by value in the six months ended 30 June 2023 relating
to land.
During the six months ended 30 June 2023, the Group executed
sale-purchase agreements (SPAs) for disposals of 273 properties
with contract value of EUR78 million, compared to SPAs for
disposals of 373 properties, with contract value of approximately
EUR99 million for the six months ended 30 June 2022.
In addition, the Group had a strong pipeline of EUR66 million by
contract value as at 30 June 2023, of which EUR38 million related
to SPAs signed (compared to a pipeline of EUR81 million as at 30
June 2022, of which EUR41 million related to SPAs signed).
REMU on-boarded EUR6 million of assets in the six months ended
30 June 2023 (compared to additions of EUR26 million in the six
months ended 30 June 2022), via the execution of debt for asset
swaps and repossessed properties.
As at 30 June 2023, assets held by REMU had a carrying value of
EUR1,010 million, (comprising properties of EUR946 million
classified as 'Stock of property' and EUR64 million as 'Investment
properties'), compared to EUR1,116 million as at 31 December 2022
(comprising properties of EUR1,041 million classified as 'Stock of
property' and EUR75 million as 'Investment properties').
In addition to assets held by REMU, properties classified as
'Investment properties' with carrying value of EUR10 million as at
30 June 2023, compared to EUR10 million as at 31 December 2022, are
not managed by REMU.
Group financial results on the underlying basis (continued)
Income Statement Analysis
Total income
Net interest income (NII) for the six months ended 30 June 2023
amounted to EUR358 million, compared to EUR145 million for the six
months ended 30 June 2022, up by 146% compared to the prior period,
driven mainly by the repricing of loans and liquid assets to higher
rates, the limited increase in funding costs and the increase of
fixed income portfolio, notwithstanding the foregone NII on the NPE
sale Helix 3 portfolio (of approximately EUR8 million in the six
months ended 30 June 2022) and the end of TLTRO favourable terms
(approximately EUR7 million in the six months ended 30 June
2022).
Quarterly average interest earning assets (AIEA) for the six
months ended 30 June 2023 amounted to EUR22,781 million, compared
to EUR22,235 million as at 30 June 2022. The increase was driven by
the increase in liquid assets, mainly as a result of the increase
in fixed income portfolio and deposits by approximately EUR 1.3
billion and EUR0.7 billion respectively, partly offset by the
repayment of EUR1.0 billion TLTRO funding in December 2022 .
Net interest margin (NIM) for the six months ended 30 June 2023
amounted to 3.17% compared to 1.32% for the six months ended 30
June 2022, driven by interest rate rises and the increase in
average interest earning assets.
Non-interest income for the six months ended 30 June 2023
amounted to EUR153 million, compared to EUR137 million for the six
months ended 30 June 2022, comprising net fee and commission income
of EUR90 million, net foreign exchange gains and net gains/(losses)
on financial instruments of EUR21 million, net insurance result of
EUR25 million, net gains/(losses) from revaluation and disposal of
investment properties and on disposal of stock of properties of
EUR5 million and other income of EUR12 million. Each of the
components is further analysed below.
Net fee and commission income for the six months ended 30 June
2023 amounted to EUR90 million, compared to EUR94 million for the
six months ended 30 June 2022. When disregarding the impact of the
liquidity fees and NPE sale-related servicing fee, net fee and
commission income was up 8% compared to the prior period,
reflecting the introduction of a revised price list in February
2022, and higher net credit card commissions.
Net foreign exchange gains and net gains/(losses) on financial
instruments amounted to EUR21 million for the six months ended 30
June 2023, compared to EUR3 million for the six months ended 30
June 2022 . The increase was driven by higher net foreign exchange
gains of EUR16 million (30 June 2022: EUR12 million) reflecting
higher foreign exchange income through FX swaps, and net gains in
financial instruments of EUR5 million (30 June 2022: losses of EUR9
million) .
Net insurance result amounted to EUR25 million for the six
months ended 30 June 2023, compared to EUR 24 million for the six
months ended 30 June 2022, up by 4% compared to the prior
period.
Net gains/(losses) from revaluation and disposal of investment
properties and on disposal of stock of properties for the six
months ended 30 June 2023 amounted to EUR5 million (comprising net
gains on disposal of stock of properties of EUR4 million, and net
gains from revaluation and disposal of investment properties of
EUR1 million) , compared to EUR7 million for the six months ended
30 June 2022 (comprising a profit on disposal of stock of
properties of EUR8 million and net losses from revaluation and
disposal of investment properties of EUR1 million). REMU profit
remains volatile.
Total income amounted to EUR511 million for the six months ended
30 June 2023, compared to EUR282 million for the six months ended
30 June 2022 . The increase was mainly driven by strong growth in
net interest income as explained above .
Total expenses
Total expenses for the six months ended 30 June 2023 were EUR180
million, compared to EUR181 million for the six months ended 30
June 2022, 52% of which related to staff costs (EUR93 million), 38%
to other operating expenses (EUR69 million) and 10% to special levy
on deposits and other levies/contributions (EUR18 million). The
decrease mainly relates to the reduction in staff costs, as further
explained below.
Group financial results on the underlying basis (continued)
Income Statement Analysis (continued)
Total expenses (continued)
Total operating expenses amounted to EUR162 million for the six
months ended 30 June 2023, compared to EUR164 million for the six
months ended 30 June 2022, as benefits from the efficiency actions
in the year ended 31 December 2022 continue to partly offset wage
and inflationary pressures.
Staff costs for the six months ended 30 June 2023 were EUR93
million, compared to EUR95 million for the six months ended 30 June
2022, reflecting the savings of the Voluntary Staff Exit Plan (VEP)
that took place in July 2022, partially offset by inflationary
pressures and the accrual of termination benefits cost of
approximately EUR3 million. In addition staff costs for the six
months ended 30 June 2023 include EUR3.8 million staff cost rewards
(variable pay), namely the Short-Term Incentive Plan ('STIP') and
the Long-Term Incentive Plan. The STIP involves variable
remuneration to selected employees and will be driven by both
delivery of the Group's strategy, as well as individual
performance.
During December 2022 the Group granted to eligible employees
share awards under a long-term incentive plan ('2022 LTIP' or the
'2022 Plan'). The 2022 Plan involves the granting of share awards
and is driven by scorecard achievement, with measures and targets
set to align pay outcomes with the delivery of the Group's
strategy. The employees eligible for the 2022 LTIP are the members
of the Extended EXCO. The 2022 LTIP stipulates that performance
will be measured over a 3-year period and financial and
non-financial objectives to be achieved (driven by both delivery of
the Group's strategy as well as individual performance). At the end
of the performance period, the performance outcome will be used to
assess the percentage of the awards that will vest.
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.
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 EUR101 million, recorded in the consolidated income
statement in the nine months ended 30 September 2022. The gross
annual savings were estimated at approximately EUR37 million or 19%
of staff costs with a payback period of 2.7 years. The estimated
savings of the VEP are expected to be partially offset by the
renewal of the collective agreement in 2023.
As at 30 June 2023, the Group employed 2,902 persons compared to
2,889 persons as at 31 December 2022.
Other operating expenses totaled EUR69 million for the six
months ended 30 June 2023 and remained broadly flat compared to the
six months ended 30 June 2022.
Special levy on deposits and other levies/contributions for the
six months ended 30 June 2023 amounted to EUR18 million compared to
EUR17 million for the six months ended 30 June 2022, up 10%
compared to the prior period, driven mainly by the increase of
deposits of EUR0.7 billion compared to the prior period.
The cost to income ratio excluding special levy on deposits and
other levies/contributions for the six months ended 30 June 2023
was 32% compared to 58% for the six months ended 30 June 2022, down
by 26 percentage points. The decrease is driven mainly by the
higher total income.
Profit before tax and non-recurring items
Operating profit for the six months ended 30 June 2023 amounted
to EUR331 million, compared to EUR101 million for the six months
ended 30 June 2022, driven mainly by the significant increase in
net interest income.
Loan credit losses for the six months ended 30 June 2023 were
EUR24 million, compared to EUR23 million for the six months ended
30 June 2022.
Cost of risk for the six months ended 30 June 2023 was 48 basis
points, compared to a cost of risk of 43 basis points for the six
months ended 30 June 2022.
At 30 June 2023, the allowance for expected loan credit losses,
including residual fair value adjustment on initial recognition and
credit losses on off-balance sheet exposures (refer to 'Alternative
Performance Measures Disclosures' section of the Interim Financial
Report 2023 for the respective definitions) totalled EUR288
million, compared to EUR282 million at 31 December 2022, and
accounted for 2.8% of gross loans (31 December 2022: 2.8%).
Group financial results on the underlying basis (continued)
Income Statement Analysis (continued)
Profit before tax and non-recurring items (continued)
Impairments of other financial and non-financial assets for the
six months ended 30 June 2023 amounted to EUR30 million, compared
to EUR13 million for the six months ended 30 June 2022, driven
mainly by higher impairments on specific, large, illiquid REMU
stock properties.
Provisions for pending litigations, regulatory and other matters
(net of reversals) for the six months ended 30 June 2023 amounted
to EUR14 million, compared to EUR1 million for the six months ended
30 June 2022. The increase is driven by the revised approach on
pending litigation fees and the progress on legal cases, as well as
provisions for other matters in relation to the run-down and
disposal of the Group's legacy and non-core operations.
Profit before tax and non-recurring items for the six months
ended 30 June 2023 totalled EUR263 million, compared to EUR64
million for the six months ended 30 June 2022.
Profit after tax (attributable to the owners of the Company)
The tax charge totaled to EUR40 million for the six months ended
30 June 2023, compared to EUR11 million for the six months ended 30
June 2022.
Profit after tax and before non-recurring items (attributable to
the owners of the Company) for the six months ended 30 June 2023 is
EUR222 million, compared to EUR52 million for the six months ended
30 June 2022.
Advisory and other transformation costs - organic for the six
months ended 30 June 2023 are EUR2 million, compared to EUR5
million for the six months ended 30 June 2022, down by 57%.
Profit after tax arising from the organic operations
(attributable to the owners of the Company) for the six months
ended 30 June 2023 amounted to EUR220 million, compared to EUR47
million for the six months ended 30 June 2022.
Following completion of Helix 3 project, there are no amounts
recognised for provisions/net profit/(loss) relating to NPE sales
for the six months ended 30 June 2023.
Restructuring and other costs relating to NPE sales for the six
months ended 30 June 2023 was nil compared to EUR1 million for the
six months ended 30 June 2022 ( relating to the agreements for the
sale of portfolios of NPEs).
Restructuring costs relating to the Voluntary Staff Exit Plan
(VEP) of EUR3 million in the six months ended 30 June 2022, related
to a Voluntary Staff Exit Plan (VEP), through one of the Group's
subsidiaries of which a small number of its employees were approved
to leave.
Profit after tax attributable to the owners of the Company for
the six months ended 30 June 2023 amounts to EUR220 million,
corresponding to a ROTE of 24.0%, compared to EUR43 million for the
six months ended 30 June 2022, corresponding to a ROTE of 4.9%.
Operating Environment
The Cyprus economy recovered strongly from the Covid-induced
recession of 2020 and succeeded in improving its credit and
macroeconomic profile significantly in the period that followed.
The general government budget returned to a surplus position and
the public debt dropped sharply relative to GDP in 2021-2022. In
the banking sector banks restructured their balance sheets and
reduced their non-performing exposures significantly, while at the
same time increasing their capital buffers and raising their
profitability. The growth outlook remains positive over the medium
term supported by Next Generation EU funds.
First quarter growth for 2023 was 3.4% according to the Cyprus
Statistical Service. The growth forecast for the year 2023 is
around 2.8% according to the Ministry of Finance, and the economy
is thus expected to weaken somewhat in the second half of the year.
This follows strong growth of 6.6% and 5.6% respectively in
2021-2022, driven by a strong recovery in tourism toward pre
pandemic levels, and also strong growth in other services
sectors.
Operating Environment (continued)
Employment growth remained strong in 2021-2022 averaging 1.2%
and 2.8% respectively following a 1% drop in 2020. Productivity
growth was particularly strong in the period immediately after the
Covid recession and started to slow in more recent quarters. In the
first quarter of 2023, the volume of employment increased by 2.1%
and the unemployment rate dropped to 6.7% seasonally adjusted, from
7.1% in the fourth quarter 2022.
Inflation measured by the Harmonised Index of Consumer Prices,
was 8.1% in 2022 compared to 8.4% in the Euro area. Inflation
peaked in July 2022 at 10.6% and has been decelerating since,
reaching 3.6% in May 2023 and 2.8% in June 2023, and is estimated
to reach 2.4% in July 2023. This was driven by the non-core
components of energy and food, while core inflation, defined as
total index less energy and food, was stickier and was 4% in June
2023. In the first half of 2023, total harmonised inflation was
4.9% and consisted of 4.6 percentage points of core inflation.
Harmonised inflation is expected to moderate further but only
gradually. Without energy prices spiking unexpectedly, headline
inflation is projected at 3.2% in 2023 in Cyprus and 2.5% in 2024
according to the Ministry of Finance (Strategic Framework for
Fiscal Policy 2024-2026).
Tourist activity continued to rebound in the first half of the
year after a strong performance in 2022. Arrivals increased by 32%
in January-June 2023, from a year earlier, and corresponded to 99%
of arrivals in the same period of 2019. Likewise, receipts
increased by 34% in January-May 2023, from the same period a year
earlier and exceeded receipts from the same period in 2019 by
12%.
Private consumption remains strong and retail sales picked up in
the first four months of 2023 up by 8% year-on-year excluding
vehicles. This was driven by all retail categories particularly
food and beverages, non-food products, textiles and clothing, and
computers and telecommunications equipment.
Public finances continued to improve following significant
advances in 2021-2022. The budget deficit narrowed to 2.0% of GDP
in 2021, from a deficit of 5.8% of GDP in 2020 and turned into a
surplus of 2.1% of GDP in 2022. Gross debt dropped from 101.2% of
GDP in 2021 to 86.5% in 2022. In the first quarter of 2023, gross
debt to GDP dropped further to 84.0%. In the first quarter of the
year the budget surplus increased to EUR329 million from EUR240
million in the first quarter of 2022. This was driven by
considerable increases in direct and indirect tax revenue and in
social contributions which were influenced by the inflation driven
increases in the respective tax bases.
Interest payments declined to 1.5% of GDP in 2022 or 3.6% of
general government revenue indicating that debt affordability
remains favourable. Debt affordability will remain favourable in
the medium term as the government still refinances maturing debt at
lower cost while the cash buffer allows the government a high
degree of flexibility with regards to funding.
In the banking sector, pure new business lending which excludes
renegotiated amounts, slowed in January-April 2023, compared to the
same period of last year but picked up in May. In total, for the
period January-May 2023, pure new loans were marginally higher than
pure new loans in the same period of last year, with a difference
in their composition. This year there were more new loans extended
to non-financial companies, in comparison, and less mortgage
lending primarily due to higher interest rates.
Banks managed to weather the pandemic crisis well, with their
liquidity and capital buffers intact. Non-performing exposures
(NPEs) continued their declining trend following the sale of
packages by the two largest banks. Total NPEs at the end of April
2023, were EUR2.2 billion or 9% of gross loans. Respectively, the
NPE ratio in the non-financial companies' segment was 7.7% and that
of households was 11.6%. About 44.8% of total NPEs are restructured
facilities and the coverage ratio was 54.2%.
Private indebtedness measured by loans to residents on bank
balance sheets, excluding the government, dropped to EUR20.9
billion at the end of June 2023, or about 77% of GDP. In
comparison, private indebtedness peaked at the end of December
2012, amounted to EUR53 billion or about three times GDP.
The federal reserve in the United States and the European
Central Bank, in their July 2023 meetings, raised their policy
rates by 25 basis points. The federal reserve started hiking in
March 2022 and the ECB followed in July of the same year. The
federal funds rate now stands at 5.25-5.5% target range, and the
ECB's Minimum Refinance Operations rate stands at 4.25%.
Operating Environment (continued)
Cyprus' current account deficit narrowed from 10.1% of GDP in
2020 to 6.8% in 2021 before deteriorating to 8.8% of GDP in 2022.
The current account deficit will narrow modestly according to the
IMF, in 2023-2024, to 7.8% and 7.7% of GDP respectively. The
current account deficit will remain higher than pre-pandemic levels
in the medium term, partly due to strong import growth linked to
higher energy prices and EU investment plans, which will weigh on
the trade balance. The size of the country's deficits is partly
structural, a consequence of special purpose vehicles domiciled in
Cyprus.
The outlook remains positive. The government debt ratio will
continue to decline while debt affordability metrics will remain
strong. Growth in the recent period has been broadly based and
Cyprus' economic resilience has been stronger than expected
vis-à-vis the exogenous shocks of Russia's invasion of Ukraine and
also the pandemic. Solid medium-term GDP growth prospects are
supported by the European Union's Next Generation EU package of
grants and loans.
Sovereign ratings
The sovereign risk ratings of the Cyprus Government improved
considerably in recent years reflecting reduced banking sector
risks, and improvements in economic resilience and consistent
fiscal outperformance. Cyprus demonstrated policy commitment to
correcting fiscal imbalances through reform and restructuring of
its banking system. Public debt remains high in relation to GDP but
large-scale asset purchases from the ECB ensure favourable funding
costs for Cyprus and ample liquidity in the sovereign bond
market.
Fitch Ratings has affirmed Cyprus' Long-Term Foreign-Currency
Issuer Default Rating at 'BBB' with a Stable Outlook, in June 2023,
following its upgrade last March. The affirmation reflects the
improvement in public finances and the government indebtedness as
well as strong growth in GDP, the resiliency of the Cypriot economy
to external shocks and the improvement in the Banking sector in
asset quality.
In March 2023, DBRS Morningstar confirmed the Republic of
Cyprus' Long-Term Foreign and Local Currency - Issuer Ratings at
BBB (low) and maintained the trend Stable. The affirmation is
supported by a stable political environment, the government's sound
fiscal and economic policies and the favourable government debt
profile. The stable outlook balances recent favourable fiscal
dynamics against downside risks for the economic outlook.
In September 2022, S&P Global Ratings upgraded Cyprus'
investment grade rating of BBB and has changed the outlook from
positive to stable. The upgrade reflects the resiliency of the
Cypriot economy to recent external shock (including the COVID-19
pandemic). The stable outlook balances risks from the crisis in
Ukraine and the economy's diversified structure and the expectation
that the government's fiscal position will continue to improve. The
credit rating was later reviewed and affirmed in March 2023.
In August 2022, Moody's Investors Service affirmed the
Government of Cyprus' long-term issuer and senior unsecured ratings
to Ba1 and changed the outlook from stable to positive. The ratings
and positive outlook were affirmed again in credit opinion updates
published in April 2023 and June 2023. The key drivers reflecting
the affirmation are the strong reduction in Cyprus' public debt
ratio in 2022, stronger-than expected economic resilience to
Russia's invasion of Ukraine and the COVID-19 pandemic as well the
ongoing strengthening of the banking sector. In a credit assessment
that was published in December 2022 and updated in June 2023,
Moody's investors service affirmed a new Cyprus' credit
profile.
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 are:
-- 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.
The Group's transformation into a strong, diversified,
well-capitalised and sustainably profitable banking and financial
services organisation lay the foundations to create the conditions
for higher returns. Capitalising on this transformation, the Group
has revised its financial targets during the Investor Update Event
in June 2023 and raised its Return on Tangible Equity (ROTE)
guidance for 2023 and 2024 to over 17% and over 14% respectively,
from over 13% per annum (as previously announced on 20 February
2023). The key driver of the upgrade is the revised expectation for
net interest income, primarily to reflect higher rates for
longer.
The structure of the Group's balance sheet is very liquid with
almost half of its assets held as cash balances with central banks
and fixed income portfolio, demonstrating that it is
well-positioned to benefit from rising interest rates. Factoring in
the expectations for the evolution of interest rates at the time of
the event (with the ECB deposit facility rate averaging 3% for 2023
and 3.1% for 2024), the net interest income guidance was upgraded
and is expected to exceed EUR650 million for 2023 and to fall
modestly to over EUR625 million for 2024. For 2025 net interest
income is expected to be lower than 2024 reflecting a lower
projected ECB deposit facility rate of 2.5%. These net interest
income targets incorporate assumptions of:
-- gradual increase in time and notice deposit pass-through to
approximately 50% by June 2024 (previously assumed by December
2023)
-- gradual change in deposit mix towards time and notice
deposits to approximately 50% by December 2024 (previously assumed
by December 2023) and;
-- higher wholesale funding costs.
The Group is expected to continue to gradually deploy excess
liquidity to further expand the fixed income portfolio. Over the
recent quarters the Group has increased its fixed income portfolio
reflecting the improved market conditions, whilst maintaining a low
risk, diversified, highly rated portfolio. Going forward, it is
expected to prudently grow the fixed income portfolio to reach
approximately 15% of the Group's total assets (net of TLTRO III) in
order to be broadly in line with the average of EU peers (excluding
Greek banks).
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. 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. Adjusting for these items, net fee and
commission income is expected to rise by approximately 3% per annum
for 2022-2024, broadly in line with projected economic growth,
driven by cross-selling and growth in capital-light sales.
Strategy and Outlook (continued)
The Group's insurance companies, EuroLife Ltd (Eurolife) and
Genikes Insurance of Cyprus Ltd (GI) are respectively leading
players in the life and general insurance business in Cyprus, and
have been providing a recurring and improving income, further
diversifying the Group's income streams. In the life insurance
business, further growth is expected to be driven through the
pursuit of new market segments, cross-selling opportunities in the
occupational pensions market and other appealing products and
widening the customer base by leveraging on its bancassurance model
and strengthening further its agency force. In the general
insurance business, further growth is expected by growing the
bancassurance potential leveraging on the Bank's strong market
share, promoting and enhancing the digital sales through the Bank's
mobile application, exploiting synergies with the life insurance
agency force and pursuing profitable segments and products. In this
respect, regular income for the life insurance business is expected
to rise by approximately 6% per annum for 2022-2025 whilst premium
income for the non-life insurance business is expected to rise by
over 8% per annum for the same period.
Finally, there is additional revenue upside coming from the
Digital Economy Platform (Jinius) which aims to generate new
revenue sources over the medium term, leveraging on the Bank's
market position, knowledge and digital infrastructure.
The significant improvement in the Group's revenues (driven
primarily from the expansion of net interest income) will
effectively lead to an improvement in the Group's operating
efficiency. The cost to income ratio excluding special levy on
deposits or other levies/contributions is expected to remain below
40% for 2023 and then to increase modestly to approximately 40% for
2024, despite inflationary pressures. There is some upward pressure
on costs from investments in transformation and digitisation as
well as inflationary pressure on staff costs arising from the
renewal of the collective agreement and variable remuneration to
selected employees driven by the delivery of the Group's strategy
and individual performance.
In terms of asset quality, the cost of risk target of 50-80
basis points for 2023 is reiterated to weather the ongoing
macroeconomic and geopolitical uncertainties, and then to normalise
to approximately 40-50 basis points over the medium-term.
Additionally, the NPE ratio is expected to remain below 4% for 2023
and 2024 and to fall modestly to below 3% for 2025. To achieve
this, the Group aims to maintain high quality of new lending with
strict underwriting standards and to prevent asset quality
deterioration. Currently, there are no signs of asset quality
deterioration.
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 de-risking. Going forward, REMU
sales are expected to continue at a similar pace, with expected
inflows to remain at low levels. Therefore, REMU portfolio is
expected to halve to EUR0.5 billion by 2025.
Overall these returns are expected to increase the Group's
equity base, corresponding to strong organic capital generation of
between 200 and 250 basis points (pre-distributions) per annum for
2023-2025, facilitating strong capital ratios and healthy capital
buffers. In summary, the Group expects to deliver a ROTE of over
17% for 2023 and over 14% for 2024 (which corresponds to a ROTE of
over 17% based on 15% CET1 ratio). For 2025, the Group expects to
generate a ROTE of over 13% which is equivalent to over 16% based
on a 15% CET1 ratio, reflecting lower interest rate assumptions. By
31 December 2025, the Group expects its CET1 ratio to stand at
approximately 19%, after deducting projected dividends (which
remain subject to regulatory approval) per its dividend
distribution policy.
The Group's aim to provide sustainable shareholder returns is
reiterated. Dividend payments 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.
Business Overview
Credit ratings
The Group's financial performance is highly correlated to the
economic and operating conditions in Cyprus. In May 2023, Moody's
Investors Service upgraded the Bank's long-term deposit rating to
Ba1 from Ba2, maintaining the positive outlook. The main drivers
for this upgrade are the continued strengthening of the Bank's
asset quality and its improving profitability prospects that
continue to reduce risks to its capital. In April 2023, S&P
Global Ratings affirmed the long-term issuer credit rating of the
Bank at BB- and revised the outlook to positive from stable. The
revised outlook reflects the likelihood of further progress in
Cyprus' operating environment, in particular materially easing
funding risks. In December 2022, Fitch Ratings upgraded the Bank's
long-term issuer default rating to B+ from B-, whilst maintaining
the positive outlook. The two-notch upgrade reflects improved
Bank's asset quality, supported by the completion of Project Helix
3 together with the organic reduction of impaired assets. The
upgrade is also underpinned by Fitch's view of the resilience of
the Cypriot economy, even in light of growing economic
uncertainties.
Financial performance
The Group is a leading, financial and technology hub in Cyprus.
In 2022 the Group completed its transformation into a diversified
and well-capitalised organisation with sustainably profitable
banking and other financial services. This was marked by the
resumption of dividend payments after 12 years, a significant
milestone, as it represents a new chapter for the Group.
In April 2023 the Company obtained the approval of the European
Central Bank to pay a dividend out of FY2022 profitability.
Following this approval, the Board of Directors of the Company
recommended to the shareholders for approval at the AGM a final
Dividend of EUR0.05 per ordinary share in respect of earnings for
the year ended 31 December 2022. This proposed Dividend was
declared at the AGM on 26 May 2023, amounted to EUR22.3 million in
total and is equivalent to a payout ratio of 14% of the FY2022
adjusted recurring profitability or 31% based on FY2022 profit
after tax (as reported in 2022 Annual Financial Report). The
dividend was paid in cash on 16 June 2023.
Additionally, the Board of Directors approved the Group's
dividend policy. The Group aims to provide a sustainable return to
shareholders. Dividend payments are expected to build prudently and
progressively over time, towards a payout ratio in the range of
30-50% of the Group's profitability after tax, before non-recurring
items, adjusted for AT1 distributions (referred to as 'adjusted
recurring profitability'). The dividend policy takes into
consideration market conditions as well as the outcome of capital
and liquidity planning.
During the quarter ended 30 June 2023, the Group's financial
performance was strong, with well-diversified revenues and
disciplined cost containment, despite inflationary pressures.
Overall, the Group generated a ROTE of 26.6% compared to 21.3% in
the previous quarter, underpinned mainly by the interest rate rises
and simultaneously a well-managed deposit pass-through.
On 8 June 2023, the Company presented and discussed an update of
the Group's outlook at the Investor Update event in London. During
the Investor Update event, the Company presented its updated 2023
and 2024 financial targets and raised its ROTE guidance to over 17%
and over 14% respectively, from over 13% per annum (as previously
announced on 20 February 2023). The key driver of the upgrade is
the revised expectation for net interest income, primarily to
reflect higher rates for longer. In a normalised interest rate
environment, the Company expects to generate ROTE of over 13% by
2025. These returns expect to increase the Group's equity base,
corresponding to a strong organic capital generation of
approximately 200-250 basis points (pre-distributions) per annum
for 2023-2025. By 31 December 2025, the Group expects its CET1
ratio to stand at approximately 19%, after deducting projected
dividend distributions, per its dividend distribution policy.
Finally, the Group's dividend policy has been reiterated.
Therefore, dividend payments 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.
Favourable interest rate environment
The structure of the Group's balance sheet is geared towards
higher interest rates. As at 30 June 2023, cash balances with ECB
(excluding TLTRO III of approximately EUR2.0 billion) amounted to
approximately EUR7.1 billion, reflecting immediate benefit from
interest rate rises. The repricing of the reference rates gradually
benefits the interest income on loans, as over 95% of the Group's
loan portfolio is variable rate as at 30 June 2023. The net
interest income for the six months ended 30 June 2023 stood at
EUR358 million, more than double compared to the six months ended
30 June 2022. This increase is underpinned by faster and steeper
than expected interest rate rises as well as a resilient low
deposit pass-through.
Business Overview (continued)
Favourable interest rate environment (continued)
In July 2023, ECB set the remuneration of minimum reserves (MRR)
at 0%. The impact on forgone net interest income from the recent
reduction of MRR is expected to be approximately EUR7 million per
annum at an annual depo rate of 3.75%.
Growing revenues in a more capital efficient way
The Group remains focused on growing revenues in a more capital
efficient way. The Group aims to continue to grow its high-quality
new lending, drive growth in niche areas for further market
penetration and diversify through non-banking services, such as
insurance and digital products.
The Group has continued to provide high quality new lending in
the six months ended 30 June 2023 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 six months ended 30 June 2023, new lending remained
strong at EUR1,118 million, mainly driven by strong demand for
business loans. Gross performing loan book remained broadly flat as
ongoing repayments offset new lending. Performing loan book is
expected to remain broadly flat in 2023.
Fixed income portfolio amounts to EUR3,178 million as at 30 June
2023, compared to EUR2,500 million as at 31 December 2022 . The
increase reflects incremental new investments in the six months
ended 30 June 2023 ahead of expected maturities in the second half
of 2023. The portfolio represents 13% of total assets (excluding
TLTRO III) and comprises EUR2,703 million (85%) measured at
amortised cost and EUR475 million (15%) 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 A1 or at Aa2 when Cyprus government
bonds are excluded. The fair value of the amortised cost fixed
income portfolio as at 30 June 2023 amounts to EUR 2,619 million,
reflecting an unrealised fair value loss of EUR 84 million,
equivalent to approximately 80 basis points of CET1 ratio .
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 six
months ended 30 June 2023, non-interest income amounted to EUR148
million (excluding an one-off insurance receivable in other
income), remaining an important contributor to the Group's
profitability, and contributing to approximately 90% of the Group's
total operating expenses. Going forward, non-interest income is
expected to continue covering approximately 80% of the Group's
total operating expenses.
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. As a result, net
fee and commission income was reduced by 4% in the first half 2023
to EUR90 million.
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. JCC's net fee and commission
income contributed 9% of total non-interest income and amounted to
EUR14 million in the six months ended 30 June 2023, up 11% compared
to the prior period, 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 a recurring and
improving income, further diversifying the Group's income streams.
The net insurance result for the six months ended 30 June 2023
contributed 16% of non-interest income and amounted to EUR25
million, up 4% compared to the prior period; insurance companies
remain valuable and sustainable contributors to the Group's
profitability. On 1 January 2023, the Group adopted IFRS 17,
retrospectively, which impacts the profit recognition for insurance
contracts by phasing of profit over their lifetime compared to
recognising profit substantially up-front under IFRS 4. The new
accounting standard does not change the economics of the insurance
business and decreases the volatility of the Group's insurance
companies profitability. For further details please refer to Note
3.3.1 of the Consolidated Condensed Interim Financial Statements
within the Interim Financial Report 2023.
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 electronic invoicing,
remittance management, tenders management and ecosystem management.
The next key milestone is the launch of the first
Business-to-Consumer service, a product marketplace, driving
opportunities in lifestyle banking and beyond. Currently, over
1,600 companies are registered in the platform.
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 July 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 EUR101 million. Following the completion of the VEP, the
gross annual savings were estimated at approximately EUR 37 million
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
EUR3 million. In relation to branch restructuring, during 2022 the
Group reduced the number of branches by 20 to 60, a reduction of
25%. As a result, the Group's total operating expenses for the six
months ended 30 June 2023 were reduced by 2% on prior year,
reflecting the benefits from the efficiency actions in an
inflationary environment. The cost to income ratio excluding
special levy on deposits and other levies/contributions for the six
months ended 30 June 2023 was reduced further to 32%, 26 percentage
points down compared to the six months ended 30 June 2022, driven
mainly by the higher total income. In the second half of 2023, some
upward pressure on total operating expenses is expected reflecting
the increased cost of living adjustment (COLA) in staff costs and
the launch of a reward programme through 'Antamivi Reward scheme'
to the Group's performing borrowers, with an expected impact of
approximately EUR4 million in other operating expenses.
During December 2022 the Group has granted to eligible employees
share awards under a long-term incentive plan ('2022 LTIP' or the
'2022 Plan'). The 2022 Plan involves the granting of share awards
and is driven by scorecard achievement, with measures and targets
set to align pay outcomes with the delivery of the Group's
strategy. The employees eligible for the 2022 LTIP are the members
of the Extended EXCO. The 2022 LTIP stipulates that performance
will be measured over a 3 year period and financial and
non-financial objectives to be achieved (driven by both delivery of
the Group's strategy as well as individual performance). At the end
of the performance period, the performance outcome will be used to
assess the percentage of the awards that will vest.
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.
In addition, staff costs for the six months ended 30 June 2023
include approximately EUR3.5 million staff cost rewards, in
relation to the Short-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.
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.
Business Overview (continued)
Lean operating model (continued)
Digital transformation
The Bank's digital transformation continues to focus on
developing digital services and products that improve the customer
experience, streamlining internal processes, and introducing new
ways for improving the workplace environment.
During the second quarter of 2023, the Bank continued to enrich
and improve its digital portfolio with new innovative services to
its customers. QuickHub, the Bank's new, digital branch has been
introduced at the beginning of May 2023, offering all products and
services that are digitally available to customers at the tap of a
button. Additionally, customers are now able to manage their Fixed
Deposit accounts through digital channels by providing instructions
for maturity. These include options such as changing the duration
of their fixed deposit, increasing or decreasing capital and
closing the account. Moreover, the customer experience during
digital onboarding has been improved by providing the NFC
technology during the ID verification process through passport.
The adoption of digital products and services continued to grow
and gained momentum in the second quarter of 2023. As at the end of
June 2023, 95.0% of the number of transactions involving deposits,
cash withdrawals and internal/external transfers were performed
through digital channels (up by 11.2 percentage points from 83.8%
in June 2020). In addition, 83.2% of individual customers were
digitally engaged (up by 10.8 percentage points from 72.4% in June
2020), choosing digital channels over branches to perform their
transactions. As at the end of June 2023, active mobile banking
users and active QuickPay users have grown by 15.0% and 25.1%
respectively over the last 12 months. The highest number of
QuickPay users to date was recorded in June 2023 with 186 thousand
active users. Likewise, the highest number of QuickPay payments (in
2023) was recorded in June 2023 with 602 thousand transactions (up
32% compared to the prior year period).
Digital offerings via digital channels continued to enhance
Group's sales further in the second quarter of 2023. During the
second quarter of 2023, new lending via Quickloans reached EUR26
million (compared to new lending of EUR18 million for the first
quarter of 2023) and totalled EUR44 million for the six months
ended 30 June 2023. Digital deposits have also shown an increase of
33% compared to the prior year period, reaching EUR221 million at
30 June 2023. For the six months ended 30 June 2023, digital
insurance sales, with two new products in mobile app (Motor &
Home Insurance), amounted to EUR159 thousand (31 December 2022:
EUR68 thousand).
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
approximately EUR 550 million as at the date of completion. Project
Helix 3 represented a further milestone in the delivery of one of
the Group's strategic priorities of improving asset quality through
the reduction of NPEs and delivering NPE ratio below 5%. As at 30
June 2023, the Group's NPE ratio stood at 3.6%.
T he Group's priorities remain intact, maintaining high quality
new lending with strict underwriting standards and preventing asset
quality deterioration in this uncertain outlook.
Capital market presence
In June 2023, the Company successfully launched and priced an
issue of EUR220 million Fixed Rate Reset Perpetual Additional Tier
1 Capital Securities (the 'New Capital Securities').
The issue was met with exceptional demand, attracting interest
from approximately 240 institutional investors, with the final
order book over 12 times over-subscribed and final pricing 62.5
basis points tighter than the initial pricing indication. This also
reflects significant improvement in the credit spread to
approximately 910 basis points compared to approximately 1,260
basis points for the previous AT1 issue in 2018 ('Existing Capital
Securities').
Business Overview (continued)
Capital market presence (continued)
In July 2023, the Bank has successfully launched and priced an
issuance of EUR350 million 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 issuance was met with strong demand,
attracting interest from more than 90 institutional investors, with
a peak orderbook of EUR950 million and final pricing 37.5 basis
points tighter than the initial pricing indication.
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 2022, the Company
received a rating of AA (on a scale of AAA-CCC) in the MSCI ESG
Ratings assessment.
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 articulate the delivery of its primary ESG
targets and address regulatory expectations, a comprehensive ESG
working plan has been established in 2022. The ESG working plan is
closely monitored by the Sustainability Committee, the Executive
Committee and the Board of Directors at frequent intervals.
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 plans to invest in energy
efficient installations and actions as well as replace fuel
intensive machineries and vehicles from 2023 to 2025, which would
lead to approximately 5-10% reduction in Scope 1 and Scope 2
emissions by 2025 compared to 2021. The Bank 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 5% in Scope 1 - Mobile Combustion GHG emissions and
16% in Scope 2 - Purchased electricity GHG emissions in the six
months ended 30 June 2023, compared to the six months ended 30 June
2022 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 Bank achieved an increase by 50% in
renewable energy production, from 79,424 Kwh to 119,499 Kwh in the
six months ended 30 June 2023 compared to the six months ended 30
June 2022 respectively.
The Bank is the first bank in Cyprus to join the Partnership for
Carbon Accounting Financials (PCAF) in October 2022 and is
following the recommended methodology for the estimation of the
Financed Scope 3 emissions. The Group has estimated Financed Scope
3 GHG emissions relating to the loan portfolio based on PCAF
standard and proxies. Following the estimation of Financed Scope 3
GHG emissions derived from its loan portfolio and in conjunction
with the materiality assessment's results on climate and
environmental risks the Bank will be able to identify the
carbon-concentrated areas so as to take the necessary actions to
minimise the environmental and climate impact associated with its
loan portfolio by offering targeted climate friendly products and
engaging with its customers. In 2023, following the identification
of carbon-concentrated sectors and asset classes, the Group is in
the process to set decarbonisation targets aligned with 1.5C
climate scenario (Science based targets) which will assist in the
formulation of the Group's strategy going forward.
Business Overview (continued)
Enhancing organisational resilience and ESG (Environmental,
Social and Governance) agenda (continued)
Environmental Pillar (continued)
The Bank in 2022 launched a low emission vehicle loan product
(either hybrid or electric) and is working to expand its range of
environmentally friendly products further in 2023. The gross amount
of environmentally friendly loans as at 30 June 2023 was EUR21.2
million compared to EUR20.9 million as at 31 December 2022.
Moreover, the Bank is making substantial progress in further
integrating climate risk considerations into its risk management
approach, as it tries to integrate climate related risk into its
risk culture. The Bank, within the context of underwriting
processes, is currently in the process of incorporating the
assessment of ESG and climate matters and amending its Policies and
Procedures in such a way that potential impact from ESG and climate
is reflected in the fundamental elements of the creditworthiness
assessment. The Bank designed ESG questionnaires for key selected
sectors which will then be leveraged for deriving an ESG
classification. In addition, the Bank is in the process to enhance
its risk quantification methodology to assess how the portfolio is
affected by Climate and Environmental (C&E) risks and will be
incorporating the above elements into the stress testing
infrastructure.
During 2023 in order to enhance the awareness and skillset
towards the ESG, the Group performed trainings to the Board of
Directors and Senior Management. In addition, the internal
communication channels are enhanced by establishing an ESG internal
portal and launching Green@work which provides tips on energy
efficiency actions at work. Early in 2023 the Bank launched a
campaign on new Visa Debit cards produced from recyclable plastic
extracted from the ocean. The campaign aims to inform the public on
the level of water contamination from plastic and the impact on
life below water.
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 approximately EUR70 million since 1998, whilst 60% of
diagnosed cancer cases in Cyprus are being treated at the Centre),
the work of SupportCY Network, which was developed in 2020, the
contribution of the Bank of Cyprus Cultural Centre in promoting the
cultural heritage of the island, and the Work of IDEA Innovation
Centre. The Cultural Centre undertook a number of innovative
projects such as 'AISTHISEIS' - Multi sensory museum experience for
people with disabilities as well as the ReInHerit program
facilitating innovation and research cooperation between European
museums and heritage continuing also into 2023, with 16,542 people
participating in events at the Cultural Foundation between January
to June 2023. The IDEA Innovation Centre, invested approximately
EUR4 million in start-up business creation since its incorporation,
supported creation of 89 new companies to date, and provided
support to 210+ entrepreneurs through its Startup program since
incorporation. Staff have 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 31,012 hours of trainings. In addition, in 2023
the Group launched the BoC Academy to offer up-skilling short
courses for employees. Moreover, the Group continues its emphasis
on staff wellness into 2023 by offering webinars, team building
activities and family events with sole purpose to enhance mental,
physical, financial and social health.
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 of prudent and
effective controls, 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 robust 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.
Business Overview (continued)
Enhancing organisational resilience and ESG (Environmental,
Social and Governance) agenda (continued)
Governance Pillar (continued)
The Board composition of the Company and the Bank is diverse,
with 44% of the Board members being female as at 30 June 2023. The
Board displays a strong skillset stemming from broad international
experience. Moreover, the Group aspires to achieve a representation
of at least 30% women in Group's management bodies (Defined as the
EXCO and the Extended EXCO) by 2030. As at 30 June 2023, there is a
27% representation of women in Group's management bodies and a 40%
representation of women at key positions below the Extended EXCO
level (defined as positions between Assistant Manager and
Manager).
Ukrainian crisis
The economic environment has evolved rapidly since February 2022
following Russia's invasion in Ukraine. In response to the war in
Ukraine, the EU, the UK and the US, in a coordinated effort joined
by several other countries imposed a variety of financial sanctions
and export controls on Russia, Belarus and certain regions of
Ukraine as well as various related entities and individuals. As the
war is prolonged, geopolitical tension persists and inflation
remains elevated, impacted by soaring energy prices and disruptions
in supply chains. This high inflation weighs on business confidence
and consumers' behaviour. In this context, the Group is closely
monitoring the developments, utilising dedicated governance
structures including a Crisis Management Committee as required and
has assessed the impact the crisis has on the Group's operations
and financial performance.
Direct impact
The Group does not have any banking operations in Russia or
Ukraine, following the sale of its operations in Ukraine in 2014
and Russia in 2015. The Group has run down its legacy net exposure
to less than EUR1 million as at 30 June 2023 in Russia through
write-offs and provisions.
The Group has no exposure to Russian bonds or banks which are
subject to sanctions.
The Group has limited direct exposure with loans related to
Russia and Belarus, representing 0.3% of total assets or less than
1% of net loans as at 30 June 2023. The net book value of these
loans stood at EUR81 million as at 30 June 2023, of which EUR74
million are performing, whilst the remaining were classified as
NPEs well before the current crisis. The portfolio is granular and
secured mainly by real estate properties in Cyprus.
Customer deposits related to Russian and Belarusian customers
account for only 4% of total customer deposits as at 30 June 2023.
This exposure is not material, given the Group's strong liquidity
position. The Group operates with a significant surplus liquidity
of EUR7.7 billion (LCR ratio of 316%) as at 30 June 2023.
Since 2014 the Bank, has engaged in a very demanding and
rigorous anti-financial crime remediation programme. It fully
adheres to all relevant UN, EU, USA and UK sanction frameworks and
has implemented additional measures to monitor a complicated
sanctions environment including systemic enhancements, specialised
training and revision of risk appetite. As a result, the Bank has
effectively terminated the relationship with professional
intermediaries introducing customers to the Bank. Additionally,
approximately 25,900 customer relationships were terminated and
approximately 12,000 potential new customer relationships were
suspended solely on compliance reasons (eg: KYC, or AML) in the
years 2015-2022.
Indirect impact
Although the Group's direct exposure to Russia or Belarus is
limited, the crisis in Ukraine had a negative impact on the Cypriot
economy, mainly arising from the tourism and professional services
sectors, increasing energy prices fuelling inflation and
disruptions to global supply chains. During the first six months of
2023 the performance of the tourism sector was strong and
represented 99% of 2019 respective levels, despite the sizeable
loss of tourist arrivals from Russia and Ukraine. To date, tourist
activity is recovering to pre-pandemic levels. The Group continues
to monitor exposures in sectors likely impacted by the prolonged
geopolitical uncertainty and persistent inflationary pressures and
remains in close contact with customers to offer solutions as
necessary.
Cyprus has no energy dependence on Russia as it imports oil from
Greece, Italy and the Netherlands; however it is indirectly
affected by pricing pressures in the international energy markets.
The focus on renewables increases, and a steady increase in
contribution from renewables is noted.
Business Overview (continued)
Ukrainian crisis (continued)
Indirect impact (continued)
Overall, the Group has limited impact from its direct exposure,
while any indirect impact depends on the duration and severity of
the crisis and its impact on the Cypriot economy.
The Group continues to closely monitor the situation, taking all
necessary and appropriate measures to minimise the impact on its
operations and financial performance, as well as to manage all
related risks and comply with the applicable sanctions.
Going concern
The Directors have made an assessment of the ability of the
Group, the Company and BOC PCL to continue as a going concern for a
period of 12 months from the date of approval of these Consolidated
Financial Statements.
The Directors have concluded that there are no material
uncertainties which would cast significant doubt over the ability
of the Group, the Company and BOC PCL to continue to operate as a
going concern for a period of 12 months from the date of approval
of the Consolidated Condensed Interim Financial Statements.
In making this assessment, the Directors have considered a wide
range of information relating to present and future conditions,
including projections of profitability, cash flows, capital
requirements and capital resources, taking also into consideration,
the Group's Financial Plan approved by the Board in February 2023
(the 'Plan') and the operating environment, as well as any
reforecast exercises performed. The Group has sensitised its
projection to cater for a downside scenario and has used reasonable
economic inputs to develop its medium-term strategy. The Group is
working towards materialising its Strategy.
Capital
The Directors and Management have considered the Group's
forecasted capital position, including the potential impact of a
deterioration in economic conditions. The Group has developed
capital projections under a base and an adverse scenario and the
Directors believe that the Group has sufficient capital to meet its
regulatory capital requirements throughout the period of
assessment.
Funding and liquidity
The Directors and Management have considered the Group's funding
and liquidity position and are satisfied that the Group has
sufficient funding and liquidity throughout the period of
assessment. The Group continues to hold a significant liquidity
buffer at 30 June 2023 that can be easily and readily monetised in
a period of stress.
Principal risks and uncertainties -- Risk management and
mitigation
As part of its business activities, the Group faces a variety of
risks. The Group monitors, manages and mitigates these risks
through various control mechanisms. Credit risk, liquidity and
funding risk, market risk (arising from adverse movements in
foreign currency exchange rates, interest rates, security prices
and property prices) and insurance and re--insurance risk, are some
of the key significant risks the Group faces. In addition, key
risks facing the Group include operational risk which includes also
compliance, legal and reputational risk, regulatory risk,
information security and cyber risk, digital transformation risk,
technology risk, climate risk as well as business model and
strategic risk.
Information relating to the principal risks the Group faces and
risk management is set out in Notes 30 to 32 of the Consolidated
Condensed Interim Financial Statements and in the 'Risk and Capital
Management Report', both of which form part of the Interim
Financial Report for the six months ended 30 June 2023. In
addition, in relation to legal risk arising from litigations,
investigations, claims and other matters, further information is
disclosed in Note 27 of the Consolidated Condensed Interim
Financial Statements.
Additionally, the Group is exposed to the risk of changes in the
value of property which is held either for own use or as stock of
property or as investment property. Stock of property is
predominately acquired in exchange for debt and is intended to be
disposed of in line with the Group's strategy. Further information
is disclosed in Note 19 to the Consolidated Condensed Interim
Financial Statements.
Details of the financial instruments and hedging activities of
the Group are set out in Note 16 of the Consolidated Condensed
Interim Financial Statements. Further information on financial
instruments is also presented in Notes 30-31 of the Consolidated
Condensed Interim Financial Statements.
Going concern (continued)
Principal risks and uncertainties -- Risk management and
mitigation (continued)
The Group activities are mainly in Cyprus therefore the Group's
performance is impacted by changes in the Cyprus operating
environment, as described in the 'Operating environment' section of
the Interim Management Report and changes in the macroeconomic
conditions and geopolitical developments as described in the 'Risk
and Capital Management Report' which forms part of the Interim
Financial Report for the six months ended 30 June 2023.
In addition, details of the significant and other judgements,
estimates and assumptions which may have a material impact on the
Group's financial performance and position are set out in Note 6 to
the Consolidated Condensed Interim Financial Statements.
The invasion of Russia in Ukraine and the sanctions imposed on
Russia raised new challenges for the Group and the developments are
closely monitored. The Group's direct exposure is limited, however
any indirect impact will depend on the duration and severity of the
crisis in Ukraine and its impact on the Cypriot economy, mainly due
to a negative impact on the tourism sector, the increasing energy
prices resulting in inflationary pressures and disruptions to
global supply chains. Further disclosures are provided in 'Business
Overview' and 'Operating Environment' sections of the Interim
Management Report.
The risk factors discussed above and in the reports referenced
above should not be regarded as a complete and comprehensive
statement of all potential risks and uncertainties. There may be
risks and uncertainties of which the Group is not aware or which
the Group does not consider significant, but which may become
significant. The challenging conditions in global markets arise due
to factors including the Ukraine-Russian war, high interest rate
environment, inflationary pressures, the growing threat from
cyberattacks and other unknown risks. As a result the precise
nature of all risks and uncertainties that the Group faces cannot
be predicted as many of these risks are outside of the Group's
control.
Events after the reporting date
In July 2023, BOC PCL issued a EUR350 million senior preferred
note (the 'Notes') under the EMTN Programme. 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, BOC PCL
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 of
the Notes. If the Notes are not redeemed by BOC PCL, 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 plus 409.5 basis points, payable quarterly in
arrears. The Notes are listed on the Luxembourg Stock Exchange's
Euro MTF market. The Notes comply with the criteria for the minimum
requirement for own funds and eligible liabilities (MREL) and
contribute towards BOC PCL's MREL requirements.
No other significant non adjusting events have taken place since
30 June 2023.
Dividends
Based on the 2022 SREP decision, effective from 1 January 2023,
any equity dividend distribution is subject to regulatory approval,
both for the Company and BOC PCL. The requirement for approval does
not apply if the distributions are made via the issuance of new
ordinary shares to the shareholders which are eligible as Common
Equity Tier 1 Capital nor to the payment of coupons on any AT1
capital instruments issued by the Company or BOC PCL.
In April 2023, the Company obtained the approval of the European
Central Bank to pay a dividend. Following this approval, the Board
of Directors of the Company recommended to the shareholders for
approval at the Annual General Meeting ('AGM') on 26 May 2023, a
final dividend of EUR0.05 per ordinary share in respect of the
earnings of the year ended 31 December 2022 ('Dividend'). The AGM
on 26 May 2023 declared a final dividend of EUR0.05 per share. The
Dividend amounted to EUR22,310 thousand in total and is equivalent
to a payout ratio of 14% of the financial year 2022 recurring
profitability adjusted for the AT1 coupon or 31% based on the
financial year 2022 profit after tax (as reported in the 2022
Annual Financial Report).
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Interim
Financial Report in accordance with International Accounting
Standard (IAS) 34 on 'Interim Financial Reporting' as adopted by
the European Union, the Transparency (Directive 2004/109/EC)
Regulations 2007, as amended, Part 2 (Transparency Requirements) of
the Central Bank (Investment Market Conduct) Rules 2019 and the
applicable requirements of the Disclosure Guidance and Transparency
Rules of the UK's Financial Conduct Authority.
Each of the Directors, whose names and functions are listed on
page 1, confirms that to the best of each person's knowledge and
belief:
-- the Consolidated Condensed Interim Financial Statements,
prepared in accordance with IAS 34 'Interim Financial Reporting' as
adopted by the EU, give a true and fair view of the assets,
liabilities and financial position of the Group at 30 June 2023,
and its profit for the period then ended; and
-- the Interim Financial Report includes a fair review of:
a. important events that have occurred during the first six
months of the year, and their impact on the Consolidated Condensed
Interim Financial Statements;
b. a description of the principal risks and uncertainties for
the next six months of the financial year;
c. details of any related party transactions that have
materially affected the Group's financial position or performance
in the six months ended 30 June 2023; and
d. any changes in the related parties' transactions described in
the last annual report that could have a material effect on the
financial position or performance of the Group in the first six
months of the current financial year.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included in the
Company's website. Legislation in Ireland governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Efstratios--Georgios Arapoglou
Chairman
Panicos Nicolaou
Chief Executive Officer
08 August 2023
Risk and Capital Management Report 30 June 2023
One of the Group's main priorities is to continually improve its
risk management framework so as to be able to respond to the ever
changing environment in an appropriate manner. Effective risk
management is critical to the success of the Group, and as such the
Group maintains a risk management framework designed to ensure the
safety and soundness of the institution, protect the interests of
depositors and shareholders and comply with regulatory
requirements. Clearly defined lines of authority and accountability
are in place as well as the necessary infrastructure and analytics
so as to allow the Group to identify, assess, monitor and control
risk.
1. Risk Management Framework (RMF)
The Board of Directors, through the Risk Committee, is
responsible to ensure that a coherent and comprehensive Risk
Management Framework (the 'framework' or 'RMF') for the
identification, assessment, monitoring and controlling of all risks
is in place. The framework ensures that material and emerging risks
are identified, including, but not limited to, risks that might
threaten the Group's business model, future performance, liquidity,
and solvency. Such risks are taken into consideration in defining
the Group's overall business strategy ensuring alignment with the
Group's risk appetite. In setting its risk appetite, the Group
ensures that its risk bearing capacity is considered so that the
appropriate capital levels are always maintained.
The RMF is supported by a strong governance structure and is
comprised by several components that are analysed in the sections
below. The RMF is reviewed, updated and approved by the Board at
least annually to reflect any changes to the Group's business or to
take into consideration external regulations, corporate governance
requirements and industry best practices.
1.1 Risk Governance
T he responsibili ty for the governance of risk at the Group
lies w i th the Boa rd of Directors (the 'Board') which is
ultimately accountable for the effective management of risks and
for the system of internal controls in the Group. The Board is
assisted in its risk governance responsibilities by the Board Risk
and Board Audit Committees (RC and AC respectively) and at
executive level by the Executive Committee (EXCO), Asset and
Liability Committee (ALCO), Asset Disposal Committee (ADC),
Technology Committee (TC), Sustainability Committee (SC) and the
Credit Committees.
The RC supports the Board on risk oversight matters including
the monitoring of the Group's risk profile and of all risk
management activities whilst the AC supports the Board in relation
to the effectiveness of the system of internal controls. In
addition, discussion and escalation processes are in place through
both Board and Executive Committees that provide for a consistent
approach to risk management and decision-making.
Discussion around risk management is supported by the
appropriate risk information submitted by the Risk Management
Division (RMD) and Executive Management. The Chief Risk Officer
(CRO) or his representatives participate in all such key committees
to ensure that the information is appropriately presented, and that
RMD's position is clearly articulated.
Furthermore, certain roles within the Group are critical as they
carry specific responsibilities with respect to risk management.
These include:
1. Risk Management Framework (RMF) (continued)
1.1 Risk Governance (continued)
Chief Executive Officer (CEO)
The CEO is accountable for leading the development of the
Group's strategy and business plans in a manner that is consistent
with the approved risk appetite and for managing and organising
Executive Management to ensure these are executed. It is the CEO's
responsibility to manage the Group's financial and operational
performance within the approved risk appetite.
Chief Risk Officer (CRO)
The CRO leads an independent RMD across the Group including its
subsidiaries. The CRO is responsible for the execution of the Risk
Management Framework and the development of risk management
strategies. The CRO is expected to challenge business strategy and
overall risk taking and risk governance within the Group and
independently submit his findings, where necessary, to the RC. The
CRO reports to the RC and for administrative purposes has a dotted
line to the CEO.
Accountability and Authority
The RMD operates independently and this is achieved through:
- Organisational independence from the activities assigned to be controlled
- Unrestricted and direct access to Executive Management and the
Board, either through the RC or directly
- Direct and unconditional access to all business lines that
have the potential to generate material risk to the Group. Front
Line managers are required to cooperate with the RMD managers and
provide access to all records and files of the Group as well as any
other information necessary
- A separate budget submitted to the RC for approval
- The CRO is a member of the EXCO and holds voting or veto
presence in key executive committees as well as operational
committees
Furthermore, this independence is also ensured as:
- The CRO is assessed annually by the RC that is jointly
responsible with Human Resources & Remuneration Committee
- The CRO maintains a close working relationship with both the
RC and its Chairperson which includes regular and frequent
communication both during official RC meetings as well as
unofficial meetings and discussions
1.2 Organisational Model
The RMD is the business function set up to manage the risk
management process of the Group on a day-to-day basis. The risk
management process is integrated into BOC PCL's internal control
system. The RMD is organized into several departments, each of
which is specialized in one or several categories of risks. The
organization of RMD reflects the types of risks inherent in the
Group.
The RMD organisational model is structured so as to:
- Define risk appetite and report regularly on the status of the risk profile
- Ensure that all material and emerging risks have proper
ownership, management, monitoring and clear reporting
- Promote proper empowerment in key risk areas that will assist
in the creation of a robust risk culture
- Provide tools and methodologies for risk management to the business units
- Report losses from risks identified to the EXCO, the RC and
the Board and, where necessary, to the Regulatory Authorities
- Collect and monitor Key Risk Indicators (KRIs)
RMD is responsible for the risk management across the Group
companies.
1. Risk Management Framework (continued)
1.3 Risk Identification
The risk identification process is comprised of two simultaneous
but complementary approaches, namely, the top-down and the
bottom-up approaches. The top-down process is led by Senior
Management and focuses on identifying the Group's material risks
whilst the bottom-up approach risks are identified and captured
through several methods such as the Risk and Control
Self-Assessment (RCSA) process, incident capture, fraud events
capture, regulatory audits, direct engagement with specialized
units and other. The risks captured by these processes are compiled
during the annual ICAAP process and its quarterly updates and form
the Groups' material risks.
To ensure a complete and comprehensive identification of risks t
he Group has integrated several key processes into its risk
identification process,including the:
- Internal Capital Adequacy Assessment Process (ICAAP)
- Internal Liquidity Adequacy Assessment Process (ILAAP)
- Stress testing
- Group Financial Plan compilation process
- Regulatory, internal and external reviews and audits
1.4 Three Lines of Defence
The Group complies with the regulatory guidelines for corporate
governance and has established the "Three Lines of Defence" model
as a framework for effective risk and compliance management and
control. The three lines of defence model defines the
responsibilities in the risk management process ensuring adequate
segregation in the oversight and assurance of risk.
First Line of Defence
The first line of defence lies with the functions that own and
manage risks as part of their responsibility for achieving
objectives and are responsible for implementing corrective actions
to address, process and control deficiencies. It comprises of
management and staff of business lines and support functions who
are directly aligned with the delivery of products and/or
services.
Second Line of Defence
The second line of defence includes functions that oversee the
compliance of the first line management and staff, with the
regulatory framework and risk management principles. It comprises
of the RMD, Information Security and Compliance functions. The
second line of defence sets the corporate governance framework of
the Group and establishes policies and guidelines that the business
lines and support functions, Group entities and staff should
operate within. The second line of defence also provides support,
as well as independent oversight of the risk profile and risk
framework.
Third Line of Defence
The third line of defence is the Internal Audit Division (IA)
which provides independent assurance to the Board and the EXCO on
the design adequacy and operating effectiveness of the Group's
internal control framework, corporate governance and risk
management processes for the management of risks according to the
risk appetite set by the Board. Findings are communicated to the
Board through the committees and senior management and other key
stakeholders, with remediation plans monitored for progress against
agreed completion dates.
1. Risk Management Framework (continued)
1.4 Three Lines of Defence (continued)
1. Risk Management Framework (continued)
1.5 Risk Appetite Framework (RAF)
The objective of the Risk Appetite Framework (RAF) is to set out
the level of risk that the Group is willing to take in pursuit of
its strategic objectives, outlying the key principles and rules
that govern the risk appetite setting. It comprises the Risk
Appetite Statement (RAS), the associated policies and limits where
appropriate, as well as the roles and responsibilities for the
implementation and monitoring of the RAF.
The RAF has been developed in order to be used as a key
management tool to better align business strategy (financial and
non-financial targets) with risk management, and it should be
perceived as the focal point for all relevant stakeholders within
the Group, as well as the supervisory bodies, for the assessment of
whether the undertaken business activities are consistent with the
set risk appetite.
The RAF is one of the main elements of the Risk Management
Framework which includes, among others, a number of frameworks,
policies and circulars that address the principal risks of the
Group. Separate RAFs are in place for all operating subsidiaries
which are subject to each subsidiary's board approval.
Risk Appetite Statement (RAS)
The RAS is the articulation, in written form, of the aggregate
level and types of risk that the Group is willing to accept in the
course of executing its business objectives and strategy. It
includes qualitative statements as well as quantitative measures
expressed relative to capital, liquidity, earnings, funding and
other risks.
The RAS considers both principal and other risks (financial and
non-financial), which indicatively include the following:
Financial Risks Non-Financial Risks
Capital Transaction Processing & Execution
Risk
======================================
Earnings Compliance Risk
======================================
Credit Risk Reputational Risk
======================================
Market Risk Legal Risk
======================================
Interest Rate Risk in the Banking Information Security and Cyber
Book (IRRBB) Risk
======================================
Concentration Risk Technology Risk
======================================
Funding & Liquidity Risk Outsourcing/3rd Party Risk
======================================
Climate & Environmental (C&E)
risks
======================================
Risk appetite and Financial Plan interaction
The RAS is subject to an annual review process during the period
in which the Group's Financial Plan as well as the divisional
strategic plans are being devised. The interplay between these
processes provides for an iterative cycle of feedback during which
RAS indicators, with minimum regulatory requirements, act as a
backstop to the Financial Plan while for other indicators the
Financial Plan provides input for risk tolerance setting.
Furthermore, every revision of the Group Financial Plan (as well as
different scenarios run under the Group Financial Plan) and/or
Reforecast exercises run, are tested to ensure they are within the
Group's risk appetite.
Risk Appetite Dashboard monitoring
To ensure that the risk profile of the Group is within the
approved risk appetite, a consolidated risk report and a risk
appetite dashboard are regularly reviewed and discussed by the
Board and the RC.
Where a breach occurs, the Risk Appetite Framework provides the
necessary escalation process to analyse the materiality and nature
of the breach, notify the appropriate authorities, and decide the
necessary remediation actions.
1. Risk Management Framework (continued)
1.6 Risk Taxonomy
In order to ensure that all risks the Group may face are
identified and managed, a risk taxonomy is in place which is a key
component of the Internal Capital Adequacy Assessment Process
(ICAAP) and the Internal Liquidity Adequacy Assessment Process
(ILAAP). The taxonomy ensures that the coverage of risks is
comprehensive and identifies potential linkages between risks.
1.7 Risk measurement and reporting
The RMD uses several systems and models to support key business
processes and operations, including stress testing, credit
approvals, fraud risk and financial reporting. The RMD has
established a model governance and validation framework to help
address risks arising from model use.
Additionally, the RMD:
- Maintains a categorization and definitions of risks and
terminologies which are used throughout the Group
- Collates reports of Key Risk Indicators (KRIs) and other
relevant risk information. When limit violations occur, escalation
and reporting procedures are in place
- Checks that risk information provided by management is
complete and accurate and management has made all reasonable
endeavour to identify and assess all key risks
- Ensures that the risk information submitted to the RC and the
Board by RMD and management is appropriate and enables monitoring
and control of all the risks faced by the Group
- Discloses risk information externally and prepares reports on
significant risks in line with internal and external regulatory
requirements.
Stress testing
Stress testing is a key risk management tool used by the Group
to provide insights on the behaviour of different elements of the
Group in a crisis scenario and assess Group's resilience and
capital and liquidity adequacy, through the use of a range of
scenarios, based on variations of market, economic and other
operating environment conditions. Stress tests are performed for
both internal and regulatory purposes and serve an important role
in:
- Understanding the risk profile of the Group
- Evaluating whether there is sufficient capital or adequate
liquidity under stressed conditions (ICAAP and ILAAP) so as to put
in place the appropriate mitigants
- Evaluating of the Group's strategy
- Establishing or revising limits
- Assisting the Group to understand the events that might push
the Group outside its risk appetite
The Group carries out the stress testing process through a
combination of bottom-up and top-down approaches. Scenario and
sensitivity analysis follows a bottom-up approach, whereas reverse
stress testing follows through a top-down approach.
If the stress testing scenarios reveal vulnerability to a given
set of risks, management makes recommendations to the Board,
through RC, for remedial measures or actions.
The Group's stress testing programme embraces a range of forward
looking stress tests and takes all the Group's material risks into
account. These key internal exercises include:
-- ICAAP stress testing undertaken in support of the Internal
Capital Adequacy Assessment Process. Quarterly ICAAP reviews are
also undertaken.
-- ILAAP stress testing applied to the funding and liquidity
plan in support of the Internal Liquidity Adequacy Assessment
Process to formally assess the Group's liquidity risks. Quarterly
ILAAP reviews are also undertaken.
-- Ad hoc stress testing as and if required, including in response to regulatory requests.
1. Risk Management Framework (continued)
1.7 Risk measurement and reporting (continued)
Other business and risk type specific stress tests
The Market Risk and Liquidity Risk Department performs
additional stress tests, which include the following:
- Monthly stress testing for interest rate risk (2% shock on Economic Value (EV))
- Quarterly stress testing for interest rate risk (2% shock on Net Interest Income (NII))
- Quarterly stress testing for interest rate risk (based on the
six predefined Basel interest rate scenarios which involve
flattening, steepening, short up, short down, parallel up, parallel
down shocks)
- Quarterly stress testing on items that are marked to market:
impact on profit/loss and reserves is indicated from changes in
interest rates and prices of bonds and equities
ICAAP
The ICAAP is a process whose main objective is to assess the
Group's capital adequacy in relation to the level of underlying
material risks that may arise from pursuing the Group's strategy or
from changes in its operating environment. More specifically, the
ICAAP analyses, assesses and quantifies the Group's risks,
establishes the current and future capital needs for the material
risks identified and assesses the Group's absorption capacity under
both the baseline scenario and stress testing conditions, aiming to
demonstrate that the Group has sufficient capital, under both the
base and stress case scenarios, to support its business and achieve
its strategic objectives as per its Board--approved Risk Appetite
and Strategy.
The Group undertakes quarterly reviews of its ICAAP results as
well as on an ad-hoc basis if needed, which are submitted to the
ALCO and the RC, considering the latest actual and forecasted
information. During the quarterly review, the Group's risk profile
is reviewed and any material changes/developments since the annual
ICAAP exercise are assessed in terms of capital adequacy.
The 2022 ICAAP was submitted to the ECB on 31 March 2023. The
2022 ICAAP indicated that the Group has sufficient capital and
available mitigants to support its risk profile and its business
and to enable it to meet its regulatory requirements, both under a
baseline and stressed conditions scenarios.
ILAAP
The ILAAP is a process whose main objective is to assess whether
the volume and capacity of liquidity resources available to the
Group are adequate to support its business model, to achieve its
strategic objectives under both the base and severe stress
scenarios, and to meet regulatory requirements including the LCR
and the NSFR.
The Group undertakes quarterly reviews of its ILAAP results
through quarterly liquidity stress tests which are submitted to the
ALCO and the RC, where actual and forecasted information is
considered. Any material changes since the year-end are assessed in
terms of liquidity and funding. The quarterly review assessment
identifies whether the Group has an adequate liquidity buffer to
cover the stress outflows.
The 2022 ILAAP was submitted to the ECB on 31 March 2023. The
2022 ILAAP indicated that the Group maintains liquidity resources
which are adequate to ensure its ability to meet obligations as
they fall due under ordinary and stressed conditions scenarios.
The Group participated in the ECB's inaugural climate risk
stress test in 2022
The exercise served as a learning exercise for banks to
introduce climate risk into risk management as a qualitative part
of the Supervisory Review and Evaluation Process (SREP).
1.8. 2023 ECB SREP Stress Test
The Group participated in the ECB SREP Stress Test of 2023. The
stress test measures how banks would fare in a hypothetical adverse
economic scenario , which assumes a prolonged period of low growth,
elevated interest rates and high inflation. It is not a
'pass-or-fail' exercise, and no threshold is set to define the
failure or success of banks. Instead, the findings of the stress
test will feed into the ongoing supervisory dialogue, in which
supervisors explain their assessment to banks and discuss potential
measures to address any shortcomings.
The ECB published on 28 July 2023 the results of the stress
test. As per the relevant ECB press release 'Capital depletion at
the end of the three-year horizon was lower than in previous stress
tests. This was mainly due to banks overall being in better shape
going into the exercise, with higher-quality assets and stronger
profitability.
1.8. 2023 ECB SREP Stress Test (continued)
By its standard procedures, the ECB considers the quantitative
performance in the adverse scenario as an input when reconsidering
the level of the Pillar II Guidance in its 2023 SREP assessment and
the qualitative performance as one aspect when holistically
reviewing the Pillar II Requirement. The stress test was based on a
Static balance sheet approach, thus using the Group's financial and
capital position as at 31 December 2022 as a starting point. The
results for the Group, as published by the ECB, are presented
below:
High-level individual results Scenario sensitivities: 2023-2025
by range projections
adverse scenario, FL (delta over total REA FL 2022)
--------------------------------------------- ---------------------------------------------
Institution Sample Maximum Minimum Minimum Delta Delta Delta
CET1 ratio CET1 ratio Tier 1 projected projected projected
(FL) (FL) by leverage NII adverse LLPs adverse profit/
depletion ranges ratio (FL) vs. baseline vs. baseline loss adverse
by ranges by ranges scenario scenario vs. base-line
(in %) (in %) scenario
(in %)
-------- -------------- ------------- -------------- ------------- ------------- ---------------
Bank of
Cyprus
Holdings
Public
Limited 300 to 599 8%<CET1R 5%<LR <
Company SSM bps < 11% 6% -3.7% 4.4% -9.0%
-------- -------------- ------------- -------------- ------------- ------------- ---------------
In terms of the Group's results, the capital depletion of the
CET1 FL ratio over the 3-year horizon in the adverse scenario is in
the range of 300 to 599 basis points as indicated above, compared
to 600 to 899 basis points in the 2021 stress test, and compares
well with the average 480 basis points for the 98 ECB stress-tested
banks.
2. Recovery and resolution planning
The Group's recovery plan sets out the arrangements and measures
that the Group could adopt in the event of severe financial stress
to restore the Group to long term viability. A suite of indicators
and options are included in the Group's recovery plan, which
together present the identification of stress events and the
tangible mitigating actions available to the Group to restore
viability. The Group's recovery plan is approved by the Board on
the recommendation of the RC and ALCO.
The Group resolution plan is prepared by the Single Resolution
Board in cooperation with the National Resolution Authority
(Central Bank of Cyprus). The resolution plan describes the
Preferred Resolution Strategy (PRS), in addition to ensuring the
continuity of the Group's critical functions and the identification
and addressing of any impediments to the Group's resolvability. The
PRS for the Group is a single point of entry bail-in via BOC PCL.
The resolution authorities also determine the Minimum Requirements
for own funds and Eligible Liabilities (MREL) corresponding to the
loss absorbing capacity necessary to execute the resolution.
3. Risk Culture
A robust risk culture is a substantial determinant of whether
the Group will be able to successfully execute its strategy within
its defined risk appetite. An action plan towards the
implementation of a firm-wide risk culture is in place across the
Group and RMD has a leading role in it. The action plan includes,
among other, the measurement of risk culture, both at bank wide and
divisional level, through a specific Risk Culture Dashboard, the
communication of a series of topics aiming at re-enforcing risk
culture and the provision of specific training for areas such as
credit underwriting and other risk management related topics.
The Group enhances its risk control culture and increases the
awareness of its employees on risk issues through ongoing staff
training (both through physical workshops and through
e-learning).
4. Principal Risks
As part of its business activities, the Group faces a variety of
risks, the most significant of which include Credit risk, Market
risk, Liquidity and Funding risk, and Operational risk.
Additionally, further risks are also faced by the Group. The
principal and other risks faced by the Group are described below as
well as the way these are identified, assessed, managed and
monitored by the Group, including the available mitigants. The
risks described below, should not be regarded as a complete and
comprehensive statement of all potential risks, uncertainties or
mitigants as other factors either not yet identified or not
currently material, may also adversely affect the Group.
4.1 Credit Risk
Credit risk is defined as the current or prospective risk to
earnings and capital arising from an obligor's failure to meet the
terms of any contract with the Group (actual, contingent or
potential claims both on and off balance sheet) or failure to
perform as agreed. Within the general definition of credit risk,
the Group identifies and manages the following types of risk:
-- Counterparty credit risk (CCR): the Group's credit exposure with other counterparties.
-- Settlement risk: the risk that a counterparty fails to
deliver the terms of a contract with the Group.
-- Issuer risk: the risk to earnings arising from a credit
deterioration of an issuer of instruments in which the Group has
invested.
-- Concentration risk: the risk that arises from the uneven
distribution of exposures (i.e.credit concentration) to individual
borrowers or by industry, collateral, product, currency, economic
sector or geographical region.
-- Country risk: the Group's credit exposure arising from
lending and/or investment or the presence of the Group to a
specific country.
4. Principal Risks (continued)
4.1 Credit Risk (continued)
Further information and analysis relating to credit risk is set
out in Note 30 of the Consolidated Condensed Interim Financial
Statements for the six months ended 30 June 2023 (the Consolidated
Financial Statements) included within the Interim Financial Report
for 2023. Furthermore, the Group's significant judgements,
estimates and assumptions regarding the determination of the level
of provisions for impairment/expected credit losses (ECLs) are set
out in Note 6 'Significant and other judgements, estimates and
assumptions' of the Consolidated Financial Statements.
In order to manage these risks the Group has a Credit Risk
Management function within RMD that:
- Develops policies, guidelines and approval limits necessary to
manage and control or mitigate the credit and concentration risk in
the Group. These documents are reviewed and updated at least
annually, or earlier if deemed necessary, to reflect any changes in
the Group's risk appetite and strategy and consider the market
environment or any other major changes from external or internal
factors that come into effect
- Assesses credit applications before their submission for
approval to Credit Committees / the RC / the Board from an
independent credit risk perspective and prepares recommendations
with suggestions to improve credit proposals and mitigate credit
risk
- Participates in the Credit Committees of BOC PCL
- Sets KRIs for monitoring the loan portfolio quality and adopts
a proactive monitoring approach for such risks
- Measures the expected credit losses in a prudent way in order
to have a fair representation of the loan book in the financial
statements of the Group
The Group sets and monitors Risk Appetite limits around credit
risk. Furthermore, a Limits framework is in place in relation to
the credit granting process and its structure and also the general
rules are documented in the Group's Lending Policy. Relevant
circulars and guidelines are in place that provide limits and
parameters for the approval of credit applications and related
credit limits. The Group currently has Credit Committees which are
comprised of members from various Group divisions outside RMD to
ensure independence of opinion. Applications falling outside the
approval limits of these Credit Committees are submitted to the RC
or the Board, depending on the total exposure of the customer
group.
The Group has adopted methodologies and techniques for credit
risk identification. These methodologies are revised and modified
whenever deemed necessary to reflect changes in the financial
environment and adjusted to be in line with the Group's overall
strategy and its short-term and long-term objectives.
The Group dedicates considerable resources to assess credit risk
and to correctly reflect the value of its on-balance and
off-balance sheet exposures in accordance with regulatory and
accounting guidelines. This process can be summarised in the
following stages:
-- Analysing performance and asset quality
-- Measuring exposures and concentrations
-- Raising allowances for impairment
Furthermore, post-approval monitoring is in place to ensure
adherence to both, terms and conditions set in the approval process
and Credit Risk policies and procedures. A key aspect of credit
risk is credit risk concentration which is defined as the risk that
arises from the uneven distribution of exposures to individual
borrowers, specific industry or economic sectors, geographical
regions, product types or currencies. The monitoring and control of
concentration risk is achieved by limit setting (e.g. sector and
name limits) and reporting them to senior management.
4. Principal Risks (continued)
4.1 Credit Risk (continued)
Approved policies and procedures are in place for the approval
of Credit and Settlement Limits per counterparty based on the
business needs, current exposures and investment plans.
Counterparty credit and settlement limits for Treasury transactions
are monitored real-time through the Treasury front to back system.
In the case of a breach, an automatic e-mail is sent to the dealers
and Market & Liquidity Risk officers.
With the aim of identifying credit risk at an early stage, a
number of key reports are prepared for the EXCO and / or the Board.
Indicatively, these include a credit quality dashboard which
analyses, among others, the overall loan book performance, forborne
facilities, the performance of new lending, specific products or
portfolios, new forbearances and modifications and other portfolio
quality KPIs.
Country Risk
Country Risk refers to the possibility that borrowers of a
particular country may be unable or unwilling to fulfill their
foreign obligations for reasons beyond the usual risks which arise
in relation to all lenders. Country risk affects the Group via its
operation in other countries and also via investments in other
countries (Money Market (MM) placements, bonds, shares,
derivatives, etc.). In addition, the Group is indirectly affected
by credit facilities provided to customers for their international
operations or due to collateral in other countries. In this
respect, country risk is considered in the risk assessment of all
exposures, both on-balance sheet and off-balance sheet. Country
risk exposures are the aggregation of the various on-balance sheet
and off-balance sheet exposures including investments in bonds,
money market placements, loans by or guarantees to residents of a
country, letters of credit, properties etc.
The Group monitors country risk on a quarterly basis by
reporting to ALCO country exposures compared to country limits. The
Board, through the RC is also informed on a regular basis and at
least annually, on any limit breaches. The country limits are
allocated based on the CET1 capital of the Group, the country's
credit rating and internal scoring.
Credit Risk Mitigation
The fundamental lending principle of the Group is to approve
applications and provide credit facilities only when the applicant
has the ability to pay and where the terms of these facilities are
consistent with the customers' income and financial position,
independent of any collateral that may be assigned as security and
in full compliance with all external laws, regulations, guidelines,
internal codes of conduct and other internal policies and
procedures. The value of collateral is not a decisive factor in the
Group's assessment and approval of any credit facility since
collaterals may only serve as a secondary source of repayment in
case of default.
Collaterals are used for risk mitigation. Collaterals are
considered as an alternative means of debt recovery in case of
default. Collateral by itself is not a predominant criterion for
approving a loan, with the exception of when the loan agreement
envisages that the repayment of the loan is based on the sale of
the property pledged as collateral or liquid collateral
provided.
Credit risk mitigation is also implemented through a number of
policies, procedures, guidelines circulars and limits. Policies are
approved by the RC and include the:
-- Lending Policy
-- Write-off policy
-- Concentration Risk Policy
-- Valuation Policy
-- Credit Risk Monitoring Policy
4. Principal Risks (continued)
4.1 Credit Risk (continued)
Systems
The effective management of the Group's credit risk is achieved
through a combination of training and specialisation as well as
appropriate credit risk assessment (risk rating) systems. The Group
aims to continuously upgrade the systems and models used in
assessing the creditworthiness of Group customers. Additionally the
Group continuously upgrades the systems and models for the
assessment of credit risk aiming to correctly reflect the value of
its on-balance and off-balance sheet exposures in accordance with
regulatory and accounting guidelines.
The analysis of loans and advances to customers in accordance
with the EBA standards is presented below.
4. Principal Risks (continued)
4.1 Credit Risk (continued)
The tables below present the analysis of loans and advances to
customers in accordance with the EBA standards.
Gross loans and advances to customers Accumulated impairment, accumulated negative
changes in fair value due to credit risk
and provisions
30 June 2023 Group Of Of which exposures Accumulated Of Of which exposures
gross which: with forbearance impairment, which: with forbearance
customer NPEs measures accumulated NPEs measures
loans negative
and changes
advances(1,2) in fair
value
due to
credit
risk and
provisions
-------------- -------- ------------------------ ------------ -------- ------------------------
Total Of which: Total Of which:
exposures NPEs exposures NPEs
with with
forbearance forbearance
measures measures
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
EUR000 EUR000 EUR000 EUR000 EUR000 EUR000 EUR000 EUR000
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Loans and
advances
to customers
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
General
governments 42,617 - - - 34 - - -
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Other financial
corporations 240,481 2,526 23,323 2,182 5,736 1,958 2,011 1,890
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Non-financial
corporations 5,131,534 131,992 473,886 84,842 101,605 71,610 55,060 49,547
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Of which: Small
and
Medium sized
Enterprises(3)
(SMEs) 3,265,501 72,343 217,817 25,610 50,836 30,680 12,894 9,054
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Of which:
Commercial
real estate(3) 3,895,018 109,623 436,537 76,672 79,255 60,639 50,963 46,452
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Non-financial
corporations
by sector
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Construction 526,409 8,380 10,285
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Wholesale and
retail
trade 901,834 18,565 16,851
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Accommodation
and food
service
activities 1,207,745 20,699 10,881
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Real estate
activities 1,073,133 16,507 17,030
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Manufacturing 379,347 7,316 4,966
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Other sectors 1,043,066 60,525 41,592
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Households 4,791,088 234,687 233,781 119,784 90,526 64,478 40,943 32,950
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Of which:
Residential
mortgage
loans(3) 3,776,027 193,706 205,936 104,043 58,323 44,227 33,356 26,487
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Of which:
Credit for
consumption(3) 571,712 33,935 26,402 17,407 23,584 14,604 7,138 6,242
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Total
on-balance
sheet 10,205,720 369,205 730,990 206,808 197,901 138,046 98,014 84,387
============== ======== ============ ========== ============ ======== ============ ==========
(1) Excluding loans and advances to central banks and credit
institutions.
(2) The residual fair value adjustment on initial recognition
(which relates mainly to loans acquired from Laiki Bank and is
calculated as the difference between the outstanding contractual
amount and the fair value of loans acquired and bears a negative
balance) is considered as part of the gross loans, therefore
decreases the gross balance of loans and advances to customers.
(3) The analysis shown in lines 'non-financial corporations' and
'households' is non-additive across all categories as certain
customers could be in both categories.
4. Principal Risks (continued)
4.1 Credit Risk (continued)
Gross loans and advances to customers Accumulated impairment, accumulated negative
changes in fair value due to credit risk
and provisions
31 December Group Of Of which exposures Accumulated Of Of which exposures
2022 gross which: with forbearance impairment, which: with forbearance
customer NPEs measures accumulated NPEs measures
loans negative
and changes
advances(4,5) in fair
value
due to
credit
risk and
provisions
-------------- -------- ------------------------ ------------ -------- ------------------------
Total Of which: Total Of which:
exposures NPEs exposures NPEs
with with
forbearance forbearance
measures measures
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
EUR000 EUR000 EUR000 EUR000 EUR000 EUR000 EUR000 EUR000
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Loans and
advances
to customers
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
General
governments 39,766 - - - 25 - - -
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Other financial
corporations 186,281 3,202 11,665 2,825 6,008 2,332 2,453 2,250
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Non-financial
corporations 5,134,784 144,522 950,499 91,100 100,265 69,212 53,940 44,957
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Of which: Small
and
Medium sized
Enterprises(6)
(SMEs) 3,492,414 84,493 449,891 33,140 53,939 33,882 17,643 11,683
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Of which:
Commercial
real estate(6) 3,975,290 120,445 895,971 80,980 76,385 58,414 47,047 41,152
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Non-financial
corporations
by sector
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Construction 549,921 11,949 13,319
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Wholesale and
retail
trade 909,438 20,783 15,907
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Accommodation
and food
service
activities 1,164,979 20,824 9,543
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Real estate
activities 1,108,581 20,281 19,738
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Manufacturing 392,843 9,429 4,033
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Other sectors 1,009,022 61,256 37,725
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Households 4,770,863 260,629 290,556 143,140 72,144 54,643 37,362 32,087
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Of which:
Residential
mortgage
loans(6) 3,785,834 220,354 253,794 125,994 45,805 37,616 29,759 25,751
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Of which:
Credit for
consumption(6) 547,490 37,622 42,719 21,235 20,355 14,628 8,543 7,486
-------------- -------- ------------ ---------- ------------ -------- ------------ ----------
Total
on-balance
sheet 10,131,694 408,353 1,252,720 237,065 178,442 126,187 93,755 79,294
============== ======== ============ ========== ============ ======== ============ ==========
(4) Excluding loans and advances to central banks and credit
institutions.
(5) The residual fair value adjustment on initial recognition
(which relates mainly to loans acquired from Laiki Bank and is
calculated as the difference between the outstanding contractual
amount and the fair value of loans acquired and bears a negative
balance) is considered as part of the gross loans, therefore
decreases the gross balance of loans and advances to customers.
(6) The analysis shown in lines 'non-financial corporations' and
'households' is non-additive across all categories as certain
customers could be in both categories.
4. Principal Risks (continued)
4.2 Market Risk
Market Risk is defined as the current or prospective risk to
earnings and capital arising from adverse movements in interest
rates, currency / foreign exchange rates and from any other changes
in market prices. The main types of market risk to which the Group
is exposed to are listed below:
a. Interest Rate Risk (IRR);
b. Currency / foreign exchange risk;
c. Securities price risk (bonds, equities);
d. Properties risk;
Each of the risks above is defined and further analysed in the
subsections below. Furthermore, additional information relating to
Market risk is set out in Note 31 of the Consolidated Financial
Statements.
Interest Rate Risk in the Banking Book
Interest rate risk in the banking book ("IRRBB") is the current
or prospective risk to both the earnings and capital of the Group
as a result of adverse movements in interest rates. The four
components of interest rate risk are: repricing risk, yield curve
risk, basis risk and option risk. Repricing risk is the risk of
loss of net interest income or economic value as a result of timing
mismatch in the repricing of assets, liabilities and off balance
sheet items. Yield curve risk arises from changes in the slope and
the shape of the yield curve. Basis risk is the risk of loss of net
interest income or economic value as a result of imperfect
correlation between two different variable reference rates. Option
risk arises from options, including embedded options, e.g.
consumers redeeming fixed rate products when market rates
change.
The Group does not operate any trading book and thus all
interest rate exposure arises from the banking book.
In order to manage interest rate risk, the Group sets a one year
limit on the maximum reduction of the net interest income. Limits
are set as a percentage of Group capital and as a percentage of
Group net interest income (when positive). There are different
limits for Euro and USD. Whilst limit breaches must be avoided at
all times, any such occurrence is reported to the relevant
authorities (ALCO and / or RC) and mitigating actions are put in
place. Monthly monitoring is provided to the Group ALCO.
Group Treasury is responsible for managing the interest rate
exposure of the Group. Corrective actions are taken by Treasury
with a view of minimizing the risk exposure and in any event to
restrict exposure within limits (unless an ALCO/RC approval is
obtained).
Currency/foreign exchange risk
Currency/foreign exchange risk is the risk that the fair value
of future cash flows of a financial instrument will fluctuate
because of changes in foreign exchange rates.
In order to limit the risk of loss from adverse fluctuations in
foreign exchange rates, overall Intraday and Overnight open
currency position limits have been set. These internal limits are
small compared to the maximum permissible by the CBC. Internal
limits serve as a trigger to management for avoiding regulatory
limit breaches. Due to the fact that there is no Foreign Exchange
Trading Book, VaR (Value at Risk) is calculated on a monthly basis
on the position reported to the CBC. Intraday and overnight FX
position limits are monitored daily and the open foreign currency
position or any breaches are reported to ALCO and to the RC on a
monthly basis.
4. Principal Risks (continued)
4.2 Market Risk (continued)
Currency/foreign exchange risk (continued)
Group Treasury is responsible for managing the foreign currency
open position of the Group emanating from its balance sheet. The
foreign currency position emanating from customer transactions is
managed by the Treasury Sales Unit of Global Markets & Treasury
Sales Department. Treasury is also responsible for the hedging for
the foreign currency open positions of the foreign non-banking
units of the Group.
Equities Price Risk
The risk of loss from changes in the price of equity securities
arises when there is an unfavorable change in the prices of equity
securities held by the Group as investments.
The Group has an outstanding equity and fund portfolio in its
books. The equity portfolio mainly relates to certain legacy
positions acquired through loan restructuring activity and
specifically through debt for equity swaps, whereas the fund
portfolio mainly relates to the insurance operations of the Group.
The policy is to manage the current equity portfolio with the
intention to run it down by selling all positions for which there
is a market. No new purchases of equities are allowed without ALCO
approval. Nevertheless, new equities may be obtained from
repossessions of collateral for loans. Analysis of equity and fund
holdings are reported to ALCO on a quarterly basis. The RC is also
updated on a quarterly basis. Analysis of the positions the Group
maintains as at 30 June 2023 is presented in Note 15 of the
Consolidated Financial Statements.
Debt Securities Price Risk
Debt securities price risk is the risk of loss as a result of
adverse changes in the prices of debt securities held by the Group.
Debt security prices change as the credit risk of the issuers
changes and/or as the interest rates of fixed rate securities
change.
The Group invests a significant part of its liquid assets in
debt securities. Changes in the prices of debt securities
classified as investments at FVPL, affect the profit or loss of the
Group, whereas changes in the value of debt securities classified
as FVOCI affect directly the equity of the Group. Debt securities
classified as HTC are held at amortised cost.
Debt security investment limits exist at RAS level governing the
level of riskiness of the overall portfolio. Credit limits per
issuer are also in place. Market and Liquidity Risk Department is
responsible for setting and calibrating bond related limits. Limit
monitoring is performed on a daily basis. Any breaches are reported
following the escalation process depending on the limit breach.
The debt security portfolio is management by Group Treasury and
governed by the Bond Investment Policy. The annual bond investment
strategy is proposed by Treasury and approved by ALCO. Treasury
proceeds with bond investment amounts approved through the
Financial Plan, within the Bond Investment Policy and within limits
and parameters set in the various policies and frameworks. Analysis
of the positions the Group maintains as at 30 June 2023 is
presented in Note 15 of the Consolidated Financial Statements.
Property Price Risk
Property price risk is the risk that the value of property will
decrease, either as a result of:
Changes in the demand for, and prices of, Cypriot real estate;
or
Regulatory requests which may increase the capital requirements
for stock of property
The Group is exposed to the risk of changes in the fair value of
property which is held either for own use or as stock of property
or as investment property. Stock of property is predominately
acquired in exchange of debt and is intended to be disposed off in
line with the Group's strategy.
4. Principal Risks (continued)
4.2 Market Risk (continued)
Property Price Risk (continued)
The Group has in place a number of actions to manage and monitor
the exposure to property risk as indicated below:
It has an established Real Estate Management Unit (REMU), a
specialised division to manage the repossessed portfolio including
employing appropriate disposal strategies.
It has placed great emphasis on the efficient and quick disposal
of on-boarded properties and in their close monitoring and regular
reporting. RAS indicators and other KPIs are in place monitoring
REMU properties in terms of value and sales levels.
It assesses and quantifies property risk as one of the material
risks for ICAAP purposes under both the normative and economic
perspective.
It monitors the changes in the market value of the collateral
and, where necessary, requests the pledging of additional
collateral in accordance with the relevant agreement.
As part of the valuation process, assumptions are made about the
future changes in property values, as well as the timing for the
realisation of collateral, taxes and expenses on the repossession
and subsequent sale of the collateral as well as any other
applicable haircuts.
For the valuation of properties owned by the Group judgement is
exercised which takes into account all available reference points,
such as expert valuation reports, current market conditions and
application of appropriate illiquidity haircuts where relevant.
4.3 Liquidity and Funding Risk
Liquidity risk is the risk that the Group does not have
sufficient financial resources to meet its commitments as they fall
due. This risk includes the possibility that the Group may have to
raise funding at high cost or sell assets at a discount to fully
and promptly satisfy its obligations.
Funding risk is the risk that the Group does not have
sufficiently stable sources of funding or access to sources of
funding may not always be available at a reasonable cost and thus
the Group may fail to meet its obligations, including regulatory
ones (e.g. MREL).
Further information relating to Group risk management in
relation to liquidity and funding risk is set out in Note 32 of the
Consolidated Financial Statements. Additionally, information on
encumbrance and liquidity reserves is provided below.
4.3.1 Encumbered and unencumbered assets
Asset encumbrance arises from collateral pledged against secured
funding and other collateralised obligations.
An asset is classified as encumbered if it has been pledged as
collateral against secured funding and other collateralised
obligations and, as a result, is no longer available to the Group
for further collateral or liquidity requirements. The total
encumbered assets of the Group amounted to EUR3,661,160 thousand as
at 30 June 2023 (31 December 2022: EUR3,631,269 thousand).
An asset is classified as unencumbered if it has not been
pledged as collateral against secured funding and other
collateralised obligations. Unencumbered assets are further
analysed into those that are available and can potentially be
pledged and those that are not readily available to be pledged. As
at 30 June 2023, the Group held EUR19,630,696 thousand (31 December
2022: EUR19,468,233 thousand) of unencumbered assets that can
potentially be pledged and can be used to support potential
liquidity funding needs and EUR846,459 thousand (31 December 2022:
EUR659,311 thousand) of unencumbered assets that are not readily
available to be pledged for funding requirements in their current
form.
4. Principal Risks (continued)
4.3 Liquidity and Funding Risk (continued)
4.3.1 Encumbered and unencumbered assets (continued)
The table below presents an analysis of the Group's encumbered
and unencumbered assets and the extent to which these assets are
currently pledged for funding or other purposes. The carrying
amount of such assets is disclosed below:
30 June 2023 Encumbered Unencumbered Total
Pledged as Which can Which are
collateral potentially not readily
be pledged available to
be pledged
------------ ------------- --------------
EUR000 EUR000 EUR000 EUR000
------------ ------------- -------------- -----------
Cash and other liquid
assets 69,345 8,932,649 557,247 9,559,241
------------ ------------- -------------- -----------
Investments 257,147 3,056,286 16,274 3,329,707
------------ ------------- -------------- -----------
Loans and advances to
customers 3,334,668 6,442,025 231,126 10,007,819
------------ ------------- -------------- -----------
Property - 1,199,736 41,812 1,241,548
------------ ------------- -------------- -----------
Total on-balance sheet 3,661,160 19,630,696 846,459 24,138,315
============ ============= ============== ===========
31 December 2022
Cash and other liquid
assets 73,557 9,391,365 307,147 9,772,069
---------- ----------- -------- -----------
Investments 284,343 2,393,796 25,564 2,703,703
---------- ----------- -------- -----------
Loans and advances to
customers 3,273,369 6,397,745 282,138 9,953,252
---------- ----------- -------- -----------
Property - 1,285,327 44,462 1,329,789
---------- ----------- -------- -----------
Total on-balance sheet 3,631,269 19,468,233 659,311 23,758,813
========== =========== ======== ===========
Encumbered assets primarily consist of loans and advances to
customers and investments in debt securities. These are mainly
pledged for the funding facilities of the European Central Bank
(ECB) and for the covered bond ( Notes 21 and 32 of the
Consolidated Financial Statements for the six months ended 30 June
2023 respectively ). Encumbered assets include cash and other
liquid assets placed with banks as collateral under ISDA agreements
which are not immediately available for use by the Group but are
released once the transactions are terminated. Cash is mainly used
to cover collateral required for (i) derivatives and (ii) trade
finance transactions and guarantees issued. It may also be used as
part of the supplementary assets for the covered bond.
BOC PCL maintains a Covered Bond Programme set up under the
Cyprus Covered Bonds legislation and the Covered Bonds Directive of
the Central Bank of Cyprus (CBC). Under the Covered Bond Programme,
BOC PCL has in issue covered bonds of EUR650 million secured by
residential mortgages originated in Cyprus. The covered bonds have
a maturity date on 12 December 2026 and interest rate of 3-months
Euribor plus 1.25% payable on a quarterly basis. On 9 August 2022,
BOC PCL proceeded with an amendment to the terms and conditions of
the covered bonds following the implementation of Directive (EU)
2019/2162 in Cyprus. The covered bonds are listed on the Luxemburg
Bourse and have a conditional Pass-Through structure. All the bonds
are held by BOC PCL. The covered bonds are eligible collateral for
the Eurosystem credit operations and are placed as collateral for
accessing funding from the ECB.
Unencumbered assets which can potentially be pledged include
debt securities and Cyprus loans and advances which are less than
90 days past due. Balances with central banks are reported as
unencumbered and can be pledged, to the extent that there is excess
available over the minimum reserve requirement. The minimum reserve
requirement is reported as unencumbered not readily available to be
pledged.
4. Principal Risks (continued)
4.3 Liquidity and Funding Risk (continued)
4.3.1 Encumbered and unencumbered assets (continued)
Unencumbered assets that are not readily available to be pledged
primarily consist of loans and advances which are prohibited by
contract or law to be encumbered or which are more than 90 days
past due or for which there are pending litigations or other legal
actions against the customer, a proportion of which would be
suitable for use in secured funding structures but are
conservatively classified as not readily available for collateral.
Properties whose legal title has not been transferred to the
Company or a subsidiary are not considered to be readily available
as collateral. Non-current assets held for sale are also reported
as not readily available to be pledged.
Insurance assets held by Group insurance subsidiaries are not
included in the table above or below as they are primarily due to
the insurance policyholders.
The carrying and fair value of the encumbered and unencumbered
investments of the Group as at 30 June 2023 and 31 December 2022
are as follows:
30 June 2023 Carrying Fair value Carrying value Fair value
value of of encumbered of unencumbered of unencumbered
encumbered investments investments investments
investments
EUR000 EUR000 EUR000 EUR000
------------- --------------- ----------------- -----------------
Equity securities - - 148,216 148,216
------------- --------------- ----------------- -----------------
Debt securities 257,147 239,317 2,924,344 2,858,123
------------- --------------- ----------------- -----------------
Total investments 257,147 239,317 3,072,560 3,006,339
============= =============== ================= =================
31 December 2022
Equity securities - - 194,841 194,841
-------- -------- ---------- ----------
Debt securities 284,343 265,696 2,224,519 2,150,383
-------- -------- ---------- ----------
Total investments 284,343 265,696 2,419,360 2,345,224
======== ======== ========== ==========
4.3.2 Liquidity regulation
The Group has to comply with provisions on the Liquidity
Coverage Ratio (LCR) under CRD IV/CRR (as supplemented by Delegated
Regulations (EU) 2015/61), with the limit set at 100%. The Group
has to also comply with the Net Stable Funding Ratio (NSFR)
calculated as per the Capital Requirements Regulation II (CRR II),
with the limit set at 100%.
The LCR is designed to promote the short-term resilience of a
Group's liquidity risk profile by ensuring that it has sufficient
high-quality liquid resources to survive an acute stress scenario
lasting for 30 days. The NSFR has been developed to promote a
sustainable maturity structure of assets and liabilities.
As at 30 June 2023, the Group was in compliance with all
regulatory liquidity requirements. As at 30 June 2023, the Group's
LCR stood at 316% (compared to 291% at 31 December 2022) and the
Group's NSFR stood at 165% (compared to 168% at 31 December
2022).
4. Principal Risks (continued)
4.3 Liquidity and Funding Risk (continued)
4.3.3 Liquidity reserves
The below table sets out the Group's liquidity reserves:
Composition of 30 June 2023 31 December 2022
the liquidity reserves
Internal Liquidity reserves Internal Liquidity reserves
Liquidity as per LCR Delegated Liquidity as per LCR Delegated
Reserves Regulation (EU) Reserves Regulation (EU)
2015/61 LCR eligible 2015/61 LCR eligible
----------- ------------------------ ----------- ------------------------
Level Level Level 1 Level
1 2A & 2A &
2B 2B
----------- ------------- --------- ----------- ------------- ---------
EUR000 EUR000 EUR000 EUR000 EUR000 EUR000
----------- ------------- --------- ----------- ------------- ---------
Cash and balances
with central banks 8,943,425 8,943,425 9,379,888 9,379,888 -
----------- ------------- --------- ----------- ------------- ---------
Placements with 263,69
banks 8 55,825 - -
----------- ------------- --------- ----------- ------------- ---------
Liquid investments 2,476,326 2,021,659 331,111 1,827,698 1,344,032 214,800
----------- ------------- --------- ----------- ------------- ---------
Available ECB Buffer 57,509 147,844 - -
----------- ------------- --------- ----------- ------------- ---------
Total 11,740,958 10,965,084 331,111 11,411,255 10,723,920 214,800
=========== ============= ========= =========== ============= =========
Internal Liquidity Reserves present the total liquid assets as
defined in BOC PCL's Liquidity Policy. Liquidity reserves as per
LCR Delegated Regulation (EU) 2015/61 present the liquid assets as
per the definition of the aforementioned regulation i.e.
High-Quality Liquid Assets (HQLA).
Balances in Nostro accounts and placements with banks are not
included in Liquidity reserves as per LCR, as they are not
considered HQLA (they are part of the LCR Inflows).
Liquid investments under the Liquidity reserves as per LCR are
shown at market values reduced by standard weights as prescribed by
the LCR regulation. Liquid investments under Internal Liquidity
Reserves include additional unencumbered liquid bonds and are shown
at market values net of haircuts based on ECB methodology and
haircuts.
Current available ECB buffer is not part of the Liquidity
reserves as per LCR.
In March 2022, the ECB announced the steps for the gradual
phasing out of the temporary pandemic collateral easing measures
implemented during COVID-19 breakout. The gradual phasing out is
scheduled to be concluded in three steps having started from July
2022 and will be completed by March 2024 and gives banks time to
adapt to the adjustments to the collateral framework. In the first
step in July 2022, the ECB halved the temporary reduction in
collateral valuation haircuts across all assets from the previous
20% adjustment to 10%. In the second step, in June 2023, the ECB
expects to implement a new valuation haircut schedule based on its
pre-pandemic risk tolerance level for credit operations, phasing
out the temporary reduction in collateral valuation haircuts
completely. In the third and final step, in March 2024, the ECB
will, in principle, phase out the remaining pandemic collateral
easing measures.
4. Principal Risks (continued)
4.4 Operational Risk
Operational risk is defined as the risk of direct or indirect
impact/loss resulting from inadequate or failed internal processes,
people, and systems or from external events. The Group includes in
this definition compliance, legal and reputational risk.
The Group recognises that the control of operational risk is
directly related to effective and efficient management practices
and high standards of corporate governance. To that effect, the
management of operational risk is geared towards maintaining a
strong internal control governance framework and managing
operational risk exposures through a consistent set of management
processes that drive risk identification, assessment, control and
monitoring.
The Group also maintains adequate insurance policies to cover
for unexpected material operational losses.
Operational Risk Management (ORM) Framework
The Group has established an Operational Risk Management
Framework which addresses the following objectives:
- Raising operational risk awareness and building the appropriate risk culture,
- Providing effective risk monitoring and reporting to the
Group's management at all levels in relation to the operational
risk profile, so as to facilitate decision making for risk control
activities,
- Mitigating operational risk to ensure that operational losses
do not cause material damage to the Group's franchise and that the
impact on the Group's profitability and corporate objectives is
contained, and
- Maintaining a strong system of internal controls to ensure
that operational incidents do not cause material damage to the
Group's franchise and have a minimal impact on the Group's
profitability and reputation.
Operational risks can arise from all business lines and from all
activities carried out by the Group and are thus diverse in
nature.
To enable effective management of all material operational
risks, the operational risk management framework adopted by the
Group is based on the three lines of defence model, through which
risk ownership is dispersed throughout the organisation.
The key components of the Operational Risk Management Framework
include the following:
Risk Appetite
A defined Operational RAS is in place, which forms part of the
Group RAS. Thresholds are applied for conduct and other operational
risk related losses.
Risk Control Self-Assessment (RCSA)
A RCSA methodology is established across the Group. According to
the RCSA methodology, business owners are requested to identify
risks that arise primarily from the risk areas under a full Risk
Taxonomy. Updating/enriching the risk register in terms of existing
and potential new risks identified and their mitigation is an
on-going process, sourced from RCSAs, but also from other risk and
control assessments (RCAs) performed.
4. Principal Risks (continued)
4.4 Operational Risk (continued)
Operational Risk Management (ORM) Framework (continued)
Incident recording and analysis
An operational risk event is defined as any incident where
through the failure or lack of a control, the Group could actually
or potentially have incurred a loss including circumstances whereby
the Group could have incurred a loss, but in fact made a gain, as
well as, incidents resulting in potential reputational or
regulatory impact.
Operational risk loss events are classified and recorded in the
Group's Risk and Compliance Management System (RCMS), which serves
as an enterprise tool integrating all risk-control data (e.g.
risks, loss incidents, KRIs) to provide a holistic view with
regards to risk identification, corrective action and statistical
analysis. During the six months ended 30 June 2023, 406 loss events
with gross loss equal to or greater than EUR1,000 each were
recorded including incidents of prior years (mostly legal cases)
for which losses materialised in the first six months of 2023.
Key Risk Indicators (KPIs)
These are operational or financial variables, which track the
likelihood and/or impact of a particular operational risk. KRIs
serve as a metric, which may be used to monitor the level of
particular operational risks.
Operational Risk Capital Requirements and ICAAP
Regulatory and economic capital requirements for operational
risk are calculated using the Standardised Approach. Additional
Pillar II Regulatory capital is calculated for operational risk on
a scenario-based approach. Scenarios are built after taking into
consideration the Key Risk Drivers, which are identified using a
combination of methods and sources, through top-down and bottom-up
approaches.
Training and awareness
The Group strives to continuously enhance its risk control
culture and increase the awareness of its employees on operational
risk issues through ongoing staff training (both through physical
workshops and through e-learning).
Reporting
Important operational risks identified and assessed through the
various tools/methodologies of the Operational Risk Management
Framework, are regularly reported to top management, as part of
overall risk reporting. More specifically, the CRO reports on risk
to the EXCO and the RC on a monthly basis, while annual risk
reports are submitted to the Regulators. Ad-hoc reports are also
submitted to management, as needed.
4.4.1 Fraud Risk Management
Ongoing activities/initiatives towards further enhancements of
Operational Risk Management (ORM), involved inter alia the
following: (i) provision of a fraud risk awareness seminar to staff
and top-management, (ii) establishment of the specialised Fraud
Risk Assessment Framework, going beyond the current Risk Control
Self-Assessment (RCSA) process, and (iii) ongoing reviews and
enhancements of the internal ORM policies and procedures as well as
the ORM database. As a result of the customers' accelerated shift
towards digital channels, the Fraud Risk Management unit further
strengthened the Group's current external fraud prevention controls
and framework.
4. Principal Risks (continued)
4.4 Operational Risk (continued)
4.4.2 Third-Party Risk Management
Third-Party and Outsourcing risk can arise from a third party's
failure to perform as expected due to reasons such as inadequate
capacity, technological failure, human error, unsatisfactory
quality of service, unsatisfactory continuity of service and/or
financial failure.
The Group has a dedicated unit under the ORM Function, the
Third-Party Risk Management unit, which is responsible to perform
risk assessments on all outsourcing, strategic and intragroup
arrangements of the Group. As part of the risk assessment, the team
identifies and monitors the effective handling of any potential
gaps/weaknesses. The risk assessment occurs prior to signing an
outsourcing, strategic or intragroup arrangement as well as prior
to their renewal or annually.
5. Other principal risks and uncertainties
In addition to the most significant risks described in section 4
above, further risks are also faced by the Group. These risks are
described below as well as the way these are identified, assessed,
managed and monitored by the Group, including the available
mitigants.
Emerging risks are defined as new risks or existing risks that
may escalate in a different way, with the potential to threaten the
execution of the Group's strategy or operations over a medium-term
horizon. The main emerging risks currently considered by the Group
are also stated below.
The risks described below, should not be regarded as a complete
and comprehensive statement of all potential risks, uncertainties
or mitigants, as other factors either not yet identified or not
currently material, may also adversely affect the Group.
5.1 Business Model and Strategic Risk
Business model and strategic risk arises from changes in the
external environment including economic trends and competition. The
Group faces competition from domestic banks, international banks
and financial technology companies operating in Cyprus and in other
parts of Europe and insurance companies offering savings, insurance
and investment products. Also, a continuing deterioration of the
macroeconomic environment stemming from the impact of high
inflation and the resultant interest hikes or other factors could
lead to adverse financial performance which could deplete capital
resources.
Furthermore, the Group's business and performance are materially
dependent on the economic conditions in, and future economic
prospects of, Cyprus where the Group's operations and earnings are
predominantly based and generated. The Group is also dependent on
the economic conditions and prospects in the countries of the main
counterparties it conducts business with.
The Group has a clear strategy with key objectives to enable
delivery and operates within defined risk appetite limits which are
calibrated to be within the Group's Risk bearing capacity. The
strategy is monitored closely on a regular basis. Furthermore, the
Group remains ready to explore opportunities that complement its
strategy including diversification of income. As the Group's
business model is pivotal to strategic risk, it has to be viable
and sustainable and produce results that are consistent with its
annual targets.
5. Other principal risks and uncertainties (continued)
5.1 Business Model and Strategic Risk (continued)
The Group manages business model risk within its Risk Appetite
Framework, by setting limits in respect of measures such as
financial performance, portfolio performance and concentration and
capital levels. At a more operational level, the risk is mitigated
through periodic monitoring of variances to the Financial Plan.
During the year, periodic forecast updates for the full year
financial outcome are produced. The frequency of forecast updates
during each year will be determined based on prevailing business
and economic conditions. Performance against plan is monitored at a
Group and business line level on a monthly basis and reported to
the EXCO and the Board.
The Group also closely monitors the risks and impact of changing
macroeconomic conditions on its lending portfolio, strategy and
objectives and takes mitigating actions were necessary. An internal
stress testing framework (ICAAP) is in place to provide insights
and to assess capital resilience to shocks.
5.2 Geopolitical Risk
Cyprus is a small, open, services-based economy, with a large
external sector and high reliance on tourism and international
business services. As a result, external factors which are beyond
the control of the Group, including developments in the European
Union and in the global economy, or in specific countries with
which Cyprus maintains close economic and investment links can have
a significant impact on domestic economic activity. A number of
macro and market related risks, including weaker economic activity,
the higher interest rate environment and higher competition in the
financial services industry, could negatively affect the Group's
business environment, results and operations.
In the continuing war in Ukraine the preannounced Ukrainian
counter offensive has started and is expected to lead to an
escalation of the fighting, but it is unlikely to result in any
significant recapture of territory or alter the strategic balance
on the ground. The war is seen to be settling to a stalemate and
holding the threat of renewed supply disruptions and heightened
shortages. Ukraine's bid to join NATO is unlikely to receive
material support from other member states and as the counter
offensive is shown to have limited potential, voices for a
ceasefire and peace negotiations will increase.
In Cyprus, financial sector exposure to foreign markets has been
reduced since the 2013 banking crisis. Although, there have been
distinct improvements in Cyprus' risk profile after the banking
crisis, substantial risks remain. Cyprus' overall country risk is a
combination of sovereign, currency, banking, political and economic
structure risk, influenced by external developments with
substantial potential impact on the domestic economy. Given the
above, the Group recognises that unforeseen political events can
have negative effects on the Group's activities, operating results,
and market position.
Economic growth will continue to slow in the third and
subsequent quarters, but there will not be a recession this year at
least.
Interest rates in the US and the eurozone will peak in the third
quarter as headline inflation continues to decline while core
inflation proves stickier. Amidst a high interest rate environment,
financial stability risks will remain elevated.
The BRICS summit in August will likely make progress on the
incorporation of additional members and the establishment of a
bloc-backed reserve currency. Both of which seek to reduce the
dominance of the dollar and Western institutions in the long run.
The August summit could be the most consequential for the bloc in
years as China, Russia and others aim to boost membership and
coordination on key issues. While the summit itself may not result
in the immediate entry of new members or an agreement on a reserve
currency, there will probably be precursor deals that could
accelerate those two important long-term trends.
5. Other principal risks and uncertainties (continued)
5.2 Geopolitical Risk (continued)
The Group is continuously monitoring the current affairs and the
impact of the forecasted macroeconomic conditions on the Group's
strategy to proactively manage emerging risks. Where necessary,
bespoke solutions are offered to the affected exposures and close
monitoring on those is maintained. Furthermore, the Group includes
related events in its stress testing scenarios in order to gain a
better understanding of the potential impact.
5.3 Legal Risk
The Group may, from time to time, become involved in legal or
arbitration proceedings which may affect its operations and
results. Litigation risk arises from pending or potential legal
proceedings and regulatory investigations against the Group (Note
27 of the Consolidated Financial Statements for the six months
ended 30 June 2023). In the event that legal issues are not
properly dealt with by the Group, this may result in financial
and/or reputational loss to the Group.
The Group has procedures in place to ensure effective and prompt
management of Legal risk including, among others, the risk arising
from regulatory developments, new products and internal
policies.
The Legal Services department (LSD) monitors the pending
litigation against the Group and assesses the probability of loss
for each legal action against the Group based on International
Accounting Standards. It also estimates the amount of potential
loss where it is deemed as probable. Additionally, it reports
pending litigation and latest developments to the EXCO and the
Board.
5.4 Technology Risk
Technology risk arises from system downtimes impacting customer
service which may be due to inadequate, failed, or unavailable
systems, use of outdated, obsolete and unsupported systems, or
systems which do not fully support the requirements of
business.
The Group has in place a Technology strategy designed to support
Business strategy and customer centric view. The strategy includes
investments in skills and technology to minimize system downtimes
and security risks, modernization of legacy applications, a
risk-based approach to leverage the benefits of Cloud technologies,
and investments in new and innovative applications to support
business requirements. The Group implements a collaborative
operating model to implement the technology initiatives that
support Business strategy and Digital Transformation. The Operating
Model involves setting up cross-functional teams that combine
Technical, Business and Risk skills for accelerated results. Where
necessary, the Group engages with appropriate external experts to
augment capacity and meet peak demand for technical initiatives
while always maintaining good levels of internal skills and
capacity.
The Group's policies, standards, governance and controls undergo
ongoing review to ensure continued alignment with the Group's
Technology strategy, compliance with regulation and effective
management of the associated risks.
5.5 Digital Transformation Risk
Digital transformation risk arises as banking models are rapidly
evolving both locally and globally and available technologies have
resulted in the customers' accelerated shift towards digital
channels. Money transmission, data driven integrated services and
Digital Product Sales are rapidly evolving. How the Group adapts to
these emerging developments could impact the realisation of its
market strategies and financial plans.
In the context of the overall business strategy, the Group
assesses and develops its Digital Strategy and maintains a clear
roadmap that provides for migration of transactions to the Digital
Channels, full Digital and Digital Assisted Product Sales, and
Self-service banking support services. The Group's emphasis on the
Digital Strategy is reflected in the Operating Model with a
designated Chief Digital Officer supported by staff with the
appropriate skills that work closely with Technology and Control
functions to execute the strategy.
5. Other principal risks and uncertainties (continued)
5.5 Digital Transformation Risk (continued)
The Group's policies, standards, governance and controls undergo
ongoing review to ensure continued alignment with the Group's
strategy for digital transformation and effective management of the
associated risk.
5.6 Information security and cyber risk
Information security and cyber-risk is a significant inherent
risk, which could cause a material disruption to the operations of
the Group. The Group's information systems have been and will
continue to be exposed to an increasing threat of continually
evolving cybercrime and data security attacks. Customers and other
third parties to which the Group is significantly exposed,
including the Group's service providers (such as data processing
companies to which the Group has outsourced certain services), face
similar threats.
Current geopolitical tensions have also led to increased risk of
cyber-attack from foreign state actors.
The Group has an internal specialized Information Security team
which constantly monitors current and future cyber security threats
(either internal or external, malicious or accidental) and invests
in enhanced cyber security measures and controls to protect,
prevent, and appropriately respond against such threats to Group
systems and information.
The Group also collaborates with industry bodies, the National
Computer Security Incident Response Team (CSIRT) and
intelligence-sharing working groups to be better equipped with the
growing threat from cyber criminals. In addition, the Group
maintains insurance coverage which covers certain aspects of cyber
risks, and it is subject to exclusion of certain terms and
conditions.
5.7 Regulatory Compliance Risk
The Group conducts its business subject to on-going regulation
and the associated regulatory risk, including the effects of
changes in the laws, regulations, policies, voluntary codes of
practice and interpretations. Regulatory compliance risk is the
risk of impairment to the organization's business model, reputation
and financial condition from failure to meet laws and regulations,
internal standards and policies, and expectations of key
stakeholders such as shareholders, customers, employees and
society. Failure to comply with regulatory framework requirements
or identify and plan for emerging requirements could lead to,
amongst other things, increased costs for the Group, limitation on
BOC PCL's capacity to lend and could have a material adverse effect
on the business, financial condition and results, operations and
prospects of the Group.
There is strong commitment by the management of the Group for an
on-going and transparent dialogue with the Regulators ( jointly
supervised by the ECB and the CBC and others, such as CySec and
CSE) . The Regulatory Steering Group, chaired by the CEO and
consisting of executive management, monitors the regulatory agenda,
through the Regulatory Affairs Department, to ensure that all
regulatory matters are brought to the attention of management in a
timely manner.
Regulatory compliance risks are identified and assessed using a
combination of methods and sources as these are incorporated in the
Group Compliance Policy which sets out the compliance framework
that applies within BOC PCL and its subsidiaries in Cyprus and
abroad. It sets out the business and legal environment applicable
to the Group as well as the objectives, principles, and
responsibilities for compliance and how these responsibilities are
allocated and carried out at Group and Entity level. Furthermore,
this Policy ensures that there are proper procedures in place for
BOC PCL to comply with the requirements of the CBC Internal
Governance Directive and the EBA Guidelines on Internal
Governance.
The Compliance Risk Assessment Methodology sets out the
principles to assess compliance risks. The Compliance function
identifies and communicates new and/or amended regulations, within
the regulatory compliance universe to the relevant business areas
for impact assessment and/or a regulatory gap analysis with the
Compliance function as second line of defence to review and
challenge.
5. Other Principal Risks and uncertainties (continued)
5.7 Regulatory Compliance Risk (continued)
Appropriate tools and mechanisms are in place for monitoring,
escalating and reporting compliance activities which, inter alia,
include:
The assessment of periodic reports submitted by the network of
its compliance liaisons,
The use of aggregated risk measurements such as risk
indicators,
The use of reports warranting management attention, documenting
material deviations between actual occurrences and expectations (an
exceptions report) or situations requiring resolution (an issues
log),
Targeted trade surveillance, observation of procedures, desk
reviews and/or interviewing relevant staff,
Conducting periodic onsite/offsite reviews with applicable laws,
rules, regulations and standards and providing recommendations /
advise to management on measures to be taken to ensure
compliance,
Investigating possible breaches of the compliance policy and
regulatory framework and/or conducting investigations thereof, as
requested by competent authorities with the assistance, if deemed
necessary, of experts from within the institution such as experts
from the Internal Audit function, Legal Services Department,
Information Security Department or Fraud Risk Management unit.
Investigating and reporting to competent authorities' incidents
of non-compliance with the CBC Directive within one month of
identification and mitigating actions to prevent a recurrence of
similar incidents within two months of identification of the
incident.
Regulatory compliance risks are reported promptly to senior
management and the management body in accordance with the
guidelines of the CBC Directive.
5.8 Insurance risk and re-insurance risk
The Group, through its subsidiaries EuroLife Ltd ('EuroLife')
and General Insurance of Cyprus Ltd ('GIC'), provides life
insurance and non-life insurance services, respectively, and is
exposed to certain risks specific to these businesses. Insurance
events are unpredictable and the actual number and amount of claims
and benefits will vary from year to year from the estimate
established using actuarial and statistical techniques. Insurance
risk therefore is the risk that an insured event under an insurance
contract occurs and uncertainty over the amount and the timing of
the resulting claim exists.
The above risk exposure is mitigated by the Group through the
diversification across a large portfolio of insurance contracts.
The variability of risks is also reduced by careful selection and
implementation of underwriting strategy guidelines, as well as the
use of reinsurance arrangements. Although the Group has reinsurance
coverage, it is not relieved of its direct obligations to
policyholders and is thus exposed to credit risk with respect to
ceded insurance, to the extent that any reinsurer is unable to meet
the obligations assumed under such reinsurance arrangements.
For that reason, the creditworthiness of reinsurers is evaluated
by considering their solvency and credit rating and reinsurance
arrangements are monitored and reviewed to ensure their adequacy as
per the reinsurance policy. In addition, counterparty risk
assessment is performed on a frequent basis.
Both EuroLife and GIC perform their annual stress tests (ORSA)
which aim to ensure, among others, the appropriate identification
and measurement of risks, an appropriate level of internal capital
in relation to each company's risk profile, and the application and
further development of suitable risk management and internal
control systems.
5. Other Principal Risks and uncertainties (continued)
5.9 Climate Risk
Climate risk is a growing consideration for financial
institutions given the increasing effects of climate change
globally and the sharp regulatory focus on addressing the resultant
risks. The Group' s businesses, operations and assets could be
affected by climate-related and environmental (C&E) risks over
the short, medium and long term. The Group is committed to
integrate C&E risk considerations into all relevant aspects of
the decision-making, governance, strategy and risk management and
has taken the necessary steps to achieve this.
The Group applies the definition used in the Task Force on
Climate-related Financial Disclosures (TCFD) for C&E risks
whereby climate-related risks are divided into two major
categories: (1) risks related to the transition to a lower-carbon
economy (transition risks) and (2) risks related to the physical
impacts of climate change (physical risks).
Physical risk refers to the financial impact of a changing
climate, including more frequent extreme weather events and gradual
changes in climate, as well as of environmental degradation, such
as air, water and land pollution, water stress, biodiversity loss
and deforestation. Physical risk is categorised as "acute" when it
arises from extreme events, such as droughts, floods and storms,
and "chronic" when it arises from progressive shifts, such as
increasing temperatures, sea-level rises, water stress,
biodiversity loss, land use change, habitat destruction and
resource scarcity. This can directly result in, for example, damage
to property or reduced productivity, or indirectly lead to
subsequent events, such as the disruption of supply chains.
Transition risk refers to an institution's financial loss that
can result, directly or indirectly, from the process of adjustment
towards a lower-carbon and more environmentally sustainable
economy. This could be triggered, for example, by a relatively
abrupt adoption of climate and environmental policies,
technological progress or changes in market sentiment and
preferences.
Accelerating climate change could lead to sooner than
anticipated physical risk impacts to the Group and the wider
economy and there is uncertainty in the scale and timing of
technology, commercial and regulatory changes associated with the
transition to a low carbon economy.
The Group has put in place targets which set transparent
ambitions on its climate strategy and decarbonization of its
operations and portfolio aiming to achieve the transition to a net
zero economy by 2050. An overall ESG strategy and working plan is
thus in place to facilitate these ambitions and address ECB
expectations.
A dedicated ESG team, RMD as well as other resources have been
mobilised across the Group and are engaged in various streams of
work such as the measuring of the own and financed emissions, the
integration of C&E risk in the risk management framework and
the enhancement of green products offering.
Further information on C&E risks and its risk management is
provided in the ESG Disclosures 2022 that form part of the Group's
Annual Financial Report for 2022, within part A 'Task Force on
Climate-related Financial Disclosures (TCFD)'.
6. Capital management
The primary objective of the Group's capital management is to
ensure compliance with the relevant regulatory capital requirements
and to maintain healthy capital adequacy ratios to cover the risks
of its business and support its strategy and maximise shareholders'
value.
The capital adequacy framework, as in force, was incorporated
through the Capital Requirements Regulation (CRR) and Capital
Requirements Directive (CRD) which came into effect on 1 January
2014 with certain specified provisions implemented gradually. The
CRR and CRD transposed the new capital, liquidity and leverage
standards of Basel III into the European Union's legal framework.
CRR establishes the prudential requirements for capital, liquidity
and leverage for credit institutions. It is directly applicable in
all EU member states. CRD governs access to deposit-taking
activities and internal governance arrangements including
remuneration, board composition and transparency. Unlike the CRR,
member states were required to transpose the CRD into national law
and national regulators were allowed to impose additional capital
buffer requirements.
On 27 June 2019, the revised rules on capital and liquidity
(Regulation (EU) 2019/876 (CRR II) and Directive (EU) 2019/878 (CRD
V)) came into force. As an amending regulation, the existing
provisions of CRR apply, unless they are amended by CRR II. Certain
provisions took immediate effect (primarily relating to Minimum
Requirement for Own Funds and Eligible Liabilities (MREL)), but
most changes became effective as of June 2021. The key changes
introduced consist of, among others, changes to qualifying criteria
for Common Equity Tier 1 (CET1), Additional Tier 1 (AT1) and Tier 2
(T2) instruments, introduction of requirements for MREL and a
binding Leverage Ratio requirement (as defined in the CRR) and a
Net Stable Funding Ratio (NSFR).
The amendments that came into effect on 28 June 2021 are in
addition to those introduced in June 2020 through Regulation (EU)
2020/873, which among others, brought forward certain CRR II
changes in light of the COVID-19 pandemic. The main adjustments of
Regulation (EU) 2020/873 that had an impact on the Group's capital
ratio relate to the acceleration of the implementation of the new
SME discount factor (lower RWAs), extending the IFRS 9 transitional
arrangements and introducing further relief measures to CET1
allowing to fully add back to CET1 any increase in ECL recognised
in 2020 and 2021 for non-credit impaired financial assets and
phasing in this starting from 2022 (phasing in at 25% in 2022 and
50% in 2023) and advancing the application of prudential treatment
of software assets as amended by CRR II (which came into force in
December 2020). In addition, Regulation (EU) 2020/873 introduced a
temporary treatment of unrealized gains and losses on exposures to
central governments, to regional governments or to local
authorities measured at fair value through other comprehensive
income which the Group elected to apply and implemented from the
third quarter of 2020. This temporary treatment was in effect until
31 December 2022.
In October 2021, the European Commission adopted legislative
proposals for further amendments to the 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. The 2021 Banking Package
includes:
-- a proposal for a Regulation (sometimes known as 'CRR III') to
make amendments to CRR with regard to (amongst other things)
requirements on credit risk, credit valuation adjustment risk,
operational risk, market risk and the output floor;
-- a proposal for a Directive (sometimes known as 'CRD VI') to
make amendments to CRD with regard to (amongst other things)
requirements on supervisory powers, sanctions, third-country
branches and ESG risks; and
-- a proposal for a Regulation to make amendments to CRR and the
BRRD with regard to (amongst other things) requirements on the
prudential treatment of G-SII groups with a multiple point of entry
resolution strategy and a methodology for the indirect subscription
of instruments eligible for meeting the MREL requirements.
The 2021 Banking Package is subject to amendment in the course
of the EU's legislative process; and its scope and terms may change
prior to its implementation. In addition, 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.
6. Capital management (continued)
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, and the 2021 Banking Package is
currently in the final stage of the EU legislative process. It is
expected that the 2021 Banking Package will come in force on 1
January 2025; and certain measures are expected to be subject to
transitional arrangements or to be phased in over time.
The CET1 ratio of the Group as at 30 June 2023 stands at 16.0%
and the Total Capital ratio at 21.1% on a transitional basis. The
ratios as at 30 June 2023 include reviewed profits for the six
months ended 30 June 2023 and an accrual for an estimated final
dividend at a payout ratio of 30% of the Group Adjusted Profit
after tax for the period, which represents the low-end range of the
Group's approved dividend policy. As per the latest SREP decision,
any dividend distribution is subject to regulatory approval. Such
dividend accrual does not constitute a binding commitment for a
dividend payment nor does it constitute a warranty or
representation that such a payment will be made. Group Adjusted
Profit after tax 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. For Capital Requirements Regulation
(CRR) purposes a payout of 50% of the Group's adjusted recurring
profitability for the period, the high-end of the payout range, is
prescribed, corresponding to a CET1 ratio of 15.6% and a Total
Capital Ratio of 20.7% as at 30 June 2023.
30 June
Minimum CET1 Regulatory Capital Requirements 202 3 202 2
Pillar I - CET1 Requirement 4.50% 4.50%
-------- -------
Pillar II - CET1 Requirement 1.73% 1.83%
-------- -------
Capital Conservation Buffer (CCB)* 2.50% 2.50%
-------- -------
Other Systematically Important Institutions
(O-SII) Buffer** 1.50% 1.25%
-------- -------
Countercyclical Buffer (CcyB) 0.02% 0.02%
-------- -------
Minimum CET1 Regulatory Requirements 10.26% 10.10%
======== =======
* Fully phased in as of 1 January 2019
** Fully phased in as of 1 January 2023
30 June
Minimum Total Capital Regulatory Requirements 202 3 202 2
Pillar I - Total Capital Requirement 8.00% 8.00%
-------- -------
Pillar II - Total Capital Requirement 3.08% 3.26%
-------- -------
Capital Conservation Buffer (CCB) * 2.50% 2.50%
-------- -------
Other Systematically Important Institutions
(O-SII) Buffer** 1.50% 1.25%
-------- -------
Countercyclical Buffer (CcyB) 0.02% 0.02%
-------- -------
Minimum Total Capital Regulatory Requirements 15.10% 15.03%
======== =======
* Fully phased in as of 1 January 2019
** Fully phased in as of 1 January 2023
The minimum Pillar I total capital requirement ratio of 8.00%
may be met, in addition to the 4.50% CET1 requirement, with up to
1.50% by AT1 capital and with up to 2.00% by T2 capital.
The Group is also subject to additional capital requirements for
risks which are not covered by the Pillar I capital requirements
(Pillar II add-ons). Applicable Regulation allows a part of the
said Pillar II Requirements (P2R) to be met also with AT1 and T2
capital and does not require solely the use of CET1.
6. Capital management (continued)
In the context of the annual SREP conducted by the ECB in 2022
and based on the final SREP decision received in December 2022
effective from 1 January 2023, the P2R has been revised to 3.08%,
compared to the previous level of 3.26%. The revised P2R includes a
revised P2R add-on of 0.33%, compared to the previous level of
0.26%, relating to ECB's prudential provisioning expectations. The
P2R add-on is dynamic and can vary on the basis of in-scope NPEs
and level of provisioning. When disregarding the P2R add-on
relating to ECB's prudential provisioning expectations, the P2R is
reduced from 3.00% to 2.75%. As a result, the Group's minimum
phased in CET1 capital ratio and Total Capital ratio requirements
were reduced when disregarding the phasing in of the O-SII Buffer.
The Group's minimum phased in CET1 capital ratio requirement was
set at 10.26%, comprising a 4.50% Pillar I requirement, a P2R of
1.73%, the CCB of 2.50%, the O-SII Buffer of 1.50% (fully phased in
on 1 January 2023) and the CcyB of 0.02%. The Group's minimum
phased in Total Capital requirement was set at 15.10%, 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
P2R of 3.08%, the CCB of 2.50%, the O-SII Buffer of 1.50% and the
CcyB of 0.02%. The ECB has also maintained the P2G unchanged.
The Group is subject to a 3% Pillar I Leverage Ratio
requirement.
The above minimum ratios apply for both BOC PCL and the
Group.
The capital position of the Group and BOC PCL as at 30 June 2023
exceeds both their Pillar I and their Pillar II add-on capital
requirements. However, the Pillar II add-on capital requirements
are a point-in-time assessment and therefore are subject to change
over time.
The CBC, in accordance with the Macroprudential Oversight of
Institutions Law of 2015, sets, on a quarterly basis, the CcyB
rates in accordance with the methodology described in this law. The
CcyB for the Group as at 30 June 2023 has been calculated at
approximately 0.02%.
On 30 November 2022, the CBC, following the revised methodology
described in its macroprudential policy, decided to increase the
CcyB rate from 0.00% to 0.50% of the total risk exposure amount in
Cyprus of each licensed credit institution incorporated in Cyprus.
The new rate of 0.50% must be observed as from 30 November 2023.
Moreover, on 2 June 2023, the CBC, announced its decision to raise
the CcyB rate to 1.00% of the total risk exposure amount in Cyprus
of each authorised credit institution incorporated in Cyprus. The
said increase of the CcyB is effective as from 2 June 2024. Based
on the above, the CcyB for the Group is expected to increase
further.
In accordance with the provisions of this law, the CBC is also
the responsible authority for the designation of banks that are
Other Systemically Important Institutions (O-SIIs) and for the
setting of the O-SII Buffer requirement for these systemically
important banks. BOC PCL has been designated as an O-SII and since
November 2021 the O-SII Buffer has been set to 1.50%. This buffer
was phased in gradually, having started from 1 January 2019 at
0.50%. The O-SII Buffer as at 31 December 2022 stood at 1.25% and
was fully phased in on 1 January 2023.
The EBA final guidelines on SREP and supervisory stress testing
and the Single Supervisory Mechanism's (SSM) 2018 SREP methodology
provide that the own funds held for the purposes of Pillar II
Guidance (P2G) cannot be used to meet any other capital
requirements (Pillar I requirement, P2R or the Combined Buffer
Requirement (CBR)), and therefore cannot be used twice.
6. Capital management (continued)
The capital position of the Group and BOC PCL as at the
reporting date (after applying the transitional arrangements) is
presented below:
Regulatory capital Group BOC PCL
30 June 31 December 30 June 31 December
2023 (1) 2022(3) 2023 (2) 2022(3)
(restated)
(restated)
----------- ------------ ----------- -------------
EUR000 EUR000 EUR000 EUR000
----------- ------------ ----------- -------------
Transitional Common Equity
Tier 1 (CET1 )(4) 1,638,707 1,540,292 1,601,417 1,509,056
----------- ------------ ----------- -------------
Transitional Additional Tier
1 capital (AT1) 228,250 220,000 228,250 220,000
----------- ------------ ----------- -------------
Tier 2 capital (T2) 300,000 300,000 300,000 300,000
----------- ------------ ----------- -------------
Transitional total regulatory
capital 2,166,957 2,060,292 2, 129,667 2,029,056
=========== ============ =========== =============
Risk weighted assets - credit
risk(5) 9,245,884 9,103,330 9,229,649 9,150,831
----------- ------------ ----------- -------------
Risk weighted assets - market - - - -
risk
----------- ------------ ----------- -------------
Risk weighted assets - operational
risk 1,010,885 1,010,885 997,720 997,720
----------- ------------ ----------- -------------
Total risk weighted assets 10,256,769 10,114,215 10,227,369 10,148,551
=========== ============ =========== =============
Transitional % % % %
----------- ------------ ----------- -------------
Common Equity Tier 1 ratio 16.0 15.2 15.7 14.9
----------- ------------ ----------- -------------
Total capital ratio 21.1 20.4 20.8 20.0
----------- ------------ ----------- -------------
Leverage ratio 7.3 7.0 7.2 6.9
----------- ------------ ----------- -------------
(1.) Includes reviewed profits for the six months ended 30 June
2023 and an accrual for dividend at a payout ratio of 30% of the
Group Adjusted Profit after tax for the period, which represents
the low-end range of the Group's approved dividend policy. As per
the latest SREP decision, any dividend distribution is subject to
regulatory approval. Such dividend accrual does not constitute a
binding commitment for a dividend payment nor does it constitute
a warranty or representation that such a payment will be made. For
Capital Requirements Regulation (CRR) purposes a payout of 50% of
the Group's adjusted recurring profitability for the period, the
high-end of the payout range, is prescribed, corresponding to a
CET1 ratio of 15.6%, a Total Capital ratio of 20.7% and a Leverage
ratio of 7.1% as at 30 June 2023.
(2.) Includes unaudited/un-reviewed profits for the six months
ended 30 June 2023 and an accrual for dividend at a payout ratio
of 30% of the Group Adjusted Profit after tax for the period, which
represents the low-end range of the Group's approved dividend policy.
As per the latest SREP decision, any dividend distribution is subject
to regulatory approval. Such dividend accrual does not constitute
a binding commitment for a dividend payment nor does it constitute
a warranty or representation that such a payment will be made. For
Capital Requirements Regulation (CRR) purposes a payout of 50% of
the Group's adjusted recurring profitability for the period, the
high-end of the payout range, is prescribed corresponding to a CET1
ratio of 15.3%, a Total Capital ratio of 20.4% and a Leverage ratio
of 7% as at 30 June 2023.
(3.) The 2022 capital ratios as previously reported in the 2022
Annual Financial Report and 2022 Pillar III Disclosures have been
restated following the approval by the ECB for the payment of a
dividend in April 2023 and recommendation by the Board of Directors
to the shareholders for approval at the Annual General Meeting on
26 May 2023, of a final dividend in respect of earnings for the
year ended 31 December 2022 which amounts to an aggregate distribution
of EUR22,310 thousand.
(4.) CET1 includes regulatory deductions, comprising, amongst others,
intangible assets amounting to EUR27,227 thousand for the Group
and EUR18,310, thousand for BOC PCL as at 30 June 2023 (31 December
2022: EUR30,421 thousand for the Group and EUR25,445 thousand for
BOC PCL). As at 30 June 2023 an amount of EUR11,475 thousand, relating
to intangible assets, is considered prudently valued for CRR purposes
and is not deducted from CET1 (31 December 2022: EUR12,934 thousand).
(5.) Includes Credit Valuation Adjustments (CVA).
6. Capital management (continued)
The capital ratios of the Group and BOC PCL as at the reporting
date on a fully loaded basis are presented below:
Fully loaded Group BOC PCL
30 June 31 December 30 June 31 December
2023(1,3) 2022(4,5) 2023(2,3) 2022(4,5)
(restated) (restated)
------------ ------------ ------------ ------------
% % % %
------------ ------------ ------------ ------------
Common Equity Tier 1 ratio 15.9 14.5 15.6 14.1
------------ ------------ ------------ ------------
Total capital ratio 21.1 19.6 20.8 19.3
------------ ------------ ------------ ------------
Leverage ratio 7.3 6.7 7.1 6.5
------------ ------------ ------------ ------------
(1.) Includes reviewed profits for the six months ended 30 June
2023 and an accrual for dividend at a payout ratio of 30% of the
Group Adjusted Profit after tax for the period, which represents
the low end range of the Group's approved dividend policy. As
per the latest SREP decision, any dividend distribution is subject
to regulatory approval. Such dividend accrual does not constitute
a binding commitment for a dividend payment nor does it constitute
a warranty or representation that such a payment will be made.
For Capital Requirements Regulation (CRR) purposes a payout of
50% of the Group's adjusted recurring profitability for the period,
the high end of the payout range, is prescribed corresponding
to a fully loaded CET1 ratio of 15.5%, a fully loaded Total Capital
ratio of 20.7% and a fully loaded Leverage ratio of 7.1% as at
30 June 2023.
2 Includes unaudited/un-reviewed profits for the six months ended
30 June 2023 and an accrual for dividend at a payout ratio of
30% of the Group Adjusted Profit after tax for the period, which
represents the low end range of the Group's approved dividend
policy. As per the latest SREP decision, any dividend distribution
is subject to regulatory approval. Such dividend accrual does
not constitute a binding commitment for a dividend payment nor
does it constitute a warranty or representation that such a payment
will be made. For Capital Requirements Regulation (CRR) purposes
a payout of 50% of the Group's adjusted recurring profitability
for the period, the high end of the payout range, is prescribed
corresponding to a fully loaded CET1 ratio of 15.2%, a fully loaded
Total Capital ratio of 20.4% and a fully loaded Leverage ratio
of 7% as at 30 June 2023.
(3) IFRS 9 fully loaded as applicable.
(4) IFRS 9 and application of the temporary treatment of certain
FVOCI instruments in accordance with Article 468 of CRR fully
loaded as applicable.
(5) The 2022 capital ratios as previously reported in the 2022
Annual Financial Report and 2022 Pillar III Disclosures have been
restated following the approval by the ECB for the payment of
a dividend in April 2023 and recommendation by the Board of Directors
to the shareholders for approval at the Annual General Meeting
on 26 May 2023, of a final dividend in respect of earnings for
the year ended 31 December 2022 which amounts to an aggregate
distribution of EUR22,310 thousand.
During the six months ended 30 June 2023, CET1 ratio was
negatively affected mainly by the phasing in of IFRS 9 and other
transitional adjustments on 1 January 2023, provisions and
impairments, the payment of AT1 coupon, AT1 refinancing costs,
other movements and the increase in risk-weighted assets and was
positively affected by pre-provision income as well as the EUR50
million dividend distributed to BOC PCL in February 2023 by the
life insurance subsidiary. As a result, the CET1 ratio (on a
transitional basis) has increased by c.75 bps during the six months
ended 30 June 2023, whereas on a fully loaded basis the ratio has
increased by c.150 bps.
In addition, 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 17
bps on the Group's CET1 ratio as at 30 June 2023, decreased from
26bps on 31 December 2022 mainly due to impairment recognised
during the period.
In June 2023, the Company successfully launched and priced an
issue of EUR220 million Fixed Rate Reset Perpetual Additional Tier
1 Capital Securities (the 'New Capital Securities').
The proceeds of the issue of the New Capital Securities were
on-lent by the Company to BOC PCL to be used for general corporate
purposes. The on-loan qualifies as Additional Tier 1 capital for
BOC PCL.
At the same time, the Company invited the holders of its
outstanding EUR220 million Fixed Rate Reset Perpetual Additional
Tier 1 Capital Securities callable in December 2023 to tender the
previous AT1 issue in 2018 ('Existing Capital Securities') at a
purchase price of 103% of the principal amount. As at 30 June 2023
Existing Capital Securities of a nominal amount of approximately
EUR8 million remaining outstanding, are included in Tier 1 and
Total Capital, the impact of which is c.8 bps on the Group's Total
Capital Ratio as at 30 June 2023.
6. Capital management (continued)
Transitional arrangements
The Group has elected in prior years to apply the
'static-dynamic' approach in relation to the transitional
arrangements for the initial application of IFRS 9 for regulatory
capital purposes, where the impact on the impairment amount from
the initial application of IFRS 9 on the capital ratios is phased
in gradually. The 'static-dynamic' approach allows for
recalculation of the transitional adjustment periodically on Stage
1 and Stage 2 loans, to reflect the change of the ECL provisions
within the transition period. The Stage 3 ECL remained static over
the transition period as per the impact upon initial
recognition.
The amount added each year for the 'static component' was
decreasing based on a weighting factor until the impact of IFRS 9
was fully absorbed back to CET1 at the end of the five years, with
the impact being fully phased-in (100%) on 1 January 2023. The
cumulative impact on the capital position as at 31 December 2022
was 75%, with the impact being fully phased in (100%) on 1 January
2023.
Following the June 2020 amendments to the CRR in relation to the
dynamic component a 100% add back of IFRS 9 provisions was allowed
for the years 2020 and 2021, reducing to 75% in 2022, to 50% in
2023 and to 25% in 2024. This will be fully phased in (100%) by 1
January 2025. The calculation at each reporting period is against
Stage 1 and Stage 2 provisions as at 1 January 2020, instead of 1
January 2018.
In relation to the temporary treatment of unrealized gains and
losses for certain exposures measured at fair value through other
comprehensive income, Regulation EU 2020/873 allows institutions to
remove from their CET1 the amount of unrealized gains and losses
accumulated since 31 December 2019, excluding those of financial
assets that are credit impaired. The relevant amount was removed at
a scaling factor of 100% from January to December 2020, reduced to
70% from January to December 2021 and to 40% from January to
December 2022. The Group applied the temporary treatment from the
third quarter of 2020.
Capital requirements of subsidiaries
The insurance subsidiaries of the Group, the General Insurance
of Cyprus Ltd and Eurolife Ltd, comply with the requirements of the
Superintendent of Insurance including the minimum solvency ratio.
The regulated investment firm (CIF) of the Group, The Cyprus
Investment and Securities Corporation Ltd (CISCO), complies with
the minimum capital adequacy ratio requirements. From 2021 the new
prudential regime for Investment Firms ('IFs') as per the
Investment Firm Regulation (EU) 2019/2033 ('IFR') on the prudential
requirements of IFs and the Investment Firm Directive (EU)
2019/2034 ('IFD') on the prudential supervision of IFs came into
effect. Under the new regime CISCO has been classified as
Non-Systemic 'Class 2' company and is subject to the new IFR/IFD
regime in full. In February 2023, the activities of the regulated
UCITS management company of the Group, BOC Asset Management Ltd,
were absorbed by CISCO and BOC Asset Management Ltd was dissolved
without liquidation. The payment services subsidiary of the Group,
JCC Payment Services Ltd, complies with the regulatory capital
requirements.
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 came into effect and was
required to be transposed into national law. BRRD II was transposed
and implemented in Cyprus law in May 2021. In addition, certain
provisions on MREL have been introduced in CRR which also came into
force on 27 June 2019 as part of the reform package and took
immediate effect.
6. Capital management (continued)
Minimum Requirement for Own Funds and Eligible Liabilities
(MREL) (continued)
In February 2023, BOC PCL received notification from the Single
Resolution Board (SRB) of the final decision for the binding MREL
for BOC PCL, determined as the preferred resolution point of entry.
As per the decision, the final MREL requirement was set at 24.35%
of risk weighted assets and 5.91% of Leverage Ratio Exposure (LRE)
(as defined in the CRR) and must be met by 31 December 2025.
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 BOC PCL to meet the CBR are not
eligible to meet its MREL requirements expressed in terms of
risk-weighted assets. BOC PCL must comply with the MREL requirement
at the consolidated level, comprising BOC PCL and its
subsidiaries.
The MREL ratio(7) as at 30 June 2023, calculated according to
the SRB's eligibility criteria currently in effect and based on
internal estimate, stood at 21.5% of RWAs and at 10.2% of LRE. In
July 2023 BOC PCL proceeded with an issue of EUR350 million senior
preferred notes (the 'Notes'). The Notes comply with the MREL
criteria and expected to contribute towards BOC PCL's MREL
requirements. When accounting for the Notes, BOC PCL's MREL ratio
improves to 24.9% of RWA and 11.4% of 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 4.02% on 30 June
2023 (compared to 3.77% as at 31 December 2022), expected to
increase further on 30 November 2023 following increase in CcyB
from 0.00% to 0.50% of the total risk exposure amounts in Cyprus
and to 1% from June 2024 as announced by Central Bank of
Cyprus.
The MREL ratios as at 30 June 2023 include profits for the six
months ended 30 June 2023 and an accrual for an estimated final
dividend at a payout ratio of 30% of the Group Adjusted Profit
after tax for the period, which represents the low-end range of the
Group's approved dividend policy. For CRR purposes, a payout ratio
of 50% of the Group's adjusted recurring profitability for the
period, the high-end of the payout range of the Group's approved
dividend policy is prescribed, corresponding to an MREL ratio
expressed as a percentage of RWA of 21.1% and MREL ratio expressed
as a percentage of LRE of 10.1% as at 30 June 2023; pro forma for
the Notes issuance MREL ratio expressed as a percentage of RWA
stands at 24.5% and MREL ratio expressed as a percentage of LRE
stands at 11.3%.
When accounting for the Notes issued in July 2023, BOC PCL meets
the final MREL requirement currently set by the SRB well ahead the
compliance date of 31 December 2025. Acknowledging that the MREL
requirement (amount and date) is subject to annual review by the
regulator, BOC PCL continues to evaluate opportunities to optimise
the build-up of its MREL.
(7) The MREL ratio as at 30 June 2023 includes an amount of
approximately EUR8 million representing the nominal amount of
securities remaining outstanding following the tender offer and
open market purchases of the Existing Capital Securities. This
amount contributes approximately 8 basis points to the MREL ratio
expressed as a percentage of RWA and approximately 3 basis points
to the MREL ratio expressed as a percentage of LRE.
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END
IR FIFSETIIAIIV
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August 09, 2023 02:03 ET (06:03 GMT)
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