Bank of Cyprus Holdings Public Limited Company

Good morning, everyone. Thank you for joining our financial results conference call for the period ended 30 September 2024.

I am joined by Eliza Livadiotou, Executive Director of Finance; and Annita Pavlou, Manager, IR and ESG. After my introductory remarks, Eliza will go into more detail on our financial performance and then we will be happy to take your questions both during this conference call and afterwards.

I would like to start by briefly reminding you of our powerful equity story and our core strengths on Slide #3. We are the leading financial group across banking and other financial services in Cyprus, which is a highly liquid and concentrated banking sector, and we operate in a supportive macroeconomic environment.

The Cypriot economy remains strong delivering good growth, proving once again its flexible and resilient characteristics. We have strong levers under our control.

Our diversified business model, our robust asset quality and our strong capital position; all support our commitment for attractive shareholder returns by continuing to deliver sustainable mid-teens ROTE on reported equity over the medium term in a normalized interest rate environment. To demonstrate that, we are targeting distribution for 2024 at the top end of our payout range at 50% market conditions allowing.

Slides 4 and 5 show an overview of the macroeconomic environment. We operate in a strong diversified mainly service-based economy that exhibits continued growth.

Based on the latest projections of the Ministry of Finance, economy growth is now expected to be around 3.7% in 2024, outperforming significantly Eurozone average. This is underpinned by strong tourist activity, lower unemployment, improved public debt to GDP and decelerated inflation.

Let me now deep dive into each element. Tourist activity in the first 9 months of 2024 remained strong and similar to prior year's levels despite the geopolitical uncertainty.

Likewise, tourist receipts for the period January to August 2024 were 5% higher compared to the corresponding period in 2023. Public debt to GDP continued to improve to 71% as of Q2 and remains well below the euro area average with the latest projections indicating that by 2026, public debt to GDP will be below 60%.

The unemployment rate decreased to below 5% in the second quarter and it is considered that the economy operates at almost full employment. Lastly, inflation has now come under control.

In Cyprus, inflation stood at 1.6% in September 2024 and is expected to average around 2.2% for the year. The strength of the Cypriot economy is reflected in its credit rating with the country receiving investment grade rating by 4 credit rating agencies.

Let's now turn to Slide 6, which shows a snapshot of the Q3 financial results. Our strong performance continued in the third quarter.

Net interest income for Q3 remained strong and similar to Q2 despite the beginning of ECB rate cuts. Our cost to income ratio was higher at 35% this quarter reflecting the impact of the full cost of a small-scale voluntary exit plan, but the year-to-date ratio remains on track against our 2024 target of below 35%.

Cost of risk is behaving better than expected and remains well below our normalized provisioning range reflecting the continued robust credit portfolio performance in the third quarter. Overall, the group generated a profit after tax of €131 million.

Moving now to Slide 7. For the seventh consecutive quarter, we delivered a ROTE of over 20% despite the strong growth in the equity base.

Our earnings per share at €0.29 has driven strong growth in our tangible book value, up 20% year-on-year to €5.56. We are delivering on shareholder remuneration.

We started with a symbolic dividend payout from 2022 earnings and then proceeded with a more meaningful 30% payout ratio from 2023 earnings equivalent to an 8% yield. This distribution corresponded to a fivefold increase in cash dividend which, as mentioned, we have already paid and a share buyback of €25 million currently around 80% complete.

For this year we are targeting a 50% payout ratio out of 2024 earnings, which corresponds to a more than 10% distribution yield based on current share price. It is important to mention that the current regulatory approval requirement for dividend payments is expected to be lifted in January 2025 based on our draft SREP letter.

Turning now to Slide 8, which demonstrates that we track well against the 2024 targets we gave in August. It is clear that the key financial metrics of net interest income, efficiency and asset quality are all well ahead of the upgraded 2024 targets we communicated in August 2024.

All in all, we generated a ROTE of almost 23% and a CET1 generation of 355 basis points on a predistribution level. We have left our targets unchanged for 2024, but to be clear, we expect to beat them.

Let's now turn to Slide 9. Since we updated our guidance in August 2024, the interest rate environment has changed considerably with current forward curves anticipating a faster pace of interest rate cuts compared to what we expected last quarter.

Currently, the market expects the ECB rate at 6-month Euribor to average to around 2.2% reflecting a decline of around 115 basis points on a yearly basis. Using the sensitivity analysis, we estimate that 100 basis points parallel decrease in rates will reduce net interest income by €89 million.

The rate sensitivity will obviously have the biggest impact on our 2025 NII, but there are obviously other positive and negative factors and we will provide you with more precise guidance at our full year results. That said, drivers that may have a negative impact on the net interest income evolution for 2025 includes the speed in deposit repricing, the change in the mix toward term deposits and the full impact of the MREL issuance.

As we embark in a new rate reduction cycle, we are looking to manage the pricing of deposits, but this will not take place overnight. On the other hand, the profile of our deposit book is better than what we anticipated in terms of volume mix and pricing and this is expected to support NII going forward.

Other positive factors include loan volume growth, increased hedging as well as the expansion and rollover of our fixed income portfolio. As shown on Slide 10, despite the lower rate expectations, we reiterate our target of high teens ROTE based on 15% CET1 ratio for 2025 with our mid-teens ROTE range based on reported equity is achievable albeit impacted by the growing equity base.

As previously communicated, we expect to review our distribution policy with the full year 2024 financial results in the context of prevailing market conditions with a view towards converting closer to peer European banks. And as I mentioned earlier, the current regulatory approval requirement for dividend payments is expected to be lifted in January 2025 based on our draft SREP letter.

We remain confident in the group's ability to deliver sustainable mid-teens ROTE over the medium term in a normalized interest rate environment. We will update our detailed financial targets and we will review our distribution policy alongside our full year 2024 financial results.

I will now hand over to Eliza to take you through our financial results for the period in more detail.

Thank you, Panicos, and good morning from me too. Let's now provide more details to the 9 months 2024 highlights with Slide 12.

As the largest financial group in Cyprus, we extended €1.7 billion of new loans in the 9 months, an increase of 9% over the prior year whilst maintaining robust underwriting standards and our gross performing loan book of €10 billion grew by 3% year-to-date. During the first 9 months of the year, we recorded a profit after tax of €401 million equivalent to earnings per share of €0.90 against €0.78 for the corresponding period last year.

Our resilient NII, diversified business model, ample liquidity and healthy asset quality has been pivotal in achieving the strong profitability. On the other hand, our cost base was impacted by inflationary pressures and the small-scale voluntary staff exit plan, but our cost to income ratio for the 9 months remained low at 32%.

On asset quality, our NPE ratio decreased further to 2.4% and coverage increased to 96% following the agreement of a small NPE sale in the third quarter. We're now broadly aligned with the EU banking average.

We maintained high liquidity this quarter with cash balances with central banks representing almost 30% of the group's total assets. Our customer deposits exhibited an increase of 4% and 1% on a yearly and quarterly basis, respectively, to €20 billion.

Moving on to capital metrics. Our regulatory CET1 and total capital ratio stood at 18.6% and 23.7%, respectively.

Including Q3 profitability net of a 50% distribution accrual, the CET1 and total capital ratios increased further to 19.1% and 24.3%, respectively. Since the beginning of the year, we have generated 355 basis points of organic capital achieving early our target to deliver over 300 basis points before distributions.

In the third quarter, we successfully executed our plan to list on the Athens Stock Exchange in conjunction with the delisting from the LSE. As stated previously, we expect the ATHEX listing to improve the liquidity of the bank's shares as well as the bank's market visibility making the shares more accessible to a new pool of investors.

Slide 13 now shows the detailed income statement of the group. I will not go through every line here since I will be discussing the drivers of our profitability in the following slides.

So let's start with net interest income evolution and its key drivers on Slide 15. Our net interest income for the 9 months stood at €624 million, up 9% year-on-year benefiting from higher rates, high liquidity and the well-managed cost of deposits.

On a quarterly basis, our net interest income was largely unchanged versus prior quarter at €204 million declining by only 1% Q-on-Q as the ECB deposit rate cut in June was largely offset by the increased liquidity in the quarter following the continued increase in customer deposits. We expect a further modest decline in the fourth quarter reflecting the further rate cuts in September and October.

The NIM and NII dynamics are explained by a number of factors. Firstly, the effective yield on liquids, which has decreased by 26 basis points mainly reflecting the lower ECB depo rate.

Secondly, the gradual repricing of the loan portfolio. If you remember, 50% of our loan book is linked to Euribor and the ECB MRO rate.

The effective yield on the performing book declined modestly by 4 basis points. Thirdly, better than expected deposit trends facilitated by the very liquid secured banking sector.

This is evidenced by the evolution of our cost of deposits, which remained low at 37 basis points. And lastly, our cost of wholesale funding, which reflects the full impact of the issuance of green senior preferred notes at the end of April at a coupon rate of 5% per annum.

Now turning to Slide 16 on our hedging activity. Since 2023, we have been taking actions to position our balance sheet towards a declining interest rate environment and to reduce our NII sensitivity via hedging.

In the first 9 months of 2024, we added €4 billion of hedging. Overall, since 2023, the group has carried out hedging of €8.4 billion representing around 35% of the group's interest-earning assets.

These hedging actions include received fixed interest rate swaps, further investment in fixed rate bonds and reverse repos. We believe that the hedging we have carried out so far will support future revenues and most importantly, will result in lower rate sensitivity.

As of 30th September, the hedging carried an average yield of 2.9% Simultaneously, about 1/4 of the group's loan portfolio is linked with the bank's base rate, which provides a natural hedge against the cost of deposit. Overall, these actions have led to a reduction in NII sensitivity to a parallel shift in interest rates by 100 basis points by almost €40 million since December 2022.

On Slide 17, you can see that deposits increased by 1% on the quarter and 4% on the prior year to €20.0 billion. We are encouraged that the shift in deposit mix towards time and notice deposits remained flat Q-on-Q at 33% of the total.

And if you look at the breakdown of our €20 billion deposit base, you can see on the bottom left chart that 81% of our deposits are from Cypriot residents. Additionally, deposit costs remained well managed remaining low at 37 basis points.

This reflects the very liquid secured banking sector as well as our market position and strong franchise. As a reminder, the sensitivity to each 10 basis point change in cost of deposit is equivalent to around €20 million of NII impact while the percentage point change in the deposit mix impacts NII by around €2 million.

Moving to Slide 18 on new lending. The group extended €1.7 billion of new loans in the first 9 months of '24, up 9% on the prior year whilst maintaining strict lending criteria.

As a result, the gross performing loan book has now grown by 3% since the beginning of the year to €10 billion, in line with our target. We have of course maintained our strong underwriting standards as 99% of new exposures written since 2016 remain performing.

Slide 19 shows our progress on the fixed income portfolio. As of 30th September, our fixed income portfolio stood at €4.1 billion, up by 16% on the prior year representing 16% of total assets.

The majority of the portfolio is measured at amortized cost and is held to maturity. Hence, no fair value of gains or losses are recognized in the group's income statement or equity.

The portfolio is characterized of high quality with average maturity of 3 to 4 years and is highly diversified. Slide 20 provides a summary of non-NII.

On this slide, we would like to highlight that noninterest income remains an important driver of the group's profitability covering more than 75% of total operating expenses for the third quarter. Net fee and commission income remained broadly flat on the prior quarter and FX and other income benefited by one-off revaluation gains of €5.5 million on financial instruments.

I would also like to remind you that FX gains are volatile profit contributors. Similarly, our net insurance result was also broadly flat on the prior quarter.

And our insurance companies, EuroLife and GI, are respectively key leading players in the life and general insurance business in Cyprus and have been providing recurring and improving income. EuroLife's regular income was up 12% in the 9 months while General Insurance gross written premiums rose by 2% over the same period, both reflecting increased business volumes.

Moving now to Slide 26, which provides an overview of operating expenses. This quarter our cost base saw an increase of 14% on the prior quarter primarily impacted by the small-scale targeted voluntary staff exit plan announced in Q3 as well as higher professional fees on ATHEX listing and market expenses on the new reward scheme to reward performing borrowers.

As a result, our cost to income ratio stood at 35% for the third quarter. Overall, our cost to income ratio for the 9 months remained low at 32% supported by strong revenue, partially offset by higher cost base impacted by inflation.

We remain on track to deliver on our sub 35% cost to income ratio for the full year. Turning now to Slide 27 on cost of risk.

The continued robust performance of the credit portfolio along with the improved macroeconomic assumptions in the first 9 months of the year drove our cost of risk down to 29 basis points. On a quarterly basis, cost of risk stood at 26 basis points, down 8 basis points Q-on-Q.

Additionally, we incurred impairment of around €14 million in the third quarter relating to the revenue stock properties due to impairments on large specific illiquid properties. During Q3, there was a reversal in provision for pending litigation, claims and other matters of €4 million relating mainly to the progress of cases on existing litigation.

Let's now move to Slide 29 and capital. The bank's capital position remains robust.

Our regulatory CET1 and total capital stood at 18.6% and 23.7%, respectively. On a predistribution level, our CET1 ratio increased further to 20.9% reflecting organic CET1 generation of 355 basis points, already above our full year target to deliver over 300 basis points CET1 generation predistributions per annum.

As mentioned earlier, for 2024 we are now targeting a distribution at 50% payout ratio at the top end of our distribution policy. And we are delighted that the current regulatory requirement for dividend is expected to be lifted in January 2025 based on our draft SREP letter.

Moving now to Slide 30 and asset quality. We have achieved our 2024 NPE target.

The NPE ratio decreased to 2.4% as of 30th September pro forma for the NPE sales agreement, which places us in line with the EU sector. Our NPE coverage improved to 96%.

When including tangible collateral, NPEs are fully covered. Slide 31 on our Real Estate Management Unit.

REMU is our engine to manage the stock of properties acquired from defaulted borrowers. As you can see, REMU repossessed stock decreased by almost €100 million during the first 9 months of the year to €764 million as at September.

With balance sheet derisking completed, the inflows are expected to remain at extremely low levels and our focus will be on delivering sales. We remain on track to achieve our 2025 target of reducing the revenue stock to around €500 million and we continue to sell on average close to independently assessed open market values and above book values.

I would now like to hand back to Panicos for his closing remarks.

Thank you, Eliza. Moving to Slide 33.

In the first 9 months of 2024, we delivered a ROTE of 22.9% and we're tracking ahead of our 2024 target. We understand that the interest rate environment has moved since we guided in August 2024; but despite that, we confirm our target of high teens ROTE on 15% CET1 ratio for 2025.

And we remain confident that the group can generate sustainable mid-teens ROTE over the medium term in a normalized interest rate environment. In this period, we are targeting a distribution at the higher end of our payout range of 50% for 2024 subject of course to market conditions.

This is equivalent to a more than 10% dividend yield based on current share price. This concludes our presentation and we will now open the floor for your questions.

Congratulations on the results. My first question is regarding the lifting the requirement for SSM approval on dividend.

Can you update us a bit on the process? Is it now just a notification that will be required for distribution approval?

That's my first question. My second question is regarding the NII and deposit rates.

We see deposit rate -- when would you expect the time deposit rates to peak? We see still time deposit rates going up despite the declining rate environment.

Which quarter do you think we're going to see a peak in the level of time deposit rates? And on this front, maybe a bit on NII.

I remember in your August target, you were anticipating around €700 million NII in 2025 in your guidance. Would you now maybe expect something a bit lower in 2025, but better in 2026 as there is a faster decline in rates?

Those were my questions.

Okay. Regarding the lifting of approval from the ECB for dividend payment, yes, we expect this.

This is according to our draft SREP letter starting from 1st of January 2025 and yes, it will be converted into prenotification. Regarding the cost of deposit rates, yes, we see the volume going up.

The cost although I cannot be 100% certain, I expect these levels of cost to be around the peak levels and then we'll start gradually seeing declines starting from next year. So Eliza, on the NII?

On NII, we haven't specifically guided for 2025. But as we always do, we've been very transparent in our assumptions on the sensitivity in the debt, it's on Page 16.

So I suggest that you do your own math on the basis of also your views on where you think rate will land. Of course always remember that our starting point is incredibly high in terms of returns, in terms of ROTE.

And the end game on steady state rates will also compare favorably to peers given the very high starting point. The other thing I want to mention is volumes of deposits.

This have pleasantly surprised us during this year and have been a positive catalyst to P&L, to NII and returns and that's expected. That's a positive, let's say, contributor to NII going into 2025.

Great. One follow-up regarding the distribution.

Is the mix that we saw in the previous year between cash and buybacks, should we expect something similar going forward or is that to be determined every year differently?

Okay. There is no decision about the final mix between buybacks and dividends, but you should expect that the cash dividend payment will be the main source of shareholder remuneration.

I have a couple of them, if I may. First on NII follow-up because we've seen in the quarter, you have had strong contribution support from the excess liquidity.

But as long as ECB rates could drop, how would you manage that contribution drops? And furthermore, how do you expect that excess liquidity that you are collecting to be used going forward?

And second question is on the voluntary exit plan. How do you see the cost performing and what's the impact that you will have from that plan?

Okay. On the exit plan, this is part of our ongoing cost planning so that we manage future, let's say, cost annual increments.

The payback period is around 2.4 years. For 2024, we expect the cost to income ratio to be in line with what we have guided the market and going forward, we'll provide more clarity with our full year results.

But for 2025, we expect the cost to income to be broadly in line with our previous guidance around 40%.

And on liquidity and the sensitivity of that, first of all, you should all remember that excess liquidity for us comes from obviously deposits and it's profitable. Both legs of our balance sheet are profitable.

Both loans and deposits are profitable at positive rates for Banco Cyprus given the low cost of deposits and the low pass-through level. Therefore, the excess liquidity is a positive contributor to both NII and ROTE.

On the sensitivity, I would refer you back to the sensitivity slide in the deck and the fact that on a static balance sheet, a 25 basis points parallel curve move leads to a €6 million per quarter impact on NII from the liquids.

I've got 2. You mentioned the stable evolution of time deposits, which are around 1/3 of your deposit base and I think you previously were assuming that this would increase to around 43% by year-end.

Is that still the case and does that obviously suggest upside to guidance for this year? You also were previously guiding to some low single-digit loan growth.

Is that still the expectation for this year and into the next? My second question is to do with the dividend process, which is obviously good news and I imagine that helps with capital optionality, but I'd be interested in your thoughts.

You also operate with a lot of excess capital. So I was just interested to hear what your current thinking is on how you prioritize or how you plan to prioritize this next year?

Ben, can you repeat the last question? We didn't hear it very well.

It was just on the dividend approval process in terms of how you're going to prioritize the excess capital -- deploying excess capital next year, just what your thoughts are around that.

Okay. Starting from the mix of deposit between time and current.

Yes, things are running better than we have initially estimated and we expect this current mix to be similar with the year-end, which means 33% to 66%, which means it's better than we have initially estimated during our previous results guidance in August this year. In terms of loan growth, yes, low single-digit growth per annum is our basic plan for this year and the years to come, but we'll provide more clarity for the years to come with our full year results.

On prioritization of the dividend versus other options, I mean returning back -- distributing back to our shareholders remains a priority. And in terms of prioritizing between dividend and buyback, inevitably the cash dividend has to be the main tool we will be using for returning to shareholders and I say inevitably because the buyback is naturally constrained by the trading volumes of the share.

Therefore, although we have constructive feedback from shareholders on the buyback, it is the inherently limiting factor, which is the volumes of the shares. Of course trading liquidity on the Athens Exchange is significantly better than the situation before in London, but still there are natural constraints to the buyback.

Therefore, prioritization has to inevitably be between firstly cash, then buyback.

Okay. Is it okay for just a follow-up question again on NII.

Your plan to grow the bond portfolio to around 17% of assets by year-end. Is that kind of how you see the terminal size or are you kind of looking to grow further next year?

It's not terminal. I mean we are currently in our annual planning process so we will review this.

Whether it's going up or staying flat, I can't predict, but it's definitely not the terminal value by choice.

So you've successfully brought your nonperforming exposures down to under €250 million, which is great news. Obviously the flip side of that is that it now means your remaining NPEs, especially large ones, are going to be very -- any big loans are very sensitive to changes in the risk profile.

So which brings me to the question. Are you worried how exposed are you to the big changes in expectations for the liquefied natural gas import terminal, which we were supposed to be having and now it's very uncertain?

I know that you've lent out fairly large loans to people -- to companies that will benefit if and when we actually ever get this LNG import terminal. But is that a risk that you're actively managing or what you're able to say about that?

Okay. I will start by saying that we are very glad with the performance of the loan portfolio of the Bank of Cyprus.

So 2.4% NPE ratio with a coverage of 96% I think speaks on itself with minimal NPE inflows. So we don't have large exposures remaining on our NPE portfolio and in fact €75 million out of the €250 million are re-performing NPEs, which means that there is a high probability of this to naturally exit NPE.

The economy in Cyprus is doing well and this is another comforting factor for us. So I don't expect any material NPE inflows coming either because of the economy or directly or indirectly because of delays in liquefied natural gas coming to the island.

So we are not very exposed to energy sectors. I'm not sure if I answered your question completely.

I think you should keep the message that the NPE ratio is reduced to levels that are completely manageable having in mind the coverage. The economy is doing well, NPE flows are minimal.

So we feel very comfortable with our portfolio quality. Of course we'll provide more guidance for the NPEs for years to come with our full year results in early 2025 for full year results 2024.

I have 3 questions. The first one is about the rewards program you launched for good borrowers.

Can you maybe talk a bit more about this program and what it means for OpEx going forward and what kind of incentives do you give to the borrowers? The second question is on JCC.

You mentioned in the presentation that you are reviewing your ownership within a strategic review, which means that probably you might dispose that asset. And I was just wondering why would you dispose it and if you dispose it, what kind of valuation you would consider to dispose it?

And the last question on fees. Can you tell us why fees contracted year-on-year in the 9 months despite the fact that the rest of the business volumes do not display such contraction?

So that's the third question.

Okay. Let me start with the reward program.

It's kind of a cash reward through our card spending scheme we call it antamivi for housing loan borrowers provided that they remain performing. This is expected €3 million cost and is included in the Q3 results and it's one-off.

So you should not expect this to be recurring. In terms of JCC, yes, we never said that there is a decision to sell.

Of course for all of our business, there is a strategic review with the purpose to extract the highest value for our shareholders and if there is financial strategic sense, we will consider that and of course market will be informed accordingly. In terms of fees, I think there are one-off fees in 2023.

Generally, I will say that Q3 was a good quarter. We do expect the net fee commission to be broadly in line with economic growth and going forward, this you should consider as our base case scenario.

We'll continue growing the insurance business. We introduced a couple of new future contributions to non-NII, which is our Affluent Banking Jinius.

And of course for non-NII, it's a source of income that we'd like to see if there are any organic opportunities that can help us going even higher.

Okay. Maybe just one follow-up on JCC.

So assuming you sell that asset, wouldn't that sale put more capital in the bank that's already overcapitalized arguably? I mean isn't there a downside like that from that disposition?

I just wanted to...

I mean this is pure math, right? So yes, more capital will be added to our existing high capital position.

And of course this is a factor that we will consider if we have to make a decision on whether to sell or not JCC.

Okay. Thank you all for your attendance in the call.

And as always, myself and the team are always available to take any offline questions or arrange any meetings or to provide more details. Thank you very much.