Bk. Cyprus Hldg Regulatory News (BOCH)

Announcement

Group Financial Results for the quarter ended 31 March 2021

Nicosia, 25 May 2021

1. According to ECDC https://vaccinetracker.ecdc.europa.eu/public/extensions/COVID-19/vaccine-tracker.html#uptake-tab

2. Data as at 21 May 2021. 20% have completed their vaccination regime (Source: Ministry of Health)

3. Excluding special levy and contributions to SRF and DGF

4. Pro forma for Helix 2 (Portfolio A and B). Calculations on a pro forma basis assume legal completion of the transaction

5. Allowing for IFRS 9 and temporary treatment for certain FVOCI instruments transitional arrangements

6. On the basis of 31 March 2021 figures. The Total Capital ratio pro forma for Helix 2 is expected to increase to 19.5%, including 28 bps relating to the outstanding Existing Notes (remaining after the Tender Offer) of €43 mn. The Existing Notes are redeemable at the option of the Bank (subject to applicable regulatory consents) in January 2022.

7. As at 31 March 2021

Group Chief Executive Statement

"The first quarter of the year has again been a period characterised by on-going pandemic-related disruption. Despite the significant progress made both within Cyprus and globally with the vaccine roll-out programme, the day-to-day operating environment continues to be challenging, and the first quarter saw restrictions remaining in place within Cyprus. As such, our priority during the period has continued to be focused on providing support to our customers, colleagues and community. Although the pace of economic recovery in Cyprus temporarily slowed in the first quarter as result of the restrictions, we have continued to support the country's return to growth, extending €487 mn of new loans in the period, the strongest quarter in new lending since the pandemic struck a year ago.

This lending performance, allied to the recent relaxation of restrictions and the progress of the vaccination programmes both in Cyprus and abroad support our confidence in the economic recovery gathering pace. As at 21 May 2021, 48% of the adult population in Cyprus have been vaccinated with the first dose, on track with the target of reaching 65% by the end of June. Also, Cyprus ranks 4th in the EU in COVID-19 vaccine doses administered per 100 people. As a bank we remain ready to do all we can to ensure Cyprus recovers quickly and emerges strongly from the crisis.

During the first quarter of the year, we generated total income of €136 mn and a positive operating result of €45 mn. Cost of risk was reduced by 33 bps to 66 bps. We delivered an underlying profit of €14 mn and the overall result for the quarter was a profit after tax of €8 mn. At the same time, we reduced our total operating expenses (excluding levies and contributions) by €9 mn or 9% on the prior quarter to €82 mn, reflecting our on-going efforts to contain costs.

The Bank's capital position remains good and comfortably in excess of our regulatory requirements. As at 31 March 2021, our capital ratios (on a transitional basis) were 18.3% for the Total Capital ratio and 14.6% for CET1 ratio, both pro forma for NPE sales. Our liquidity position also remains strong and we continue to operate with almost €5 bn surplus liquidity and an LCR at 284%. Deposits on our balance sheet remained broadly flat in the quarter at €16.3 bn.

In April 2021, we successfully refinanced our Tier 2 capital, further optimising the capital structure of the Group. The issuance of €300 mn Tier 2 Capital Notes is expected to increase the Group's Total Capital ratio pro forma for NPE sales by c.100 bps to 19.2%. The transaction has also enhanced the diversification of our investor base, and the significant reduction in the coupon to 6.625% confirms market recognition of the significant progress made in evolving the Group's financial profile.

Balance sheet repair has continued in the first quarter of the year. As previously noted, in January 2021, despite the challenging environment, we reached agreement for the sale of a further €500 mn NPE portfolio, continuing to deliver on one of the Group's strategic priorities of improving asset quality through the reduction of NPEs. Overall, since the peak in 2014, we have now reduced the stock of NPEs by €13.3 bn or 89% to €1.7 bn and the NPE ratio by 47 percentage points, from 63% to 16%, pro forma for NPE sales. This remained stable qoq as organic NPE reduction was impacted by the lockdown. Whilst we expect this to recover in the coming quarters, we continue to actively explore strategies to accelerate de-risking including further portfolio sales, and remain on track with achieving a single digit NPE ratio by the end of 2022. At the same time, we continue to closely monitor the performance of loans which had been granted payment deferrals in the previous year, and we remain cautiously optimistic based on their performance to date.

As the leading bank in Cyprus, it is both our focus and purpose to help support the country's return to growth, and we remain confident about the future and committed to playing our part in that. Despite the challenges of the last year having persisted in the quarter, we, as a Bank, have continued to make progress, and remain absolutely committed to our strategic initiatives of completing de-risking, revenue enhancement and cost reduction through business transformation in order to deliver shareholder returns in the medium term."

Panicos Nicolaou

Commentary on Underlying Basis

The financial information presented in this Section provides an overview of the Group financial results for the quarter ended 31 March 2021 on the 'underlying basis' which the management believes best fits the true measurement of the performance and position of the Group, as this presents separately the exceptional and one off items.

Reconciliations between the statutory basis and the underlying basis are included in section F.1 'Reconciliation of income statement between statutory and underlying basis' and in Section G. 'Definitions and Explanations', to facilitate the comparability of the underlying basis to the statutory information.

With respect to the 'Balance Sheet Analysis', please note the following in relation to the disclosure of pro forma figures and ratios with respect to Project Helix 2 (as explained in the paragraph below). All relevant figures are based on 31 March 2021 financial results, unless otherwise stated. Numbers on a pro forma basis are based on the 31 March 2021 underlying basis figures and are adjusted for Project Helix 2, and assume its completion, which remains subject to required customary regulatory and other approvals. Where numbers are provided on a pro forma basis this is stated.

Project Helix 2 refers to the agreement the Group reached in August 2020 with funds affiliated with Pacific Investment Management Company LLC ("PIMCO"), for the sale of a portfolio of loans with gross book value of €0.9 bn (Helix 2 Portfolio A), as well as to the agreement the Group reached with PIMCO in January 2021 for the sale of an additional portfolio of loans with gross book value of €0.5 bn (Helix 2 Portfolio B). Further details are provided in Section A.1.5 'Loan portfolio quality'.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis

A.1.1 Capital Base

Total equity excluding non-controlling interests totalled €2,064 mn at 31 March 2021, compared to €2,051 mn at 31 December 2020. Shareholders' equity totalled €1,844 mn at 31 March 2021, compared to €1,831 mn at 31 December 2020.

The Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at 14.4% at 31 March 2021 and 14.6% pro forma for the Project Helix 2 (Portfolios A and B) sale agreements reached in 3Q2020 and 1Q2021 respectively (referred to as "pro forma for Helix 2"), compared to 14.8% at 31 December 2020 and 15.2% pro forma for Helix 2. During 1Q2021, the CET1 ratio was negatively affected mainly by the phasing-in of IFRS 9 transitional arrangements, and provisions and impairments, and was positively affected by the pre-provision income and the decrease in risk-weighted assets (RWAs). Throughout, the capital ratios as at 31 March 2021 include unaudited / unreviewed profits for 1Q2021, unless otherwise stated.

The Group has elected to apply the EU transitional arrangements for regulatory capital purposes (EU Regulation 2017/2395) where the impact on the impairment amount from the initial application of IFRS 9 on the capital ratios is phased-in gradually. The amount added back to CET1 each year decreases based on a weighting factor until the impact of IFRS 9 is fully absorbed at the end of the five years. The impact on the capital position for year 2018 was 5% of the impact on the impairment amount from the initial application of IFRS 9, increased to 15% (cumulative) for year 2019, 30% (cumulative) for year 2020 and 50% (cumulative) for year 2021. This will increase to 75% (cumulative) for year 2022 and will be fully phased in (100%) by 1 January 2023. The phasing-in of the impairment amount from the initial application of IFRS 9 on 1 January 2021 had a negative impact of c.45 bps on the CET1 ratio.

In June 2020, Regulation (EU) 2020/873, regarding certain adjustments in response to the COVID-19 pandemic, came into force, extending the IFRS 9 transitional arrangements and introducing further relief measures to CET1, such as allowing to temporarily add back unrealised gains or losses on certain financial instruments measured at fair value through other comprehensive income. Further details are set out below under 'Implications on capital from the Outbreak of COVID-19'.

The CET1 ratio on a fully loaded basis amounted to 13.1% as at 31 March 2021 and 13.3% pro forma for Helix 2, compared to 12.9% as at 31 December 2020 and 13.3% pro forma for Helix 2. On a transitional basis and on a fully phased-in basis, after the transition period is completed, the impact of IFRS 9 is expected to be manageable and within the Group's capital plans.

The Total Capital ratio stood at 18.0% as at 31 March 2021 and 18.3% pro forma for Helix 2, compared to 18.4% as at 31 December 2020 and 18.7% pro forma for Helix 2.

The Group's capital ratios are above the Supervisory Review and Evaluation Process (SREP) requirements.

In the context of the European Central Bank's (ECB's) capital easing measures for COVID-19, in April 2020, the Bank received an amendment to the December 2019 SREP decision effective as of 12 March 2020, reducing the Group's minimum phased-in Common Equity Tier 1 (CET1) capital ratio to 9.7% (comprising a 4.5% Pillar I requirement, a 1.7% Pillar II requirement, the Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer of 1.0%), following the frontloading of the new rules on the Pillar II Requirement composition, to allow banks to use Additional Tier 1 (AT1) capital and Tier 2 (T2) capital to meet Pillar II Requirements and not only by CET1, initially scheduled to come into effect in January 2021.

The SREP Total Capital Requirement remained unchanged at 14.5%, comprising an 8.0% Pillar I requirement (of which up to 1.5% can be in the form of AT1 capital and up to 2.0% in the form of T2 capital), a 3.0% Pillar II requirement, the Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer of 1.0%. The ECB has also provided non-public guidance for an additional Pillar II CET1 buffer. Pillar II add-on capital requirements derive from the context of the SREP, which is a point in time assessment, and are therefore subject to change over time.

In November 2020, the Group received communication from the ECB according to which no SREP decision would be issued for the 2020 SREP cycle and that the 2019 SREP decision will remain in force, hence leaving the Group's capital requirements unchanged, as well as other requirements established by the 2019 SREP decision (as amended in April 2020). The communication followed a relevant announcement by the ECB earlier in 2020 that the ECB would be taking a pragmatic approach towards the SREP for the 2020 cycle.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.1 Capital Base (continued)

In accordance with the provisions of the Macroprudential Oversight of Institutions Law of 2015, the Central Bank of Cyprus (CBC) is the responsible authority for the designation of banks that are Other Systemically Important Institutions (O-SIIs) and for the setting of the O-SII buffer requirement for these systemically important banks. The Group has been designated as an O-SII and the O-SII buffer currently set by the CBC for the Group is 2%. This buffer is being phased-in gradually, having started from 1 January 2019 at 0.5% and increasing by 0.5% every year thereafter, until being fully implemented (2.0%). In April 2020, the CBC decided to delay the phasing-in (0.5%) of the O-SII buffer on 1 January 2021 and 1 January 2022 by 12 months. Consequently, the O-SII buffer will be fully phased-in on 1 January 2023, instead of 1 January 2022 as originally set.

Further analysis on the recent developments on the regulatory capital ratios due to the COVID-19 outbreak is set out further below under 'Implications on capital from the Outbreak of COVID-19'.

The European Banking Authority (EBA) final guidelines on SREP and supervisory stress testing and the Single Supervisory Mechanism's (SSM) 2018 SREP methodology provide that own funds held for the purposes of Pillar II Guidance 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. Following the 2019 SREP decision, the new provisions became effective as of 1 January 2020.

Based on the SREP decisions of prior years, the Company (Bank of Cyprus Holdings PLC) and the Bank were under a regulatory prohibition for equity dividend distribution and therefore no dividends were declared or paid during 2019. Following the 2020 SREP communication, the Company and the Bank are still under equity dividend distribution prohibition as the 2019 SREP decision remains in force. This prohibition does not apply if the distribution is made via the issuance of new ordinary shares to the shareholders, which are eligible as CET1 capital. No prohibition applies to the payment of coupons on any AT1 capital instruments issued by the Company or the Bank.

The ECB, as part of its supervisory role, has completed an onsite inspection and review on the value of the Group's foreclosed assets with reference date 30 June 2019. The findings relate to a prudential charge of up to 44 bps, the majority of which is expected to be taken at 30 June 2021, depending on the Bank's progress in disposing the properties impacted by the prudential charge.

Project Helix 2

In August 2020, the Group signed an agreement (the 'agreement') for the sale of a portfolio of loans with gross book value of €0.9 bn as at 30 June 2020, known as Project 'Helix 2 Portfolio A'. Loan credit losses in relation to the agreement of c.€68 mn, including transaction costs were recognised during 2Q2020.

In January 2021, the Group amended and restated the agreement to incorporate the sale of an additional portfolio of loans with gross book value of €0.5 bn as at 30 September 2020, known as Project 'Helix 2 Portfolio B'. As at the year‑end, in anticipation of the agreement for Project 'Helix 2 Portfolio B' loan credit losses of c.€27 mn were recognised in 4Q2020.

The completion of Helix 2 Portfolio B will be aligned with the completion of Helix 2 Portfolio A and is currently estimated to occur early in 2H2021. The completion remains subject to a number of conditions, including required customary regulatory and other approvals.

Project Helix 2 (Portfolios A and B) up to and including legal completion (including the impact in FY2020) is expected to have a negative capital impact of 48 bps on the Group's CET1 ratio, on the basis of 31 March 2021 figures. The legal completion of the transaction is expected to increase the CET1 ratio as at 31 March 2021 from 14.4% to 14.6% (pro forma). Upon the full payment of the deferred considerations and without taking into consideration any positive impact from the earnout, Project Helix 2 (Portfolios A and B) is expected to have an additional positive capital impact of 64 bps on the Group's CET1 ratio, on the basis of 31 March 2021 figures.

Further details regarding the consideration, including the deferred component and earnout, are provided in Section A.1.5 'Loan portfolio quality'.

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 law amendments cover the utilisation of income tax losses transferred from Laiki Bank to the Bank in March 2013. The introduction of CRD IV in January 2014 and its subsequent phasing-in led to a more capital-intensive treatment of this DTA for the Bank. The law amendments resulted in an improved regulatory capital treatment, under CRR, of the DTA amounting to c.€285 mn or a CET1 uplift of c.190 bps in March 2019.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.1 Capital Base (continued)

Legislative amendments for the conversion of DTA to DTC (continued)

The Group understands that, 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 is considering the adoption of modifications to the Law, including requirements for an additional annual fee over and above the 1.5% annual guarantee fee already acknowledged, to maintain the conversion of such DTAs into tax credits. 

The Group, in anticipation of modifications in the Law, acknowledges that such increased annual fee may be required to be recorded on an annual basis until expiration of such losses in 2028. The determination and conditions of such amount will be prescribed in the Law to be amended and the amount determined by the Government on an annual basis. Amendments to the Law will need to be adopted by the Cyprus Parliament and published in the Official Gazette of the Republic for the amendments to be effective. The Group, however, understands that contemplated amendments to the Law may provide that the minimum fee to be charged will be 1.5% of the annual instalment and can range up to a maximum amount of €10 mn per year. The Group estimates that such increased fees could range up to €5.3 mn per year (for each tax year in scope i.e. since 2018) although the Group understands that such fee may fluctuate annually as to be determined by the Ministry of Finance. In this respect, an amount of €3 mn was recorded in 4Q2020 to bring the total amount provided for years 2018-2020 to €16 mn, being the maximum expected increased amount for these years (€13 mn in 4Q2019 and €19 mn in FY2019).

Voluntary Staff Exit Plans

In December 2020, the Group completed a targeted voluntary staff exit plan (VEP) at a total cost of €6 mn, recorded in the consolidated income statement in 4Q2020, resulting in a negative impact of c.5 bps on the Group's CET1 ratio as at 31 December 2020. For further information please refer to Section A.2.2 'Total expenses'.

Tier 2 Capital Notes

In April 2021, the Company issued €300 mn unsecured and subordinated Tier 2 Capital Notes (the 'New Notes').

Immediately after, the Company and the Bank entered into an agreement pursuant to which the Company on-lent to the Bank the entire €300 mn proceeds of the issue of the New Notes (the 'Tier 2 Loan') on terms substantially identical to the terms and conditions of the New Notes. The Tier 2 Loan constitutes an unsecured and subordinated obligation of the Bank.

The New 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 for the New Notes is 23 October 2031. The Company will have the option to redeem the New Notes early on any day during the six-month period from 23 April 2026 to 23 October 2026, subject to applicable regulatory consents.

At the same time, the Bank invited the holders of its €250 mn Fixed Rate Reset Tier 2 Capital Notes due January 2027 (the 'Existing Notes') to tender their Existing Notes for purchase by the Bank at a price of 105.50%. The Bank received valid tenders of €207 mn in aggregate nominal amount, all of which were accepted by the Bank, and after which €43 mn in aggregate nominal amount of the Existing Notes remain outstanding.

The issuance of the New Notes is expected to increase the Group's Total Capital ratio pro forma for Helix 2 by 123 bps to 19.5%, on the basis of 31 March 2021 figures, including 28 bps relating to the outstanding Existing Notes. The Existing Notes are redeemable at the option of the Bank (subject to applicable regulatory consents) in January 2022.

The issuance is expected to be MREL eligible, contributing towards the Bank's MREL requirements.

A.1. Balance Sheet Analysis (continued)

A.1 Capital Base (continued)

Implications on capital from the Outbreak of COVID-19

The Group continues to closely monitor developments in, and the effects of COVID-19 on both the global and Cypriot economy. In early 2020, the ECB announced a package of positive measures that should help to support the capital position of banks, in order to secure favourable conditions of financing for the economy with the aim to mitigate the effects of the crisis. Specifically, the measures increased the Group's capital base available to absorb potential losses due to the crisis. In addition, the early adoption of CRD V for the composition of the Pillar II Requirement provides flexibility regarding the Group's compliance with the minimum capital requirement of Pillar II.

In the context of the ECB's capital easing measures for COVID-19, in April 2020, the Bank received an amendment to the December 2019 SREP decision effective as of 12 March 2020, reducing the Group's minimum phased-in CET1 capital ratio to 9.7%. In addition, in March 2020, the ECB announced that banks are temporarily allowed to operate below the level of Pillar II Guidance (P2G), the capital conservation buffer (CCB) and the countercyclical buffer. In July 2020, the ECB committed to allow banks to operate below the P2G and the combined buffer requirement until at least end of 2022, without automatically triggering supervisory actions. In addition, in April 2020, the CBC decided to delay the phasing-in of the O-SII buffer. Further details are given above. The CBC has set the level of the countercyclical buffer for Cyprus at 0% for the year 2020 and the six months to 30 June 2021.

In June 2020, Regulation (EU) 2020/873, in response to the COVID-19 pandemic, came into force, bringing forward some of the capital-relieving measures that were due to come into force at a later stage and introducing modifications as part of the wider efforts of competent authorities to provide the support necessary to the institutions. The main amendments with an impact on the Group's capital ratios related to the acceleration of the implementation of the new SME discount factor under CRR II introduced in June 2020, instead of June 2021, extending the IFRS 9 transitional arrangements and introducing further relief measures to CET1, advancing the application of the prudential treatment of software assets as amended by CRR II, and introducing a temporary treatment of unrealized gains and losses to exposures to central governments, regional governments or local authorities, measured at fair value through other comprehensive income. Overall, the Group's CET1 ratio benefited by c.80 bps in 2020 as a result of the above amendments.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.2. Regulations and Directives

A.1.2.1 Revised rules on capital and liquidity (CRR II and CRD V)

On 27 June 2019, the revised rules on capital and liquidity (CRR II and CRD V) came into force. As this was an amending regulation, the existing provisions of CRR apply, unless they are amended by CRR II. Being a Regulation, CRR II is directly applicable in each member state. Member states are required to transpose the CRD V into national law. CRD V was transposed and implemented in Cyprus law in early May 2021. Certain provisions took immediate effect (primarily relating to Minimum Requirement for Own Funds and Eligible Liabilities, MREL), and most changes will start to apply from mid-2021. Certain aspects of CRR II are dependent on final technical standards to be issued by the EBA and adopted by the European Commission. The key changes introduced consist of, among others, changes to qualifying criteria for CET1, AT1 and Tier 2 instruments, introduction of MREL requirements and binding Leverage Ratio and Net Stable Funding Ratio (NSFR) requirements. 

A.1.2.2 Bank Recovery and Resolution Directive (BRRD)

Minimum Requirement for Own Funds and Eligible Liabilities (MREL)

The Bank Recovery and Resolution Directive (BRRD) requires that from January 2016 EU member states shall apply the BRRD's provisions requiring EU credit institutions and certain investment firms to maintain a minimum requirement for own funds and eligible liabilities (MREL), subject to the provisions of the Commission Delegated Regulation (EU) 2016/1450. On 27 June 2019, as part of the reform package for strengthening the resilience and resolvability of European banks, the BRRD ΙΙ came into effect and was required to be transposed into national law. BRRD II was transposed and implemented in Cyprus law in early May 2021. In addition, certain provisions on MREL have been introduced in CRR ΙΙ which also came into force on 27 June 2019 as part of the reform package and took immediate effect.

In April 2021, 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 minimum MREL requirement is set at 23.32% of risk weighted assets and 5.91% of Leverage Ratio Exposure (LRE) and must be met by 31 December 2025. Furthermore, the Bank must comply by 1 January 2022 with an interim requirement of 14.94% of risk weighted assets and 5.91% of LRE. The own funds used by the Bank to meet the Combined Buffer Requirement (CBR) will not be eligible to meet its MREL requirements expressed in terms of risk-weighted assets. The above requirements replace those that were previously applicable. The Bank must comply with the MREL requirement at the consolidated level, comprising the Bank and its subsidiaries.

The MREL ratio of the Bank as at 31 March 2021, calculated according to SRB's eligibility criteria currently in effect and based on the Bank's internal estimate, stood at 15.03% of risk weighted assets and at c.9% of LRE. Pro forma for Project Helix 2, the MREL ratio of the Bank as at 31 March 2021, calculated on the same basis, stood at 15.27% of risk weighted assets. The MREL ratio expressed as a percentage of risk weighted assets does not include capital used to meet the CBR amount, currently at 3.5% and expected to increase to 4% on 1 January 2022. The MREL ratios as at 31 March 2021 include unaudited / unreviewed profits for 1Q2021.

The MREL requirement is in line with the Bank's expectations and funding plans, and in this context, and following the highly successful Tier 2 capital refinancing, the Bank will focus on evaluating opportunities for an MREL issuance in terms of debt capital markets activity.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.3 Funding and Liquidity

Funding

Funding from Central Banks

At 31 March 2021, the Bank's funding from central banks amounted to €2,692 mn, which relates to ECB funding, comprising solely of funding through the Targeted Longer-Term Refinancing Operations (TLTRO) III, compared to €995 mn as at 31 December 2020.

In March 2021, the Bank borrowed an amount of €1.7 bn under the seventh TLTRO III operation, increasing the funding from central banks to €2.7 bn, as the Bank had already borrowed an amount of €1 bn under the fourth TLTRO III operation in June 2020, despite its comfortable liquidity position, given the favourable borrowing rate, in combination with the relaxation of collateral terms.

Based on internal estimations (subject to confirmation from the CBC), the Bank has exceeded the benchmark net lending threshold in the period 1 March 2020 -31 March 2021 and is therefore expected to qualify for a beneficial rate for the period from June 2020 to June 2021. Based on current ECB rates, the Bank estimates the NII benefit from its TLTRO III borrowing for the period from June 2020 to June 2021 at c.€7 mn, recognised over the respective period in the income statement.

The potential NII benefit from the TLTRO III borrowing for the period from June 2021 to June 2022 amounts to c.€13.5 mn, based on current ECB rates and provided the Bank meets the lending thresholds.

Deposits 

Customer deposits totalled €16,332 mn at 31 March 2021 (compared to €16,533 mn at 31 December 2020), reduced by 1% in the first quarter.

The Bank's deposit market share in Cyprus reached 34.5% as at 31 March 2021, compared to 35.0% at 31 December 2020. Customer deposits accounted for 71% of total assets and 78% of total liabilities at 31 March 2021 (compared to 77% of total assets and 85% of total liabilities at 31 December 2020).

The net Loans to Deposits (L/D) ratio stood at 64% as at 31 March 2021 (compared to 63% as at 31 December 2020). The L/D ratio had reached a peak of 151% as at 31 March 2014. 

Subordinated Loan Stock

At 31 March 2021 the Bank's subordinated loan stock (including accrued interest) amounted to €254 mn (compared to €272 mn at 31 December 2020) and relates to unsecured subordinated Tier 2 Capital Notes (the 'Existing Notes') of nominal value €250 mn, issued by the Bank in January 2017.

In April 2021, the Company issued €300 mn unsecured and subordinated Tier 2 Capital Notes (the 'New Notes'). The New 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 for the New Notes is 23 October 2031. The Company will have the option to redeem the New Notes early on any day during the six-month period from 23 April 2026 to 23 October 2026, subject to applicable regulatory consents.

At the same time, the Bank invited the holders of the Existing Notes due January 2027 to tender them for purchase by the Bank at a price of 105.50%. The Bank received valid tenders of €207 mn in aggregate nominal amount, all of which were accepted by the Bank, and, as a result, a cost of c.€11 mn will be recorded in the income statement in 2Q2021, forfeiting the relevant obligation for future coupon payments. Existing Notes of €43 mn in aggregate nominal amount remain outstanding.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.3 Funding and Liquidity (continued)

Liquidity

At 31 March 2021 the Group Liquidity Coverage Ratio (LCR) stood at 284% (compared to 254% at 31 December 2020), above the minimum regulatory requirement of 100%. 

The liquidity surplus in LCR at 31 March 2021 amounted to €4.9 bn (compared to €4.2 bn at 31 December 2020). The increase in 1Q2021 is driven mainly by the borrowing of €1.7 bn through the ECB's TLTRO III in March 2021.

The Net Stable Funding Ratio (NSFR) has not yet been introduced. It will be enforced as a regulatory ratio under CRR II in June 2021, with the limit set at 100%. At 31 March 2021, the Group's NSFR, on the basis of Basel ΙΙΙ standards, stood at 140% (compared to 139% at 31 December 2020).

Regulatory measures to mitigate the impact of COVID-19 crisis on banks' liquidity position

Resulting from the outbreak of COVID-19, the ECB has adopted a broad set of policy measures to mitigate the economic impact of the crisis and to ensure that its directly supervised banks can continue to fulfil their role in funding the real economy. The main measures which have a direct or indirect impact on the liquidity position of banks are summarised below:

· The ECB allows banks to operate below the defined level of 100% of the LCR until at least the end of 2021.

· Collateral easing measures: The package included a set of collateral easing measures, which resulted in increasing the banks' borrowing capacity at the ECB operations and improving the liquidity buffers due to the lower haircuts applied to the ECB eligible collateral the bank holds, that consist of bonds and Additional Credit Claims (ACC). The collateral easing packages are designed mainly as temporary measures that will remain in place until June 2022 and will be reassessed before then. Furthermore, the ECB enlarged the scope of the ACC framework, increasing the universe of eligible loans. In addition, the ECB announced changes in collateral rules, temporarily accepting collateral with a rating below investment grade, not lower than a certain rating level.

· Favourable terms of LTRO operations: the package contained measures to provide liquidity support to the euro area financial system. Such measures include a series of LTROs which ran from March to June 2020 so that participants could shift their outstanding LTRO amounts to TLTRO III, as well as significant amendments in the terms and characteristics of TLTRO III, including a very low interest rate applicable to the TLTRO III funding, provided the lending performance target during the specified periods is achieved. Furthermore, a new series of longer-term refinancing operations, called Pandemic Emergency Longer-Term Refinancing Operations (PELTROs), with low rates, was introduced.

In December 2020, the ECB announced certain amendments in the terms of the third series of targeted longer-term refinancing operations (TLTRO III), including the extension of the period over which more favourable terms will apply by twelve months, to June 2022 and also announced that three additional TLTRO III operations will be conducted between June and December 2021. Please refer to 'Funding from Central Banks' in Section A.1.3. 'Funding and Liquidity' for further details.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.4 Loans

Group gross loans totalled €12,281 mn at 31 March 2021, compared to €12,261 mn at 31 December 2020. Gross loans of the Group's Cyprus operations totalled €12,219 mn at 31 March 2021 accounting for 99% of Group gross loans. Pro forma for Helix 2, gross loans are reduced by €1,339 mn to €10,942 mn as at 31 March 2021.

New loans granted in Cyprus reached €487 mn for 1Q2021, compared to €374 mn for 4Q2020 (up by 30% qoq), and to €451 mn for 1Q2020 (up by 8% yoy). New lending in 1Q2021 comprised €233 mn of corporate loans, €159 mn of retail loans (of which €102 mn were housing loans), €63 mn of SME loans and €32 mn of shipping and international loans. 1Q2021 was the strongest quarter in new lending since the beginning of the COVID-19 crisis in March 2020. The qoq increase reflects demand for new loans in 1Q2021 picking up, driven mainly by corporate (up by 34% qoq), as economic activity continues to improve. At the same time, demand for retail housing loans remain above pre-COVID levels, supported by Government schemes.

At 31 March 2021, the Group net loans and advances to customers totalled €9,960 mn (compared to €9,886 mn at 31 December 2020). In addition, at 31 March 2021 net loans and advances to customers of €472 mn were classified as held for sale in line with IFRS 5 and relate to Project Helix 2 (comprising €299 mn relating to Portfolio A and €173 mn relating to Portfolio B), compared to €493 mn as at 31 December 2020 relating to Project Helix 2 (€485 mn, comprising €310 mn relating to Portfolio A and €175 mn relating to Portfolio B) and Helix Tail (€8 mn).

The Bank is the single largest credit provider in Cyprus with a market share of 42.4% at 31 March 2021, compared to 41.9% at 31 December 2020.

A.1.5 Loan portfolio quality

Tackling the Group's loan portfolio quality remains a top priority for management. The Group has continued to make steady progress across all asset quality metrics and the loan restructuring activity has continued despite challenges brought upon by COVID-19. The Group has been successful in engineering restructuring solutions across the spectrum of its loan portfolio. The Group's near-term priorities include completing the balance sheet de-risking, whilst managing the post-pandemic NPE inflow.

The loan credit losses for 1Q2021 totalled €20 mn (excluding 'provisions/net loss relating to NPE sales, including restructuring expenses'), compared to €31 mn for 4Q2020 and to €64 mn for 1Q2020. Further details regarding loan credit losses are provided in Section A.2.3 'Profit/(loss) before tax and non-recurring items' below.

Loan moratorium

As part of the measures to support borrowers affected by COVID-19 and the wider Cypriot economy, the Cyprus Parliament voted for the suspension of loan repayments for interest and principal (loan moratorium) for the period to the end of the year 2020, for all eligible borrowers with no arrears for more than 30 days as at the end of February 2020. The payment holiday for all these loans expired on 31 December 2020.

Performing loans as at 31 March 2021 under expired payment deferrals amounted to €5.1 bn (compared to €5.3 bn as at 31 December 2020), of which €4.2 bn or 82% had an instalment due by 14 May 2021 with a strong performance; 95% present no arrears (of which €0.26 bn have been restructured) and 5% are in arrears.

Performing loans to private individuals as at 31 March 2021 under expired payment deferrals amounted to €1.86 bn, of which 96% had an instalment due by 14 May 2021. Of those, 91% present no arrears (of which €20 mn have been restructured) and 9% are in arrears.

Similarly, performing loans to businesses as at 31 March 2021 under expired payment deferrals amounted to €3.22 bn, of which 74% had an instalment due by 14 May 2021. Of those, 98% present no arrears (of which €0.24 bn have been restructured, mostly in the tourism sector) and 2% are in arrears.

In 1Q2021, net reclassifications of €53 mn of loans under expired payment deferrals were made from Stage 2 to Stage 1, following reclassifications of €304 mn of loans under expired payment deferrals from Stage 1 to Stage 2 as a result of management overlays and restructurings, and reclassifications of €357 mn of loans under expired payment deferrals from Stage 2 to Stage 1, mainly due to the good performance of loans to private individuals after the expiry of the payment deferrals. In addition, reclassifications of €14 mn of loans under expired payment deferrals were made mainly from Stage 2 to Stage 3 in 1Q2021.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.5 Loan portfolio quality (continued)

Loan moratorium (continued)

The Bank will continue to monitor this portfolio closely, to ensure that potential difficulties in the repayment ability are identified at an early stage, and appropriate solutions are provided to viable customers. To that end, the Bank has enhanced its monitoring process to include transactional analysis to establish funds availability to meet upcoming instalments and performance of daily monitoring of arrears and excesses, as well as NPEs inflows and outflows.

The Bank has a strong track record in dealing with restructurings. Targeted restructuring solutions are offered to alleviate pandemic-related short-term cash flow burden, following rigorous assessment of repayment ability. To date, most restructurings relate to tourism.

Regarding the economic effects of COVID-19, the impact of IFRS 9 Forward Looking Information (FLI), driven by the update of the macroeconomic assumptions, resulted in an €9 mn charge (29 bps) included in 1Q2021 loan credit losses of €20 mn (cost of risk of 66 bps), compared to a charge of €11 mn (37 bps) included in 4Q2020 loan credit losses of €31 mn (cost of risk of 99 bps). Overall, in FY2020, the impact of IFRS 9 FLI driven by the update of the macroeconomic assumptions resulted in a €54 mn charge (43 bps) included in the FY2020 loan credit losses of €149 mn (cost of risk of 1.18%).

Finally, the provision coverage of Stage 3 loans under payment deferrals that expired on 31 December 2020 of c.25% as at 31 March 2021 is considered to be adequate, as it is higher than the coverage of re-performing NPEs (NPEs in the pipeline to exit, subject to meeting all exit criteria) of 19%.

The table below presents the loans under payment deferrals that expired on 31 December 2020, by IFRS 9 staging.

A second scheme for the suspension of loan repayments for interest and principal (loan moratorium) was launched in January 2021 for customers impacted by the second lockdown. Payment deferrals are offered to the end of June 2021, however, the total months under loan moratorium, including the loan moratorium offered in 2020, cannot exceed a total of nine months. The application period expired on 31 January 2021 and loans of c.€20 mn were approved for the second moratorium. Close monitoring of the credit quality of loans in moratoria continues.

Following the outbreak of COVID-19, the sectors most adversely affected are tourism, trade, transport, manufacturing and construction. The Group has a well - diversified performing loan portfolio. For further information on the Group's non-legacy loan book exposure to tourism and trade and the performance of these loans after the expiry of the loan moratorium, please refer to Section C. Business Overview.

For further information please refer to the presentation for the Group Financial Results for the quarter ended 31 March 2021 (slides 7 to 10).

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.5 Loan portfolio quality (continued)

Non-performing exposure reduction 

Non-performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced by €74 mn (2%) during 1Q2021 (comprising net organic NPE reductions of €59 mn and further net NPE reductions of €15 mn relating to the NPE sales lockbox), compared to a reduction of €152 mn or 5% in 4Q2020 (comprising organic net NPE reductions of €85 mn and further NPE reductions of €67 mn relating to the NPE sales lockbox) to €3,012 mn at 31 March 2021 (compared to €3,086 mn at 31 December 2020). The organic NPE reduction in 1Q2021 were impacted by the COVID-19 lockdown. Pro forma for Helix 2, NPEs are reduced by a further €1.311 mn to €1,701 mn on the basis of 31 March 2021 figures.

The NPEs account for 25% of gross loans as at 31 March 2021, at the same level as at 31 December 2020, on the same basis, i.e. including the NPE portfolios classified as 'Non-current assets and disposal groups held for sale'. Pro forma for Helix 2 the NPE ratio is reduced to 16% on the basis of 31 March 2021 figures.

The NPE coverage ratio stands at 62% at 31 March 2021, at the same level as at 31 December 2020, on the same basis, i.e. including the NPE portfolios classified as 'Non-current assets and disposal groups held for sale'. When taking into account tangible collateral at fair value, NPEs are fully covered. Pro forma for Helix 2 the NPE coverage ratio is maintained at 59% on the basis of 31 March 2021 figures.

As of 1 January 2021, the new regulation on Definition of Default has been implemented, affecting NPE exposures and the calculation of Days-Past-Due (please refer to Section G. Definitions & Explanations for the changes in the definition). The impact of these changes on the Group on 1 January 2021 is immaterial.

1. The analysis is performed on a customer basis.

Project Helix 2

In August 2020, the Group signed an agreement for the sale of a portfolio of loans with gross book value of c.€898 mn (of which €886 mn related to non-performing exposures) as at 30 June 2020, known as Project Helix 2 Portfolio A. This portfolio had a contractual balance of €1.46 bn as at the reference date of 30 September 2019 and comprises loans to mainly retail and small-to-medium-sized enterprises, secured by real estate collateral. This portfolio is classified as a disposal group held for sale since 30 June 2020 and it includes other assets (comprising properties and cash already received since the reference date) amounting to c.€34 mn as at 30 June 2020.

The gross consideration amounts to 46% of the gross book value as at 30 June 2020 and 29% of the contractual balance, payable in cash, of which 35% is payable at completion, and the remaining 65% is deferred without any conditions attached. The deferred component is payable in three broadly equal instalments over 48 months from completion. The consideration can be increased through an earnout arrangement, depending on the performance of Portfolio A.

In January 2021, the Group reached agreement with the buyer of Project Helix 2 Portfolio A for the sale of an additional portfolio of loans with gross book value of €545 mn (of which €529 mn related to non-performing exposures) as at 30 September 2020, known as Project Helix 2 Portfolio B. The gross book value of €545 mn includes other assets (comprising properties and cash already received since the reference date) amounting to €26 mn as at 30 September 2020. This portfolio had a contractual balance of €783 mn as at the reference date of 30 September 2019 and comprises loans to mainly retail and small-to-medium-sized enterprises, secured by real estate collateral. This portfolio is classified as a disposal group held for sale since 31 December 2020.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.5 Loan portfolio quality (continued)

Project Helix 2 (continued)

The gross consideration amounts to 44% of the gross book value as at 30 September 2020 and 31% of the contractual balance as at the reference date (30 September 2019), payable in cash, of which 50% is payable at completion and the remaining 50% is deferred up to December 2025 without any conditions attached. The consideration can be increased through an earnout arrangement, depending on the performance of Portfolio B.

The completion of Helix 2 Portfolio B will be aligned with the completion of Helix 2 Portfolio A and is currently estimated to occur early in 2H2021. The completion of Project Helix 2 remains subject to a number of conditions, including required customary regulatory and other approvals.

Following a transitional period where servicing will be retained by the Bank, it is intended that the servicing of both portfolios will be carried out by a third party servicer selected and appointed by the purchaser.

Project Helix 2 (Portfolios A and B) accelerates the Group's strategy of de-risking its balance sheet, by reducing its stock of NPEs by 44% to €1,701 mn pro forma on the basis of the 31 March 2021 figures, and its NPE ratio by 9 p.p., to 16% pro forma on the basis of the 31 March 2021 figures.

Project Velocity 2

In May 2020, the Group completed the sale of a non-performing loan portfolio of primarily retail unsecured exposures, with a contractual balance of €398 mn and gross book value of €144 mn as at the reference date of 31 August 2019 (known as Project Velocity 2) to B2Kapital Cyprus Ltd. This portfolio comprised c.10.000 borrowers, including c.8.400 private individuals and c.1.600 small-to-medium-sized enterprises. The gross book value of this portfolio as at the date of disposal was €133 mn. The sale was broadly neutral to both the profit or loss and to capital.

Additional strategies to accelerate de-risking

The Group remains committed to further de-risking its balance sheet and will continue to seek solutions to achieve this. The Group continues to work with its advisors towards the sale of portfolios of NPEs in the future, assessing the potential to accelerate the decrease in NPEs on the balance sheet through additional sales of NPEs.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.6 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. The Group completed disposals of €24 mn in 1Q2021 (compared to €32 mn in 4Q2020 and €14 mn in 1Q2020), resulting in a profit on disposal of €3 mn for 1Q2021 (compared to a profit on disposal of €3 mn for 4Q2020). Asset disposals are across all property classes, with 36% of sales by value relating to land.

During the quarter ended 31 March 2021, the Group executed sale-purchase agreements (SPAs) for disposals with contract value of €28 mn (164 properties), compared to €35 mn (172 properties) for 4Q2020. In addition, the Group had signed SPAs for disposals of assets with contract value of €49 mn as at 31 March 2021, compared to €53 mn as at 31 December 2020.

REMU on-boarded €11 mn of assets in 1Q2021 (broadly flat yoy and down by 84% qoq), via the execution of debt for asset swaps and repossessed properties.

Details with respect to the prudential charge relating to the onsite inspection findings are provided in Section A.1.1 'Capital Base'.

Project Helix 2

Stock of property with a carrying value of €64 mn as at 31 March 2021 (compared to €59 mn as at 31 December 2020) is included in the Helix 2 portfolio, comprising stock of property with carrying value of €35 mn relating to Helix 2 Portfolio A and €28 mn of stock of property and €1 mn of investment property relating to Helix 2 Portfolio B, and is classified as non-current assets and disposal groups held for sale.

Assets held by REMU

As at 31 March 2021, assets held by REMU had a carrying value of €1,433 mn (comprising properties of €1,328 mn classified as 'Stock of property' and €105 mn as 'Investment properties'), compared to €1,457 mn as at 31 December 2020 (comprising properties of €1,350 mn classified as 'Stock of property' and €107 mn as 'Investment properties').

In addition to assets held by REMU, properties classified as 'Investment properties' with carrying value of €21 mn as at 31 March 2021 (at the same levels as at 31 December 2020), relate to legacy properties held by the Bank before the set-up of REMU in January 2016.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.6 Real Estate Management Unit (REMU) (continued)

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis

A.2.1 Total income

Net interest income (NII) for 1Q2021 amounted to €76 mn, down by 5% qoq mainly due to higher interest collections in 4Q2020 of c.€2.5 mn not previously recognised and continuing pressure from the low interest rate environment. Net interest income (NII) for 1Q2021 was down by 10% yoy due to higher interest collections in 1Q2020 of €4 mn not previously recognised, continuing pressure from the low interest rate environment and the impact of the NPE sale (Project Helix 2). Net interest margin (NIM) for 1Q2021 amounted to 1.63% (compared to 1.75% in 4Q2020) negatively impacted mainly by the increase in liquid assets following the increase in the borrowing under TLTRO III by €1.7 bn in March 2021.

Quarterly average interest earning assets for 1Q2021 amounted to €18,978 mn, up by 4% qoq and 8% yoy, following the increase in liquid assets resulting from the participation in TLTRO III in June 2020 and March 2021, partly offset by the reduction in net loans.

Non-interest income for 1Q2021 amounted to €60 mn (compared to €62 mn for 4Q2020, down by 2% qoq and at the same levels yoy), comprising net fee and commission income of €39 mn, net foreign exchange gains and net losses on financial instrument transactions and disposal/dissolution of subsidiaries and associates of €2 mn, net insurance income of €13 mn, net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of €2 mn and other income of €4 mn. The qoq decrease is mainly due to higher net revaluation gains relating to specific properties in Greece in 4Q2020.

Net fee and commission income for 1Q2021 amounted to €39 mn, compared to €38 mn for 4Q2020 (and 1Q2020), mainly due to the extension of liquidity fees to a broader pool of customers and the introduction of a revised price list in February 2021, partially offset by lower transactional fees impacted by the lockdown in 1Q2021.

Net foreign exchange gains and net losses on financial instrument transactions and disposal/dissolution of subsidiaries and associates of €2 mn for 1Q2021 (comprising net foreign exchange gains of c.€3.5 mn and net revaluation losses on financial instrument transactions of €1 mn) compared to €1 mn for 4Q2020 and decreased by 55% yoy. The increase qoq is mainly driven by the higher net foreign exchange gains in 1Q2021 compared to 4Q2020. The decrease yoy is mainly driven by the lower net foreign exchange gains in 1Q2021, impacted by the lockdown.

Net insurance income of €13 mn for 1Q2021 (compared to €14 mn for 4Q2020), down by 9% qoq, mainly driven by seasonally lower premiums, partially offset by lower claims.

Net gains from revaluation and disposal of investment properties and on disposal of stock of properties for 1Q2021 amounted to €2 mn (comprising a profit on disposal of stock of properties of €3 mn and net losses from revaluation of investment properties of €1 mn), compared to €5 mn in 4Q2020. The decrease qoq is mainly due to higher net revaluation gains relating to specific properties in Greece in 4Q2020. REMU profit remains volatile.

Total income for 1Q2021 amounted to €136 mn, compared to €142 mn for 4Q2020 (down by 3% qoq) and to €145 mn for 1Q2020 (down by 6% yoy).

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.2 Total expenses

Total expenses for 1Q2021 were €91 mn (compared to €97 mn for 4Q2020 and €93 mn for 1Q2020, down by 5% qoq and down by 1% yoy), 55% of which related to staff costs (€50 mn), 35% to other operating expenses (€32 mn) and 10% (€9 mn) to special levy and contributions to Single Resolution Fund (SRF) and Deposit Guarantee Fund (DGF). The yoy decrease is driven by lower other operating expenses, reflecting the on-going efforts for cost containment. The qoq decrease is driven by lower other operating expenses, due to seasonality. More information on these is provided further below.

Total operating expenses for 1Q2021 were €82 mn, compared to €91 mn for 4Q2020 (down by 9% qoq) and to €84 mn for 1Q2020 (down by 1% yoy).

Staff costs of €50 mn for 1Q2021 broadly flat qoq and yoy. The Group employed 3,557 persons as at 31 March 2021 (compared to 3,573 as at 31 December 2020).

In December 2020, the Group completed a targeted voluntary staff exit plan (VEP) with a total cost of €6 mn, recorded in the consolidated income statement in 4Q2020 (as a non-recurring item in the underlying basis). The gross annual savings are estimated at c.€2 mn or c.1% of staff costs. The renewal of the collective agreement for 2021 remains under discussion.

Other operating expenses for 1Q2021 were €32 mn, compared to €41 mn for 4Q2020 (down by 21% qoq), mainly due to seasonally lower marketing, consultancy and professional fees, and compared to €35 mn for 1Q2020 (down by 6% yoy).

Special levy and contributions to Single Resolution Fund (SRF) and Deposit Guarantee Fund (DGF) for 1Q2021 were €9 mn, compared to €6 mn in 4Q2020 (up by 48% qoq) and €9 mn in 1Q2020 (broadly flat yoy). The increase of €3 mn qoq is driven by the contribution of the Bank to the Deposit Guarantee Fund (DGF) which relates to 1H2021 and is recorded in 1Q2021, in line with IFRSs.

As from 1 January 2020 and until 3 July 2024 the Bank is subject to contribution to the Deposit Guarantee Fund (DGF) on a semi-annual basis. The contributions are calculated based on the Risk Based Methodology (RBM) as approved by the management committee of the Deposit Guarantee and Resolution of Credit and Other Institutions Schemes (DGS) and is publicly available on the CBC's website. In line with the RBM, the contributions are broadly calculated on the covered deposits of all authorised institutions and the target level is to reach at 0.8% of these deposits by 3 July 2024.

The cost to income ratio excluding special levy and contributions to Single Resolution Fund (SRF) and Deposit Guarantee Fund (DGF) for 1Q2021 was 60%, compared to 64% for 4Q2020 and 58% for 1Q2020. The improvement of 4 p.p. qoq is driven by the reduction in total operating expenses. Pro forma for Helix 2, the cost to income ratio excluding special levy and contributions to Single Resolution Fund (SRF) and Deposit Guarantee Fund (DGF) for 1Q2021 was 64%. The cost to income ratio excluding special levy and contributions to Single Resolution Fund (SRF) and Deposit Guarantee Fund (DGF) is expected to rise in the near term as revenues remain under pressure and operating expenses increase due to higher IT/digitisation investment costs, whilst it is expected to decrease to mid-50% in the medium term.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.3 Profit/(loss) before tax and non-recurring items

Operating profit for 1Q2021 was €45 mn, broadly flat qoq and compared to €52 mn for 1Q2020, down by 15% yoy. 

The loan credit losses for 1Q2021 totalled €20 mn, compared to €31 mn in 4Q2020 and €64 mn in 1Q2020. Regarding the economic effects of COVID-19, the impact of IFRS 9 Forward Looking Information (FLI), driven by the update of the macroeconomic assumptions, resulted in an €9 mn charge (29 bps) included in 1Q2021 loan credit losses, compared to a charge of €11 mn (37 bps) included in 4Q2020 loan credit losses. Further details on the loan moratorium are provided in Section A.1.5 'Loan portfolio quality'.

The annualised loan credit losses charge (cost of risk) for 1Q2021 accounted for 0.66% of gross loans, of which 29 bps reflect the update of the macroeconomic assumptions in 1Q2021 (compared to a loan credit losses charge of 0.99% for 4Q2020, of which 37 bps reflect the update of the macroeconomic assumptions in 4Q2020).

At 31 March 2021, the allowance for expected loan credit losses, including residual fair value adjustment on initial recognition and credit losses on off-balance sheet exposures totalled €1,869 mn (compared to €1,902 mn at 31 December 2020) and accounted for 15.2% of gross loans including portfolios held for sale (compared to 15.5% at 31 December 2020).  The decrease in the allowance for expected loan credit losses in 1Q2021 amounted to €33 mn (compared to a decrease of €31 mn in 4Q2020).

Impairments of other financial and non-financial assets for 1Q2021 amounted to €5 mn, compared to €6 mn for 4Q2020 (down by 15% qoq) and €4 mn for 1Q2020 (up by 19% yoy).

Provisions for litigation, claims, regulatory and other matters for 1Q2021 totalled €1 mn, compared to €3 mn for 4Q2020 and €2 mn for 1Q2020.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.4 Profit/(loss) after tax (attributable to the owners of the Company)

The tax charge for 1Q2021 is €2 mn, compared to €1 mn for 4Q2020 and €2 mn for 1Q2020.

Profit after tax and before non-recurring items (attributable to the owners of the Company) for 1Q2021 was €17 mn, compared to €3 mn for 4Q2020 and to a loss of €20 mn for 1Q2020.

Advisory and other restructuring costs - organic for 1Q2021 amounted to €3 mn, compared to €1 mn for 4Q2020 and to €3 mn for 1Q2020.

Profit after tax arising from the organic operations (attributable to the owners of the Company) for 1Q2021 amounted to €14 mn, compared to €2 mn for 4Q2020 and to a loss of €23 mn for 1Q2020.

Provisions/net loss relating to NPE sales, including restructuring expenses for 1Q2021 was €6 mn (compared to €42 mn for 4Q2020 and €3 mn for 1Q2020), of which restructuring costs relating to NPE sales amounted to €4 mn for 1Q2021 (compared to c.€1.5 for 4Q2020 and €3 mn for 1Q2020).

Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) amounted to €6 mn for 4Q2020. For further details please refer to Section A.2.2 'Total expenses'.

The DTC levy was €3 mn for 4Q2020 and relates to a levy in the form of a guarantee fee relating to the revised Income Tax legislation. For further information please refer to 'Legislative amendments for the conversion of DTA to DTC' within Section A.1.1. 'Capital base'.

Profit after tax attributable to the owners of the Company for 1Q2021 was €8 mn (compared to a loss of €49 mn for 4Q2020 and a loss of €26 mn for 1Q2020), representing a Return on Tangible Equity (ROTE) of 2.0%.

B. Operating Environment

Real GDP contracted by 1.6% in the first quarter of 2021, year-on-year, seasonally adjusted, following a drop of 5.1% overall in 2020 as a whole. The contraction in the first quarter, according to the Cyprus Statistical Service, was driven mainly by contractions in tourist activity, manufacturing, retail trade and other tourist related services that were more affected by the continuation of lockdown measures.

The outlook for the year remains uncertain as it is still largely unknown how the recovery in the tourist sector will unfold. There is positive news in terms of improvements in the epidemiological condition in Cyprus and its main markets, particularly the United Kingdom. The vaccination programme in Cyprus has picked up. As at 21 May 2021, 48% of the adult population in Cyprus have been vaccinated with the first dose, on track with the target of reaching 65% by the end of June (Ministry of Health). Also, according to the European Centre for Disease Prevention and Control (ECDC) Cyprus ranks 4th in the EU in COVID-19 vaccine doses administered per 100 people.

The European Commission (EC), in its spring forecast (May 2021), predicts EU real GDP to expand by 4.2% in 2021, up from its previous forecast of a 3.7% growth in the year. For Cyprus, the EC predicts a growth of 3.1% in 2021 and 3.8% in 2022 compared with 3.0% and 3.2% respectively in the winter forecasts. The revised forecasts of the EC are in line with the revised forecasts of the IMF from a month earlier. According to the IMF, Cyprus' GDP will increase by 3.0% in 2021 and 3.9% in 2022. The Cypriot Ministry of Finance predicts growth of 3.6% and 3.8% respectively as published in the Stability Programme Update 2021-2024.

Early indicators into 2021 are in line with expectations: a declining economy in the first quarter with a brisk upsurge in the second quarter and beyond, depending on the recovery of the tourist sector. Tourist arrivals dropped by 92.8% in the first quarter of the year and receipts dropped by 91.3% in the first two months. The first quarter, however, is seasonally low with less than 10% of yearly arrivals in a normal year and thus not deterministic for the yearly outcome. Elsewhere in production activity, indicators of construction and industrial activity dropped in the first two months.

On the demand side, the volume of retail sales excluding vehicles dropped 4.9% in the first two months. Total vehicle registrations continued to decline down by 2.8% in the first quarter, but surged in April 2021. In housing, sales surged by 27.6% in the first quarter in the residents' segment. Sales to non-residents declined by 30.6% in the first quarter and surged in April 2021 also. A similar pattern was observed in economic sentiment, a sharp decline by 25% in the first quarter of the year, followed by a 20% rise in April alone, from a year earlier.

Consumer prices continued to decline in the first quarter of the year down by 1.4% on average. Consumer prices spiked by 1.6% in April alone driven by higher energy prices that were reflected in higher prices in housing and transport goods and services.

The contraction by 5.1% in Cyprus' GDP in 2020 was less than initially anticipated and compares favourable both against the Euro Area average of a 6.6% drop in the year; and against all southern economies, all contracting between 8% and 11%. This relative outperformance had two main sources: the substantial fiscal expansion undertaken to mitigate the impact of the coronavirus pandemic, and the structure of the supply side of the economy. On the latter, Cyprus features a larger share of its gross value-added consisting of growth sectors not affected by the pandemic, and a much smaller share of the manufacturing sector, which was more steeply affected, in comparison with its southern peers.

In 2020, the Government injected significant fiscal support in the economy. According to the Stability Programme Update for 2021-2024, released in late April 2021 by the Ministry of Finance, support measures with a fiscal impact amounted to €766 mn or 3.6% of GDP.

These measures included support for the health sector; income support for households; wage subsidies for businesses to retain workers; support for the tourism sector specifically; and grants to small firms and the self-employed. There were also measures aiding liquidity in the market including a two-month deferral of value-added tax (VAT) payments for small businesses; a temporary VAT cut for the tourism and hospitality sector; a three-month suspension of a planned increase in the contribution to the national healthcare system; and a debt moratorium for interest and principal repayments on loans for individuals and firms that has been extended into 2021 (payment deferrals are offered to the end of June 2021, however, the total months under loan moratorium, including the loan moratorium offered in 2020, cannot exceed a total of nine months). The authorities also approved additional state financing and loan guarantees. In 2021, a range of support measures continue to apply. Their fiscal impact according to the Stability Programme Update will be 3.4% of GDP or €750 mn.

The budget turned into a deficit of €1.2 bn or 5.7% of GDP in 2020, from a surplus of €0.3 bn or 1.5% of GDP in 2019. Total expenditures increased by 9.8%, whilst revenues declined by 7.1%. The budget position was aided by a decline in debt interest payments despite an increase in debt levels, as a result of the ECB's ultra-accommodative monetary policy. The budget deficit is expected to narrow in 2021 as the economy recovers, but will remain sizeable as the government continues its support measures for the pandemic.

B. Operating Environment (continued)

The debt to GDP ratio reached 118.2% at the end of 2020 from 94% the year before, exhibiting an increase of about 24 percentage points of GDP. According to the latest projections from the Ministry of Finance, the debt to GDP ratio is expected to follow a downward trend and fall to 92.9% by the end of 2024, on the assumption that debt servicing costs will remain low.

The ECB's monetary policy is expected to remain highly accommodative at least until the end of 2023. Policy rates are at their effective lower bounds and monetary policy relies on quantitative easing.

Real economic activity in the medium term is expected to be supported by the recovery in tourism and to be aided by higher investment activity linked with Next Generation EU grants. The main risk concerns the epidemiological outlook. Cyprus is set to receive €1.2 bn or 5% of its GDP in 2021-2026. The effectiveness of the funds will depend on the implementation of structural reforms, mainly to improve the efficiency of the judiciary and of the public and local administration. Effectiveness will also be determined by the effectiveness of the productive investments and activities that will be taking place.

In the banking sector, total non-performing exposures at the end of December 2020 were €5.1 bn or 17.7% of gross loans compared with 28% at the end of 2019. The non-performing exposures ratio in the non-financial companies' segment was 14.6% at the end of December 2020 and that for households stood at 24.8%. The coverage ratio was 49.8% at the end of December.

Sovereign ratings

The sovereign risk ratings of the Cyprus Government improved considerably in recent years reflecting improvements in economic resilience and consistent fiscal outperformance. Cyprus demonstrated policy commitment to correcting fiscal imbalances through reform and restructuring of its banking system.

S&P Global Ratings maintains an investment grade rating of BBB- with a stable outlook since September 2018. The rating and the outlook were affirmed in March and September 2020, and in March 2021. In March 2021, S&P Global Ratings affirmed its rating and outlook, balancing the risks from the pandemic's protracted adverse impact on growth, fiscal, and banking sector performance against benefits of the EU's Recovery and Resilience Facility (RRF) transfers, as well as further improvement in the government's debt profile.

Fitch Ratings maintains a Long-Term Issuer Default rating of investment grade at BBB- since November 2018, affirmed in April and October 2020, and in March 2021. Its outlook was upgraded to positive in October 2019 and revised to stable in April 2020, reflecting the significant impact the global COVID-19 pandemic might have on the Cyprus economy and fiscal position. The stable outlook was affirmed in March 2021.

Moody's Investors Service maintains a long-term credit rating of Ba2 since July 2018 and a positive outlook since September 2019. In January 2021, Moody's issued a revised credit opinion on the Cyprus Sovereign, maintaining the positive rating outlook. This was driven by the substantial reduction of non-performing exposures and a favourable outlook on public debt reduction expected to resume after the COVID-19 crisis. The large increase in debt related to the COVID-19 pandemic is expected to be transitory in part because of Cyprus' large fiscal surplus going into the pandemic.

In May 2021, DBRS Ratings confirmed Cyprus' Long-Term Foreign and Local Currency Issuer Ratings at BBB (low) with a stable trend reflecting a balanced view on the risks despite the deterioration in public finances caused by the COVID-19 pandemic. According to the ratings firm, Cyprus' ratings are supported by a prudent public debt management framework, a good track record in fiscal deficit reduction, Eurozone membership fostering sustainable macroeconomic policies, and openness to investment encouraging a favourable business environment.

C. Business Overview

Credit ratings

The Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. In January 2021, Fitch Ratings affirmed their long-term issuer default rating of B- (negative outlook). In April 2020, Fitch Ratings revised their outlook to negative, reflecting the significant impact the outbreak of COVID-19 might have on the Cypriot economy and consequently on the Bank. In November 2020, Moody's Investors Service affirmed the Bank's long-term deposit rating of B3 (positive outlook). In July 2020, Standard and Poor's affirmed their long-term issuer credit rating on the Bank of 'B+' (stable outlook).

COVID-19 impact

The Group continues to closely monitor developments in, and the effects of COVID-19 on both the global and Cypriot economy. The first quarter of the year continued to be characterised by on-going pandemic-related disruption. Despite the significant progress made both within Cyprus and globally with the vaccine roll-out programme, the day-to-day operating environment continues to be challenging, and the first quarter saw restrictions remaining in place. As such, the Group's priority during the period has continued to be focused on providing support to customers, colleagues and community.

The Group continued to support the country's economy return to growth, that temporarily slowed in the first quarter as result of the restrictive measures. The Group's lending performance in the first quarter, allied to the recent relaxation of restrictions and the progress of the vaccination programmes both in Cyprus and abroad support the confidence in the economic recovery gathering pace.

Statistics are encouraging as Cyprus ranks 4th in the EU in COVID-19 vaccine doses administered per 100 people (ECDC). As at 21 May 2021, 48% of the adult population in Cyprus have been vaccinated with the first dose, on track with the target of reaching 65% by the end of June 2021 (Ministry of Health).

Upon the outbreak of COVID-19 in March 2020, the Pandemic Incident Management Plan of the Group was invoked and a dedicated team (Pandemic Incident Management Team) has been monitoring the situation domestically and globally and providing guidance on health and safety measures, travel advice and business continuity for the Group. Local government guidelines are being followed in response to the virus.

In accordance with the Pandemic Plan, the Group adopted a set of measures to ensure minimum disruption to its operations. The Pandemic Incident Management Team and the Crisis Management Committee continue to closely monitor the dynamic COVID-19 pandemic developments and status. The measures comprise rules for quarantine for vulnerable employees due to health conditions and for those returning from epicentres of the infection. The Group replaced face-to-face meetings with telecommunications, adjusting the customary etiquette of personal contact, including those with customers. Staff of critical functions have been split into separate locations. In addition, to ensure continuity of business, a number of employees have been working from home and the remote access capability has been upgraded significantly, whilst at the same time maintaining relevant control procedures to ensure authorisation in line with the Group's governance structure. Additionally, the Group follows strict rules of hygiene, increased intensity of cleaning and disinfection of spaces, and other measures to protect the health and safety of staff and customers.

Following the recent relaxation of restrictive measures by the Government, in combination with the positive development and present recession of the pandemic in the community, along with the national vaccination programme which is in progress, the Group initiated a Back To Normal (BTN) plan for a smooth transition to normal operations status ensuring at all times the business continuity resilience of the Bank. The BTN plan is deployed in different phases and closely monitored by the Pandemic Incident Management Team, aiming to gradually reduce the number of employees working from home and subsequently proceed with the remaining Pandemic Business Continuity arrangements, depending on the pandemic status in the organisation and community.

The potential economic implications for the sectors in which the Group is active have been assessed and possible mitigating actions for supporting the economy have been identified, such as supporting viable affected businesses and households with new lending to cover liquidity, working capital, capital expenditure and investments related to the activity of the borrower.

The package of policy measures announced by the ECB and the European Commission, as well as the unprecedented fiscal and other measures of the Cyprus Government, have helped and should continue to help reduce the negative impact and support the recovery of the Cypriot economy.

As part of the measures to support borrowers affected by COVID-19 and the wider Cypriot economy, the Cyprus Parliament voted for the suspension of loan repayments for interest and principal (loan moratorium) for the period to the end of the year 2020, for all eligible borrowers with no arrears for more than 30 days as at the end of February 2020. The payment holiday for all these loans expired on 31 December 2020. Performing loans as at 31 March 2021 under expired payment deferrals amounted to €5.1 bn (compared to €5.3 bn as at 31 December 2020), of which €4.2 bn or 82% had an instalment due by 14 May 2021 with a strong performance; 95% present no arrears (of which €0.26 bn have been restructured) and 5% are in arrears.

C. Business Overview (continued)

COVID-19 impact (continued)

Further details are provided in Section A.1.5 'Loan portfolio quality'. Close monitoring of the credit quality of these loans continues and customers with early arrears are offered solutions. The Bank has a strong track record in dealing with restructurings. Targeted restructuring solutions are offered to alleviate pandemic-related short-term cash flow burden, following rigorous assessment of repayment ability.

Following the outbreak of COVID-19, the sectors most adversely affected are tourism being the sector with the highest impact, and trade, transport, manufacturing and construction with medium impact. The Group has a well - diversified performing loan portfolio.

As at 31 March 2021, the Group's non-legacy loan book exposure to tourism was limited to €1.15 bn (out of a total non-legacy loan book of €9.3 bn), of which c.€1.0 bn of performing loans as at 31 March 2021 were under expired payment deferrals. 60% of those had an instalment due by 14 May 2021 and of those, 99% present no arrears (of which c.€190 mn have been restructured) and 1% present arrears.

A recovery in tourism activity is expected from 2H2021 and the reduction in international tourist arrivals in 2021 compared to 2019 is expected to be partly offset by domestic tourism. It is important to note, that the majority of 'accommodation' customers entered the crisis with significant liquidity, following strong performance in recent years and that 98% of the tourism portfolio is secured by property. Close monitoring of developments continues.

Respectively, as at 31 March 2021 the Group's non-legacy loan book exposure to trade was €0.9 bn, of which €0.33 bn of performing loans as at 31 March 2021 were under expired payment deferrals. 90% of those had an instalment due by 14 May 2021 and of those, 96% present no arrears (of which €6 mn have been restructured) and 4% present arrears. It is important to note that c.30% of the exposure to trade relates to lower-risk essential retail services, not materially impacted by COVID-19.

Strategic priorities for the medium term

The Bank's medium-term strategic priorities remain clear, with a sustained focus on strengthening its balance sheet, and improving asset quality and efficiency, whilst maintaining a good capital position, in order to continue to play a vital role in supporting the recovery of the Cypriot economy. The Group continues to explore opportunities to grow revenues in a more capital efficient way and to improve efficiency through its digital transformation programme in order to provide products and services while reducing operating costs. In addition, the Bank is looking to enhance its organisational resilience and ESG (Environmental, Social and Governance) agenda by building a forward-looking organisation with a clear strategy supported by effective corporate governance aligned with ESG agenda priorities.

Completing balance sheet de-risking

Tackling the Bank's loan portfolio quality is of utmost importance for the Group. Despite the challenging market conditions resulting from the outbreak of COVID-19, the Group signed an agreement for the sale of a portfolio of loans with gross book value of c.€898 mn (of which €886 mn related to non-performing exposures) as at 30 June 2020, known as Project Helix 2 Portfolio A and also, in January 2021, the Group amended and restated the agreement to incorporate the sale of an additional portfolio of loans with gross book value of c.€545 mn (of which €529 mn related to non-performing exposures) as at 30 September 2020, known as Project Helix 2 Portfolio B.

Project Helix 2 represents a further milestone in the delivery of one of the Group's strategic priorities of improving asset quality through the reduction of NPEs. Project Helix 2 (Portfolios A and B) reduces the NPE ratio by 9 p.p. to 16% pro forma and on the basis of 31 March 2021 figures. Overall, since the peak in 2014, the stock of NPEs has been reduced by €13.3 bn or 89% and the NPE ratio by 47 percentage points, from 63% to 16%, on the same basis.

Project Helix 2 marks further progress against delivering on the Group's strategic objectives of becoming a stronger, safer and more efficient institution. The Group is now better positioned to manage the challenges resulting from the impact of the ongoing COVID-19 crisis, and to support the recovery of the Cypriot economy.

The Group remains committed to further de-risking its balance sheet and will continue to seek solutions to achieve this. The Group continues to work with its advisors towards the sale of portfolios of NPEs in the future, assessing the potential to accelerate the decrease in NPEs on the balance sheet through additional sales of NPEs. At the same time, following the outbreak of COVID-19 and the expiration of the 2020 loan moratorium at the end of year 2020, the Group remains focused on arresting any potential asset quality deterioration and early managing arrears.

C. Business Overview (continued)

Strategic priorities for the medium term (continued)

Completing balance sheet de-risking (continued)

Following the outbreak of COVID-19, all foreclosures were suspended between March - August 2020, and then between January - March 2021 but only for specific categories including primary residences with open market value up to €350 thousand. In early May 2021, further legislation was enacted by the Cyprus Parliament by which foreclosures are suspended until the end of July 2021, for primary residences with open market value up to €500 thousand, premises of very small businesses (with annual turnover up to €2 mn and less than 10 employees), and agricultural fields with open market value up to €250k.

Growing revenues in a more capital efficient way

The accelerated de-risking of the balance sheet increases pressure on revenues in the near term. There are multiple initiatives underway to increase net interest income and less capital-intensive non-interest income, with a focus on fees, insurance and non-banking business.

The Group continues to provide high quality new loans via prudent underwriting standards. Growth in new lending in Cyprus has been focused on selected industries more in line with the Bank's target risk profile, and following the outbreak of COVID-19, the focus remains to support the Cypriot economy in order to overcome the crisis. During the quarter ended 31 March 2021, new lending amounted to €487 mn, increased by 30% qoq, as demand for new loans is picking up, driven mainly by corporate (up by 34% qoq), as economic activity continues to improve. At the same time, the demand for retail housing loans remains above pre-COVID levels, supported by the Government interest rate subsidy scheme. The pipeline for new housing loans remains strong at over €100 mn as at mid-May 2021, whilst new housing loans of €117 mn have been approved by the Bank since the beginning of the scheme.

Aiming at supporting investments by SMEs and mid-caps to boost the Cypriot economy, and create new jobs for young people, the Bank continues to provide joint financed schemes. To this end, the Bank continues its partnership with the European Investment Bank (EIB), the European Investment Fund (EIF) and the Cyprus Government.

In common with other European banks, the prolonged low interest rate environment also continues to present a challenge to the Group's profitability. There are efforts underway to improve credit spreads, despite competition pressures. Over the medium-term, the Group aims to grow its performing book by c.10%, as well as to grow shipping and international corporate lending with prudency.

At the same time, in order to further optimise its funding structure, the Bank continues to focus on the shape and cost of deposit franchise, taking advantage of the increased customer confidence towards the Bank. The cost of deposits has been reduced by 72 bps to 4 bps over the last 39 months. Moreover, liquidity fees for specific customer groups were introduced in March 2020. The introduction of liquidity fees to a broader group of corporate clients, that was delayed due to the COVID-19 pandemic, was implemented as of 1 February 2021. Separately, a new price list for charges and fees was also implemented as of 1 February 2021, with the positive impact from both initiatives to be estimated at c.€13 mn per annum. Transactional fee volumes are expected to recover to pre-COVID-19 levels, as the Cypriot economy recovers.

In the medium-term, the Group aims to increase the average product holding through cross selling to the under-penetrated customer base, as well as to introduce the Digital Economy Platform to generate new revenue sources, through leveraging the Bank's market position, knowledge and digital infrastructure.

Management is placing emphasis on diversifying income streams by optimising fee income from international transaction services, wealth management and insurance. The Group's insurance companies, EuroLife Ltd and General Insurance of Cyprus Ltd (GIC) operating in the sectors of life and general insurance respectively, are leading players in the insurance business in Cyprus, and have been providing a stable, recurring fee income, further diversifying the Group's income streams. The insurance income net of claims and commissions for 1Q2021 amounted to €13 mn (up 15% yoy), contributing to 22% of non-interest income. Furthermore, there are initiatives underway to enhance revenues from the insurance business in the medium-term, in order to deliver sustainable profitability and shareholder returns. Specifically, EuroLife Ltd is aiming to improve total regular income mainly by extending its customer base and using a new distribution philosophy; whereas GIC is aiming to increase its gross written premiums mainly by leveraging on the Bank's customer base through revamping its bancassurance channel, and by focusing on high margin products. Efficiencies through enhancing digital capabilities are also expected in the medium-term.

In March 2021, the Bank participated in TLTRO III by borrowing an additional amount of €1.7 bn, increasing its participation to €2.7 bn, despite its comfortable liquidity position, given the favourable borrowing rate, in combination with the relaxation of collateral terms. Based on current ECB rates, the Bank estimates the NII benefit from its TLTRO III borrowing for the period from June 2020 to June 2021 at c.€7 mn. The potential NII benefit for the period from June 2021 to June 2022 amounts to c.€13.5 mn, based on current ECB rates and provided the Bank meets the lending thresholds.

C. Business Overview (continued)

Strategic priorities for the medium term (continued)

Growing revenues in a more capital efficient way (continued)

In April 2021, the Company issued €300 mn unsecured and subordinated Tier 2 Capital Notes (the 'New Notes'), with a coupon of 6.625%, to refinance its outstanding €250 mn Tier 2 Capital Notes, with a coupon of 9.25%, issued in 2017 (the 'Existing Notes'). At the same time, the Bank invited the holders of the 'Existing Notes' to tender them for purchase by the Bank at a price of 105.50%. The Bank accepted tenders of €207 mn in aggregate nominal amount, after which €43 mn in aggregate nominal amount of the Existing Notes remain outstanding.

The issuance of the New Notes is expected to increase the Group's Total Capital ratio pro forma for Helix 2 by 123 bps to 19.5%, on the basis of 31 March 2021 figures, including 28 bps relating to the outstanding Existing Notes. The Existing Notes are redeemable at the option of the Bank (subject to applicable regulatory consents) in January 2022.

The refinancing represents a major milestone for the Group, and has helped to diversify the Group's investor base, re-rate the Group's pricing in the international credit markets and demonstrate the Group's proactive capital management. Also, the highly successful Tier 2 capital refinancing will allow the Group to focus on evaluating opportunities for an MREL issuance in terms of debt capital markets activity.

Improving operating efficiencies

The Digital Transformation Programme that started in 2017 has begun to deliver an improved customer experience, whilst the branch footprint rationalisation to date, has further improved the Bank's operating model. The branch network is now less than half the size it was in 2013.

Management remains focused on further improvement in efficiency, through further branch footprint rationalisation, further exit solutions to release full time employees, containment of restructuring costs following the completion of balance sheet de-risking, enhancement of procurement control, as well as reduction of total operating expenses by c.10% compared to FY2019 over the medium term despite inflation, facilitated by the Digital Transformation Programme.

The Group continues to work towards becoming a more customer centric organisation. A Transformation Office has been established at the beginning of the year further reinforcing the commitment to the Bank's modernisation agenda. The transformation programme will enable the implementation of the strategy with key shifts focusing on a leaner and more efficient operating model, capital profitability and optimisation of the client service and distribution models with an emphasis on the customer.

Digital Transformation

As part of its vision to be the leading financial hub in Cyprus, the Bank continues its Digital Transformation Programme, which focuses on three strategic pillars: developing digital services and products that enhance the customer experience, streamlining internal processes, and introducing new ways of working to improve the workplace environment.

In the last few months, a number of new features promoting self-service functionalities have been made available to subscribers through the Bank's mobile banking app. Users now have the option of viewing the data held about them by the Bank and updating it in case of changes (KYC review). In many cases, updates are performed in real time without a staff member having to review them, thus contributing in operational savings as well. Additionally, card holders can now view their card PINs instantly and securely using biometric authentication. This has proved a popular feature with the customer base, but its benefits are not limited to the improved user experience. It has also contributed in cost savings with card PINs no longer being printed and mailed by default. Instead, cards are mailed to the customer's home and the customer can instantly retrieve their first PIN through the app without going to the branch. Finally, verification of online card transactions has been made more secure with the replacement of the SMS One Time Password sent to date with secure push notifications. These notifications are sent through a secure channel and use biometric or password authentication to verify the identity of the customer quickly and easily.

The adoption of digital products and services continued to grow and gained momentum in the first quarter of 2021. As at the end of March 2021, 85.1% of the number of transactions involving deposits, cash withdrawals and internal/external transfers were performed through digital channels (up by c.21 p.p. from 64.6% in September 2017 when the digital transformation programme was initiated). In addition, 75.4% of individual customers were digitally engaged (up by c.16 p.p. from 59.6% in September 2017), choosing digital channels over branches to perform their transactions. As at 31 March 2021, active mobile banking users and active QuickPay users have grown by 20% and 73% respectively yoy. The highest number of QuickPay users to date was recorded in April 2021 with 99 thousand active users. Likewise, the highest number of QuickPay payments was recorded in April 2021 with 257 thousand transactions.

C. Business Overview (continued)

Strategic priorities for the medium term (continued)

Improving operating efficiencies (continued)

Digital Transformation (continued)

Furthermore, as part of the Digital Transformation Programme, major changes are underway in relation to enabling a modern and more efficient workplace. New technologies and tools have been introduced that will drastically change the employee experience, improving collaboration and knowledge sharing across the organisation. For instance, the rollout of Microsoft Surface portable devices has been initiated to the employees whose role demands high mobility, allowing them to work seamlessly wherever they are. Further enhancements will be implemented in 2021 and the full impact will be seen over the coming months.

Enhancing organisational resilience and ESG (Environmental, Social and Governance) agenda

The Bank aims to enhance its organisational resilience and ESG (Environmental, Social and Governance) agenda by building a forward-looking organisation with a clear strategy supported by effective corporate governance aligned with ESG agenda priorities.

As part of its responsibility to a wider group of stakeholders, the Group is working to build a forward-looking organisation with a clear strategy supported by effective corporate governance aligned with ESG priorities. Earlier this year a dedicated executive committee, the Sustainability Committee, was set up, that will 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.

In order to further strengthen the Bank's corporate responsibility regarding the protection of the environment the Bank is proceeding with the launch of 'environmentally friendly' loan products to promote investment in energy saving and environmentally friendly products and services.

In 2020, the Bank received a rating of A (on a scale of AAA-CCC) in the MSCI ESG Ratings assessment.

D. Strategy and Outlook

The strategic objectives for the Group are to become a stronger, safer and a more efficient institution capable of supporting the recovery of the Cypriot economy and delivering appropriate shareholder returns in the medium term.

The key pillars of the Group's strategy are to:

· Complete balance sheet de-risking

· Grow revenues in a more capital efficient way; by enhancing revenue generation via growth in performing book

and less capital-intensive banking and financial services operations (Insurance and Digital economy)

· Improve operating efficiency; by achieving leaner operations through digitisation and automation

· Enhance organisational resilience and ESG (Environmental, Social and Governance) agenda; by building a forward-looking organisation with a clear strategy supported by effective corporate governance aligned with ESG agenda priorities

D. Strategy and Outlook (continued)

Although there remains uncertainty in the broader economic environment as a result of the pandemic, the Management remains confident in delivering on the strategic objectives for the Group.

The Group's near-term priorities include completing the balance sheet de-risking, whilst managing the post-pandemic NPE inflow; positioning the Bank on the path for sustainable profitability; ensuring the cost base remains appropriate, whilst further investing in the digital transformation programme in the near term in order to modernise the Bank's franchise (in fact, the cost to income ratio is expected to rise in the near term as revenues remain under pressure and operating expenses increase due to higher digitisation investment costs, and to reduce to mid-50s% in the medium term); addressing the challenges from low rates and surplus liquidity; and focusing on evaluating opportunities for an MREL issuance in terms of debt capital markets activity, following the highly successful Tier 2 capital refinancing.

The medium-term priorities include delivering sustainable profitability and shareholder returns, enhancing revenues by capitalising on the Group's market leading position; enhancing operating efficiency; and optimising capital management.

D. Strategy and Outlook (continued)

The Group's medium-term strategic targets are set out below 

1. Return on Tangible Equity (ROTE) is calculated as Profit after Tax (annualised) divided by Shareholders' equity minus intangibles assets.

2. Total operating expenses comprise staff costs and other operating expenses. Total operating expenses do not include the special levy or contributions to the Single Resolution Fund (SRF) or Deposit Guarantee Fund (DGF) and do not include any advisory or other restructuring costs.

Maintaining a strong capital base has been a key priority for management over the past few years and this remains equally important for the Group going forward. The business plan is based on maintaining a CET1 ratio of at least 13% over the entire period of the plan. The Group's capital is to be supported by organic capital generation and by focus on less capital-intensive businesses, the further reduction of high intensity risk weighted assets and the Helix 2 risk weighted asset benefit upon full repayment of deferred consideration. At the same time, factors that could potentially have a negative impact on the Group's capital ratios in addition to IFRS 9 phasing-in, include any potential regulatory impacts, as well as one-off cost optimisation charges. Until the completion of the de-risking and the restructuring of the business, there may be volatility in the capital ratios due to the timing of potential future impacts from regulatory changes and one-off restructuring costs.

The Group has a clear strategy in place, leveraging on its strong customer base, its renewed customer trust, its market leadership position, and further developing digital knowledge and infrastructure, in order to complete the turnaround of its business and set the Bank on a path for profitability and delivering value for shareholders.

E. Financial Results - Statutory Basis

Unaudited Interim Consolidated Income Statement

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Statement of Comprehensive Income

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Balance Sheet

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Statement of Changes in Equity

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Statement of Changes in Equity (continued)

F. Notes

F.1 Reconciliation of income statement between statutory and underlying basis

\* This is the profit after tax (attributable to the owners of the Company), before the provisions/net loss relating to NPE sales, including restructuring expenses.

The reclassification differences between the statutory basis and the underlying basis mainly relate to the impact from 'non-recurring items' and are explained as follows:

F.2 Customer deposits

The analysis of customer deposits is presented below:

Deposits by geographical area are based on the originator country of the deposit.