Bk. Cyprus Hldg Regulatory News (BOCH)

Announcement

Group Financial Results for the quarter ended 31 March 2023

Nicosia, 16 May 2023

1. Projections in accordance with Ministry of Finance

2. Excluding special levy on deposits and other levies/contributions

3. ROTE is calculated as annualised profit after tax (attributed to the owners of the Company) divided by the quarterly average shareholders' equity minus intangible assets

4. Calculated as NPEs net of provisions over net loans

5. Includes unaudited/unreviewed profits for 1Q2023 and for CRR compliance purposes an accrual for dividend at a payout ratio of 30% of the Group's adjusted recurring profitability in line with the Group's approved dividend policy. Any recommendation for a dividend is subject to regulatory approval

6. Based on profit after tax before non-recurring items

7. Profit after tax before non-recurring items (attributable to the owners of the Company) taking into consideration the AT1 coupon

8. As reported in the 2022 Annual Report

*On 1 January 2023, the Group adopted IFRS 17 'Insurance contracts which replaced IFRS 4 'Insurance contracts'. 2022 comparative information presented throughout are on a restated basis unless otherwise stated. Further information on IFRS 17 is provided under the sections "Commentary on Underlying Basis' and F9.

Group Chief Executive Statement

"This year we have achieved a significant milestone with the delivery of our longstanding intention to resume dividend payments after 12 years. This represents an important step in the Group's journey of delivering sustainable profitability and shareholder returns. We have proposed a dividend of €0.05 per ordinary share, in respect of 2022 earnings, equivalent to a 14% payout ratio on adjusted recurring profitability or 31% based on profit after tax as reported in 2022 annual report. Going forward, dividends are expected to build prudently and progressively towards a payout ratio in the range of 30-50%. 

The dividend decision was supported by the strong start to the year with the performance in the quarter ahead of our FY2023 targets. Overall, we generated profit after tax of €95 mn, corresponding to a ROTE of 21.3%. Total income amounted to €234 mn, of which €162 mn relates to net interest income, more than double last year's level. The growth in net interest income was underpinned by interest rate rises as well as a continued modest deposit pass-through level. Our non interest income of €72 mn (increased by 8% on prior year) remained a significant contributor to our profitability and diversified business model.

Despite elevated inflation, our cost base was 3% lower on the prior period, reflecting the benefits from recent efficiency actions. As a result, the cost to income ratio (excluding levies and contributions) stood at 34%, compared to 60% in the prior year.

Our cost of risk remained broadly flat at 44 bps reflecting our resilient credit portfolio quality. Asset quality is in line with our targets, reflected in an NPE ratio of 3.8%, and an improved level of coverage of 73% as at quarter end.

Against the backdrop in the global and European economic environment, the Cypriot economy continues to demonstrate its strength with GDP forecast to grow by c.2.8% in 2023, which is expected to outperform the Eurozone average. As the largest financial group in Cyprus, we continued to support the economy by extending a seasonally strong €0.6 bn of new loans in 1Q2023, an increase of 41% on the prior quarter, whilst maintaining strict lending criteria. Our performing loan book grew by 1% both qoq and yoy to €9.9 bn.

Our capital position remains robust and comfortably in excess of our regulatory requirements. We ended the quarter with a CET1 ratio of 15.2% and a Total Capital ratio of 20.3%, generating c.90 bps of organic capital.

Our liquidity position remains robust, stemming from our highly liquid balance sheet and growing retail-funded deposit base. As at 31 March 2023, our cash balances amounted to €9.2 bn whilst our deposits remained flat qoq, but increased by 7% on the prior year to €19.0 bn.

2023 is providing evidence of the Group's transformation into a strong, diversified, well-capitalised and sustainably profitable banking and financial services group. We have closed the chapter on the restructuring effort of recent years and have started a new chapter in which we aim to provide sustainable returns to shareholders, while continuing to serve our customers, support the Cypriot economy and contribute to the community. Our positive set of financial results this quarter provides the foundations to help us deliver against our targets. We look forward to presenting and discussing an update of the Group's outlook at our Investor Update, on 8 June 2023."

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 2023 on an 'underlying basis', which the management believes best fits the true measurement of the performance and position of the Group, as this presents separately exceptional and one-off items.

Reconciliations between the statutory basis and the underlying basis are included in Section F.1 'Reconciliation of Interim Income statement for the quarter ended 31 March 2023 between statutory basis and underlying basis' and in Section H under 'Alternative Performance Measures', and Section I under 'Definitions & Explanations' to facilitate the comparability of the underlying basis to the statutory information.

Throughout this announcement, financial information in relation to FY2022 and quarterly 2022 financial information has been restated for the effects of transition to IFRS 17 which was adopted on 1 January 2023 and applied retrospectively. As a result, such 2022 financial information, ratios and metrics are presented on a restated basis unless otherwise stated. Further information on impact of IFRS 17 transition is provided below and in Section F.9 of this announcement.

Throughout this announcement, the capital ratios as at 31 December 2022 have been restated in order to take into consideration the recommendation of dividend. This refers to the recommendation by the Board of Directors to the shareholders for approval at the Annual General Meeting ('AGM') of a final dividend in respect of the FY2022 earnings following the approval by the European Central Bank ('ECB'). This proposed dividend amounts to €22.3 mn in total and had a negative impact of 22 bps in the Group's CET1 ratio and Total Capital ratio as at 31 December 2022. As a result the 31 December 2022 capital ratios are presented as restated for the dividend proposal unless otherwise stated. Further details are provided in Section "A.1.1 Capital Base".

Transition to IFRS 17

On 1 January 2023 the Group adopted IFRS 17 'Insurance Contracts' ('IFRS 17') which replaced IFRS 4 'Insurance contracts. IFRS 17 is an accounting standard that was implemented on 1 January 2023, with retrospective application and establishes principles for the recognition, measurement, presentation, and disclosure of insurance contracts issued, investment contracts with discretionary participation features issued and reinsurance contracts held. In substance, IFRS 17 impacts the phasing of profit recognition for insurance contracts as profitability is spread over the lifetime of the contract compared to being recognised substantially up-front under IFRS 4. This new accounting standard does not change the economics of the insurance contracts but it does decrease the volatility of the Group's insurance companies profitability.

The Group's total equity as at 31 December 2022 as restated for IFRS 17 compared to IFRS 4, was reduced by overall €52 mn (predominantly relating to the life insurance business of the Group) from the below changes:  

· The removal of the present value of in-force life insurance contracts ('PVIF') asset including the associated deferred tax liability, resulting to a reduction of €101 mn in the Group's total equity.

· The remeasurement of insurance assets and liabilities (including the impact of the contractual service margin('CSM')) resulting to an increase in the Group's equity by €49 mn.

Commentary on Underlying Basis (continued)

Transition to IFRS 17 (continued)

The estimated future profit of insurance contracts is included in the measurement of the insurance contract liabilities as the contractual service margin ('CSM') and this will be gradually recognised in revenue, as services are provided over the duration of the insurance contract. A contractual service margin liability of c.€42 mn was recognised as at 31 December 2022 (reflected in the impact from the remeasurement of insurance liabilities mentioned above).

With regards to the Group's income statement for the year ended 31 December 2022 as restated for IFRS 17 the profit after tax (attributable to the owners of the Company) was reduced by €14 mn to €57 mn (vs €71 mn under IFRS 4) reflecting mainly:

· Profit is deferred and held as CSM liability as mentioned above to be recognised in the income statement over the contract service period.

· The impact of assumption changes relating to the future service is also deferred through CSM liability and is recognised in the income statement over the contract service period.

· There is increased use of current market values in the measurement of insurance assets and liabilities (for unit-linked business) and market volatility on unit-linked business is deferred to the CSM, thereby reducing the volatility in the income statement.

The transition to IFRS 17 had no impact on the Group's regulatory capital. However, as a result of the benefit arising from the remeasurement of the insurance assets and liabilities, the life insurance subsidiary distributed €50 mn as dividend to the Bank in February 2023, which benefited Group regulatory capital by an equivalent amount on the same date, enhancing CET1 ratio by c.50 bps. Going forward, meaningful dividend generation from the insurance business is expected to continue.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis

A.1.1 Capital Base

Total equity excluding non-controlling interests totalled €2,119 mn as at 31 March 2023 compared to €2,027 mn as at 31 December 2022 and €2,028 mn as at 31 March 2022. Shareholders' equity totalled €1,899 mn as at 31 March 2023 compared to €1,807 mn as at 31 December 2022 and €1,808 mn as at 31 March 2022.

The Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at 15.2% as at 31 March 2023, compared to 15.2% as at 31 December 2022, as restated. Organic capital generation for 1Q2023 amounted to c.90 bps. During 1Q2023 the CET1 ratio was positively affected by pre-provision income and negatively affected by the final phasing in of IFRS 9 and other transitional arrangements, provisions and impairments as well as the other movements. Additionally, CET1 ratio as at 31 March 2023 was positively affected by €50 mn dividend distributed to the Bank in February 2023 by the life insurance subsidiary. Throughout this announcement, the capital ratios as at 31 March 2023 include unaudited/un-reviewed profits for the three months ended 31 March 2023 and for CRR compliance purposes an accrual for an estimated final dividend at a payout ratio of 30% of the Group Adjusted Profit after tax for the period, which is in line with the Group's approved dividend policy. As per the latest SREP decision, any dividend distribution is subject to regulatory approval. Such dividend accrual does not constitute a binding commitment for a dividend payment nor does it constitute a warranty or representation that such a payment will be made. Group Adjusted Profit after tax is defined as the Group's profit after tax before non-recurring items (attributable to the owners of the Company) taking into account distributions under other equity instruments such as the annual AT1 coupon. For further details please refer to 'Resumption of dividends' in section A.1.1.

The Group has elected to apply the EU transitional arrangements for regulatory capital purposes (EU Regulation 2017/2395) where the impact on the impairment amount from the initial application of IFRS 9 on the capital ratios was phased-in gradually, with the impact being fully phased-in (100%) by 1 January 2023. The final phasing-in of the impact of the impairment amount from the initial application of IFRS 9 was c.65 bps on the CET1 ratio on 1 January 2023. In addition, a prudential charge in relation to the onsite inspection on the value of the Group's foreclosed assets is being deducted from own funds since June 2021, the impact of which is 24 bps on Group's CET1 ratio as at 31 March 2023.

The Total Capital ratio stood at 20.3% as at 31 March 2023, compared to 20.4% as at 31 December 2022 as restated.

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

In the context of the annual SREP performed by the ECB in 2022 and based on the final SREP decision received in December 2022, effective from 1 January 2023, the Pillar II requirement has been revised to 3.08%, compared to the previous level of 3.26%. The Pillar II requirement includes a revised Pillar II requirement add-on of 0.33% relating to ECB's prudential provisioning expectations. When disregarding the Pillar II add-on relating to ECB's prudential provisioning expectations, the Pillar 2 requirement has been reduced from 3.00% to 2.75%.

The Group's minimum phased-in CET1 capital ratio and Total Capital ratio requirements were reduced compared to 2022, when disregarding the phasing in of the Other Systemically Important Institution Buffer. The Group's minimum phased-in CET1 capital ratio is set at 10.25%, compared to the previous level of 10.10%, comprising a 4.50% Pillar I requirement, a 1.73% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.50% and the CcyB of 0.02%. The Group's minimum phased-in Total Capital ratio requirement is set at 15.10%, compared to the previous level of 15.03% comprising an 8.00% Pillar I requirement, of which up to 1.50% can be in the form of AT1 capital and up to 2.00% in the form of T2 capital, a 3.08% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.50% and the CcyB of 0.02%. The ECB has also maintained the non-public guidance for an additional Pillar II CET1 buffer (P2G) unchanged compared to the previous year.

The Bank has been designated as an Other Systemically Important Institution (O-SII) by the Central Bank of Cyprus (CBC) in accordance with the provisions of the Macroprudential Oversight of Institutions Law of 2015, and since November 2021 the O-SII buffer has been set to 1.50%. This buffer was phased-in gradually, having started from 1 January 2019 at 0.50%. The O-SII buffer was fully phased-in on 1 January 2023 and now stands at 1.50%.

Own funds held for the purposes of P2G cannot be used to meet any other capital requirements (Pillar I, Pillar II requirements or the combined buffer requirement), and therefore cannot be used twice.

On 30 November 2022, the CBC, following the revised methodology described in its macroprudential policy, decided to increase the CcyB from 0.00% to 0.50% of the total risk exposure amounts in Cyprus of each licensed credit institution incorporated in Cyprus. The new rate of 0.50% must be observed as from 30 November 2023. Based on the above, the CcyB for the Group is expected to increase.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.1 Capital Base (continued)

Following the 2022 SREP decision, the equity dividend distribution prohibition was lifted for both the Company and the Bank, with any dividend distribution being subject to regulatory approval. The Company (Bank of Cyprus Holdings PLC) and the Bank were under a regulatory prohibition for equity dividend distribution in the previous year. This prohibition did not apply if the distribution was made via the issuance of new ordinary shares to the shareholders, eligible as CET1 capital. No prohibition applied to the payment of coupons on any AT1 capital instruments issued by the Company or the Bank.

Resumption of dividend payments

In April 2023 the Company obtained the approval of the European Central Bank to pay a dividend. Following this approval, the Board of Directors of the Company recommended to the shareholders for approval at the Annual General Meeting ('AGM') that will be held on 26 May 2023, of a final dividend of €0.05 per ordinary share in respect of earnings for the year ended 31 December 2022 ('Dividend'). This proposed Dividend amounts to €22.3 mn in total and is equivalent to a payout ratio of 14% of the FY2022 recurring profitability adjusted for the AT1 coupon or 31% based on FY2022 profit after tax (as reported in the 2022 Annual Financial Report). Subject to approval at the AGM, the Dividend will be paid in cash on 16 June 2023 to those shareholders on the register on 5 May 2023 ("Record date") with an Ex-Dividend date of 4 May 2023.

This proposed Dividend resulted in a negative capital impact of 22 bps on the Group's CET1 ratio and Total Capital ratio as at 31 December 2022. As noted above, throughout this announcement, the capital ratios as at 31 December 2022 have been restated in order to take into consideration the recommendation of dividend.

This Dividend reflects the resumption of dividend payments after 12 years, underpinning the Group's position as a strong and well-diversified organisation, capable of delivering sustainable shareholder returns.

Dividend policy

In April 2023 the Board of Directors approved the Group dividend policy. The Group aims to provide a sustainable return to shareholders. Dividend payments are expected to build prudently and progressively over time, towards a payout ratio in the range of 30-50% of the Group's profitability after tax, before non-recurring items, adjusted for AT1 coupon (referred to as "adjusted recurring profitability"). The dividend policy takes into consideration market conditions as well as the outcome of capital and liquidity planning.

Project Helix 3

In November 2022, Project Helix 3 was completed resulting in a positive capital impact of c.50 bps on the Group's CET1 ratio mainly from the release of risk weighted assets on completion. For further information please refer to section A.1.5 "Loan portfolio quality".

Other equity instruments

At 31 March 2023, the Group's other equity instruments amounted to €220 mn flat both to the prior quarter and prior year and relates to Additional Tier 1 Capital Securities (the "AT1 securities").

The AT1 securities constitute unsecured and subordinated obligations of the Company. They carry a coupon of 12.50% per annum, payable semi-annually in arrears and resettable every five years. The AT1 securities are perpetual and can be redeemed at the option of the Company on the fifth anniversary of the issue date (i.e. 19 December 2023) and each subsequent fifth anniversary, subject to applicable regulatory consents. If the AT1 securities are not called, the coupon will reset on the fifth anniversary of the issue date (i.e.19 December 2023).

The Group continues to monitor opportunities for the optimisation of its capital position.

Legislative amendments for the conversion of DTA to DTC

Legislative amendments allowing for the conversion of specific deferred tax assets (DTA) into deferred tax credits (DTC) became effective in March 2019. The legislative amendments cover the utilisation of income tax losses transferred from Laiki Bank to the Bank in March 2013. The introduction of the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD) IV in January 2014 and its subsequent phasing-in led to a more capital-intensive treatment of this DTA for the Bank. With this legislation, institutions are allowed to treat such DTAs as 'not relying on profitability', according to CRR/CRD IV and as a result not deducted from CET1, hence improving a credit institution's capital position.

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)

In response to concerns raised by the European Commission with regard to the provision of state aid arising out of the treatment of such tax losses, the Cyprus Government has proceeded with the adoption of modifications to the Law, including requirements for an additional annual fee over and above the 1.5% annual guarantee fee already provided for in the Law, to maintain the conversion of such DTAs into tax credits. In May 2022 the Cyprus Parliament voted these amendments which became effective at that time. As prescribed by the amendments in the Law, the annual fee is to be determined by the Cyprus Government on an annual basis, providing however that such fee to be charged is set at a minimum fee of 1.5% of the annual instalment and can range up to a maximum amount of €10 mn per year, and also allowing for a higher amount to be charged in the year the amendments are effective (i.e. in 2022).

In anticipation of modifications to the Law, the Group has in prior years acknowledged that such increased annual fee may be required to be recorded on an annual basis until expiration of such losses in 2028. The Group estimates that such fees could range up to c.€5 mn per year (for each tax year in scope i.e. since 2018) although the Group understands that such fee may fluctuate annually as to be determined by the Ministry of Finance. An amount of €4.8 mn was recorded in FY2022.

A.1.2 Regulations and Directives

A.1.2.1 The 2021 Banking Package (CRR III and CRD VI and BRRD)

In October 2021, the European Commission adopted legislative proposals for further amendments to the Capital Requirements Regulation (CRR), CRD IV and the BRRD (the "2021 Banking Package"). Amongst other things, the 2021 Banking Package would implement certain elements of Basel III that have not yet been transposed into EU law. The 2021 Banking Package is subject to amendment in the course of the EU's legislative process; and its scope and terms may change prior to its implementation. In addition, in the case of the proposed amendments to CRD IV and the BRRD, their terms and effect will depend, in part, on how they are transposed in each member state. The European Council's proposal on CRR and CRD was published on 8 November 2022. During February 2023, the European Parliament's ECON Committee voted to adopt Parliament's proposed amendments to the Commission's proposal, and the 2021 Banking Package is currently in the final stage of the EU legislative process, the trilogue process, that will eventually result in the final versions of the directives and regulations. It is expected that the 2021 Banking Package will enter into force on 1 January 2025; and certain measures are expected to be subject to transitional arrangements or to be phased in over time. 

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 February 2023, the Bank received notification from the Single Resolution Board (SRB) of the final decision for the binding minimum requirement for own funds and eligible liabilities (MREL) for the Bank, determined as the preferred resolution point of entry. As per the decision, the final MREL requirement was set at 24.35% of risk weighted assets and 5.91% of Leverage Ratio Exposure (LRE) (as defined in the CRR) and must be met by 31 December 2025. Furthermore, the binding interim requirement of 1 January 2022 set at 14.94% of risk weighted assets and 5.91% of LRE must continue to be met. The own funds used by the Bank to meet the Combined Buffer Requirement (CBR) are not eligible to meet its MREL requirements expressed in terms of risk-weighted assets. The Bank must comply with the MREL requirement at the consolidated level, comprising the Bank and its subsidiaries.

A. Group Financial Results - Underlying Basis (continued)

A.1.2 Regulations and Directives (continued)

A.1.2.2 Bank Recovery and Resolution Directive (BRRD) (continued)

A.1. Balance Sheet Analysis (continued)

Minimum Requirement for Own Funds and Eligible Liabilities (MREL) (continued)

The MREL ratio as at 31 March 2023, calculated according to the SRB's eligibility criteria currently in effect and based on internal estimate, stood at 20.82% of risk weighted assets (RWA) and at 10.01% of LRE. The MREL ratio expressed as a percentage of risk weighted assets does not include capital used to meet the CBR amount, which stood at 4.02% on 1 January 2023 (compared to 3.77% as at 31 December 2022) and will further increase on 30 November 2023 following increase in CcyB from 0.00% to 0.50% of the total risk exposure amounts in Cyprus as announced by Central Bank of Cyprus. Throughout this announcement, the MREL ratios as at 31 March 2023 include unaudited/un-reviewed profits for the three months ended 31 March 2023 and for CRR compliance purposes na an accrual for an estimated final dividend at a payout ratio of 30% of the Group Adjusted Profit after tax for the period, which is in line with the Group's approved dividend policy. As per the latest SREP decision, any dividend distribution is subject to regulatory approval. Such dividend accrual does not constitute a binding commitment for a dividend payment nor does it constitute a warranty or representation that such a payment will be made.

The Bank continues to evaluate opportunities to advance the build-up of its MREL liabilities.

A.1.3 Funding and Liquidity

Funding

Funding from Central Banks

At 31 March 2023, the Bank's funding from central banks amounted to €1,988 mn, which relates to ECB funding, comprising solely of funding through the Targeted Longer-Term Refinancing Operations (TLTRO) III, compared to €1,977 mn at 31 December 2022.

The Bank borrowed an overall amount of €3 bn under TLTRO III by June 2021, despite its comfortable liquidity position, given the favourable borrowing terms, in combination with the relaxation of collateral requirements.

Following the changes in the terms of the TLTRO III announced by the ECB in October 2022, and given the Bank's strong liquidity position, the Bank proceeded with the repayment of €1 bn TLTRO III funding in December 2022.

Deposits

Customer deposits totalled €18,974 mn at 31 March 2023 (compared to €18,998 mn at 31 December 2022) flat in the first quarter and up 7% year on year. Customer deposits are mainly retail-funded and almost 60% of deposits are protected under the deposit guarantee scheme.

The Bank's deposit market share in Cyprus reached 37.3% as at 31 March 2023, compared to 37.2% as at 31 December 2022. Customer deposits accounted for 75% of total assets and 82% of total liabilities at 31 March 2023 (broadly flat since 31 December 2022).

The net loans to deposits (L/D) ratio stood at 53% as at 31 March 2023 (compared to 52% as at 31 December 2022 on the same basis), broadly flat in the first quarter.

Subordinated liabilities

At 31 March 2023, the Group's subordinated liabilities (including accrued interest) amounted to €307 mn (compared to €302 mn at 31 December 2022) and relate to unsecured subordinated Tier 2 Capital Notes ('T2 Notes').

The T2 Notes were priced at par with a fixed coupon of 6.625% per annum, payable annually in arrears and resettable on 23 October 2026. The maturity date of the T2 Notes is 23 October 2031. The Company will have the option to redeem the T2 Notes early on any day during the six-month period from 23 April 2026 to 23 October 2026, subject to applicable regulatory approvals.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.3 Funding and Liquidity (continued)

Debt securities in issue

At 31 March 2023, the carrying value of the Group's debt securities in issue (including accrued interest) amounted to €300 mn (compared to €298 mn at 31 December 2022) and relate to senior preferred notes.

In June 2021, the Bank executed its inaugural MREL transaction issuing €300 mn of senior preferred notes (the "SP Notes"). The SP Notes were priced at par with a fixed coupon of 2.50% per annum, payable annually in arrears and resettable on 24 June 2026. The maturity date of the SP Notes is 24 June 2027 and the Bank may, at its discretion, redeem the SP Notes on 24 June 2026, subject to meeting certain conditions as specified in the Terms and Conditions, including applicable regulatory consents. The SP Notes comply with the criteria for MREL and contribute towards the Bank's MREL requirements.

Liquidity

At 31 March 2023, the Group Liquidity Coverage Ratio (LCR) stood at 303% (compared to 291% at 31 December 2022), well above the minimum regulatory requirement of 100%. The LCR surplus as at 31 March 2023 amounted to €7.4 bn (compared to €7.2 bn at 31 December 2022). The increase in liquidity surplus in 1Q2023 reflects primarily the increase in the fixed income portfolio. When disregarding the TLTRO III, the Group's liquidity position remains strong with an LCR of 248% and liquidity surplus of €5.4 bn.

At 31 March 2023, the Group Net Stable Funding Ratio (NSFR) stood at 160% (compared to 168% at 31 December 2022), well above the minimum regulatory requirement of 100%.

A.1.4 Loans

Group gross loans totalled €10,278 mn at 31 March 2023, compared to €10,217 mn at 31 December 2022, up 1 percentage point on the prior quarter as repayments partly offset new lending.

New lending granted in Cyprus was seasonally strong and reached €624 mn for 1Q2023 (compared to €444 mn for 4Q2022 and €622 mn for 1Q2022) up by 41% qoq and broadly flat yoy, whilst maintaining strict lending criteria. The qoq increase is driven by increased seasonal business demand. New lending in 1Q2023 comprised €297 mn of corporate loans, €186 mn of retail loans (of which €108 mn were housing loans), €77 mn of SME loans and €64 mn of shipping and international loans. 

At 31 March 2023, the Group net loans and advances to customers totalled €10,013 mn (compared to €9,953 mn at 31 December 2022), increased by 1% since the beginning of the year.

The Bank is the largest credit provider in Cyprus with a market share of 42.4% at 31 March 2023, compared to 40.9% at 31 December 2022.

A.1.5 Loan portfolio quality

The Group has continued to make steady progress across all asset quality metrics. Today, the Group's priorities focus mainly on maintaining high quality new lending with strict underwriting standards and preventing asset quality deterioration following the ongoing macroeconomic uncertainty.

The loan credit losses for 1Q2023 totalled €11 mn, compared to €11 mn for 4Q2022 and €12 mn for 1Q2022. Further details regarding loan credit losses are provided in Section A.2.3 'Profit before tax and non-recurring items'.

The elevated inflation combined with the rising interest rate environment are expected to weigh on the purchasing power of the Bank's customers. Despite these persisting pressures there are no signs of asset quality deterioration to date. While defaults have been limited, the additional monitoring and provisioning for sectors and individuals vulnerable to the deteriorated macroeconomic environment remain in place to ensure that potential difficulties in the repayment ability are identified at an early stage, and appropriate solutions are provided to viable customers.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1. 5 Loan portfolio quality (continued)

Non-performing exposures reduction

Non-performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced by €22 mn, or 5% in 1Q2023, compared to a reduction of €607 mn in 4Q2022 (of which c.€550 mn related to Project Helix 3), to €389 mn at 31 March 2023 (compared to €411 mn at 31 December 2022). The reduction in 1Q2023 is mainly driven by the net organic NPE reductions of €22 mn (inflows minus outflows), compared to €57 mn as at 31 December 2022.

As a result, the NPEs account for 3.8% of gross loans as at 31 March 2023, compared to 4.0% at 31 December 2022.

The NPE coverage ratio stands at 73% at 31 March 2023, compared to 69% as at 31 December 2022. When taking into account tangible collateral at fair value, NPEs are fully covered.

Project Helix 3

In November 2022, the Group completed Project Helix 3, that refers to the sale of a portfolio of loans with a gross book value of €555 mn (of which €551 mn relate to non-performing exposures), as well as real estate properties with a book value of €88 mn as at 30 September 2022, to funds managed by Pacific Investment Management Company LLC, the agreement for which was announced on 15 November 2021.

Cash consideration of c.€350 mn was received by completion, reflecting adjustments resulting from, inter alia, loan repayments received on the Portfolio since the reference date of 31 May 2021.

The transaction represented a milestone in the successful delivery of one of the Group's strategic priorities of improving asset quality through the reduction of NPEs with the NPE ratio reducing below 5%.

Project Sinope

In December 2021, the Bank entered into an agreement for the sale of a portfolio of NPEs, with a contractual balance of €146 mn and a gross book value of €12 mn as at 31 December 2021, as well as properties in Romania with carrying value €0.6 mn as at 31 December 2021 (known as 'Project Sinope'). Project Sinope was completed in August 2022.

Overall, since the peak in 2014, the stock of NPEs has been reduced by €14.6 bn or 97% to €0.4 bn and the NPE ratio by 59 percentage points, from 63% to below 4%.

A.1.6 Fixed income portfolio

Fixed income portfolio amounts to €2,747 mn as at 31 March 2023, compared to €2,500 mn as at 31 December 2022, increased by 10% since the beginning of the year. The portfolio represents 11% of total assets and comprises €2,332 mn (85%) carrying value measured at amortised cost and €415 mn (15%) at fair value through other comprehensive income ('FVOCI').

The fixed income portfolio measured at amortised cost is held to maturity and therefore no fair value gains/losses are recognised in the Group's income statement or equity. This fixed income portfolio has low average duration of c.2 years and high average rating at A1 or at Aa3 when Cyprus government bonds are excluded. The fair value of the amortised cost fixed income portfolio as at 31 March 2023 amounts to €2,245 mn, reflecting an unrealised fair value loss of €87 mn, equivalent to c.85 bps of CET1 ratio. 

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.7 Real Estate Management Unit (REMU)

The Real Estate Management Unit (REMU) is focused on the disposal of on-boarded properties resulting from debt for asset swaps. Cumulative sales since the beginning of 2017 amount to €1.6 bn and exceed properties on-boarded in the same period of €1.4 bn.

The Group completed disposals of €41 mn in 1Q2023 (compared to €37 mn in 4Q2022 and €44 mn in 1Q2022), resulting in a profit on disposal of €2 mn for 1Q2023 (compared to a profit of c.€3 mn for 4Q2022 and €6 mn for 1Q2022). Asset disposals are across all property classes, with over half of sales by value in 1Q2023 relating to land.

During 1Q2023, the Group executed sale-purchase agreements (SPAs) for disposals of 138 properties with contract value of €43 mn, compared to SPAs for disposals of 161 properties, with contract value of €51 mn for 1Q2022.

In addition, the Group had a relatively strong pipeline of €58 mn by contract value as at 31 March 2023, of which €38 mn related to SPAs signed (compared to a pipeline of €70 mn as at 31 December 2022, of which €47 mn related to SPAs signed).

REMU on-boarded €2 mn of assets in 1Q2023 (compared to additions of €2 mn in 4Q2022 and €8 mn in 1Q2022), via the execution of debt for asset swaps and repossessed properties.

As at 31 March 2023, assets held by REMU had a carrying value of €1,050 mn (comprising properties of €977 mn classified as 'Stock of property' and €73 mn as 'Investment properties'), compared to €1,116 mn as at 31 December 2022 (comprising properties of €1,041 mn classified as 'Stock of property' and €75 mn as 'Investment properties').

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.7 Real Estate Management Unit (REMU) (continued)

Assets held by REMU

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis

A.2.1 Total income

Net interest income (NII) for 1Q2023 amounted to €162 mn compared to €136 mn for 4Q2022, driven by interest rate rises as well as resilient low deposit pass-through. Net interest income was up by 127% yoy, reflecting mainly the repricing of loans and liquids to higher rates and to a lesser extent the growth of the performing loan book and fixed income portfolio, notwithstanding the foregone NII on the Helix 3 portfolio (c.€3.5 mn in 1Q2022) and end of TLTRO favourable terms (c.€4 mn in 1Q2022).

Quarterly average interest earning assets (AIEA) for 1Q2023 amounted to €22,638 mn, up by 3% yoy driven by the increase in liquid assets mainly as a result of the increase in deposits by €1.3 bn yoy and the increase in the fixed income portfolio by c.€0.9 bn yoy, partly offset by the repayment of €1.0 bn TLTRO in December 2022. Quarterly average interest earning assets for 1Q2023 remained broadly flat on the prior quarter.

Net interest margin (NIM) for 1Q2023 amounted to 2.91% (compared to 2.36% for 4Q2022 and 1.32% for 1Q2022) supported by interest rate rises.

Non-interest income for 1Q2023 amounted to €72 mn (compared to €79 mn for 4Q2022, down by 11% qoq and compared to €66 mn for 1Q2022, up by 8% yoy), comprising net fee and commission income of €44 mn, net foreign exchange gains and net gains/(losses) on financial instruments of €13 mn, net insurance result of €10 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 €3 mn. The qoq decrease relates to lower net fee and commission income. The yoy increase is driven by higher net foreign exchange gains and net gains/(losses) on financial instruments.

Net fee and commission income for 1Q2023 amounted to €44 mn, down 12% qoq (compared to €50 mn for 4Q2022), impacted mainly by the termination of the liquidity fees in December 2022 and NPE sale-related servicing fee in mid- February 2023, as expected and seasonally lower transactional fees. Net fee and commission income was broadly flat yoy; when disregarding the impact of the liquidity fees and NPE sale-related servicing fee, net fee and commission income was up 16% yoy, reflecting the introduction of price adjustments in February 2022, higher non-transactional fees and higher credit card commissions.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.1 Total income (continued)

Net foreign exchange gains and net gains/(losses) on financial instruments of €13 mn for 1Q2023 (comprising net foreign exchange gains of €8 mn and net gains on financial instruments of €5 mn), compared to €2 mn for 1Q2022, reflecting mainly higher foreign exchange income through FX swaps and higher net gains on financial instruments. Net foreign exchange gains and net gains/(losses) on financial instruments were broadly flat qoq. Net foreign exchange gains and net gains/(losses) on financial instruments are considered volatile profit contributors.

Net insurance result amounted to €10 mn for 1Q2023, compared to €11 mn for 1Q2022, down 15% yoy, impacted by higher claims as well as higher attributable expenses arising from new business, partly offset by lower reinsurance expense. Net insurance result is broadly flat on prior quarter.

Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties for 1Q2023 amounted to €2 mn (comprising net gains on disposal of stock of properties of €2 mn, and net losses from revaluation of investment properties of €0.4 mn), compared to €5 mn for 1Q2022 and €2 mn for 4Q2022. REMU profit remains volatile.

Total income for 1Q2023 amounted to €234 mn, compared to €215 mn for 4Q2022 (up 8% qoq), and to €137 mn for 1Q2022 (up 70% yoy) mainly driven by the increases in the net interest income, as explained above.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.2 Total expenses

Total expenses for 1Q2023 were €91 mn (compared to €95 mn for 4Q2022 and €91 mn for 1Q2022, down 5% qoq and 1% yoy), 50% of which related to staff costs (€46 mn), 38% to other operating expenses (€34 mn) and 12% to special levy on deposits and other levies/contributions (€11 mn). The decrease of 5% qoq is driven by seasonally lower other operating expenses, partly offset by higher staff costs. The yoy decrease of 1% reflects benefits from the efficiency actions undertaken in the previous year, partly offset by inflationary pressures, increments and accrued variable compensation.

Total operating expenses for 1Q2023 amounted to €80 mn compared to €84 mn for 4Q2022 (down 5% qoq) and to €81 mn for 1Q2022 (down 3% yoy).

Staff costs for 1Q2023 were €46 mn, down by 4% yoy resulting from the savings of the Voluntary Staff Exit Plan (VEP) that took place in 3Q2022, partially offset by inflationary pressures. Staff costs were up 9% qoq driven by the cost of living adjustments (COLA) (which relates to c.50% of the annual inflation for the year ended 31 December 2022), salary increments and the accrued staff cost rewards of c. €2 mn (variable pay).

In July 2022 the Group completed a VEP which led to the reduction of the Group's full time employees by 16%, at a total cost of €101 mn, recorded in the consolidated income statement in 3Q2022. The gross annual savings were estimated at c.€37 mn or 19% of staff costs with a payback period of 2.7 years. The estimated savings of the VEP are expected to be partially offset by the renewal of the collective agreement in 2023.

In addition, in January 2022 the Group through one of its subsidiaries completed a Voluntary Staff Exit Plan (VEP), through which a small number of its employees were approved to leave at a total cost of €3 mn, recorded in the consolidated income statement in 1Q2022 as a non-recurring item in the underlying basis. 

The Group employed 2,883 persons as at 31 March 2023 compared to 2,889 persons as at 31 December 2022 and 3,395 persons as at 31 March 2022.

During December 2022 the Group has granted to eligible employees share awards under a long-term incentive plan ("2022 LTIP" or the "2022 Plan"). The 2022 Plan involves the granting of share awards and is driven by scorecard achievement, with measures and targets set to align pay outcomes with the delivery of the Group's strategy. The employees eligible for 2022 LTIP are the members of the Extended EXCO. The 2022 LTIP stipulates that performance will be measured over a 3 year period and financial and non-financial objectives to be achieved. At the end of the performance period, the performance outcome will be used to assess the percentage of the awards that will vest.

These shares will then normally vest in six tranches, with the first tranche vesting after the end of the performance period and the last tranche vesting on the fifth anniversary of the first vesting date.

In addition, staff costs for 1Q2023 include c.€2 mn staff cost rewards, namely the Short-Term Incentive Plan. The Plan involves variable remuneration to selected employees and will be driven by both, delivery of the Group's strategy as well as individual performance.

Other operating expenses for 1Q2023 were €34 mn compared to €42 mn for 4Q2022, down by 19% qoq and broadly flat yoy. The qoq reduction of 19% was mainly the result of seasonally higher professional and marketing expenses in the previous quarter.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.2 Total expenses (continued)

Special levy on deposits and other levies/contributions for 1Q2023 amounted to €11 mn broadly flat qoq and includes the contribution of the Bank to the Deposit Guarantee Fund (DGF) of €4 mn which relates to 1H2023 and was recorded in 1Q2023 (in line with IFRSs). The 4Q2022 charge includes the net impact of a levy in the form of an annual guarantee fee relating to the Income Tax legislation in relation to conversion of DTA into DTC of €4.8 mn (see Section A.1.1 'Capital Base'). The yoy increase of 12% is driven mainly by the increase of deposits of €1.3 bn yoy.

The cost to income ratio excluding special levy on deposits and other levies/contributions for 1Q2023 was 34% compared to 39% for 4Q2022 and 60% for 1Q2022. The qoq and yoy decrease of 5 p.p. and 26 p.p. respectively, is driven mainly by the higher total income.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.3 Profit before tax and non-recurring items

Operating profit for 1Q2023 amounted to €143 mn, compared to €120 mn for 4Q2022 (up 19% qoq), and to €46 mn for 1Q2022 (up 213% yoy). The qoq and yoy increase is driven mainly by the significant increase in net interest income.

Loan credit losses for 1Q2023 were €11 mn flat qoq and yoy and corresponds to a cost of risk of 44 bps, reflecting resilient credit portfolio quality. Cost of risk for 1Q2023 includes releases on management overlays for performing book in specific sectors due to continuing strong loan performance and expected improved sector performance (such as tourism) and loan credit losses on Stage 2 and Stage 3 exposures arising from post model adjustments to capture uncertain macroeconomic conditions and conservative assumptions.

At 31 March 2023, the allowance for expected loan credit losses, including residual fair value adjustment on initial recognition and credit losses on off-balance sheet exposures (please refer to Section H. 'Alternative Performance Measure' and I 'Definitions & Explanations' for definition) totalled €282 mn (compared to €282 mn at 31 December 2022 and €734 mn at 31 March 2022) and accounted for 2.7% of gross loans (compared to 2.8% of gross loans for 31 December 2022 and 6.7% of gross loans including portfolios classified as held to sale for 31 March 2022).

Impairments of other financial and non-financial assets for 1Q2023 amounted to €11 mn, compared to €13 mn for 4Q2022, down by 8% qoq and compared to €5 mn for 1Q2022, up 126% yoy and they relate mainly to REMU stock impairments.

Provisions for pending litigations, regulatory and other matters (net of reversals) for 1Q2023 amounted to €6 mn, compared to €8 mn for 4Q2022 down 26% qoq and compared to almost nil for 1Q2022.

Profit before tax and non-recurring items for 1Q2023 amounted to €115 mn compared to €88 mn for 4Q2022 and €29 mn for 1Q2022.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

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

The tax charge for 1Q2023 is €18 mn compared to €13 mn for 4Q2022 and to €6 mn for 1Q2022.

Profit after tax and before non-recurring items (attributable to the owners of the Company) for 1Q2023 is €96 mn compared to €74 mn for 4Q2022 and €23 mn for 1Q2022.

Advisory and other restructuring costs - organic for 1Q2023 are €1 mn, broadly flat qoq and yoy and relate to the transformation programme and other strategic projects of the Group.

Profit after tax arising from the organic operations (attributable to the owners of the Company) for 1Q2023 amounts to €95 mn compared to €73 mn for 4Q2022 and €22 mn for 1Q2022.

Provisions/net profit/(loss) relating to NPE sales for 1Q2023 is nil, compared to a net profit of €2 mn for 4Q2022, and a net loss of €1 mn in 1Q2022.

Restructuring and other costs relating to NPE sales for 1Q2023 is nil, flat qoq and compared to €1 mn for 1Q2022 relating to the agreements for the sale of portfolios of NPEs.

Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) is nil for 1Q2023, compared to €3 mn for 1Q2022. For further details are provided in Section A.2.2 'Total expenses'.

Profit after tax attributable to the owners of the Company for 1Q2023 amounts to €95 mn compared to €75 mn for 4Q2022 and €17 mn for 1Q2022. ROTE stands at 21.3% for 1Q2023, compared to 17.3% for 4Q2022 and 4.0% for 1Q2022.

B. Operating Environment

The International Monetary Fund in its Spring World Economic Outlook released in April 2023, predicts slower growth for the global economy and increased financial and other vulnerabilities under tighter monetary conditions. Cyprus demonstrates relative strength and resilience in this environment with a growth outlook that outweighs average growth in the EU and with inflation dropping at a faster pace in comparison.

Growth in the global economy is expected to slow in 2023 and will remain subdued in the medium term relative to the period before Covid. Growth in the Euro area and the European Union is expected to slow to 0.8% in 2023 with some countries like Germany and the United Kingdom slipping into mild recessions according to the baseline scenario. Growth is expected to be stronger in the emerging and developing world at 3.9% this year. The risk for the more advanced countries including the United States, falling into a mild recession in the second half of 2023 and early next, remains elevated. 

In Cyprus the economy rebounded strongly in 2021-22 growing by 6.6% and 5.6% respectively after a 4.4% contraction in 2020 due to Covid disruptions. The economy has proved resilient against the shocks of pandemic and the Ukraine war, attributed to a strong services sectors, particularly information, communications, professional and financial services. Tourist activity continued to rebound strongly in 2022 with total arrivals reaching 3.2 million persons or about 80% of corresponding arrivals in 2019. Receipts reached €2.4 bn or 91% of 2019 levels. In the first three months of 2023, arrivals increased by 61% on the same period a year ago and 10% higher than the corresponding arrivals in 2019. Growth in 2022 was widespread across sectors, with negative growth recorded only in construction. On the expenditure side growth in 2022 was driven by domestic demand, particularly private consumption, with net exports making a negative contribution.

Economic momentum is expected to continue in 2023 at a slower pace, driven mainly by the expected deterioration of external demand as well as slowing domestic demand caused by still high consumer price inflation. According to the Ministry of Finance, GDP is forecasted to grow by c.2.8% for 2023, outperforming Euro area average.

GDP growth will be materially supported in 2023 by EU funding in the form of grants and loans from the Recovery and Resilience Facility (RRF). Cyprus has already received €157 mn as pre-financing in September 2021 and the first payment of €85 mn in December 2022 after achieving the 14 milestones being linked to the first instalment. Cyprus is broadly on track in the implementation of its National Recovery and Resilience Plan.

Inflation measured by the Harmonised Index of Consumer Prices, was 8.1% average in 2022 compared with 8.4% in the Euro area. Inflation peaked in July 2022 at 10.6% and has been decelerating since reaching 3.8% in April 2023. In the four months January-April 2023, harmonised inflation was 5.8% and core inflation, excluding energy and food and beverages items, was 4.9%. Inflation in the Euro area is proving stickier at 8% in the first quarter of 2023 and 5.6% core, according to Eurostat. For Cyprus, the IMF forecasts harmonised inflation of 3.9% in 2023 and 2.5% in 2024. For the Euro area the IMF forecasts harmonised inflation of 5.3% in 2023 and 2.9% in 2024. Cyprus has a very high dependence on oil and petroleum products which exposes it to changes in global energy prices and imported inflationary pressures.

Fiscal consolidation will continue, leading to a material decline in debt-to-GDP ratio. The recovery in 2021 was underpinned by a significant increase in general government revenue and a relative decline in government expenditure. As a result, the budget deficit narrowed to 1.7% of GDP from a deficit of 5.8% of GDP in 2020 which included government measures to support the economy in the midst of a deep recession induced by the Covid pandemic. Developments in 2022 were favourable for public finances. Revenues grew by 14.5% while expenditures increased by considerably less, by 4.1%, generating a significant surplus of 2.3% of GDP. Part of the increase in revenues is a windfall related to the energy crisis, but overall, the current state of public finances is positive. Public debt dropped to 86.5% of GDP in 2022 from 101% of GDP in 2021. The IMF forecasts for 2023 and 2024 respectively, fiscal surpluses of 1.9% and 1.7% of GDP, and gross debt to GDP of 79.5% and 71.9% of GDP. In the longer term, public debt dynamics will depend on interest rate developments, inflation, and growth.

The ECB's Governing Council at the monetary policy meeting of 4 May 2023, decided to increase the three key ECB interest rates by 25 basis points underlying their determination to ensure the timely return of inflation to the 2% medium term target. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.75%, 4.00% and 3.25% respectively. Against an elevated level of uncertainty, the ECB's monetary policy decisions will be data driven, on the basis of internal assessments of the inflation trend in light of the incoming economic and financial data, and the strength of monetary policy transmission.

The banking sector has undergone significant restructuring since the financial crisis of 2013. Banks have reduced their foreign exposures, significantly shrunk their balance sheets, increased their capital buffers, and restructured and refocused their domestic operations. Prudential supervision has been strengthened and a new legal framework for private debt restructuring, including the sale of loans, is now in place. Total non-performing exposures (NPEs) at the end of January 2023 amounted to €2.3 billion, or 9.6% of gross loans. NPEs that were restructured were 43.2% of total NPEs, at the end of January, and the coverage ratio was 52%.

B. Operating Environment (continued)

Private debt has continued to decline since mid-2012, shrinking by more than half by the end of December 2022 and continued to decline into 2023. The decline reflects the long process of deleveraging since the start of the financial crisis and includes the sale or transfer of non-performing loans in recent years. Private debt, as measured by loans to residents excluding the government, stands at 76% of nominal GDP at the end of March 2023. New business lending excluding renegotiated amounts, ('pure loans' as defined by CBC) reached €3.2 bn in 2022 as a whole, exactly the same level as pure new lending in 2019, but started to lag in early months of 2023. Pure new loans in January-March were €0.76 billion or 83% of pure new loans in the corresponding period the year before. This was driven by a drop in the demand for mortgages. Cypriot banks are very liquid, and the bulk of excess deposits are held overnight at the ECB. 

Cyprus' current account deficit narrowed from 10.1% of GDP in 2020 to 6.8% in 2021 before deteriorating to 8.8% of GDP in 2022. The current account deficit will narrow modestly according to the IMF, in 2023-24, to 7.8% and 7.7% of GDP respectively. The current account deficit will remain higher than pre-pandemic levels in the medium term, partly due to strong import growth linked to higher energy prices and EU investment plans, which will weigh on the trade balance. The size of the country's deficits is partly structural, a consequence of special purpose vehicles domiciled in Cyprus.

Sovereign ratings

The sovereign risk ratings of the Cyprus Government improved considerably in recent years reflecting reduced banking sector risks, and improvements in economic resilience and consistent fiscal outperformance. Cyprus demonstrated policy commitment to correcting fiscal imbalances through reform and restructuring of its banking system. Public debt remains high in relation to GDP but large-scale asset purchases from the ECB ensure favourable funding costs for Cyprus and ample liquidity in the sovereign bond market.

Most recently, in March 2023 Fitch Ratings upgraded Cyprus' Long-Term Issuer Default rating at BBB which is one notch above investment grade, from BBB- and maintained the outlook stable. The upgrade reflects the improvement in public finances and the government indebtedness as well as strong growth in GDP, the resiliency of the Cypriot economy to external shocks and the improvement in the Banking sector in asset quality.

In March 2023, DBRS Morningstar confirmed the Republic of Cyprus's Long-Term Foreign and Local Currency - Issuer Ratings at BBB (low) and maintained the trend Stable. The affirmation is supported by a stable political environment, the government's sound fiscal and economic policies and the favourable government debt profile. The stable outlook balances recent favourable fiscal dynamics against downside risks for the economic outlooks.

In September 2022, S&P Global Ratings upgraded Cyprus' investment grade rating of BBB/A-2 and has changed the outlook from positive to stable. The upgrade reflects the resiliency of the Cypriot economy to recent external shock (including the COVID-19 pandemic). The stable outlook balances risks from the crisis in Ukraine and the economy's diversified structure and the expectation that the government's fiscal position will continue to improve.

In August 2022, Moody's Investors Service affirmed the Government of Cyprus' long-term issuer and senior unsecured ratings to Ba1 and changed the outlook from stable to positive. The key drivers reflecting the affirmation are the strong reduction in Cyprus' public debt ratio in 2022, stronger-than expected economic resilience to Russia's invasion of Ukraine and the COVID-19 pandemic as well the ongoing strengthening of the banking sector. In a credit assessment that was published in December 2022, Moody's investors service affirmed a new Cyprus' credit profile.

C. Business Overview

Credit ratings

The Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. In May 2023 Moody's Investors Service upgraded the Bank's long-term deposit rating to Ba1 from Ba2, maintaining the positive outlook. The main drivers for this upgrade are the continued strengthening of the Bank's asset quality and its improving profitability prospects that continue to reduce risks to its capital. In April 2023, S&P Global Ratings affirmed the long-term issuer credit rating of the Bank at BB- and revised the outlook to positive from stable. The revised outlook reflects the likelihood of further progress in Cyprus' operating environment, in particular materially easing funding risks. In December 2022, Fitch Ratings upgraded the Bank's long-term issuer default rating to B+ from B-, whilst maintaining the positive outlook. The two-notch upgrade reflects improved Bank's asset quality, supported by the completion of Project Helix 3 together with the organic reduction of impaired assets. The upgrade is also underpinned by Fitch's view of the resilience of the Cypriot economy, even in light of growing economic uncertainties.

Financial performance

The Group is a leading, financial and technology hub in Cyprus. In 2022 the Group completed its transformation into a diversified and well-capitalised organisation with sustainably profitable banking and other financial services. This was marked by the resumption of dividend payments after 12 years, a significant milestone, as it represents a new chapter for the Group. 

In April 2023 the Company obtained the approval of the European Central Bank to pay a dividend out of FY2022 profitability. Following this approval, the Board of Directors of the Company recommended to the shareholders for approval at the AGM that will be held on 26 May 2023, of a final Dividend of €0.05 per ordinary share in respect of earnings for the year ended 31 December 2022. This proposed Dividend amounts to €22.3 mn in total and is equivalent to a payout ratio of 14% of the FY2022 recurring profitability adjusted for the AT1 coupon or 31% based on FY2022 profit after tax (as reported in 2022 Annual report).

Additionally, the Board of Directors approved the Group dividend policy. The Group aims to provide a sustainable return to shareholders. Dividend payments are expected to build prudently and progressively over time, towards a payout ratio in the range of 30-50% of the Group's profitability after tax, before non-recurring items, adjusted for AT1 coupon (referred to as "adjusted recurring profitability"). The dividend policy takes into consideration market conditions as well as the outcome of capital and liquidity planning.

During the quarter ended 31 March 2023, the Group's financial performance was ahead of its 2023 targets, confirming the sustainability of its business model with well-diversified revenues and disciplined cost containment, despite inflationary pressures. Overall, the Group generated a ROTE of 21.3% compared to 17.3% in the previous quarter, underpinned mainly by the interest rate rises and simultaneously a well-managed deposit pass-through.

Favourable interest rate environment

The structure of the Group's balance sheet is geared towards higher interest rates. As at 31 March 2023, cash balances with ECB (excluding TLTRO of c.€2.0 bn) amounted to c.€7.2 bn, reflecting immediate benefit from interest rate rises. The repricing of the reference rates gradually benefits the interest income on loans, as over 95% of the Group's loan portfolio is variable rate as at 31 March 2023. The net interest income for 1Q2023 stood at €162 mn, more than doubled compared to 1Q2022. This increase is underpinned by faster and steeper than expected interest rate rises as well as a resilient low deposit pass-through.

Growing revenues in a more capital efficient way

The Group remains focused on growing revenues in a more capital efficient way. The Group aims to continue to grow its high-quality new lending, drive growth in niche areas for further market penetration and diversify through non-banking services, such as insurance and digital products.

The Group has continued to provide high quality new lending in 1Q2023 via prudent underwriting standards. Growth in new lending in Cyprus has been focused on selected industries in line with the Bank's target risk profile.

During the quarter ended 31 March 2023, new lending amounted to €624 mn, up by 41% qoq and broadly flat yoy. The qoq increase is driven by increased seasonal business demand. As a result, the gross performing loan book expanded to €9.9 bn up by 1% yoy, as repayments partly offset new lending.

Fixed income portfolio amounts to €2,747 mn as at 31 March 2023, compared to €2,500 mn as at 31 December 2022, increased by 10% since the beginning of the year. The portfolio represents 11% of total assets and comprises €2,332 mn (85%) carrying value measured at amortised cost and €415 mn (15%) at fair value through other comprehensive income ('FVOCI').

C. Business Overview (continued)

Growing revenues in a more capital efficient way (continued)

The fixed income portfolio measured at amortised cost is held to maturity and therefore no fair value gains/losses are recognised in the Group's income statement or equity. This fixed income portfolio has low average duration of c.2 years and high average rating at A1 or at Aa3 when Cyprus government bonds are excluded. The fair value of the amortised cost fixed income portfolio as at 31 March 2023 amounts to €2,245 mn, reflecting a fair value loss of €87 mn, equivalent to just c.85 bps of CET1 ratio. 

Separately, the Group focuses to continue improving revenues through multiple less capital-intensive initiatives, with a focus on fees and commissions, insurance and non-banking opportunities, leveraging on the Group's digital capabilities. In 2023 fees and commission income will negatively be affected by the termination of liquidity fees in December 2022 as well as an NPE sale-related servicing fee in mid-February 2023. As a result, net fee and commission income were reduced by 12% in the first quarter to €44 mn.

Net fee and commission income is enhanced by transaction fees from the Group's subsidiary, JCC Payment Systems Ltd (JCC), a leading player in the card processing business and payment solutions, 75% owned by the Bank. JCC's net fee and commission income contributed 9% of total non interest income and amounted to €6 mn in 1Q2023, up 21% yoy, backed by strong transaction volume.

The Group's insurance companies, EuroLife Ltd (Eurolife) and Genikes Insurance of Cyprus Ltd (GI) are respectively leading players in the life and general insurance business in Cyprus, and have been providing a recurring and improving income, further diversifying the Group's income streams. The net insurance result for 1Q2023 contributed 13% of non-interest income and amounted to €10 mn, down 15% yoy, impacted mainly by higher claims as well as higher attributable expenses arising from new business, partly offset by lower reinsurance expense. On 1 January 2023, the Group adopted IFRS 17, retrospectively, which impacts the profit recognition for insurance contracts by phasing of profit over their lifetime compared to recognised substantially up-front under IFRS 4. The new accounting standard does not change the economics of the insurance business and decreases the volatility of the Group's insurance companies profitability. For further details please refer to section F.9.

Finally, the Group through the Digital Economy Platform (Jinius) ('the Platform') aims to generate new revenue sources over the medium term, leveraging on the Bank's market position, knowledge and digital infrastructure. The Platform aims to bring stakeholders together, link businesses with each other and with consumers and to drive opportunities in lifestyle banking and beyond. The Platform is expected to allow the Bank to enhance the engagement of its customer base, attract new customers, optimise the cost of the Bank's own processes, and position the Bank next to the customer at the point and time of need. Currently, over 1,500 companies are registered in the platform. 

Lean operating model

Striving for a lean operating model is a key strategic pillar for the Group in order to deliver shareholder value, without constraining funding its digital transformation and investing in the business.

The efficiency actions of the Group in 2022 to maintain operating expenses under control in an inflationary environment included further branch footprint optimisation and substantial streamline of workforce. In July 2022 the Group successfully completed a Voluntary Staff Exit Plan (VEP) through which 16% of the Group's full-time employees were approved to leave at a total cost of €101 mn. Following the completion of the VEP, the gross annual savings were estimated at c.€37 mn or 19% of staff costs with a payback period of 2.7 years. Additionally in January 2022 one of the Bank's subsidiaries completed a small-scale targeted Voluntary Staff Exit Plan (VEP), through which a small number of full-time employees were approved to leave at a total cost of €3 mn. In relation to branch restructuring, during 2022 the Group has reduced the number of branches by 20 to 60, a reduction of 25%. As a result, the Group's total operating expenses for 1Q2023 were reduced by 3% on prior year, reflecting the benefits from the efficiency actions in an inflationary environment. The cost to income ratio excluding special levy on deposits and other levies/contributions for 1Q2023 was reduced further to 34%, 26 p.p. down compared to 1Q2022.

During December 2022 the Group has granted to eligible employees share awards under a long-term incentive plan ("2022 LTIP" or the "2022 Plan"). The 2022 Plan involves the granting of share awards and is driven by scorecard achievement, with measures and targets set to align pay outcomes with the delivery of the Group's strategy. The employees eligible for 2022 LTIP are the members of the Extended EXCO. The 2022 LTIP stipulates that performance will be measured over a 3 year period and financial and non-financial objectives to be achieved. At the end of the performance period, the performance outcome will be used to assess the percentage of the awards that will vest.

These shares will then normally vest in six tranches, with the first tranche vesting after the end of the performance period and the last tranche vesting on the fifth anniversary of the first vesting date.

C. Business Overview (continued)

Lean operating model (continued)

In addition, staff costs for 1Q2023 include c.€2 mn staff cost rewards, namely the Short-term Incentive Plan. The Plan involves variable remuneration to selected employees and will be driven by both, delivery of the Group's strategy as well as individual performance.

Transformation plan

The Group's focus continues to deepen the relationship with its customers as a customer centric organisation. A transformation plan is already in progress and aims to enable the shift to modern banking by digitally transforming customer service, as well as internal operations. The holistic transformation aims to (i) shift to a more customer-centric operating model by defining customer segment strategies, (ii) redefine distribution model across existing and new channels, (iii) digitally transform the way the Group serves its customers and operates internally, and (iv) improve employee engagement through a robust set of organisational health initiatives.

Digital transformation

The Bank's digital transformation focuses on developing digital services and products that improve the customer experience, streamlining internal processes, and introducing new ways for improving the workplace environment.

During 1Q2023, the Bank continued to enrich and improve its digital portfolio with new innovative services to its customers. A new functionality, that enables customers to file their card transaction disputes via the internet banking makes the process easier for the customers. Moreover, the digital onboarding process has been improved easing the customer experience. Additionally, a number of new security features have also been introduced to further secure the customer online transactions.

The adoption of digital products and services continued to grow and gained momentum in the first quarter of 2023 and beyond. As at the end of March 2023, 94.2% of the number of transactions involving deposits, cash withdrawals and internal/external transfers were performed through digital channels (up by 27.8 p.p. from 66.4% in September 2017 when the digital transformation programme was initiated). In addition, 82.7% of individual customers were digitally engaged (up by 22.5 p.p. from 60.2% in September 2017), choosing digital channels over branches to perform their transactions. As at the end of March 2023, active mobile banking users and active QuickPay users have grown by 15.1% and 29.3% respectively over the last 12 months. The highest number of QuickPay users to date was recorded in March 2023 with 173 thousand active users. Likewise, the highest number of QuickPay payments (in 2023) was recorded in March 2023 with 536 thousand transactions.

Asset quality

Balance sheet de-risking was largely completed in 2022, marked by the completion of Project Helix 3 which refers to the sale of non-performing exposures with gross book value of c.€550 mn as at the date of completion. Project Helix 3 represented a further milestone in the delivery of one of the Group's strategic priorities of improving asset quality through the reduction of NPEs and delivering NPE ratio below 5%. As at 31 March 2023, the Group's NPE ratio stood at 3.8%.

The Group's priorities remain intact, maintaining high quality new lending with strict underwriting standards and preventing asset quality deterioration in this uncertain outlook.

C. Business Overview (continued)

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

Climate change and transition to a sustainable economy is one of the greatest challenges. As part of its vision to be the leading financial hub in Cyprus, the Group is determined to lead the transition of Cyprus to a sustainable future. The Group continuously evolves towards its ESG agenda and continues to progress towards building a forward-looking organisation embracing ESG in all aspects of business as usual. In 2022, the Company received a rating of AA (on a scale of AAA-CCC) in the MSCI ESG Ratings assessment.

The ESG strategy formulated in 2021 is continuously expanding. The Group is maintaining its leading role in the Social and Governance pillars and focus on increasing the Group's positive impacts on the Environment by transforming not only its own operations, but also the operations of its customers.

The Group has committed to the following primary ESG targets, which reflect the pivotal role of ESG in the Group's strategy:

● Become carbon neutral by 2030

● Become Net Zero by 2050

● Steadily increase Green Asset Ratio

● Steadily increase Green Mortgage Ratio

● ≥30% women in Group's management bodies (defined as the Executive Committee (EXCO) and the Extended EXCO) by 2030

For the Group to articulate the delivery of its primary ESG targets and address regulatory expectations, a comprehensive ESG working plan has been established in 2022. The ESG working plan is closely monitored by the Sustainability Committee, Executive Committee and the Board of Directors at frequent intervals.

Environmental Pillar

The Group has estimated the Scope 1 and Scope 2 greenhouse gas ('GHG') emissions of 2021 relating to own operations in order to set the baseline for carbon neutrality target. The Bank being the main contributor of GHG emissions of the Group, designed in 2022 the strategy to meet the carbon neutrality target by 2030 and progress towards Net Zero target of 2050. The Bank plans to invest in energy efficient installations and actions and replace fuel intensive machineries and vehicles from 2023 to 2025, which would lead to c.5-10% reduction in Scope 1 and Scope 2 emissions by 2025 compared to 2021. The Bank expects that the Scope 2 emissions will be reduced further when the energy market in Cyprus shifts further towards renewable energy. The Bank through installation of solar panels and other energy efficiency actions performed in 2021 and 2022 achieved a reduction in electricity consumption of 1.8 mn KWh (11% reduction) in FY2022 compared to the baseline year of 2021 and further reduction of c.255k KWh was observed in 1Q2023 compared to 1Q2022. Investments into energy savings initiatives continue into 2023 in line with the Bank's strategy to meet its carbon neutrality target.

The Bank of Cyprus is the first bank in Cyprus to join the Partnership for Carbon Accounting Financials (PCAF) in October 2022 and is following the recommended methodology for the estimation of the Financed Scope 3 emissions. The Bank has estimated Financed Scope 3 GHG emissions relating to the loan portfolio based on PCAF standard and proxies. Following the estimation of Financed Scope 3 GHG emissions derived from loan portfolio and in conjunction with the materiality assessment's results on climate and environmental risks the Bank will be able to identify the carbon-concentrated areas so as to take the necessary actions to minimise the environmental and climate impact associated with the loan portfolio by offering targeted climate friendly products and engaging with its customers. In 2023, following the identification of carbon-concentrated sectors and asset classes, the Bank is expected to set decarbonisation targets aligned with 1.5C climate scenario (Science based targets) which will assist in the formulation of the Bank's strategy going forward.

The Bank in 2022 launched a low emission vehicle loan product (either hybrid or electric) and is working to expand its range of environmentally friendly products. In addition, the Group has set up a Sustainable Finance Framework which will facilitate the issuance of Green, Social or Sustainable bonds. The proceeds from such bonds will be allocated to eligible activities and products designated in the Sustainable Finance Framework.

Moreover, the Bank is making substantial progress in further integrating climate risk considerations into its risk management approach, as it tries to integrate climate related risk into its risk culture. The Bank, within the context of underwriting processes, is currently in the process of incorporating the assessment of ESG and climate matters and amending its Policies and Procedures in such a way that potential impact from ESG and climate is reflected in the fundamental elements of the creditworthiness assessment. This exercise includes the design of ESG questionnaires per sector which will then be leveraged for deriving an ESG classification. In addition, the Bank is in the process to enhance the risk quantification methodology to assess how the portfolio is affected by C&E risks and will be incorporating the above elements into the stress testing infrastructure.

C. Business Overview (continued)

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

During 2022 in order to enhance the awareness and skillset towards the ESG, the Group performed several trainings to the Board of Directors, Senior Management and employees. ESG training opportunities are continuing to be offered in 2023 at all levels of the organisation. In addition, the internal communication channels are enhanced by establishing an ESG internal portal and launching Green@work which provides tips on energy efficiency actions at work. Early in 2023 the Bank launched a campaign on new Visa Debit cards produced from recyclable plastic extracted from the ocean. The campaign aims to inform the public on the level of water contamination from plastic and the impact on life below water.

Social Pillar

At the centre of the Group's leading social role lie its investments in the Bank of Cyprus Oncology Centre (with an overall investment of c.€70 mn since 1998, whilst 60% of diagnosed cancer cases in Cyprus are being treated at the Centre), the work of SupportCY Network, which was developed in 2020, the contribution of the Bank of Cyprus Cultural Centre in promoting the cultural heritage of the island, and the Work of IDEA Innovation Centre. The Cultural Centre undertook a number of innovative projects such as 'AISTHISEIS' - Multi sensory museum experience for people with disabilities as well as the ReInHerit program facilitating innovation and research cooperation between European museums and heritage continuing also into 2023, with 4430 people participated in events at the Cultural Foundation between January to March 2023. The IDEA Innovation Centre, invested c.€4 mn in start-up business creation since its incorporation, supported creation of 89 new companies to date, and provided support to 210+ entrepreneurs through its Startup program since incorporation. Staff have continued to engage in voluntary initiatives to support charities, foundations, people in need and initiatives to protect the environment.

The Group has continued to upgrade its staff's skillset by providing training and development opportunities to all staff, and capitalising on modern delivery methods. In 2023, the Group has launched the 'Winning moments' training program aiming to improve Customer experience through upgrading the customer service, in which 780 members of staff are expected to participate. Moreover, the Group continues its emphasis on staff wellness into 2023 by offering webinars, team building activities and family events with sole purpose to enhance mental, physical, financial and social health.

Governance Pillar

The Group continues to operate successfully within a complex regulatory framework of a holding company which is registered in Ireland, listed on two Stock Exchanges and run in compliance with a number of rules and regulations. Its governance and management structures enable it to achieve present and future economic prosperity, environmental integrity and social equity across its value chain. The Group operates within a framework of prudent and effective controls, which enable risk assessment and risk management based on the relevant policies under the leadership of the Board of Directors. The Group has set up a robust Governance Structure to oversee its ESG agenda. Progress on the implementation and evolution of the Group's ESG strategy is monitored by the Sustainability Committee and the Board of Directors. The Sustainability Committee is a dedicated executive committee set up in early 2021 to oversee the ESG agenda of the Group, review the evolution of the Group's ESG strategy, monitor the development and implementation of the Group's ESG objectives and the embedding of ESG priorities in the Group's business targets. The Group's ESG Governance structure continues to evolve, so as to better address the Group's evolving ESG needs. The Group's regulatory compliance continues to be an undisputed priority.

The Board composition of the Company and the Bank is diverse, with 40% of the Board members being female as at 31 March 2023. The Board displays a strong skillset stemming from broad international experience. Moreover, the Bank aspires to achieve a representation of at least 30% women in Group's management bodies (Defined as the EXCO and the Extended EXCO) by 2030. As at 31 March 2023, there is a 27% representation of women in Group's management bodies and a 39% representation of women at key positions below the Extended EXCO level (defined as positions between Assistant Manager and Manager).

C. Business Overview (continued)

Ukrainian crisis

The economic environment has evolved rapidly since February 2022 following Russia's invasion in Ukraine. In response to the war in Ukraine, the EU, the UK and the US, in a coordinated effort joined by several other countries imposed a variety of financial sanctions and export controls on Russia, Belarus and certain regions of Ukraine as well as various related entities and individuals. As the war is prolonged, geopolitical tension persists and inflation remains elevated, impacted by soaring energy prices and disruptions in supply chains. This high inflation weighs on business confidence and consumers' purchasing power. In this context the Group is closely monitoring the developments, utilising dedicated governance structures including a Crisis Management Committee as required and has assessed the impact the crisis has on the Group's operations and financial performance.

Direct impact

The Group does not have any banking operations in Russia or Ukraine, following the sale of its operations of Ukraine in 2014 and in Russia in 2015. The Group has run down its legacy net exposure to less than €1 mn as at 31 March 2023 in Russia through write-offs and provisions.

The Group has no exposure to Russian bonds or banks which are subject to sanctions.

The Group has limited direct exposure with loans related to Russia and Belarus, representing 0.3% of total assets or c.1% of net loans as at 31 March 2023. The net book value of these loans stood at €87 mn as at 31 March 2023, of which €80 mn are performing, whilst the remaining were classified as NPEs well before the current crisis. The portfolio is granular and secured mainly by real estate properties in Cyprus.

Customer deposits related to Russian and Belarusian customers account for only 4% of total customer deposits as at 31 March 2023. This exposure is not material, given the Group's strong liquidity position. The Group operates with a significant surplus liquidity of €7.4 bn (LCR ratio of 303%) as at 31 March 2023.

Since 2014 the Bank, has engaged in a very demanding and rigorous anti-financial crime remediation programme. It fully adheres to all relevant UN, EU, USA, UK sanction frameworks and has implemented additional measures to monitor a complicated sanctions environment including systemic enhancements, specialised training and revision of risk appetite. As a result, the Bank has effectively terminated the relationship with professional intermediaries introducing customers to the Bank. Additionally, c.25,900 customer relationships were terminated and c.12,000 potential new customer relationships were suspended solely on compliance reasons (eg: KYC, or AML) for the years 2015-2022.

Indirect impact

Although the Group's direct exposure to Russia or Belarus is limited, the crisis in Ukraine had a negative impact on the Cypriot economy, mainly arising from the tourism and professional services sectors, increasing energy prices fuelling inflation and disruptions to global supply chains. During 2022 the performance of the tourism sector was strong despite challenges and represented 80% of 2019 levels, despite the sizeable loss of tourist arrivals from Russia and Ukraine. To date, tourist activity is recovering to pre-pandemic levels. The Group continues to monitor exposures in sectors likely impacted by the prolonged geopolitical uncertainty and persistent inflationary pressures and remains in close contact with customers to offer solutions as necessary. 

Cyprus has no energy dependence on Russia as it imports oil from Greece, Italy and the Netherlands; however it is indirectly affected by pricing pressures in the international energy markets. The focus on renewables increases, and a steady increase in contribution from renewables is noted.

Overall, the Group has limited impact from its direct exposure, while any indirect impact depends on the duration and severity of the crisis and its impact on the Cypriot economy.

The Group continues to closely monitor the situation, taking all necessary and appropriate measures to minimise the impact on its operations and financial performance, as well as to manage all related risks and comply with the applicable sanctions.

D. Strategy and Outlook

The strategic objectives for the Group are to become a stronger, safer and a more efficient institution with a sustainable and well-diversified business model committed to deliver sustainable shareholder returns.

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

· 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

· Strengthen asset quality; maintaining high quality new lending, completing legacy de-risking, normalising cost of risk and reducing (other) impairments

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

In early 2023 the Company achieved a significant milestone; its longstanding intention to resume dividends after 12 years. Following the approval of the European Central Bank, the Board of Directors of the Company recommended to the shareholders for approval at the AGM that will be held on 26 May 2023, the payment of a final dividend of €0.05 per ordinary share in respect of earnings for the year ended 31 December 2022 ('Dividend'). This proposed Dividend amounts to €22.3 mn in total and is equivalent to a payout ratio of 14% of the FY2022 recurring profitability adjusted for the AT1 coupon or 31% based on FY2022 profit after tax (as reported in the 2022 Annual Financial Report). Subject to approval at the AGM, the Dividend will be paid in cash on 16 June 2023 to those shareholders on the register on 5 May 2023 ("Record date") with an Ex-Dividend date of 4 May 2023.

Additionally, the Board of Directors approved the Group dividend policy. The Group aims to provide a sustainable return to shareholders. Dividend payments are expected to build prudently and progressively over time, towards a payout ratio in the range of 30-50% of the Group's profitability after tax, before non-recurring items, adjusted for AT1 coupon (referred to as "adjusted recurring profitability"). The dividend policy takes into consideration market conditions as well as the outcome of capital and liquidity planning.

During the quarter ended, the Group delivered another set of solid financial results, ahead of its 2023 targets across its key metrics. As a result, the Group achieved a ROTE of 21.3%, underpinned mainly by the higher interest rate rises than initially expected. Additionally, the Group's asset quality was in line with its targets as the NPE ratio stood at 3.8% at quarter end and the cost of risk amounted to 44 bps.

The Group will be holding an Investor Update event on 8 June 2023, where it will present and discuss an update of the Group's outlook.

E. Financial Results - Statutory Basis

Unaudited Interim Consolidated Income Statement

The following financial information for the first three months of 2023 and 2022 within Section E corresponds to the condensed consolidated financial statements prepared in accordance with the International Financial Reporting Standards as adopted by the European Union. As a result of the implementation from 1 January 2023 of IFRS 17, 2022 comparative information has been restated to reflect the impact of IFRS 17 adoption.

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 interim income statement between statutory and underlying basis

* Net insurance result per underlying basis comprises the aggregate of captions 'Net insurance finance income/(expense) and net reinsurance finance income/(expense)', 'Net insurance service result' and 'Net reinsurance service result' per the statutory basis.

The reclassification differences between the statutory basis and the underlying basis are explained below:

· Net gains on loans and advances to customers at FVPL of €1 million included in 'Loan credit losses' under the underlying basis are included in 'Net gains/(losses) on financial instruments' under the statutory basis. Their classification under the underlying basis is done to align their presentation with the loan credit losses on loans and advances to customers at amortised cost.

· 'Net gains on derecognition of financial assets measured at amortised cost' of approximately €0.3 million under the statutory basis comprise net gains on derecognition of loans and advances to customers included in 'Loan credit losses' under the underlying basis as to align their presentation with the loan credit losses on loans and advances to customers.

· Provisions for litigation, claims, regulatory and other matters amounting to €6 million presented within 'Operating profit before credit losses and impairment' under the statutory basis, are presented under the underlying basis in conjunction with loan credit losses and impairments.

· Advisory and other restructuring costs of approximately €1 million included in 'Other operating expenses' under the statutory basis are separately presented under the underlying basis since they comprise mainly fees to external advisors in relation to the transformation programme and other strategic projects of the Group.

· 'Credit losses on financial assets' and 'Impairment net of reversals on non-financial assets' under the statutory basis include: i) credit losses to cover credit risk on loans and advances to customers of €12 million, which are included in 'Loan credit losses' under the underlying basis, and ii) credit losses of other financial assets of €3 million and impairment net of reversals of non-financial assets of €8 million, which are included in 'Impairment of other financial and non-financial assets' under the underlying basis, as to be presented separately from loan credit losses.

F. Notes (continued)

F.2 Customer deposits

The analysis of customer deposits is presented below: