Bk. Cyprus Hldg Regulatory News (BOCH)

Announcement

Group Financial Results for the nine months ended 30 September 2022

Nicosia, 18 November 2022

Group Chief Executive Statement

"We reported a strong performance in the third quarter of 2022, delivering tangible results against our strategic targets, and confirming the sustainability of our business model with well-diversified revenues and tight cost control. We recorded a 49% increase in profit after tax, before non-recurring items, corresponding to a return on tangible equity of 11.7%, on track to achieve an underlying ROTE of c.10% already in 2022, notwithstanding external uncertainties.

Despite concerns regarding the outlook for global and European economic growth, the Cypriot economy is proving resilient to external shocks and continued to grow strongly in the third quarter with GDP increasing by 5.4%. GDP in Cyprus is forecast to grow by c.6.0% in real terms in 2022, supported by stronger-than expected tourism performance and then to grow at a slower pace by 3.0% in 2023, outperforming the eurozone average in both years.

The third quarter of 2022 was marked by the early delivery of our 2022 NPE ratio target, with the NPE ratio decreasing to 4.5%.

As the largest financial group in Cyprus, we continued to support the economy by extending €1.7 bn of new loans in the first nine months of 2022, an increase of 25% on the prior year, whilst maintaining strict lending criteria. Our performing loan book has strong fundamentals and is well positioned to face external shocks.

During the third quarter of 2022 we generated total income of €172 mn and a positive operating result of €81 mn, up 36% on the previous quarter, underpinned by strong growth in net interest income, with loan and liquid yields continuing to improve. In this respect, we are upgrading our net interest income guidance for 2022 to over €350 mn, reflecting the Group's positive gearing to higher and faster interest rate rises. Operating expenses were contained in the third quarter, on the back of efficiency actions undertaken in the current inflationary environment. Our cost to income ratio stood at 47%, down 10 p.p. on the prior quarter. Our cost of risk stood at 45 bps and remained well within our normalised target range.

In July, we completed a Voluntary Staff Exit Plan (VEP) through which 16% of the Group's full time employees were approved to leave at a total one-off cost of €101 mn recorded in the third quarter. The gross annual saving is estimated at €37 mn or 19% of total staff costs, with a payback period of 2.7 years. As a result, a net loss of €59 mn was reported for the third quarter and €9 mn for the first nine months of 2022.

The Bank's capital position remains robust and comfortably in excess of our regulatory requirements, after absorbing in full the cost of the VEP. As at 30 September 2022, our Total Capital ratio was 19.8% and our CET1 ratio was 14.7%, on both a transitional and pro forma basis. Our liquidity position also remains strong, as such our cash balances with ECB (excluding TLTRO III of €3.0 bn) amounted to €6.9 bn, leaving the Bank well positioned to benefit from further interest rate increases. Deposits on our balance sheet increased by 2% in the quarter and 7% year to date, to €18.8 bn.

Our vision for the future of the Bank is clear; we are determined to continue the successful execution of our strategy to transform the Group into a sustainably profitable organisation for banking and broader financial products and services in Cyprus. We expect the actions we are taking and the momentum in our business to create shareholder value and we now have the foundations for meaningful return to dividend distributions from 2023 onwards, subject to regulatory approval and market conditions."

Panicos Nicolaou

Commentary on Underlying Basis

The financial information presented in this Section provides an overview of the Group financial results for the nine months ended 30 September 2022 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 the exceptional and one-off items.

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

With respect to the "Balance Sheet Analysis', please note the following in relation to the disclosure of pro forma figures and ratios with respect to Project Helix 3. Further details are provided in Section A.1.5. 'Loan portfolio quality'.

References to pro forma figures and ratios as at 30 September 2022 refer to Project Helix 3. Project Helix 3 refers to the agreement the Group reached in November 2021 with funds affiliated with PIMCO, for the sale of a portfolio of NPEs with gross book value of €568 mn, as well as real estate properties with book value of c.€120 mn, as at 30 September 2021. Numbers on a pro forma basis are based on 30 September 2022 underlying basis figures and are adjusted for Project Helix 3 and assume its completion, currently expected to occur by the end of November 2022, which remains subject to customary regulatory and other approvals.

Where numbers are provided on a pro forma basis this is stated and referred to as 'Pro forma for Helix 3'.

Any references to pro forma figures and ratios as at 30 June 2022 refer to Project Helix 3, Project Sinope and the Voluntary Staff Exit Plan ('VEP') and is referred to as 'Pro forma for held for sale and Voluntary Staff Exit Plan' or 'Pro forma for HFS and VEP'.  Project Sinope refers to the agreement the Group reached in December 2021 for the sale of a portfolio of NPEs with gross book value of €12 mn, as well as properties in Romania with carrying value of €0.6 mn as at 31 December 2021. Project Sinope was completed in August 2022. VEP refers to the Voluntary Staff Exit Plan that the Group completed in July 2022, through which c.550 applicants were approved to leave the Group at a total cost of €101 mn and was recorded in the 3Q2022 income statement.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis

A.1.1 Capital Base

Total equity excluding non-controlling interests totalled €2,017 mn as at 30 September 2022 compared to €2,070 mn as at 30 June 2022, and to €2,059 mn at 31 December 2021. Shareholders' equity totalled €1,797 mn as at 30 September 2022 compared to €1,850 mn as at 30 June 2022 and to €1,839 mn at 31 December 2021.

The Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at 14.2% as at 30 September 2022 and 14.7% pro forma for Helix 3, compared to 14.6% as at 30 June 2022 and 14.2% pro forma for HFS and VEP and to 15.1% as at 31 December 2021 (and 15.8% pro forma for held for sale portfolios (referred to as 'pro forma for HFS')). During 3Q2022, the CET1 ratio was positively affected by the pre-provision income and the decrease in risk weighted assets, and negatively by provisions and impairments and mainly the cost of the Voluntary Staff Exit Plan.

The Group has elected to apply the EU transitional arrangements for regulatory capital purposes (EU Regulation 2017/2395) where the impact on the impairment amount from the initial application of IFRS 9 on the capital ratios is phased-in gradually, with the impact being fully phased-in (100%) by 1 January 2023. The phasing-in for 2022 of the impairment amount from the initial application of IFRS 9 had a negative impact of c.60 bps on the CET1 ratio on 1 January 2022. 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 33 bps on Group's CET1 ratio as at 30 September 2022.

The CET1 ratio on a fully loaded basis amounted to 13.5% as at 30 September 2022 and 13.9% pro forma for Helix 3 compared to 13.9% as at 30 June 2022 (and 13.4% pro forma for HFS and VEP), and to 13.7% as at 31 December 2021 (and 14.3% pro forma for HFS).

The Total Capital ratio stood at 19.1% as at 30 September 2022 and 19.8% pro forma for Helix 3 compared to 19.5% as at 30 June 2022 (and 19.3% pro forma for HFS and VEP), and to 20.0% as at 31 December 2021 (and 20.8% pro forma for HFS).

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

In the context of the annual SREP conducted by the European Central Bank (ECB) in 2021 and based on the final 2021 SREP Decision received in February 2022, the Pillar II requirement has been set at 3.26%, compared to the previous level of 3.00%. The additional Pillar II requirement add-on of 0.26% relates to the ECB's prudential provisioning expectations as per the 2018 ECB Addendum and subsequent ECB announcements and press release in July 2018 and August 2019. This component of the Pillar II requirement add-on takes into consideration Project Helix 3. The details of the 2022 SREP requirements are set below.

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 is being phased-in gradually, having started from 1 January 2019 at 0.50%. Currently the O-SII buffer stands at 1.25% and will be fully phased-in on 1 January 2023. 

As a result, currently the Group's minimum phased-in CET1 capital ratio requirement is set at 10.08% compared to the previous level of 9.69% (comprising a 4.50% Pillar I requirement, a 1.83% Pillar II requirement, the Capital Conservation Buffer of 2.50% and the O-SII Buffer of 1.25%) and the Group's minimum phased-in Total Capital ratio requirement is set at 15.01% compared to the previous level of 14.50% (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 3.26% Pillar II requirement, the Capital Conservation Buffer of 2.50% and the O-SII Buffer of 1.25%). The ECB has also provided revised lower non-public guidance for an additional Pillar II CET1 buffer (P2G). Pillar II add-on capital requirements derive from the SREP, which is a point in time assessment, and are therefore subject to change over time. These SREP requirements became effective as from 1 March 2022.

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.

Following the annual SREP performed by the ECB in 2022 and based on the draft SREP decision received in October 2022, expected to be effective from 1 January 2023 (subject to ECB final confirmation) the Pillar II requirement has been revised to 3.08%, compared to the current 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 ignoring the Pillar II add-on relating to ECB's prudential provisioning expectations, the Pillar 2 requirement is reduced from 3.00% to 2.75%.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.1 Capital Base (continued)

As a result, the Group's minimum phased-in CET1 capital ratio and Total Capital ratio requirements, were reduced when ignoring the phasing in of the Other Systemically Important Institution Buffer. The Group's minimum phased-in CET1 capital ratio is expected to be set at 10.23%, comprising a 4.50% Pillar I requirement, a 1.73% Pillar II requirement, the Capital Conservation Buffer of 2.50% and the O-SII Buffer of 1.50%. The Group's minimum phased-in Total Capital ratio requirement is expected to be set at 15.08%, 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% and the O-SII Buffer of 1.50%. The ECB has also maintained the non-public guidance for an additional Pillar II CET1 buffer (P2G) unchanged.

Based on the SREP decision, the Company (Bank of Cyprus Holdings PLC) and the Bank are under a regulatory prohibition for equity dividend distribution and hence no dividends were declared or paid during 2021-2022. This prohibition does not apply if the distribution is made via the issuance of new ordinary shares to the shareholders, which are eligible as CET1 capital. No prohibition applies to the payment of coupons on any AT1 capital instruments issued by the Company or the Bank. Based on the final 2021 SREP Decision, the previous restriction on variable pay was lifted.

Voluntary Staff Exit Plan

In July 2022, the Group completed a Voluntary Staff Exit Plan, resulting in a negative impact of c.95 bps both on the Group's CET1 and Total Capital ratios as at 30 September 2022. For further information please refer to Section A.2.2 "Total expenses".

Project Helix 3

In November 2021, the Group reached agreement for the sale of a portfolio of NPEs with gross book value of €568 mn as at 30 September 2021, as well as real estate properties with book value of c.€120 mn as at 30 September 2021, known as Project Helix 3. Further details are provided in Section A.1.5 "Loan portfolio quality".

Project Helix 3 is expected to have a positive capital impact of c.50 bps on the Group's CET1 ratio on the basis of 30 September 2022 figures.

Pro forma calculations are based on 30 September 2022 financial results, unless otherwise stated, and assume completion of the transaction, which remains subject to customary regulatory and other approvals.

The completion of Project Helix 3 is currently expected to occur by the end of November 2022 and remains subject to customary regulatory and other approvals.

Tier 2 Capital Notes

In April 2021, the Company issued €300 mn unsecured and subordinated Tier 2 Capital Notes (the 'New T2 Notes').

The Company and the Bank entered into an agreement pursuant to which the Company on-lent to the Bank the entire €300 mn proceeds of the issue of the New T2 Notes (the 'Tier 2 Loan') on terms substantially identical to the terms and conditions of the New T2 Notes. The Tier 2 Loan constitutes an unsecured and subordinated obligation of the Bank.

The New 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 for the New T2 Notes is 23 October 2031. The Company will have the option to redeem the New T2 Notes early on any day during the six-month period from 23 April 2026 to 23 October 2026, subject to applicable regulatory consents.

At the same time, the Bank invited the holders of its €250 mn Fixed Rate Reset Tier 2 Capital Notes due January 2027 (the 'Old T2 Notes') to tender their Old T2 Notes for purchase by the Bank at a price of 105.50%, after which Old T2 Notes of €43 mn remained outstanding. On 19 January 2022, the Bank exercised its option and redeemed the outstanding €43 mn Old T2 Notes.

The Group continues to monitor opportunities for the optimisation of its capital position, including Additional Tier 1 capital.

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

Legislative amendments allowing for the conversion of specific deferred tax assets (DTA) into deferred tax credits (DTC) became effective in March 2019. The law amendments cover the utilisation of income tax losses transferred from Laiki Bank to the Bank in March 2013. The introduction of 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.

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 since then. 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).

The Group since prior years, in anticipation of modifications in the Law, 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 €5.3 mn per year (for each tax year in scope i.e. since 2018) although the Group understands that such fee may fluctuate annually as to be determined by the Ministry of Finance. An amount of €5.3 mn was recorded in FY2021, bringing the total amount provided by the Group for such increased fee to c.€21 mn for the years 2018-2021. In 3Q2022 the Group has been levied an amount within the provisions level maintained.

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. As a general matter, it is likely to be several years until the 2021 Banking Package begins to be implemented (currently expected in 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 December 2021, the Bank received notification from the Single Resolution Board (SRB) of the final decision for the binding minimum requirement for own funds and eligible liabilities (MREL) for the Bank, determined as the preferred resolution point of entry. As per the decision, the final MREL requirement was set at 23.74% 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, an interim requirement to be met by 1 January 2022 was set at 14.94% of risk weighted assets and 5.91% of LRE. The own funds used by the Bank to meet the Combined Buffer Requirement (CBR) will not be eligible to meet its MREL requirements expressed in terms of risk-weighted assets. The 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. Balance Sheet Analysis (continued)

A.1.1 Capital Base (continued)

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

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

In November 2022, the Bank received draft notification from the SRB regarding the 2023 MREL decision, by which the above requirements and timelines remain unchanged, except for the final MREL requirement for 31 December 2025 now set at 24.35% of risk weighted assets. The revised MREL requirements remain subject to SRB and CBC final confirmation.

The MREL ratio of the Bank as at 30 September 2022, calculated according to the SRB's eligibility criteria currently in effect and based on the Bank's internal estimate, stood at 19.87% of risk weighted assets (RWA) and at 9.62% of LRE. Pro forma for Helix 3, the MREL ratio of the Bank as at 30 September 2022, calculated on the same basis, stood at 20.66% of risk weighted assets. The MREL ratio expressed as a percentage of risk weighted assets does not include capital used to meet the CBR amount, which stands at 3.75% since 1 January 2022 and is expected to increase to 4.0% on 1 January 2023.

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

A.1.3 Funding and Liquidity

Funding

Funding from Central Banks

At 30 September 2022, the Bank's funding from central banks amounted to €2,952 mn, which relates to ECB funding, comprising solely of funding through the Targeted Longer-Term Refinancing Operations (TLTRO) III, compared to €2,955 mn at 30 June 2022 and to €2,970 mn as at 31 December 2021.

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.

The Bank exceeded the benchmark net lending threshold in the period 1 March 2020 - 31 March 2021 and qualified for the beneficial rate of -1% for the period from June 2020 to June 2021. The NII benefit from its TLTRO III borrowing for the period from June 2020 to June 2021 stood at c.€7 mn and was recognised over the respective period in the income statement.

In addition, the Bank has exceeded the benchmark net lending threshold in the period 1 October 2020 - 31 December 2021 and qualified for a beneficial rate for the period from June 2021 to June 2022. The NII benefit from its TLTRO III borrowing for the period from June 2021 to June 2022 stood at €15 mn and was recognised over the respective period in the income statement.

The Bank expects an additional net NII benefit from the TLTRO III borrowing for the period 24 June 2022 to 22 November 2022 of c.€8 mn, of which c.€3 mn was recognised in the income statement in 3Q2022.

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 is contemplating earlier repayment of the TLTRO III.

Deposits

Customer deposits totalled €18,792 mn at 30 September 2022 (compared to €18,450 mn at 30 June 2022 and to €17,531 mn at 31 December 2021) and increased by 2% in the third quarter and by 7% since the year end. 

The Bank's deposit market share in Cyprus reached 37.1% as at 30 September 2022, compared to 36.8% as at 30 June 2022 and to 34.8% as at 31 December 2021. Customer deposits accounted for 72% of total assets and 78% of total liabilities at 30 September 2022 (1 p.p. up since 31 December 2021).

The net loans to deposits (L/D) ratio stood at 55% as at 30 September 2022 (compared to 56% as at 30 June 2022 and to 57% as at 31 December 2021 on the same basis). Pro forma for Helix 3, the net loans to deposit ratio as at 30 September 2022 stood at 54%.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.3 Funding and Liquidity (continued)

Subordinated liabilities

At 30 September 2022, the Group's subordinated liabilities (including accrued interest) amounted to €317 mn (compared to €312 mn at 30 June 2022 and €340 mn at 31 December 2021) and relates to unsecured subordinated Tier 2 Capital Notes.

For further information please refer to Section A.1.1 'Capital Base'.

Debt securities in issue

At 30 September 2022, the Group's debt securities in issue (including accrued interest) amounted to €299 mn (compared to €299 mn at 30 June 2022 and €303 mn at 31 December 2021) and relates 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 30 September 2022, the Group Liquidity Coverage Ratio (LCR) stood at 300% (compared to 299% at 30 June 2022 and to 298% at 31 December 2021), well above the minimum regulatory requirement of 100%. The LCR surplus as at 30 September 2022 amounted to €6.8 bn (compared to €6.7 bn at 30 June 2022 and €6.3 bn at 31 December 2021), well positioned to benefit from further interest rate increases. The increase in 3Q2022 is mainly driven by the increase in customer deposits.

At 30 September 2022, the Group Net Stable Funding Ratio (NSFR) stood at 160% (compared to 160% at 30 June 2022 and 147% at 31 December 2021), well above the minimum regulatory requirement of 100%, enforced in June 2021 as per CRR II.

A.1.4 Loans

Group gross loans (inclusive of those classified as held for sale) totalled €10,913 mn at 30 September 2022, compared to €11,047 mn at 30 June 2022 and €10,856 mn at 31 December 2021, increased by 1% since the beginning of the year.

New lending granted in Cyprus reached €497 mn for 3Q2022 (compared to €537 mn for 2Q2022 and €622 mn for 1Q2022) reflecting seasonal patterns and totalled €1,656 mn for 9M2022 (compared €1,321 mn for 9M2021) up by 25% yoy, reaching higher levels than the equivalent period pre-pandemic (9M2019), whilst maintaining strict lending criteria. The yoy increase is driven by increase in lending activity across all sectors, with corporate being the main driver. New lending in 3Q2022 comprised €269 mn of corporate loans, €155 mn of retail loans (of which €115 mn were housing loans), €42 mn of SME loans and €31 mn of shipping and international loans. 

At 30 September 2022, the Group net loans and advances to customers (excluding those classified as held for sale) totalled €10,088 mn (compared to €10,144 mn at 30 June 2022 and €9,836 mn at 31 December 2021), increased by 3% since the beginning of the year.

In addition, at 30 September 2022 net loans and advances to customers of €236 mn were classified as held for sale in line with IFRS 5 related to Project Helix 3 (see below), compared to €247 mn as at 30 June 2022 of which €241 mn related to Project Helix 3 and €6 mn to Project Sinope.

The Bank is the largest credit provider in Cyprus with a market share of 41.1% at 30 September 2022, compared to 41.2% at 30 June 2022 and 38.8% at 31 December 2021. The increase in 9M2022 is due to a reduction in loans in the banking system.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.5 Loan portfolio quality

The Group has continued to make steady progress across all asset quality metrics. As the balance sheet de-risking is largely complete, the Group's priorities include maintaining high quality new lending and preventing asset quality deterioration following the deteriorating macroeconomic landscape.

The loan credit losses for 3Q2022 totalled €13 mn (excluding 'Provisions/net (loss)/profit relating to NPE sales'), compared to €11 mn for 2Q2022 and totalled €36 mn for 9M2022, compared to €57 mn for 9M2021. Further details regarding loan credit losses are provided in Section A.2.3 'Profit before tax and non-recurring items'.

While defaults have been limited, the additional monitoring and provisioning for sectors 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. 

The Group will continue to monitor the situation, so that any changes arising from the uncertainty on the macroeconomic outlook and geopolitical developments, are timely captured.

Non-performing exposures reduction

Non-performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced by €150 mn, or 13% in 3Q2022 (comprising net organic NPE reductions of €133 mn (inflows minus outflows), completion of Project Sinope of €12 mn and further net NPE reductions of €5 mn relating to the NPE sales lockbox), compared to a reduction of €79 mn in 2Q2022 to €1,018 mn at 30 September 2022 (compared to €1,343 mn at 31 December 2021). Pro forma for Helix 3, NPEs are reduced by further €551 mn to €467 mn on the basis of 30 September 2022 figures.

The NPEs account for 9.3% of gross loans as at 30 September 2022, compared to 10.6% at 30 June 2022 and 12.4% as at 31 December 2021, on the same basis, i.e. including the NPE portfolios classified as 'Non-current assets and disposal groups held for sale'. Pro forma for Helix 3, the NPE ratio is reduced to 4.5% on the basis of 30 September 2022 figures, delivering early the 2022 target NPE ratio of c.5%.

The NPE coverage ratio stands at 60% at 30 September 2022, compared to 58% at 30 June 2022 on the same basis, i.e. including the NPE portfolios classified as 'Non-current assets and disposal groups held for sale'. When taking into account tangible collateral at fair value, NPEs are fully covered. Pro forma for Helix 3, NPE coverage ratio is 63% on the basis of 30 September 2022 figures.

Project Helix 3

In November 2021, the Group reached agreement for the sale of a portfolio of NPEs with gross book value of €568 mn as at 30 September 2021, as well as real estate properties with book value of c.€120 mn as at 30 September 2021, to funds affiliated with Pacific Investment Management Company LLC (PIMCO), known as Project Helix 3. This portfolio of loans had a contractual balance of €993 mn as at the reference date of 31 May 2021 and comprises c.20,000 loans, mainly to retail clients. As at 30 September 2022, 30 June 2022, 31 March 2022 and 31 December 2021, this portfolio of loans, as well as the real estate properties included in Helix 3, have been classified as a disposal group held for sale. At completion, currently expected to occur by the end of November 2022, the Bank will receive gross cash consideration of c.€385 mn.

This portfolio of loans (as well as the real estate properties included in Helix 3) will be transferred to a licensed Cypriot Credit Acquiring Company (the "CyCAC") by the Bank. The shares of the CyCAC will then be acquired by certain funds affiliated with Pacific Investment Management Company LLC (PIMCO), the purchaser of the portfolio.

Following a transitional period where servicing will be retained by the Bank, it is intended that the servicing of the portfolio of loans and the real estate properties included in Helix 3 will be carried out by a third party servicer selected and appointed by the purchaser.

Project Helix 3 represents a milestone in the delivery of one of the Group's core strategic priorities of improving asset quality through the reduction of NPEs. Pro forma for Helix 3, the Group's NPE ratio is now below 5%. Helix 3 reduced the stock of NPEs by 54% to €467 mn pro forma on the basis of 30 September 2022 figures, and its NPE ratio by 5 p.p., to 4.5% pro forma on the basis of 30 September 2022 figures.

The completion of Project Helix 3 is currently expected to occur by the end of November 2022 and remains subject to customary regulatory and other approvals.

All relevant figures and pro forma calculations are based on 30 September 2022 financial results, unless otherwise stated, and assume completion of the transaction, which remains subject to customary regulatory and other approvals.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.5 Loan portfolio quality (continued)

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'). The portfolio was classified as held for sale since 31 December 2021. Project Sinope was completed in August 2022.

Overall, since the peak in 2014 and pro forma for Helix 3, the stock of NPEs has been reduced by €14.5 bn or 97% to €0.5 bn and the NPE ratio by over 58 percentage points, from 63% to less than 5%.

The Group has successfully delivered NPE ratio below 5% ahead of plan.

A.1.6 Real Estate Management Unit (REMU)

The Real Estate Management Unit (REMU) is focused on the disposal of on-boarded properties resulting from debt for asset swaps. Cumulative sales since the beginning of 2017 amount to €1.50 bn and exceed properties on-boarded in the same period of €1.41 bn.

During the nine months ended 30 September 2022 the Group completed disposals of €125 mn (compared to €107 mn in 9M2021), resulting in a profit on disposal of c.€12 mn for 9M2022 (compared to a profit on disposal of €9.5 mn for 9M2021). Asset disposals are across all property classes, with over half of sales by value in 9M2022 relating to land.

As at 30 September 2022 the carrying value of assets held by REMU transferred to "non-current assets and disposal groups held for sale" amounted to €88 mn (compared to €90 mn at 30 June 2022 and €98 mn at 31 December 2021). They relate to Project Helix 3 and comprise stock of property of €83 mn and investment property of €5 mn as at 30 September 2022. The carrying value of assets held by REMU transferred to "non-current assets and disposal groups" amounted to €90 mn (stock of property of €85 mn and investment properties of €5 mn) as at 30 June 2022 and €98 mn (stock of property of €93 mn and investment properties of €5 mn) as at 31 December 2021 and relate to Project Helix 3 and Project Sinope.

During the nine months ended 30 September 2022, the Group executed sale-purchase agreements (SPAs) for disposals of 512 properties with contract value of €142 mn, compared to SPAs for disposals of 553 properties (with contract value of €113 mn) for 9M2021.

In addition, the Group had a strong pipeline of €82 mn by contract value as at 30 September 2022, of which €44 mn related to SPAs signed (compared to a pipeline of €82 mn as at 30 September 2021, of which €53 mn related to SPAs signed).

REMU on-boarded €84 mn of assets in 9M2022 (compared to additions of €29 mn in 9M2021), via the execution of debt for asset swaps and repossessed properties.

As at 30 September 2022, assets held by REMU (excluding assets classified as held for sale) had a carrying value of €1,161 mn (comprising properties of €1,083 mn classified as 'Stock of property' and €78 mn as 'Investment properties'), compared to €1,215 mn as at 31 December 2021 (comprising properties of €1,112 mn classified as 'Stock of property' and €103 mn as 'Investment properties').

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.6 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 9M2022 amounted to €234 mn, compared to €223 mn in 9M2021, up 5% yoy, marking continuing NII progress attributable to the improvement of the effective yield of loans and liquid assets and the growth of the performing (non-legacy) loan book, despite the foregone NII on the Helix 2 portfolio (c.€15 mn in 9M2021). Net interest income (NII) for 3Q2022 amounted to €89 mn, compared to €74 mn for 2Q2022, up 19% qoq, positively impacted by the increase in interest rates and the effect of one additional calendar day in this quarter.

Quarterly average interest earning assets (AIEA) for 9M2022 amounted to €22,470 mn, up by 12% yoy driven by the increase in liquid assets following the increase in deposits by €1.7 bn yoy. Quarterly average interest earning assets for 3Q2022 increased by 3%. 

Net interest margin (NIM) for 9M2022 amounted to 1.39% (compared to 1.49% for 9M2021) negatively impacted by the corresponding increase in average interest earning assets. Net interest margin (NIM) for 3Q2022 stood at 1.53%, up 20 bps qoq, supported by the rising interest rate environment. Excluding TLTRO of €3.0 bn, NIM stood at 1.69%.

Non-interest income for 9M2022 amounted to €237 mn (compared to €204 mn for 9M2021, up by 16% yoy), comprising net fee and commission income of €142 mn, net foreign exchange gains and net gains/(losses) on financial instruments of €24 mn, net insurance income of €48 mn, net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of €11 mn and other income of €12 mn. The yoy increase is driven by higher net fee and commission income, higher net foreign exchange gains and net gains/(losses) on financial instruments and higher insurance income net of claims and commissions.

Non-interest income for 3Q2022 amounted to €83 mn (compared to €79 mn for 2Q2022, up by 6% qoq), comprising net fee and commission income of €48 mn, net foreign exchange gains and net gains/(losses) on financial instruments of €13 mn, net insurance income of €15 mn, net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of €4 mn and other income of €3 mn. The qoq increase relates to higher net foreign exchange gains and net gains/(losses) on financial instruments.

Net fee and commission income for 9M2022 amounted to €142 mn, (compared to €128 mn for 9M2021, up 11% yoy), driven mainly by the introduction of a revised price list in February 2022 and the extension of liquidity fees to a wider customer group in March 2022. Net fee and commission income for 3Q2022 amounted to €48 mn, down 3% qoq (compared to €50 mn for 2Q2022) due to lower non-transactional fees but seasonally higher transaction 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 €24 mn for 9M2022 (comprising net foreign exchange gains of €21 mn and net gains on financial instruments of €3 mn), compared to €14 mn for 9M2021 (comprising net foreign exchange gains of €12 mn and net gains on financial instruments of €2 mn) and increased by 68% yoy. The increase yoy reflects higher foreign exchange gains through FX swaps.

Net foreign exchange gains and net gains/(losses) on financial instruments amounted to €13 mn for 3Q2022, compared to €5 mn in the previous quarter, reflecting higher foreign exchange gain through FX swaps and one-off gain of c.€5.5 mn of a financial instrument.

Net insurance income amounted to €48 mn for 9M2022, compared to €43 mn for 9M2021. The increase of 13% yoy is mainly due to increased new business and the positive changes in valuation assumptions, partially offset by higher insurance claims.

Net insurance income amounted to €15 mn for 3Q2022, down 9% qoq, impacted by the changes in the valuation assumptions of interest and higher insurance claims.

Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties for 9M2022 amounted to €11 mn (comprising net gains on disposal of stock of properties of €12 mn, and net losses from revaluation of investment properties of €1 mn), compared to €8 mn in 9M2021.

Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties for 3Q2022 amounted to €4 mn, compared to €2 mn for 2Q2022. REMU profit remains volatile.

Total income for 9M2022 amounted to €471 mn, compared to €427 mn for 9M2021 (up 10% yoy), mainly driven by the changes in the net interest income and net fee and commission income as explained above. Total income for 3Q2022 stood at €172 mn, compared to €153 mn for 2Q2022, up by 12% qoq, reflecting the increased net interest income by 19% qoq.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.2 Total expenses

Total expenses for 9M2022 were €281 mn (compared to €284 mn for 9M2021), broadly flat yoy, 52% of which related to staff costs (€146 mn), 39% to other operating expenses (€108 mn) and 9% to special levy on deposits and other levies/contributions (€27 mn). Total expenses for 3Q2022 were €91 mn, compared to €94 mn for 2Q2022, down by 3% qoq. The qoq decrease is driven by the 8% qoq reduction in staff costs and lower other operating expenses partially offset by the increase in special levy on deposits and other levies/contributions.

Total operating expenses for 3Q2022 were €81 mn (compared to €87 mn for 2Q2022) down 7% qoq and totalled €254 mn for 9M2022, compared to €260 mn for 9M2021 (down by 2% yoy).

Staff costs for 9M2022 were €146 mn, compared to €152 mn for 9M2021, down 4% yoy, resulting from the Voluntary Staff Exit Plans that took place in the latest quarters, the renewal of the collective agreement, and despite rising inflation. Staff costs for 3Q2022 amounted to €46 mn down 8% qoq mainly driven by the completion of the VEP in July 2022, leading 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. Following the completion of the VEP, the gross annual savings are 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 and cost of living adjustments in 2023.

The Group employed 2,955 persons as at 30 September 2022 compared to 3,422 persons as at 30 June 2022 and 3,438 persons as at 31 December 2021.

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. 

In July 2021, the Bank reached agreement with the Cyprus Union of Bank Employees for the renewal of the collective agreement for the years 2021 and 2022. The agreement related to certain changes including the introduction of a new pay grading structure linked to the value of each position of employment, and of a performance-related pay component as part of the annual salary increase, both of which have been long-standing objectives of the Bank and are in line with market best-practice. The expected impact of the renewal was an increase in staff costs for 2021 and 2022 by 3-4% per annum, in line with the impact of renewals in previous years.

Other operating expenses for 9M2022 were €108 mn, broadly flat yoy. Other operating expenses for 3Q2022 amounted to €35 mn, compared to €37 mn for 2Q2022, down by 5% qoq driven by lower marketing, IT and other professional expenses.

Special levy on deposits and other levies/contributions for 9M2022 amounted to €27 mn (compared to €24 mn for 9M2021) up 8% yoy, driven by the increase in deposits of €1.7 bn yoy. Special levy on deposits and other levies/contributions for 3Q2022 were €10 mn up by 52% qoq, owing to the €3 mn contribution of the Bank to the Deposit Guarantee Fund (DGF) which relates to 2H2022 and was recorded in 3Q2022, in line with IFRSs.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.2 Total expenses (continued)

The cost to income ratio excluding special levy on deposits and other levies/contributions for 9M2022 was 54%, compared to 61% for 9M2021. The cost to income ratio excluding special levy on deposits and other levies/contributions for 3Q2022 was 47%, compared to 57% for 2Q2022. The qoq decrease of 10 p.p. is driven by the combined effect of higher total income and lower total operating expenses.

The cost to income ratio excluding special levy on deposits and other levies/contributions for the financial year 2022 is revised downwards to low 50s from the previous guidance of 55-60% (announced in August 2022), reflecting mainly the rising revenue on improving interest rate environment and management's ongoing efforts to contain costs. The efficiency actions undertaken on the reduction of employees and branches are expected to unlock meaningful savings from 2023, although these are expected to be partly offset by high inflation.

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 before credit losses and impairments for 9M2022 was €190 mn, compared to €143 mn for 9M2021 (up by 33% yoy). Operating profit before credit losses and impairments for 3Q2022 amounted to €81 mn, compared to €59 mn for 2Q2022, up by 36% qoq driven by the increase in total income qoq.

Loan credit losses for 9M2022 totalled €36 mn, compared to €57 mn for 9M2021 (down by 37% yoy). Loan credit losses for 3Q2022 amounted to €13 mn compared to €11 mn for 2Q2022, up 11% qoq.

Cost of risk for 9M2022 was 44 bps, compared to a cost of risk of 66 bps for 9M2021, down by 22 bps reflecting strong asset quality in 2022 but also impacted by a one-off prior year charge. Cost of risk for 3Q2022 accounted for 45 bps broadly flat on the prior quarter.

At 30 September 2022, 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. 'Definitions & Explanations' for definition) totalled €610 mn (compared to €677 mn at 30 June 2022 and €792 mn at 31 December 2021) and accounted for 5.6% of gross loans including portfolios held for sale (compared to 6.1% and 7.3% of gross loans including portfolios held for sale at 30 June 2022 and 31 December 2021 respectively).

Impairments of other financial and non-financial assets for 9M2022 amounted to €20 mn, compared to €13 mn for 9M2021, (up by 51%) driven mainly by higher impairment charges on net legacy overseas exposures. Impairments of other financial and non-financial assets for 3Q2022 amounted to €7 mn, compared to €8 mn for 2Q2022, broadly flat qoq and includes an impairment charge of c.€4 mn relating to a specific, large, illiquid REMU stock property.

Provisions for litigation, claims, regulatory and other matters for 9M2022 amounted to €3 mn, compared to €6 mn for 9M2021. Provisions for litigation, claims, regulatory and other matters for 3Q2022 amounted to €2 mn in line with the previous quarter.

Profit before tax and non-recurring items for 9M2022 totalled €131 mn, compared to €67 mn for 9M2021 (up by 94% yoy). Profit before tax and non-recurring items for 3Q2022 amounted to €59 mn compared to €39 mn for 2Q2022 (up by 47% qoq).

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 3Q2022 is €8 mn, up 36% qoq and totalled to €20 mn for 9M2022, compared to €3 mn for 9M2021.

Profit after tax and before non-recurring items (attributable to the owners of the Company) for 9M2022 is €109 mn, compared to €64 mn for 9M2021. Return on Tangible Equity (ROTE) before non-recurring items calculated using 'profit after tax and before non-recurring items (attributable to the owners of the Company)' amounts to 8.8% for 9M2022, compared to 5.2% for 9M2021. Profit after tax and before non-recurring items (attributable to the owners of the Company) for 3Q2022 amounted to €50 mn, reflecting a ROTE before non-recurring items of 11.7%, compared to €32 mn for 2Q2022 (and a ROTE before non-recurring items of 7.8%).

Advisory and other restructuring costs - organic for 9M2022 amounted to €10 mn, compared to €19 mn for 9M2021, down by 48% mainly due to ad-hoc cost related to the tender offer for Existing Tier 2 Capital Notes amounting to €12 mn in 9M2021. Advisory and other restructuring costs - organic for 3Q2022 amounted to €5 mn, compared to €4 mn for 2Q2022 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 9M2022 amounted to €99 mn, compared to €45 mn for 9M2021. Profit after tax arising from the organic operations (attributable to the owners of the Company) for 3Q2022 is €45 mn, compared to €28 mn for 2Q2022, up 54% qoq.

Provisions/net (loss)/profit relating to NPE sales for 9M2022 amounted to €1 mn relating to Helix 3, compared to €6 mn for 9M2021 (relating to Helix 2 and Helix 3). Provisions/net (loss)/profit relating to NPE sales for 3Q2022 was a net loss of €1 mn, compared to a net profit of €1 mn in 2Q2022.

Restructuring and other costs relating to NPE sales for 9M2022 was €3 mn, compared to €19 mn for 9M2021 (relating to the agreements for the sale of portfolios of NPEs). Restructuring and other costs relating to NPE sales for 3Q2022 is €2 mn compared to less than €1 mn for 2Q2022.

Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) amounted to €104 mn for 9M2022, compared to Nil for 9M2021. For further details please refer to Section A.2.2 'Total expenses'.

Loss after tax attributable to the owners of the Company for 9M2022 was €9 mn, compared to a profit of €20 mn for 9M2021. Loss after tax attributable to the owners of the Company for 3Q2022 amounted to €59 mn, compared to a profit of €29 mn for 2Q2022.

B. Operating Environment

The effects from the war in Ukraine, the energy crisis, high inflation, and global monetary tightening are weighing on the global economy. Europe faces energy shortages, and possible disruptions in energy intensive sectors in the coming winter. The ECB forecasts 0.9% growth in the Euro area in 2023 with inflation expected to average 8.1% in 2022 and 5.5% in 2023. Oil and gas prices are expected to remain elevated as long as the war in Ukraine rages on. Major central banks are raising rates aggressively to try to contain inflation. Price rises are expected to start to slow later this year but remain high in level terms.

Against a challenging international environment, the Cyprus economy has shown considerable resilience. The 4.4% contraction in 2020 was modest in comparison with other southern countries. The economy rebounded strongly in 2021 with real GDP growing by 6.6%. Growth remained strong in the first three quarters of 2022, averaging 6.1% year-on-year and expected to average c.6.0% for the year 2022, outperforming the eurozone average. However, growth will slow in 2023, towards 3% according to the Ministry of Finance.

On the supply side, growth in the first half, for which data is available was almost entirely attributable to the services sectors. More than half of growth in the period came from trade, transport, and accommodation services. Information and communication, and the professional and administrative services sectors, also made significant contributions. In the industrial sector growth originated from the utilities, electricity, and water sectors, with manufacturing making only a marginal contribution. Construction activity dropped modestly and made a negative contribution. 

On the demand side, growth in the first half was attributable to both consumption and investment expenditures with the external sector making a negative contribution due to faster rising imports. Total investment was driven by transport equipment which includes ship registrations, as well as inventory adjustments.

Tourist activity has rebounded strongly in the year to September 2022. Arrivals reached 2.5 million persons, or 78% of corresponding arrivals in 2019. Receipts reached €1.6 billion in the year to August 2022, or 87% of the corresponding receipts in 2019, and an increase of 108% year on year. Travel from Russia and Ukraine is impacted from the war and sanctions, but arrivals in the period exceeded expectations significantly.

Surging energy costs that have been exacerbated by the war in Ukraine, are impacting both consumers and businesses. The government took initial measures to mitigate the consequences. The government reduced the value added tax rates on electricity and also reduced excise duties on gasoline and diesel for a fixed period until June 2022. The latter will remain in place until the end of January 2023. In September 2022, the government introduced a tiered system of subsidies for electricity consumption in place of the reduced values-added tax. The cost of reduced taxes and targeted support amounts to €350 million or 1.3% of GDP.

Cyprus received the first disbursement from the recovery and resilience facility of €157 million in September 2021 following the approval of the national recovery plan the previous July. This was pre-financing for 13% of total disbursements over the period 2021-26. The government also submitted its application to the European Commission for the first disbursement of €85 mn, in July 2022, following the passage of conditional legislation in parliament. The release of the funds is conditional on the strict implementation of reforms agreed in the national recovery plan. Funds will be used to increase investment in the digital and green transition, to increase the efficiency of public and local administrations, and to improve the efficiency of the judicial system among others.

In the banking sector there has been significant restructuring since the 2013 financial crisis. Banks have reduced their foreign exposures, reduced their balance sheets substantially, raised their capital buffers, and restructured and refocussed their operations domestically. Prudential oversight has been strengthened and a new legal framework for private-debt restructuring is now in place, including for the sale of loans. Total non-performing exposures at the end of August 2022, were €2.8 billion or 10.9% of gross loans. The corresponding ratio in the non-financial companies' segment was 8.3% and that of households 13.3%. The coverage ratio was 51.4%. In November 2022, the Cyprus Parliament voted the suspension of the foreclosure process until 31 January 2023.

The recovery in 2021 underpinned a significant increase in general government revenue and a relative drop in government spending. As a result, the budget deficit narrowed to 1.7% of GDP from a deficit of 5.8% of GDP in 2020, which reflected government measures to support the economy amidst a deep recession induced from the Covid pandemic.

Developments in the first half of 2022, were favourable for public finances. Revenues increased by 16.8% and expenditures dropped marginally by 1.2%. The budget in the first half is back to near balance, and a surplus of 1.2% of GDP is expected for the year 2022 according to the Ministry of Finance. The public debt is sustainable and firmly on a downward path. With the budget balanced in the year, and inflation at about 8.0% estimated for the year, debt to GDP will fall toward 90% at year-end, according to the Ministry of Finance.

As expected, the ECB raised its interest rate by 75 basis points at its most recent meeting, on 27 October 2022, after raising it also by 75 basis points in September 2022. The bank's main refinancing operations rate is now at 2% from zero at the beginning of the year.

B. Operating Environment (continued)

Consumer inflation continued to accelerate in 2022 driven mainly by energy prices but also food prices. The harmonised index of consumer prices increased by 8.8% in the second quarter and, by 9.7% in the third quarter and by 8.6% in October 2022. On average in the ten months January-October 2022, the harmonised inflation was 8.1% (8.1% also in the euro area). This compares with harmonised inflation of 3.9% in the second half of 2021 and 2.3% for the whole year. Core inflation was lower. Excluding energy, harmonised inflation was 5.4% in January-October 2022. Excluding energy and food, inflation was 5.0%. Non-energy industrial goods increased by 4.1% in the period and all-services increased by 5.3%. Hence, second round effects have started to show from the first quarter of 2022 and continued to affect final prices at an increasing pace.

Cyprus' current-account deficit narrowed from 10.1% in 2020 to 6.8% in 2021 and is estimated at 9.6% in 2022 according to the autumn forecasts of the European Commission. The deficit is expected to shrink gradually from 2023 onwards as services earnings recover and EU recovery funds are credited in the secondary income account. However, the current-account deficit will remain larger than pre-pandemic levels in the medium term owing in part 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 entities 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 October 2022, DBRS Morningstar affirmed 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 (including further escalation of the crisis in Ukraine).

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 September 2022, Fitch Ratings affirmed Cyprus' Long-Term Issuer Default rating at investment grade BBB- since November 2018 and stable outlook. The stable outlook reflects the view that despite Cyprus' exposure to Russia through its tourism and investment linkages, near-term risks are mitigated by a strengthened government fiscal position, and continued normalisation of spending after the pandemic shock. Meanwhile, medium-term growth prospects remain positive on the back of the government's Recovery and Resilience Plan (RRP).

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.

C. Business Overview

Credit ratings

The Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. In October 2022, Moody's Investors Service upgraded the Bank's long-term deposit rating to Ba2 from Ba3, maintaining the positive outlook. The main drivers for this upgrade are the resilience of the Cypriot economy, that is supporting the operating conditions of the banking system to external shocks and the gradual improvement in credit conditions. In September 2022, Standard and Poor's raised the long-term issuer credit rating of the Bank to BB- from B+ and revised the outlook to stable from positive. The upgrade reflects the improvement in asset quality and easing economic risks. In December 2021, Fitch Ratings affirmed the Bank's long-term issuer default rating of B- and revised the outlook to positive from negative. The revision of the outlook reflects significant improvement in asset quality following the agreement reached for Project Helix 3, as well as in organically reducing problem assets since the end of 2019, despite an adverse operating environment in Cyprus, together with an expectation that this trend will continue in the near future.

Near-term strategic priorities and outlook

The Group is a diversified, leading, financial and technology hub in Cyprus. The prolonged geopolitical crisis in Ukraine has changed the economic landscape, reflecting potential slowdown in economic growth impacted by the escalating inflationary pressures and rising interest rate outlook. Against this backdrop, the Group is determined to deliver on the levers under its control in order to face external shocks from a strong position. The Group's diversified business model, its significantly improved asset quality and efficiency as well as its ability to maintain healthy capital and liquidity buffers, all play a vital role as it heads towards these uncertain times. Additionally, as a result of the changing and dynamic economic outlook, the Group will benefit substantially from the interest rate hikes, setting NII to growth trajectory and outweighing potential pressures on total operating costs and cost of risk. This facilitates a clear path to a recurring ROTE of c.10%, already in 2022, supporting the ability to make meaningful dividend distributions from 2023 onwards, subject to regulatory approvals and market conditions. This increases the confidence of delivering a double-digit ROTE in 2023.

Favourable interest rate environment

The structure of the Group's balance sheet is geared towards higher interest rates facilitating immediate growth in net interest income. As at 30 September 2022, cash balances with ECB (excluding TLTRO of c.€3.0 bn) amounted to c.€6.9 bn. The repricing of the reference rates will gradually benefit the interest income on loans, as almost half of the loan book is priced on Euribor. The interest rates increased faster than expected in August 2022, with immediate benefits from liquid assets and variable rate loans (over 90% of the Group's loan portfolio is variable rate). Factoring in the current expectations for interest rates, the net interest income guidance for 2022 is upgraded and is now expected to exceed €350 mn. In 2023, NII is expected to be significantly higher compared to 2022, demonstrating the faster and higher repricing of loans and liquids, partially offset by increased costs of funding, gradual increase in cost of deposits from 2023 and gradual change in deposit mix towards term deposits.

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 9M2022 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 first nine months of 2022, new lending amounted to €1.7 bn, up by 25% yoy, returning to pre-pandemic levels. The yoy increase is driven by increased activity across all sectors. As a result, the net performing loan book expanded to €9.7 bn up by 4% during the nine months 2022, although it remained flat on the prior quarter due to high repayments. The short-term net interest income is expected to be supported primarily by asset repricing and higher security investments.  

As at 30 September 2022, the bond portfolio of the Group amounted to €2.3 bn, up by 17% in 9M2022 and represents 10% of total assets (excluding TLTRO III of €3.0 bn). The completion of the balance sheet de-risking and the Group's comfortable liquidity position, allow the Group to meaningfully grow its bond portfolio in 2023, subject to market conditions. The portfolio comprises highly rated fixed rate bonds with low average duration, giving the Group the flexibility to take advantage of rising interest rates.

Separately, the Group aims to increase revenues over the medium term 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 1Q2022, a revised price list for charges and fees was implemented and liquidity fees were extended to a wider customer group. As a result, net fee and commission income for 9M2022 remained strong at €142 mn, reflecting an increase of 11% yoy. Net fee and commission income is likely to be under pressure in the near term mainly due to the phasing out of liquidity fees in December 2022 (amounting to c.€4 mn per quarter).

C. Business Overview (continued)

Near-term strategic priorities and outlook (continued)

Growing revenues in a more capital efficient way (continued)

Net fee and commission income is also 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 8% of total non interest income and amounted to €19 mn in 9M2022, up 23% yoy, backed by strong transaction volume.

The Group's insurance companies, EuroLife Ltd and General Insurance of Cyprus Ltd (GI) operating in the sectors of life and general insurance respectively, are leading players in the insurance business in Cyprus, and have been providing a stable, recurring income, further diversifying the Group's income streams. The insurance income net of claims for 9M2022 contributed 20% of non-interest income and amounted to €48 mn, up 13% yoy, driven by increased new business and the positive changes in valuation assumptions, partially offset by higher insurance claims. Specifically, Eurolife increased its total regular income by 16% yoy, whilst GI increased its gross written premiums by 11% yoy. For information on IFRS 17 please refer to the relevant subsection below.

Finally, the Group through the Digital Economy Platform (Jinius) 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, around 1,500 companies were 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 in the medium term, whilst funding its digital transformation and investing in the business. Management also expects that restructuring costs will be effectively eliminated as balance sheet de-risking is largely complete.

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 Plan, the gross annual savings are 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, the Group has reduced the number of branches by 20 year-to-date to 60, a reduction of 25%. Through these successful initiatives, the Group has delivered ahead of schedule on its commitment to reduce its workforce by c.15% and its number of branches by 25%. As a result, the cost to income ratio excluding special levy on deposits and other levies/contributions for 9M2022 was reduced to 54%, 7 p.p. down compared to previous year. In 2023 the renewal of the collective agreement and the adjustment of cost of living are expected to partially offset the gross savings derived from the recent VEPs.

The cost to income ratio excluding special levy on deposits and other levies/contributions for the financial year 2022 is revised downwards to low 50s from the previous guidance of 55-60% (announced in August 2022), reflecting mainly the rising revenue on improving interest rate environment and management's ongoing efforts to contain costs. The efficiency actions undertaken on the reduction of employees and branches are expected to unlock meaningful savings from 2023, although these are expected to be partly offset by high inflation.

Transformation plan

The Group continues to work towards becoming a more 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 we serve our customers and operate internally, and (iv) improve employee engagement through a robust set of organisational health initiatives.

C. Business Overview (continued)

Near-term strategic priorities and outlook (continued)

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 of working to improve the workplace environment.

In October 2022, the Bank continued to enrich and improve its digital portfolio launching a new innovative service to its customers, the QuickLoans. Four new lending products are now available through the Group's digital channels (Mobile App and Internet Banking), which allows the Bank's retail customers to apply for a loan and have an instant update of the approval status of their application. This solution further differentiates the Bank within the Cypriot market and enhances its status as a digital leader in banking.

The adoption of digital products and services continued to grow and gained momentum in the third quarter of 2022 and beyond. As at the end of October 2022, 94.0% of the number of transactions involving deposits, cash withdrawals and internal/external transfers were performed through digital channels (up by 27.6 p.p. from 66.4% in September 2017 when the digital transformation programme was initiated). In addition, 81.3% of individual customers were digitally engaged (up by 21.1 p.p. from 60.2% in September 2017), choosing digital channels over branches to perform their transactions. As at the end of October 2022, active mobile banking users and active QuickPay users have grown by 14.5% and 33.1% respectively in the last 12 months. The highest number of QuickPay users to date was recorded in October 2022 with 162 thousand active users. Likewise, the highest number of QuickPay payments was recorded in October 2022 with 477 thousand transactions. New features, such as Google Pay, as well as management of fixed deposits accounts will soon be available to customers.

Strengthening asset quality

Ensuring the Bank's loan portfolio quality remains healthy is a priority for the Group.

Balance sheet de-risking continued in the first nine months of 2022 with further c.€300 mn of organic NPE reduction, reducing the Group's NPE ratio to 4.5%, pro forma for Helix 3, delivering early the NPE ratio target of c.5%. During 2021, the Group completed Project Helix 2 and reached an agreement for Project Helix 3. Overall, since the beginning of 2021, and including organic NPE reductions of c.€700 mn, the Group reduced its NPEs by 85% and its NPE ratio from 25.2% to 4.5%, on a pro forma basis. For further information please refer to Section A.1.5 'Loan portfolio quality'.

The cost of risk for 2022 is revised and is currently expected to be around mid-40s, reflecting strong loan portfolio performance. The cost of risk target of 50-80 bps for 2023 remains unchanged, reflecting the prevailing uncertainty on macroeconomic outlook.

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

Moving to a sustainable economy is the challenge of our time. As part of its vision to be the leading financial hub in Cyprus, the Bank is determined to lead the transition of Cyprus to a sustainable future.

The Group has set the foundations to enhance its organisational resilience and ESG (Environmental, Social and Governance) agenda and continues to work towards building a forward-looking organisation with a clear strategy supported by effective corporate governance aligned with ESG agenda priorities.

In 2022, the Company received a rating of AA (on a scale of AAA-CCC) in the MSCI ESG Ratings assessment.

In 2021, the first ESG strategy of the Group was formulated, whereby, in addition to maintaining its leading role in the social and governance pillars, there will be a shift of focus on increasing the Bank's positive impact on the environment by transforming not only its own operations, but also the operations of its client chain.

The Bank has committed to the following primary ESG targets, which reflect the pivotal role of ESG in the Bank' 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

C. Business Overview (continued)

Near-term strategic priorities and outlook (continued)

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

The Bank has recently initiated the measurement of financed emissions derived from its loan portfolio (Scope 3) and is working towards the finalisation of Sustainable Finance Framework for green bonds.

The Bank is the first bank in Cyprus joining the Partnership for Carbon Accounting Financials (PCAF).

The Board composition of the Company and the Bank is diverse, with 40% of the Board members being female as at 30 September 2022. The Board displays a strong skill set 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 30 September 2022, 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).

IFRS 17

IFRS 17, an accounting standard that will be effective from 1 January 2023, impacts the phasing of profit recognition for insurance contracts. Upon implementation, the Group's insurance-related retained earnings will be restated and the reporting of insurance new business revenue will be spread over time, as the Group provides service to its policyholders (versus recognised up-front under current accounting standards), with the quantum and timing of the impact dependent on, inter alia, the amount and mix of new business and extent of assumption changes in any given year following implementation. As highlighted in our 2021 Annual Financial Report, IFRS 17 requires a number of key changes compared with our current accounting policies for insurance.

· Under IFRS 17, there will be no present value of in-force life insurance contracts ('PVIF') asset recognised. Instead, the estimated future profit will be included in the measurement of the insurance contract liability 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. While the profit over the life of an individual contract will be unchanged, its emergence will be later under IFRS 17.

· IFRS 17 requires the increased use of current market values in the measurement of insurance assets and liabilities hence insurance liabilities and related assets will be adjusted to reflect IFRS 17 measurement requirements.

· In accordance with IFRS 17, directly attributable costs will be incorporated in the CSM and, as recognised, will be presented as a deduction to reported revenue. This will result in a reduction in operating expenses.

The Group continues to make progress on the implementation of IFRS 17 and preliminary management estimate on the impact is as previously communicated and included below. However, industry practice and interpretation of the standard are still developing, hence uncertainty remains as to the final transition impact. Additionally, the impact on the forecast future returns of the Group's insurance business is dependent on the growth, duration and composition of its insurance contract portfolio. These estimates are also impacted by the effect of market related conditions and are therefore subject to change in the period up to adoption of the standard.

For the purposes of planning the Group's financial resources, the initial estimate is that the accounting changes will result in:

a) the removal of value in force from the life insurance business (including associated deferred tax liability) of c.€102 mn as per the Group's consolidated balance sheet as at 30 September 2022, which will reduce Group accounting equity by a respective amount (with no impact on the Group regulatory capital or tangible equity), and

b) the remeasurement of insurance assets and liabilities and the creation of a contractual service margin (CSM) liability which will increase both the insurance business and the Group's equity by an amount of c.€50 mn, predominantly relating to the life business of the Group.

The adoption of IFRS 17 may result in a modest annual negative impact on the contribution to profits of the Group's insurance business in the near term which has been incorporated in the Group business plan.

The day 1 benefit from IFRS 17 arising from the net remeasurement of insurance liabilities of c.€50 mn (including the creation of the CSM liability), referred to in (b) above, enables an equivalent dividend distribution to the Bank which would benefit Group regulatory capital by an equivalent amount (upon the payment of dividend by the subsidiary), enhancing CET1 ratio by c.50 bps.

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 accelerates, impacted by the soaring energy prices and disruptions in supply chains. The escalating 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 it has on the Group's operations and financial performance.

Direct impact

The Group does not have any banking operations in Russia or Ukraine, following the sale of its operations in Ukraine in 2014 and in Russia in 2015. The Group has run down its legacy net exposure to less than €1 mn as at 30 September 2022 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 Ukraine, Russia and Belarus, representing 0.5% of total assets or c.1% of net loans as at 30 September 2022. The net book value of these loans stood at €118 mn as at 30 September 2022, of which €106 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 Ukrainian, Russian and Belarusian customers account for only 5% of total customer deposits as at 30 September 2022. This exposure is not material, given the Group's strong liquidity position. The Group operates with a significant surplus liquidity of €6.8 bn (LCR ratio of 300%) as at 30 September 2022.

Only c.3% of the Group's 2021 net fee and commission income is derived from Ultimate Beneficiary Owners (UBOs) from Ukraine, Russia or Belarus.

Indirect impact

Although the Group's direct exposure to Ukraine, Russia or Belarus is limited, the crisis in Ukraine may have an adverse impact on the Cypriot economy, mainly due to a negative impact on the tourism and professional services sectors, increasing energy prices resulting in inflationary pressures, and disruptions to global supply chains.

The impact on the Cypriot economy is expected to come from higher inflation and a consequential slowdown in economic activity. The performance of tourism sector in the first nine months of 2022 is better than initially anticipated and represents 78% of 2019 respective levels, despite the loss of tourist arrivals from Russia and Ukraine. The Group continues to monitor the 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.

Professional services account for c.10% of GDP (based on FY2020) of which some relate to Russia or Ukraine and thus expected to be adversely impacted. There is however no credit risk exposure as the sector is not levered.

Between 2018-2020, Cyprus recorded net foreign direct investment (FDI) outflow to Russia. While Russian gross FDI flows in and out of Cyprus may be quite large, these often reflect the typical set-up of Special Purpose Entities, with limited actual impact on the Cypriot economy, hence likely to have limited impact on domestic activity levels.

Conclusion

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

The Group will continue 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 capable of supporting the recovery of the Cypriot economy and delivering appropriate shareholder returns in the medium term.

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

· 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

D. Strategy and Outlook (continued)

The third quarter of 2022 was marked by the achievements of key milestones of the Group. In summary, these were:

· NPE ratio below 5% delivering early the 2022 target;

· Cost to income ratio excluding special levies and other levies/contributions below 50% (47%), 10 percentage points lower on the previous quarter and well below the previous 2022 guidance of 55% to 60% and;

· Return on tangible equity before non-recurring items (ROTE) of 11.7%, increasing confidence of achieving a recurring ROTE of c.10% already in 2022.

As a result, the Group is on a clear path to achieve a double-digit ROTE in 2023, laying the foundations for a meaningful return to dividend distributions from 2023 onwards, subject to regulatory approvals and market conditions.

The financial targets are expected to be updated post the publication of FY2022 Financial Results.

D. Strategy and Outlook (continued)

E. Financial Results - Statutory Basis

Unaudited Interim Consolidated Income Statement

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Statement of Comprehensive Income

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Balance Sheet

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Statement of Changes in Equity

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Statement of Changes in Equity (continued)