Bk. Cyprus Hldg Regulatory News (BOCH)

Announcement

Group Financial Results for the nine months ended 30 September 2023

Nicosia, 13 November 2023

Key Highlights for the nine months ended 30 September 2023

Resilient economic outlook

· Continued strong economic growth; Cyprus' GDP expanded by 2.3%1 in 2Q2023, outperforming the Eurozone average

· New lending of c.?1.6 bn, despite the rising interest rate environment

· Gross performing loan book at ?9.9 bn broadly flat year on year as repayments continue to offset new lending

Another strong quarterly performance

· NII of ?572 mn up 144% year on year; up 9% in 3Q2023 compared to prior quarter

· Non-NII of ?224 mn up 5% year on year, covering 90% of total operating expenses2

· Total operating expenses2 up 3% year on year with savings partly offsetting inflationary pressures; cost to income ratio2 reduced to 31%, down from 54% in prior year

· Profit after tax of ?349 mn (vs loss of ?19 mn in 9M2022); 3Q2023 profit after tax of ?129 mn up 3% on prior quarter

· Earnings per share of ?0.78 for 9M2023, of which ?0.29 in 3Q2023

· ROTE of 24.6% in 9M2023 and 25.6% in 3Q2023 

Liquid and resilient balance sheet

· Asset quality in line with target; NPE ratio at 3.5% (0.8% on net basis) down 6 p.p. year on year

· NPE Coverage at 77%; Cost of risk at 58 bps

· Sticky, retail funded deposit base at ?19.3 bn, up 3% year on year and broadly flat quarter on quarter

· Highly liquid balance sheet with ?9.6 bn placed at the ECB

Robust capital and shareholder focus

· Regulatory CET1 ratio and Total Capital ratio of 15.2%3 and 20.4%3 respectively

· Including 3Q2023 profits net of dividend accrual, CET1 ratio at 15.8%4 and Total Capital ratio at 21.0%4

· Organic capital generation of c.345 bps in 9M2023, of which c.125 bps in 3Q2023

Long Term Deposit rating upgraded to Investment grade by Moody's in October 2023

1. Source: Cyprus' Ministry of Finance

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

3. Includes reviewed profits for 1H2023 and a dividend accrual thereon as per the top end of the Group's dividend policy. Any recommendation for a dividend is subject to regulatory approval

4. Includes unaudited/unreviewed profits for 3Q2023 and a dividend accrual thereon as per the top end of the Group's dividend policy. Any recommendation for a dividend is subject to regulatory approval

*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 to Section F.9 of this announcement.

Group Chief Executive Statement

"We have delivered another quarter of strong profitability, achieving an ROTE of over 20% for the third consecutive quarter, demonstrating the Group's continuing ability to generate sustainable profitability and shareholder value creation. During the nine months of 2023, we recorded a profit after tax of ?349 mn, corresponding to a ROTE of 24.6%, facilitated by strong revenues.

Total income amounted to ?796 mn, of which ?572 mn related to net interest income, more than double last year's level, a reflection of the higher interest rate environment and a well-managed deposit pass-through level. Non-interest income represents a significant and sustainable contributor to the Group's profitability and covers c.90% of total operating expenses. Our cost to income ratio improved further to 31%, driven by higher income, whilst our cost base remains under control, with savings partly offsetting inflationary pressures.

Against the backdrop of geopolitical developments and heightened uncertainty, the Cypriot economy is once again proving resilient with strong economic growth of 2.3% in 2Q2023, outpacing the Eurozone average. As the largest financial group in Cyprus, we continue to support the economy by extending c.?1.6 bn new loans in 9M2023, whilst maintaining prudent underwriting standards.

Our balance sheet is characterised by ample liquidity as well as strong asset quality and a robust capital position. Over one third of our assets are cash balances with central banks, benefitting significantly from higher rates while our deposit base continued to grow. Our NPE ratio stood at 3.5%, in line with our target and our coverage stood at 77%. Our cost of risk at 58 bps remains within our 2023 target range.

In October 2023 Moody's upgraded the Bank's long term deposit rating to investment grade for the first time in 12 years, confirming this new chapter of becoming a strong, diversified well-capitalised and sustainably profitable organisation. With another strong set of results in 3Q2023, the Group's performance is well ahead of 2023 targets and notwithstanding typical 4Q2023 seasonality, we expect to comfortably exceed our 2023 ROTE target of over 17%. We continue to execute strategy, with a clear focus on supporting our customers, delivering shareholder value and assisting the development of the Cypriot economy."

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 2023 on the 'underlying basis' which management believes best fits the true measurement of the performance and position of the Group, as this presents separately any non-recurring items and also includes certain reclassifications of items, other than non-recurring items, which are done for presentational purposes under the underlying basis for aligning the presentation with items of a similar nature.

Reconciliations between the statutory basis and the underlying basis to facilitate the comparability of the underlying basis to the statutory information, are included in Section F.1 'Reconciliation of Interim Income statement for the nine months ended 30 September 2023 between statutory basis and underlying basis' and Section H under 'Alternative Performance Measures' and Section I under 'Definitions & Explanations'.

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, 2022 financial information, ratios and metrics are presented on a restated basis unless otherwise stated. Further information on the impact of IFRS 17 transition is provided below and in 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 2022 dividend declaration. This refers to the proposal by the Board of Directors to the shareholders of a final dividend in respect of the FY2022 earnings following the approval by the European Central Bank ('ECB'). The proposed final dividend was declared at the Annual General Meeting ('AGM') which was held on 26 May 2023. This dividend amounted to ?22.3 mn in total and had a negative impact of 22 bps on the Group's CET1 ratio and Total Capital ratio as at 31 December 2022. As a result, the 31 December 2022 capital ratios are presented as restated for the 2022 dividend unless otherwise stated. Additionally, throughout this announcement, the capital ratios as at 30 June 2023 are presented including 1H2023 reviewed profits and a dividend accrual thereon at the top end of the payout range of the Group's approved dividend policy in compliance with the Capital Requirements Regulation and in line with the ECB Decision EU (2015/656) on the recognition of interim profits in CET1 capital. Further details are provided in Section 'A.1.1 Capital Base'.

Capital ratios including retained earnings are referred to the CET1 ratio and Total capital ratios as at 30 September 2023 which include unaudited/unreviewed profits for the quarter ended 30 September 2023 and a dividend accrual thereon at the top end of the Group's dividend policy.

Transition to IFRS 17

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

Commentary on Underlying Basis (continued)

Transition to IFRS 17 (continued)

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 in a reduction of c.?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 in an increase in the Group's equity by ?49 mn.

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 ?2,342 mn as at 30 September 2023 compared to ?2,220 mn as at 30 June 2023 and to ?2,027 mn as at 31 December 2022. Shareholders' equity totalled to ?2,114 mn as at 30 September 2023 compared to ?1,984 mn as at 30 June 2023 and to ?1,807 mn as at 31 December 2022.

The regulatory Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at 15.2% as at 30 September 2023, compared to 15.6% as at 30 June 2023 and 15.2% as at 31 December 2022, as restated. Throughout this announcement, the capital ratios as at 30 September 2023 include reviewed profits for the six months ended 30 June 2023 in line with the ECB Decision (EU) (2015/656) on the recognition of interim or year-end profits in CET1 capital in accordance with Article 26(2) of the CRR and an accrual thereon of dividend at the top end of the Group's approved dividend policy in line with the principles of Commission Delegated Regulation EU No241/2014 (such ratios are referred as regulatory or Basel III and do not include 3Q2023 profits). 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. Including the profits for 3Q2023 of c.125 bps, net of dividend accrual at the top end of the Group's approved dividend policy of c.60 bps, the CET1 ratio on a transitional basis (including retained earnings) increases to 15.8% as at 30 September 2023. From 3Q2023, the amount corresponding to the Pillar II add-on requirement relating to ECB's prudential provisioning expectations of 33 bps is deducted from CET1 capital and therefore it is expected to be eliminated from the Pillar II SREP capital requirements as of 1 January 2024.

The Group had 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 14 bps on Group's CET1 ratio as at 30 September 2023.

The regulatory Total Capital ratio on a transitional basis stood at 20.4% as at 30 September 2023, compared to 20.7% as at 30 June 2023 and to 20.4% as at 31 December 2022, as restated. Including the profits for 3Q2023 of c.125 bps, net of dividend accrual at the top end of the Group's approved dividend policy of c.60 bps, the total capital ratio (including retained earnings) increases to 21.0%.

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%. From 30 September 2023, the Pillar II add-on of 0.33% relating to ECB's prudential provisioning expectations is being deducted from capital and therefore the Pillar 2 requirement is expected to decrease to 2.75% as of 1 January 2024.

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 currently it stands at 1.50%. In October 2023, the CBC concluded its reassessment for the designation of credit institutions that meet the definition of O-SII institutions and the setting of O-SII buffer to be observed. The Group's O-SII buffer has been revised to 2.25% (from 1.50%), to be phased in annually by 37.5 bps, to 1.875% on 1 January 2024 and to 2.25% on 1 January 2025.

The Group's minimum phased-in CET1 capital ratio requirement as at 30 September 2023 is set at 10.27%, 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 c.0.04%. The Group's minimum phased-in Total Capital ratio requirement is set at 15.12%, 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 c.0.04%. The ECB has also maintained the non-public guidance for an additional Pillar II CET1 buffer (P2G) unchanged compared to the previous year.

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.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.1 Capital Base (continued)

On 30 November 2022, the CBC, following the revised methodology described in its macroprudential policy, decided to increase the CcyB from 0.00% to 0.50% of the total risk exposure amounts in Cyprus of each licensed credit institution incorporated in Cyprus. The new rate of 0.50% must be observed as from 30 November 2023. Further, in June 2023, the CBC announced an additional increase of 0.50% in the CcyB of the total risk exposure amounts in Cyprus of each licensed credit institution incorporated in Cyprus to be observed from June 2024, increasing the CcyB to 1.00%.

Following the annual SREP performed by the ECB in 2023, and based on the draft SREP decision received in October 2023, effective from 1 January 2024 (subject to ECB final confirmation), the Group's minimum phased-in CET1 capital ratio and Total Capital ratio requirements are expected to decrease, when disregarding the phasing in of the O-SII buffer and CcyB mentioned above, reflecting the elimination of the Pillar II add-on relating to ECB's prudential provisioning expectations, following the Group's decision to directly deduct from own funds such amount. On 1 January 2024 the Group's minimum phased-in CET1 capital ratio is expected to be set at c.10.92%, comprising a 4.50% Pillar I requirement, a 1.55% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.875% and CcyB of c.0.50%. On 1 January 2024, the Group's minimum phased-in Total Capital ratio requirement is expected to be set at c.15.63%, 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 2.75% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.875% and the CcyB of 0.50%. The ECB has also provided revised lower non-public guidance for an additional Pillar II CET1 buffer (P2G). From 2 June 2024 both CET1 capital and Total Capital requirements are expected to increase by c.0.50% as a result of the increase in the CcyB described above.

The Group participated in the ECB Stress Test of 2023, the results of which were published by the ECB on 28 July 2023. For further information please refer to the 'Risk and Capital Management Report' of the 'Interim Financial Report 2023.

Resumption of dividend payments

Following the 2022 SREP decision, the equity dividend distribution prohibition was lifted for both the Company and the Bank, with any dividend distribution being subject to regulatory approval.

In April 2023, the Company obtained the approval of the European Central Bank to pay a dividend. Following this approval, the Board of Directors of the Company recommended to the shareholders a final dividend of ?0.05 per ordinary share in respect of earnings for the year ended 31 December 2022 ('Dividend'). The proposed final dividend was declared at the Annual General Meeting ('AGM') which was held on 26 May 2023. The Dividend amounted to ?22.3 mn in total and was equivalent to a payout ratio of 14% of the FY2022 Group's adjusted recurring profitability or 31% based on FY2022 profit after tax (as reported in the 2022 Annual Financial Report). The Dividend was paid in cash on 16 June 2023.

The 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.

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

Dividend policy

In April 2023 the Board of Directors approved the Group's dividend policy. The Group aims to provide a sustainable return to shareholders. Dividend payments are expected to build prudently and progressively over time, towards a payout ratio in the range of 30-50% of the Group's adjusted recurring profitability. Group adjusted recurring profitability is defined as the Group's profit after tax before non-recurring items (attributable to the owners of the Company) taking into account distributions under other equity instruments such as the annual AT1 coupon. The dividend policy takes into consideration market conditions as well as the outcome of capital and liquidity planning.

Other equity instruments

At 30 September 2023, the Group's other equity instruments relate to Additional Tier 1 Capital Securities (the "AT1 securities") and amounted to ?228 mn, compared to ?236 mn as at 30 June 2023, down 3% on prior quarter, reflecting the repurchase of c.?7 mn Existing Capital Securities in the open market by the Company in July 2023.

In June 2023, the Company successfully launched and priced an issue of ?220 mn Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities (the 'New Capital Securities').

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.1 Capital Base (continued)

Other equity instruments (continued)

The New Capital Securities constitute unsecured and subordinated obligations of the Company, are perpetual and are issued at par. They carry an initial coupon of 11.875% per annum, payable semi-annually and resettable on 21 December 2028 and every 5 years thereafter. The Company will have the option to redeem the New Capital Securities from, and including, 21 June 2028 to, and including, 21 December 2028 and on each interest payment date thereafter, subject to applicable regulatory consents and the relevant conditions to redemption.

The issue was met with exceptional demand, attracting interest from c.240 institutional investors, with the final order book over 12 times over-subscribed and final pricing 62.5 bps tighter than the initial pricing indication. The pricing also reflects significant improvement in the credit spread to c.910 bps compared to c.1,260 bps for the previous AT1 issue in 2018 ('Existing Capital Securities').

The net proceeds of the issue of the New Capital Securities were on-lent by the Company to the Bank to be used for general corporate purposes. The on-loan qualifies as Additional Tier 1 capital for the Bank.

The issue of the New Capital Securities maintains the Group's optimised capital structure and contributed to the Group's Total Capital Ratio by c.215 bps at the time of issuance.

At the same time, the Company invited the holders of its outstanding ?220 mn Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities callable in December 2023 to tender their Existing Capital Securities at a purchase price of 103% of the principal amount. The Company received valid tenders of c.?204 mn in aggregate principal amount, or c.93% of the outstanding Existing Capital Securities, all of which were accepted by the Company.

As a result, a cost of c.?7 mn was recorded directly in the Company's equity in 2Q2023, forfeiting the relevant future coupon payments. Transaction costs of ?3.5 mn in relation to the transactions were recorded directly in equity in June 2023. Existing Capital Securities of c.?8 mn in aggregate principal amount remained outstanding as at 30 September 2023.

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. The Law provides for a guarantee fee on annual tax credit is payable annually by the credit institution to the Government.

Following certain modifications to the Law in May 2022, the annual guarantee 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 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.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

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. In June 2023, negotiators from the Council presidency and the European Parliament reached a provisional agreement on amendments to the Capital Requirements Regulation and the Capital Requirements Directive. 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 £ came into effect and was required to be transposed into national law. BRRD II was transposed and implemented in Cyprus law in early May 2021. In addition, certain provisions on MREL have been introduced in CRR £ which also came into force on 27 June 2019 as part of the reform package and took immediate effect.

In February 2023, the Bank received notification from the Single Resolution Board (SRB) of the 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 2023 MREL decision, the 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.

In November 2023, the Bank received draft notification from the SRB regarding the 2024 MREL decision, by which the final MREL requirement is now set at 25.00% of risk weighted assets and must be met by 31 December 2024, one year earlier than the previous decision, in light of the Group's progress over the years of becoming a strong, well-capitalised with sustainable profitability organisation. The revised MREL requirements remain subject to SRB and CBC final confirmation.

Furthermore, the binding interim requirement of 1 January 2022 set at 14.94% of risk weighted assets and 5.91% of LRE must continue to be met. The own funds used by the Bank to meet the Combined Buffer Requirement (CBR) are not eligible to meet its MREL requirements expressed in terms of risk-weighted assets. The Bank must comply with the MREL requirement at the consolidated level, comprising the Bank and its subsidiaries.

The regulatory MREL ratio as at 30 September 2023, calculated according to the SRB's eligibility criteria currently in effect and based on internal estimate, stood at 24.1% of risk weighted assets (RWA) and at 11.0% of LRE. The MREL ratio expressed as a percentage of risk weighted assets does not include capital used to meet the CBR requirement, which stood at 4.04% on 30 September 2023 (compared to 3.77% as at 31 December 2022), expected to increase on 30 November 2023 following increase in CcyB from 0.00% to 0.50% of the total risk exposure amounts in Cyprus and to 1.00% from June 2024 as announced by CBC. Additionally, the CBR requirement is expected to increase further on 1 January 2024 following an increase in O-SII buffer from 1.50% to 1.875% and subsequently to 2.25% from 1 January 2025, as announced by CBC.

Throughout this announcement, the MREL ratios as at 30 September 2023 include reviewed profits for the six months ended 30 June 2023 in line with the ECB Decision (EU) (2015/656) on the recognition of interim or year-end profits in CET1 capital in accordance with Article 26(2) of the CRR and an accrual of dividend at the top end of the Group's approved dividend policy in line with the principles of Commission Delegated Regulation EU No241/2014. The MREL ratio expressed as a percentage of RWA and the MREL ratio expressed as a percentage of LRE as at 30 September 2023 stand at 24.6% and 11.2% respectively when including the profits for 3Q2023 net of a dividend accrual at the top end of the Group's approved dividend policy.

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

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.3 Funding and Liquidity

Funding

Funding from Central Banks

At 30 September 2023, the Bank's funding from central banks amounted to ?2,023 mn, which relates to ECB funding, comprising solely of funding through the Targeted Longer-Term Refinancing Operations (TLTRO) III, compared to ?2,004 mn at 30 June 2023 and 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. The maturity date of the Bank's funding of ?1.7 bn under the seventh TLTRO III operation is in March 2024, whilst the ?300 mn under the eighth TLTRO III operation is in June 2024.

Deposits

Customer deposits totalled ?19,267 mn at 30 September 2023 (compared to ?19,166 mn at 30 June 2023 and to ?18,998 mn at 31 December 2022) broadly flat in the third quarter. Customer deposits are mainly retail-funded and 58% of deposits are protected under the deposit guarantee scheme as at 30 September 2023.

The Bank's deposit market share in Cyprus reached 37.7% as at 30 September 2023, compared to 37.4% as at 30 June 2023 and to 37.2% as at 31 December 2022. Customer deposits accounted for 73% of total assets and 80% of total liabilities at 30 September 2023 (compared to 75% of total assets and 82% of total liabilities as at 31 December 2022).

The net loans to deposits (L/D) ratio stood at 51% as at 30 September 2023 (compared to 52% as at 30 June 2023 and 31 December 2022 on the same basis), down 1 p.p. in the third quarter.

Subordinated liabilities

At 30 September 2023, the carrying amount of the Group's subordinated liabilities amounted to ?315 mn (compared to ?309 mn at 30 June 2023 and 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.

Debt securities in issue

At 30 September 2023, the carrying value of the Group's debt securities in issue amounted to ?644 mn (compared to ?292 mn at 30 June 2023 and to ?298 mn at 31 December 2022) and relate to senior preferred notes. The increase of 116% since the beginning of the year, relates to the issuance of ?350 mn senior preferred notes in 3Q2023.

In July 2023, the Bank has successfully launched and priced an issuance of ?350 mn of senior preferred notes (the "Notes"). The Notes were priced at par with a fixed coupon of 7.375% per annum, payable annually in arrear, until the Optional Redemption Date i.e. 25 July 2027. The maturity date of the Notes is 25 July 2028; however, the Bank may, at its discretion, redeem the Notes on the Optional Redemption Date subject to meeting certain conditions (including applicable regulatory consents) as specified in the Terms and Conditions. If the Notes are not redeemed by the Bank, the coupon payable from the Optional Redemption Date until the Maturity Date will convert from a fixed rate to a floating rate and will be equal to 3-month Euribor + 409.5 bps, payable quarterly in arrear. The issuance was met with strong demand, attracting interest from more than 90 institutional investors, with a peak orderbook of ?950 mn and final pricing 37.5 bps tighter than the initial pricing indication. The Notes comply with the criteria for the Minimum Requirement for Own Funds and Eligible Liabilities ("MREL") and contribute towards the Bank's MREL requirements.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

Debt securities in issue (continued)

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 2023, the Group Liquidity Coverage Ratio (LCR) stood at 350% (compared to 316% at 30 June 2023 and to 291% at 31 December 2022), well above the minimum regulatory requirement of 100%. The LCR surplus as at 30 September 2023 amounted to ?8.6 bn (compared to ?7.7 bn at 30 June 2023 and to ?7.2 bn at 31 December 2022). The increase in liquidity surplus in 3Q2023 reflects primarily the issuance of ?350 mn of senior preferred notes in July 2023 and the increase in deposits. When disregarding the TLTRO III, the Group's liquidity position remains strong with an LCR of 292% and liquidity surplus of ?6.6 bn.

At 30 September 2023, the Group Net Stable Funding Ratio (NSFR) stood at 162% (compared to 165% at 30 June 2023 and to 168% at 31 December 2022), well above the minimum regulatory requirement of 100%.

A.1.4 Loans

Group gross loans totalled ?10,167 mn at 30 September 2023, compared to ?10,277 mn at 30 June 2023 and to ?10,217 mn at 31 December 2022, broadly flat yoy as repayments continue to offset new lending.

New lending granted in Cyprus reached ?445 mn for 3Q2023 (compared to ?494 mn for 2Q2023 and to ?624 mn for 1Q2023) down by 10% qoq. New lending in 3Q2023 comprised ?190 mn of corporate loans, ?167 mn of retail loans (of which ?103 mn were housing loans), ?45 mn of SME loans and ?43 mn of shipping and international loans. New lending for 9M2023 stood at ?1,563 mn, despite the rising interest rate environment, driven mainly by corporate demand.

At 30 September 2023, the Group net loans and advances to customers totalled ?9,910 mn (compared to ?10,008 mn at 30 June 2023 and to ?9,953 mn at 31 December 2022), flat since the beginning of the year.

The Bank is the largest credit provider in Cyprus with a market share of 42.3% at 30 September 2023, compared to 42.4% at 30 June 2023 and 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 3Q2023 totalled ?20 mn, compared to ?13 mn for 2Q2023, and totalled to ?44 mn for 9M2023, compared to ?36 mn for 9M2022. Further details regarding loan credit losses are provided in Section A.2.3 'Profit before tax and non-recurring items'.

In 3Q2023 an amount of ?37 mn were classified as unlikely to pay exposures (UTPs), following a deep dive assessment of the Group's portfolio. With the conclusion of this assessment, expected in 4Q2023, another similar UTP amount will potentially be recognised. These UTPs are customer specific with idiosyncratic characteristics and are not linked with the current macroeconomic environment; they adhere their payment schedule and present no arrears. The elevated inflation combined with the rising interest rate environment are expected to weigh on customer behaviour. Despite the higher interest rates, there are no material signs of asset quality deterioration to date. While defaults have been limited, the additional monitoring and provisioning for sectors and individuals vulnerable to the deteriorated macroeconomic environment remain in place to ensure that potential difficulties in the repayment ability are identified at an early stage, and appropriate solutions are provided to viable customers.

Non-performing exposures

Non-performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced by ?13 mn, or 3% in 3Q2023, compared to a net organic reduction of ?18 mn in 2Q2023, to ?358 mn at 30 September 2023 (compared to ?371 mn at 30 June 2023 and ?411 mn at 31 December 2022).

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.5 Loan portfolio quality (continued)

Non-performing exposures (continued)

As a result, the NPEs account for 3.5% of gross loans as at 30 September 2023, compared to 3.6% at 30 June 2023 and to 4.0% at 31 December 2022.

The NPE coverage ratio stands at 77% at 30 September 2023, compared to 78% at 30 June 2023 and to 69% as at 31 December 2022. When taking into account tangible collateral at fair value, NPEs are fully covered.

Overall, since the peak in 2014, the stock of NPEs has been reduced by ?14.6 bn or 98% to below ?0.4 bn and the NPE ratio by 59 percentage points, from 63% to below 4%.

Mortgage-To-Rent Scheme ("MTR")

In July 2023, the Mortgage-to-Rent Scheme ('MTR') was approved by the Council of Ministers and aims for the reduction of NPEs backed by primary residence and simultaneously protect the primary residence of vulnerable borrowers. The eligible criteria include:

· Borrowers that were non-performing as at 31 December 2021 and remained non-performing as at 31 December 2022 with facilities backed by primary residence with open market value up to ?250k;

· Borrowers that that had a fully completed application to Estia Scheme and were assessed as eligible but not viable with a primary residence of up to ?350k Open Market Value; and

· all applicants that were approved under Estia Scheme but their inclusion was terminated.

The eligible applicants will be able to reside in their primary residence as tenants and are exempted from their mortgage loan, as the state will be covering fully the required rent on their behalf. The eligible applicants will be able to acquire the primary residence after 5 years at a favourable price, below the Open Market Value.

The scheme has not been launched yet; it is expected to act as another tool to address NPEs in the Retail sector.

A.1.6 Fixed income portfolio

Fixed income portfolio amounts to ?3,489 mn as at 30 September 2023, compared to ?3,178 mn as at 30 June 2023 and to ?2,500 mn as at 31 December 2022, increased by 10% on the prior quarter. As at 30 September 2023, the portfolio represents 14% of total assets (net of TLTRO III) and comprises ?3,074 mn (88%) measured at amortised cost and ?415 mn (12%) at fair value through other comprehensive income ('FVOCI').

The fixed income portfolio measured at amortised cost is held to maturity and therefore no fair value gains/losses are recognised in the Group's income statement or equity. This fixed income portfolio has high average rating at Aa3 or at Aa2 when Cyprus government bonds are excluded. The fair value of the amortised cost fixed income portfolio as at 30 September 2023 amounts to ?2,983 mn, reflecting an unrealised fair value loss of ?91 mn, equivalent to c.90 bps of CET1 ratio.

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 2019 amount to ?0.9 bn and exceed properties on-boarded in the same period of ?0.5 bn.

During the nine months ended 30 September 2023, the Group completed disposals of ?101 mn (compared to ?125 mn in 9M2022), resulting in a profit on disposal of c.?8 mn for 9M2023 (compared to a profit of c.?12 mn for 9M2022). Asset disposals are across all property classes, with 40% gross sale value in 9M2023 relating to land.

During the nine months ended 30 September 2023, the Group executed sale-purchase agreements (SPAs) for disposals of 399 properties with contract value of ?111 mn, compared to SPAs for disposals of 512 properties with contract value of ?142 mn for 9M2022.

In addition, the Group had a strong pipeline of ?64 mn by contract value as at 30 September 2023, of which ?49 mn related to SPAs signed (compared to a pipeline of ?82 mn as at 30 September 2022, of which ?44 mn related to SPAs signed).

REMU on-boarded ?18 mn of assets in 9M2023 (compared to additions of ?84 mn in 9M2022), via the execution of debt for asset swaps and repossessed properties.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

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

As at 30 September 2023, assets held by REMU had a carrying value of ?983 mn, of which ?947 mn are repossessed properties (comprising properties of ?922 mn classified as 'Stock of property' and ?61 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').

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 9M2023 amounted to ?572 mn compared to ?234 mn for 9M2022, up 144% yoy, benefitting from higher interest rates, growth of fixed income portfolio and well-managed deposit pass-through, notwithstanding the foregone NII on the NPE sale Helix 3 portfolio (c.?12 mn in 9M2022) and end of TLTRO III favourable terms (c.?10 mn in 9M2022).

Net interest income (NII) for 3Q2023 amounted to ?214 mn compared to ?196 mn for 2Q2023, up 9% qoq, attributable to higher interest rates and the continued low deposit pass-through, partially offset by increased funding costs.

Quarterly average interest earning assets (AIEA) for 9M2023 amounted to ?23,011 mn, up 2% yoy driven by the increase in liquid assets mainly as a result of the increase in deposits by c.?0.48 bn yoy and the issuance of senior preferred notes of ?0.35 bn. Quarterly average interest earning assets for 3Q2023 was also up by 2% qoq reflecting the increase in liquid assets and the issuance of senior preferred notes of ?0.35 bn in July 2023.

Net interest margin (NIM) for 9M2023 amounted to 3.32% (compared to 1.39% for 9M2022), up 193 bps yoy driven by the continuing interest rate rises. Net interest margin (NIM) for 3Q2023 stood at 3.63% (compared to 3.43% for 2Q2023) up 20 bps qoq.

Non-interest income for 9M2023 amounted to ?224 mn (compared to ?213 mn for 9M2022, up 5% yoy) comprising net fee and commission income of ?135 mn, net foreign exchange gains and net gains/(losses) on financial instruments of ?29 mn, net insurance result of ?38 mn, net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of ?7 mn and other income of ?15 mn. The yoy increase relates to higher net foreign exchange gains and net gains/(losses) on financial instruments, partly offset by lower net fee and commission income.

Non-interest income for 3Q2023 amounted to ?71 mn (compared to ?81 mn for 2Q2023, down 13% qoq) comprising net fee and commission income of ?45 mn, net foreign exchange gains and net gains/(losses) on financial instruments of ?8 mn, net insurance result of ?13 mn, net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of ?2 mn and other income of ?3 mn. The qoq reduction relates mainly to a non-recurring insurance receivable of c.?5 mn included in other income and recognised in the previous quarter. Non-interest income excluding the non-recurring insurance receivable of c.?5 mn, was down by 7% compared to the previous quarter, mainly due to higher insurance claims.

Net fee and commission income for 9M2023 amounted to ?135 mn (compared to ?142 mn for 9M2022, down 5% yoy); when disregarding the impact of the liquidity fees and NPE sale-related servicing fee, net fee and commission income was up 7% yoy, reflecting the introduction of a revised price list in February 2022 and higher net credit card commissions and transactional fees.

Net fee and commission income for 3Q2023 amounted to ?45 mn, broadly flat qoq.

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 ?29 mn for 9M2023 (comprising net foreign exchange gains of ?23 mn and net gains on financial instruments of ?6 mn), compared to ?14 mn for 9M2022 up 110% yoy, due to higher net gains on financial instruments.

Net foreign exchange gains and net gains/(losses) on financial instruments amounted to ?8 mn for 3Q2023, broadly flat qoq. Net foreign exchange gains and net gains/(losses) on financial instruments are considered volatile profit contributors.

Net insurance result amounted to ?38 mn for 9M2023, compared to ?34 mn for 9M2022, up 12% yoy, driven mainly by healthy growth of new business.

Net insurance result amounted to ?13 mn for 3Q2023, compared to ?15 mn for 2Q2023, down 12% qoq, impacted by higher insurance claims.

Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties for 9M2023 amounted to ?7 mn (comprising net gains on disposal of stock of properties of ?6 mn, net gains on disposal of investment properties of ?1.5 mn and net loss from revaluation of investment properties of ?0.5 mn), compared to ?11 mn for 9M2022. REMU profit remains volatile.

Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties for 3Q2023 amounted to ?2 mn (comprising net gains on disposal of stock of properties of ?2 mn, net gains on disposal of investment properties of ?0.6 mn and net loss from revaluation of investment properties of ?0.4 mn), compared to ?3 mn for 2Q2023.

Total income amounted to ?796 mn for 9M2023 (compared to ?447 mn for 9M2022, up 78% yoy), and to ?285 mn for 3Q2023 (compared to ?277 mn for 2Q2023, up 3% qoq), driven by strong growth in 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 9M2023 were ?278 mn (compared to ?268 mn for 9M2022, moderately up 3% yoy), 51% of which related to staff costs (?141 mn), 38% to other operating expenses (?107 mn) and 11% to special levy on deposits and other levies/contributions (?30 mn). Total expenses for 3Q2023 were ?98 mn compared to ?89 mn for 2Q2023, up 10% qoq. The yoy and qoq increase relates to higher other operating expenses and special levy on deposits and other levies/contributions.

Total operating expenses amounted to ?248 mn for 9M2023 (compared to ?241 mn for 9M2022, up 3% yoy), with savings partly offsetting inflationary pressures. Total operating expenses amounted to ?86 mn for 3Q2023 (compared to ?82 mn for 2Q2023, up 5% qoq), attributed mainly to higher expenses due to the Reward Programme launched to reward performer borrowers through Antamivi Reward Scheme.

Staff costs for 9M2023 were ?141 mn (compared to ?139 mn for 9M2022, up 2% yoy) due to the accrual of termination benefit cost of c.?4.5 mn and the performance related pay accrual of c.?7 mn, partly offset by the savings of the Voluntary Staff Exit Plan that took place in 3Q2022. The performance-related pay accrual relates to the Short-Term Incentive Plan and the Long-Term Incentive Plan. The Short-Term Incentive Plan involves variable remuneration to selected employees and will be driven by both, delivery of the Group's strategy as well as individual performance. Staff costs for 3Q2023 were ?48 mn, up 2% qoq due to higher performance-related pay accrual compared to prior quarter.

During December 2022 the Group has granted to eligible employees share awards under a long-term incentive plan ("2022 LTIP" or the "2022 Plan"). The 2022 Plan involves the granting of share awards and is driven by scorecard achievement, with measures and targets set to align pay outcomes with the delivery of the Group's strategy. The employees eligible for the 2022 LTIP are the members of the Extended EXCO. The 2022 LTIP stipulates that performance will be measured over a 3 year period and financial and non-financial objectives to be achieved (driven by both delivery of the Group's strategy as well as individual performance). At the end of the performance period, the performance outcome will be used to assess the percentage of the awards that will vest. In October 2023, the Group has granted to eligible employees share awards under a long-term incentive plan, the '2023 LTIP'. The 2023 LTIP is granted under the same terms as the 2022 LTIP (group of eligible participants and vesting terms and period are the same) however, the performance period relates to the period 2023-2025 with updated scorecard targets for the said period.

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

In July 2022 the Group completed a VEP which led to the reduction of the Group's full-time employees by 16%, at a total cost of ?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 and the increased cost of living adjustment (COLA).

As at 30 September 2023, the Group employed 2,913 persons compared to 2,902 persons as at 30 June 2023 and to 2,889 persons as at 31 December 2022.

Other operating expenses for 3Q2023 amounted to ?38 mn, up 10% qoq and totaled ?107 mn for 9M2023, compared to ?102 mn for 9M2022. The qoq and yoy increase relate mostly to higher expenses due to the Reward Programme launched to reward Antamivi Reward Scheme performing borrowers.

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 9M2023 amounted to ?30 mn compared to ?27 mn for 9M2022, up 12% yoy, driven mainly by the increase of deposits of ?0.48 bn yoy. Special levy on deposits and other levies/contributions for 3Q2023 amounted to ?12 mn up by 61% qoq, due to the c.?4 mn contribution of the Bank to the Deposit Guarantee Fund (DGF) relating to 2H2023 which was recorded in 3Q2023 (in line with IFRSs).

The cost to income ratio excluding special levy on deposits and other levies/contributions for 9M2023 was 31% compared to 54% for 9M2022, down 23 p.p. yoy. The yoy decrease is driven by the higher total income. The cost to income ratio excluding special levy on deposits and other levies/contributions for 3Q2023 was 30% broadly flat qoq.

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 9M2023 amounted to ?518 mn, compared to ?179 mn for 9M2022 (up 190% yoy). The yoy increase is driven by the significant increase in net interest income. Operating profit for 3Q2023 amounted to ?187 mn, broadly flat qoq.

Loan credit losses for 9M2023 were ?44 mn, compared to ?36 mn for 9M2022 (up 24% yoy). Loan credit losses for 3Q2023 were ?20 mn, compared to ?13 mn for 2Q2023, up 49% on prior quarter.

Cost of risk for 9M2023 was 58 bps, compared to a cost of risk of 44 bps for 9M2022 (up 14 bps), reflecting higher loan credit losses on specific customers with idiosyncratic characteristics assessed as 'Unlikely to pay' ('UTPs) exposures, even though they adhere their repayment schedule and present no arrears. Cost of risk for 3Q2023 was 76 bps, compared to a cost of risk of 51 bps for 2Q2023, up 25 bps qoq, and includes 43 bps (c.?11 mn) on UTPs and 15 bps (c.?4 mn) management overlays on Stage 1 and Stage 2 exposures to capture conservative assumptions.

At 30 September 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 I. 'Definitions and Explanations' for definition) totalled ?275 mn (compared to ?288 mn at 30 June 2023 and to ?282 mn at 31 December 2022) and accounted for 2.7% of gross loans (compared to 2.8% of gross loans for 30 June 2023 and 31 December 2022).

Impairments of other financial and non-financial assets for 9M2023 amounted to ?38 mn, compared to ?20 mn for 9M2022, up 88% yoy, driven mainly by higher impairments on specific, large, illiquid REMU stock properties. Impairments of other financial and non-financial assets for 3Q2023 amounted to ?8 mn compared to ?19 mn for 2Q2023, down 57% qoq.

Provisions for pending litigations, regulatory and other provisions (net of reversals) for 9M2023 amounted to ?20 mn, compared to ?3 mn for 9M2022. The yoy increase is driven mainly by the revised approach on pending litigation fees and provisions relating to other matters in relation to the run-down and disposal of legacy and non-core operations of the Group. Provisions for pending litigations, regulatory and other provisions (net of reversals) for 3Q2023 amounted to ?6 mn compared to ?8 mn for 2Q2023. 

Profit before tax and non-recurring items for 9M2023 totalled to ?416 mn, compared to ?120 mn for 9M2022. Profit before tax and non-recurring items for 3Q2023 amounted to ?153 mn compared to ?148 mn for 2Q2023 (up 3% 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 3Q2023 is ?23 mn broadly flat qoq, and totalled to ?63 mn for 9M2023, compared to ?19 mn for 9M2022.

Profit after tax and before non-recurring items (attributable to the owners of the Company) for 9M2023 is ?351 mn, compared to ?99 mn for 9M2022. Profit after tax and before non-recurring items (attributable to the owners of the Company) for 3Q2023 is ?129 mn, compared to ?126 mn for 2Q2023.

Advisory and other transformation costs - organic for 9M2023 are ?2 mn, compared to ?10 mn for 9M2022, down 77% yoy. Advisory and other transformation costs - organic for 3Q2023 are nil compared to ?1 mn in 2Q2023.

Profit after tax arising from the organic operations (attributable to the owners of the Company) for 9M2023 amounted to ?349 mn, compared to ?89 mn for 9M2022. Profit after tax arising from the organic operations (attributable to the owners of the Company) amounted to ?129 mn for 3Q2023, compared to ?125 mn for 2Q2023 (up 3% qoq).

Following completion of Helix 3 project, there are no amounts recognised for provisions/net profit/(loss) relating to NPE sales for 9M2023.

Restructuring and other costs relating to NPE sales for 9M2023 was nil compared to ?3 mn for 9M2022 (relating to the agreements for the sale of portfolios of NPEs). Restructuring and other costs relating to NPE sales for 3Q2023 was nil, flat qoq.

Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) of ?104 mn in 9M2022 mainly related to the Voluntary Staff Exit Plan (VEP) that took place in 3Q2022. For more details, please refer to the section A.2.2 'Total expenses'.

Profit/(loss) after tax attributable to the owners of the Company for 9M2023 amounts to a profit of ?349 mn, corresponding to a ROTE of 24.6%, compared to a loss after tax of ?19 mn for 9M2022. Profit/(loss) after tax attributable to the owners of the Company for 3Q2023 amounts to a profit of ?129 mn, compared to a profit of ?125 mn for 2Q2023 (up 3% qoq). ROTE stands at 25.6% for 3Q2023, compared to 26.6% for 2Q2023.

B. Operating Environment

Geopolitical tensions remain high as the war in Ukraine continues and the latest military conflict in the Middle East rages on, adding considerable uncertainty to the outlook for the global economy. The wider impact will depend on how these conflicts evolve in the future. 

However, the International Monetary Fund's World Economic Outlook for Autumn 2023 presents a cautiously optimistic baseline scenario. According to the outlook, no recession is expected in the advanced world until at least 2024, but there are downside risks. In the baseline scenario, world growth slows from 3.5% in 2022 to 3.0% in 2023 and 2.9% in 2024. Average growth in 2023-2028 will be below historical averages, but on a par with, and slightly better than, the previous period 2015-2022.

Headline inflation continues to decline and core inflation, excluding food and energy prices, is also projected to fall, but more gradually. Most countries are not expected to return to the 2% inflation target until 2025-2026.

Growth in the Cypriot economy slowed to 2.8% in the first half of 2023 (3.3% in the first quarter of 2023 and 2.3% in the second quarter of 2023), compared with 5.1% growth in 2022. According to the IMF's Autumn World Economic Outlook, growth will average 2.2% in the year and accelerate to 2.7% in 2024 (while the Ministry of Finance projects growth of around 2.4% in 2023 and almost 3.0% in 2024).

Employment growth remains strong in 2021-2022, averaging 1.2% and 2.8% respectively, following a 1% decline in 2020. Productivity growth was particularly strong in the period immediately following the Covid recession and has slowed in recent quarters. The unemployment rate after rising in 2020 and the first half of 2021, has been declining in the period since, dropping to 6.5% in the first quarter of 2023 and 6.1% in the second quarter of 2023. For the euro area as a whole, the seasonally adjusted unemployment rate was 6.6% in the first quarter of 2023 and 6.5% in the second quarter of 2023.

Inflation, as measured by the Harmonised Index of Consumer Prices, averaged 8.1% in 2022, compared with 8.4% in the euro area. Inflation peaked at 10.6% in July 2022 and has been decelerating since, reaching 2.4% in July 2023, before rising to 4.3% in September 2023. Overall, inflation averaged 4.4% in the year to September 2023. The decline in headline inflation has been driven by the non-core components of energy and food, while core inflation, defined as total minus energy and food, has been more volatile. In Cyprus, core inflation fell to 3.8% in August 2023 and to 3.5% in September 2023. In the euro area, core inflation was 5.5% in August 2023 and 5.4% in September 2023, close to peak levels. Harmonised inflation is expected to continue to moderate, but only gradually. Headline inflation in Cyprus is projected to be around 3.5% in 2023, or 4.1% according to the Ministry of Finance.

Following a strong performance in 2022, tourism activity continued to recover in the first nine months of the year. Arrivals in January-September 2023 were up 23.4% on the same period of last year, reaching 96% of arrivals in the same period in 2019. Similarly, receipts in January-August 2023, were ?2.03 bn , an increase of 25% year-on-year. Arrivals for the year are expected to be close to 2019 levels, while receipts are expected to exceed 2019 levels.

Cyprus received a first payment from the Recovery and Resilience Facility of ?157 mn in September 2021, following the approval of the National Recovery Plan in July 2020. This was pre-financing for 13% of the total disbursements for the period 2021-2026. Cyprus received its first disbursement of ?85 mn in December 2022, following the adoption of conditional legislation in Parliament and approval by the European Commission. The release of the funds is conditional on the strict implementation of the reforms agreed in the National Recovery Plan. The funds will be used, among other things, to increase investment in the digital and green transition, to improve the efficiency of public and local administrations, and to improve the efficiency of the judicial system.

In the area of public finances, there have been significant improvements in debt dynamics and debt affordability indicators. The recovery in 2021 was underpinned by a significant increase in general government revenue and a relative decrease in government expenditure. The result was a reduction in the budget deficit to 1.9% of GDP, from a deficit of 5.7% of GDP in 2020. In 2022, public finances improved further. The budget deficit turned into a surplus of 2.4% of GDP and gross debt dropped from 99.3% of GDP in 2021 to 85.6%. In 2023, according to the Ministry of Finance, the budget surplus will be 2.5% of GDP and gross debt will fall to 78% of GDP. Debt affordability metrics are favourable and are expected to remain solid in 2023-2024, as gross financing needs are moderate, and the cash buffer gives the government a high degree of financing flexibility.

The ECB left its interest rates unchanged at the Governing Council meeting in October 2023, after raising them by 25 bps in September 2023. The minimum refinancing operations rate is now 4.5%, compared with zero at the start of the tightening cycle in July 2021, while the ECB deposit facility rate is 4.0%, compared with -50 bps in July 2021.

B. Operating environment (continued)

The banking sector has undergone significant restructuring since the financial crisis in 2013. Total NPEs at the end of June 2023, amounted to ?2.1 bn, or 8.7% of gross loans. The NPE ratio in the non-financial corporations segment was 7.3% at end-June 2023, and that of households was 11.2%. About 45.0% of total NPEs are restructured facilities and the coverage ratio was 55.6%. In November 2023, the Cyprus Banking Association, following discussions with the Cypriot government and parliament, agreed to suspend the foreclosure process for primary residences with an open market value of up to ?350,000 until 31 December 2023.

Sovereign ratings

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

In September 2023, Moody's Investors Service upgraded the long-term issuer and senior unsecured ratings of the Government of Cyprus to Baa2 from Ba1. The outlook was revised to stable from positive. This is a two-notch upgrade of Cyprus' ratings, reflecting broad-based and sustained improvements in the country's credit profile as a result of past and ongoing economic, fiscal and banking reforms. Economic resilience has improved and medium-term growth prospects remain strong. Fiscal strength has also improved significantly, with a positive debt trend and sound debt affordability metrics. The stable outlook balances the positive credit trends with remaining challenges.

In addition, S&P Global Ratings revised its outlook on Cyprus to positive from stable in September 2023 and affirmed Cyprus' long-term local and foreign currency sovereign ratings at BBB. The positive outlook reflects the ongoing macroeconomic normalisation since the country's financial crisis in 2012-2013, with the government on track to achieve steady fiscal surpluses and a declining debt-to-GDP ratio in the coming years. The positive outlook also reflects the significant progress made in the banking sector.

Also in September 2023, DBRS Ratings GmbH (DBRS Morningstar) upgraded the long-term foreign and local currency issuer ratings of the Republic of Cyprus from BBB to BBB (high). The rating action is stable. The upgrade is driven by the recent decline in government debt and the expectation that public debt metrics will continue to improve over the next few years, while economic growth is expected to remain among the strongest in the euro area. The stable outlook balances the recent favourable fiscal dynamics with downside risks to the economic outlook.

Fitch Ratings has affirmed Cyprus' long-term foreign currency issuer default rating at 'BBB' with a stable outlook in June 2023, following the upgrade in March last year. The upgrade and affirmation reflect the improvement in public finances and government debt, as well as strong GDP growth, the resilience of the Cypriot economy to external shocks, and the improvement in the banking sector's asset quality

C. Business Overview

Credit ratings

The Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. In November 2023, Fitch Ratings upgraded long-term issuer default rating to BB from B+, whilst maintaining the positive outlook. The two notch upgrade reflects a combination of Fitch's improved assessment of the Cypriot operating environment and continued improvement in the Bank's credit profile, strengthened capitalisation, reduced stock of legacy problem assets and structurally improved profitability. In October 2023 Moody's Investors Service upgraded the Bank's long-term deposit rating to the investment grade Baa3 from Ba1, while the outlook remained positive. The main drivers for this upgrade are the continued resilience of the Cypriot economy and credit conditions and the continued improvements in Bank's solvency profile, with further gradual improvements in asset quality and capital metrics, and a significant strengthening in the Bank's core profitability. 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.

Financial performance

The Group is a leading, financial and technology hub in Cyprus. During the quarter ended 30 September 2023, the Group delivered another strong set of financial results, generating a ROTE of 25.6%, the third consecutive quarter with a ROTE over 20%. Overall, the Group generated ?349 mn profit after tax, corresponding to a ROTE of 24.6%, supported by strong net interest income growth and a well-managed deposit pass-through, whilst non-interest income remained a significant contributor to the Group's profitability and diversified model, covering around 90% of total operating expenses. The Group's efficiency ratio was significantly improved on prior year reflecting continued revenue growth and disciplined cost management amidst persistent inflationary pressures. Overall, the strong performance is feeding through the Group's tangible book value growth trajectory, that increased by 22% on prior year to ?4.63 per share. With such strong set of financial results, the Group is paving the way for delivering a ROTE for 2023 well above the Group's 2023 target (of over 17%), albeit 4Q2023 ROTE is expected to modestly decline compared to the 9M2023 levels, partly due to typical seasonality in 4Q2023 and the fact that strong profitability builds into equity.

Favourable interest rate environment

The structure of the Group's balance sheet is geared towards higher interest rates. As at 30 September 2023, cash balances with ECB (excluding TLTRO III of c.?2.0 bn) amounted to c.?7.6 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 30 September 2023. The net interest income for 9M2023 stood at ?572 mn, more than double compared to 9M2022. This increase is underpinned by faster and steeper than expected interest rate rises as well as a resilient low deposit pass-through.

Net interest income is expected to remain strong on the back of the improved interest rate environment and well-managed deposit pass-through and hence net interest income for 4Q2023 is expected to be at similar levels to 3Q2023. At the same time, the Group is undertaking pro-active solutions to enhance the resilience of the net interest income to future reduction of interest rates. These solutions include the increase in investment in fixed rate bonds with longer duration and high credit, the initiation of use of reverse repos, the offering of fixed rate lending and the entering into fixed rate receiver swaps.

Growing revenues in a more capital efficient way

The Group remains focused on growing revenues in a more capital efficient way through growth of high-quality new lending and the growth in niche areas, such as insurance and digital products that provide further market penetration and diversify through non-banking operations.

The Group has continued to provide high quality new lending in 9M2023 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 9M2023, new lending amounted to ?1,563 mn, despite the rising interest rate environment. Gross performing loan book remained broadly flat yoy as repayments continue to offset new lending. Performing loan book is expected to remain broadly flat in 2023.

Fixed income portfolio continued to grow in the third quarter of 2023 to ?3,489 mn, and currently represents 14% of total assets (net of TLTRO III). This portfolio is mostly measured at amortised cost and is characterised with high average rating at Aa3 (or Aa2 when Cyprus government bonds are excluded). The mark-to market impact of this amortised cost fixed income portfolio is ?91 mn as at 30 September 2023, corresponding to c.90 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. During the first nine months of 2023, non-interest income (excluding an ad-hoc insurance receivable of c.?5 mn) amounted to ?219 mn, remaining an important contributor to the Group's profitability, and contributing to 90% of the Group's total operating expenses. Going forward, non-interest income is expected to continue covering c.80% of the Group's total operating expenses.

C. Business Overview (continued)

Growing revenues in a more capital efficient way (continued)

In 2023, net fee and commission income is negatively affected by the termination of liquidity fees in December 2022 and an NPE sale-related servicing fee in mid-February 2023. When disregarding the aforementioned impact of the liquidity fees and NPE sale-related servicing fee, net fee and commission income increased by 7% on prior year, reflecting the introduction of a revised price list in February 2022 and higher net credit card commissions and transactional fees.

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 ?21 mn in 9M2023, up 8% yoy, backed by strong transaction volume.

The Group's insurance companies, EuroLife and GI are respectively leading players in the life and general insurance business in Cyprus, and have been providing recurring and improving income, further diversifying the Group's income streams. The net insurance result for 9M2023 contributed 17% of non-interest income and amounted to ?38 mn, up 12% yoy, reflecting healthy new business growth; insurance companies remain valuable and sustainable contributors to the Group's profitability. On 1 January 2023, the Group adopted IFRS 17, retrospectively, which impacts the profit recognition for insurance contracts by phasing of profit over their lifetime compared to recognising profit substantially up-front under IFRS 4. The new accounting standard does not change the economics of the insurance business and decreases the volatility of the Group's insurance companies profitability. For further details please refer to Section F.9 of this announcement.

Finally, the Group through the Digital Economy Platform (Jinius) ('the Platform') aims to support the national digital economy by optimising processes in a cost-efficient way, allow the Bank to strengthen its client relationships, create cross-selling opportunities as well as to generate new revenue sources over the medium term, leveraging on the Bank's market position, knowledge and digital infrastructure. The first Business-to-Business services are already in use by clients and include electronic invoicing, remittance management, tenders management and ecosystem management. The next key milestone is the launch of the first Business-to-Consumer service, a product marketplace, driving opportunities in lifestyle banking and beyond. Currently, over 1,800 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 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 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 reduced the number of branches by 20 to 60, a reduction of 25%.

The Group's total operating expenses for 9M2023 amounted to ?248 mn, moderately up by 3% yoy with savings partly offsetting inflationary pressures. The cost to income ratio excluding special levy on deposits and other levies/contributions for 9M2023 was reduced further to 31%, 23 p.p. down compared to 9M2022, driven mainly by the higher total income. Overall, the cost to income ratio excluding special levy on deposits and other levies/contributions for 2023 is expected to be considerably below 2023 target of

During 2022 the Group has established a share awards scheme under a long-term incentive plan ("the "LTIP Plan"). The LTIP 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 LTIP stipulates that performance will be measured over a 3 year period and financial and non-financial objectives to be achieved (driven by both delivery of the Group's strategy as well as individual performance). At the end of the performance period, the performance outcome will be used to assess the percentage of the awards that will vest. The Group proceeded in December 2022 to grant to eligible employees share awards under the established LTIP Plan; this is the 2022 LTIP and refers to the performance period 2022-2024. Further in October 2023, the Group has granted a new award, the 2023 LTIP, under the same LTIP Plan, which refers to the performance period 2023-2025. The employees eligible for both the 2022 LTIP and 2023 LTIP are the members of the Extended EXCO. A performance scorecard is set for each annual LTIP award granted.

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 9M2023 include c.?7 mn staff cost rewards, namely the Short-term Incentive Plan. The Short-term Incentive Plan involves variable remuneration to selected employees and will be driven by both, delivery of the Group's strategy as well as individual performance.

Transformation plan

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

Digital transformation

The Bank's digital transformation continues to focus on developing digital services and products that improve the customer experience, streamlining internal processes, and introducing new ways for improving the workplace environment. Furthermore, the Bank's Digital strategy also embraces the advancement of digital sales, reinforcing our commitment to delivering exceptional value to our customers.

During 3Q2023, the Bank continued to enrich and improve its digital portfolio with new innovative services to its customers. The innovative QuickLoan products have been further enhanced with the integration of Short-Lived digital signature Certificate (SLC). As a result, BoC customers are offered an end-to-end digital experience when applying for the new lending products, with the capability to digitally sign the required documents, related to the quick loans, conveniently from anywhere at any time via the BoC mobile app/Internet Banking and not having to visit a BoC branch for this purpose.

The adoption of digital products and services continued to grow and gained momentum in the third quarter of 2023. As at 30 September 2023, 95.0% of the number of transactions involving deposits, cash withdrawals and internal/external transfers were performed through digital channels (up by 11.2 p.p. from 83.8% in June 2020). In addition, 83.5% of individual customers were digitally engaged (up by 11.1 p.p. from 72.4% in June 2020), choosing digital channels over branches to perform their transactions.

As at 30 September 2023, active mobile banking users and active QuickPay users have grown by 15.1% and 22.4% respectively over the last 12 months. The highest number of QuickPay users to date was recorded in September 2023 with 195.2 thousand active users and 584 thousand transactions (up 28.4% yoy).

Digital offerings via digital channels continued to enhance Group's sales further in the third quarter of 2023. During 3Q2023, new lending via Quickloans amounted to ?29 mn (compared to new lending of ?26 mn in 2Q2023 and ?18 mn for 1Q2023) and totalled ?73 mn for 9M2023. Deposits in accounts opened digitally have also shown an increase of 26.3% yoy, reaching ?227 mn at 30 September 2023. 9M2023 digital insurance sales, with two new products in mobile app (Motor & Home Insurance), have more than tripled compared to FY2022 sales (?276k in 9M2023 compared to ?68k in FY2022).

Asset quality

Balance sheet de-risking was largely completed in 2022, marked by the completion of Project Helix 3 in November 2022 which refers to the sale of non-performing exposures with gross book value of 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 at 4% by end-2022. As at 30 September 2023, the Group's NPE ratio stood at 3.5%. The Group's priorities remain intact, maintaining high quality new lending with strict underwriting standards and preventing asset quality deterioration in this uncertain outlook.

Against the backdrop of ongoing macroeconomic uncertainty, the cost of risk range target of 50-80 bps remains unchanged. The Group expects to end the year below the NPE ratio target of 4%.

C. Business Overview (continued)

Capital market presence

In June 2023, the Company successfully launched and priced an issue of ?220 mn Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities (the 'New Capital Securities').

The issue was met with exceptional demand, attracting interest from c.240 institutional investors, with the final order book over 12 times over-subscribed and final pricing 62.5 bps tighter than the initial pricing indication. This also reflects significant improvement in the credit spread to c.910 bps compared to c.1,260 bps for the previous AT1 issue in 2018 ('Existing Capital Securities').

In July 2023, the Bank has successfully launched and priced an issuance of ?350 mn of senior preferred notes (the "Notes"). The Notes were priced at par with a fixed coupon of 7.375% per annum, payable annually in arrear, until the Optional Redemption Date i.e. 25 July 2027. The issuance was met with strong demand, attracting interest from more than 90 institutional investors, with a peak orderbook of ?950 mn and final pricing 37.5 bps than the initial pricing indication.

Dividend policy and shareholder value

In April 2023, the Company obtained the approval of the European Central Bank to pay a dividend out of FY2022 profitability. Following this approval, the Board of Directors of the Company recommended to the shareholders for approval at the AGM a final Dividend of ?0.05 per ordinary share in respect of earnings for the year ended 31 December 2022. The Dividend which was declared at the AGM on 26 May 2023, amounted to ?22.3 mn in total and was equivalent to a payout ratio of 14% of the FY2022 adjusted recurring profitability or 31% based on FY2022 profit after tax (as reported in 2022 Annual Financial Report). The dividend was paid in cash on 16 June 2023 and was the first dividend payment after 12 years, a significant milestone for the Group, as it represents a new chapter for the Group. 

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

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

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

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

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

? Become carbon neutral by 2030

? Become Net Zero by 2050

? Steadily increase Green Asset Ratio

? Steadily increase Green Mortgage Ratio

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

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

C. Business Overview (continued)

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

Environmental Pillar

The Group has estimated the Scope 1 and Scope 2 greenhouse gas ('GHG') emissions of 2021 relating to own operations in order to set the baseline for carbon neutrality target. The Bank being the main contributor of GHG emissions of the Group, designed in 2022 the strategy to meet the carbon neutrality target by 2030 and progress towards Net Zero target of 2050. For the Group to become carbon neutral by 2030, Scope 1 and Scope 2 emissions should be reduced by 42% by 2030. The Bank plans to invest in energy efficient installations and actions as well as replace fuel intensive machineries and vehicles from 2023 to 2025, which would lead to 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 achieved a reduction of 18% in Scope 1 -Mobile and Stationary Combustion GHG emissions and 7% in Scope 2 - Purchased electricity GHG emissions in 9M2023 compared to 9M2022 due to new solar panels connected to energy network in 2022 and early 2023 as well as the reduction of number of branches as part of the digitalisation journey. The Bank achieved an increase by 61% in renewable energy production, from 129,840 Kwh to 208,651 Kwh, in 9M2023 compared to 9M2022.

The Bank is the first bank in Cyprus to join the Partnership for Carbon Accounting Financials (PCAF) in October 2022 and is following the recommended methodology for the estimation of the Financed Scope 3 emissions. The Group has estimated Financed Scope 3 GHG emissions relating to the loan portfolio based on PCAF standard and proxies. Following the estimation of Financed Scope 3 GHG emissions derived from its loan portfolio and in conjunction with the materiality assessment's results on climate and environmental risks the Bank identified the carbon-concentrated areas so as to take the necessary actions to minimise the environmental and climate impact associated with its loan portfolio by offering targeted climate friendly products and engaging with its customers. In 2023, following the identification of carbon-concentrated sectors and asset classes, the Group is in the process to set decarbonisation targets aligned with climate scenario (Science based targets) which will assist in the formulation of the Group'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 further in 2023. The gross amount of environmentally friendly loans as at 30 September 2023 was ?21.6 mn compared to ?20.9 mn as at 31 December 2022.

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

During 2023, in order to enhance the awareness and skillset towards the ESG, the Group performed trainings to the Board of Directors and Senior Management.

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 immediate and efficient response of Bank of Cyprus' SupportCY network consisting of companies and organisations, to various needs of the society and in cases of crises and emergencies, through the activation of programs, specialied equipment and a highly trained Volunteers Corps, the contribution of the Bank of Cyprus Cultural Centre in promoting the cultural heritage of the island, and the work of IDEA Innovation Centre. During 2023, SupportCY among other initiatives responded to more than 30 fire incidents in Cyprus and Greece, the deadly floods in Greece and sent support to the earthquake victims in Syria. 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 30,456 people participating in events at the Cultural Foundation between January to September 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.

C. Business Overview (continued)

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

The Group has continued to upgrade its staff's skillset by providing training and development opportunities to all staff and capitalising on modern delivery methods. In 2023, the Bank's employees attended 53,435 hours of trainings. In addition, in 2023 the Group launched the BoC Academy to offer up-skilling short courses for employees with 20 members of staff enrolling on the Academy's programs to date. In addition, 4 full MBA scholarships were offered to selected members of staff. 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 50% of the Board members being female as at 30 September 2023. The Board displays a strong skillset stemming from broad international experience. Moreover, the Group aspires to achieve a representation of at least 30% women in Group's management bodies (Defined as the EXCO and the Extended EXCO) by 2030. As at 30 September 2023, there is a 29% representation of women in Group's management bodies and a 41% representation of women at key positions below the Extended EXCO level (defined as positions between Assistant Manager and Manager).

D. Strategy and Outlook

The vision of the Group is to create a lifelong partnership with its customers, guiding and supporting them in an evolving world.

The strategic pillars of the Group are: 

· Grow revenues in a more capital efficient way; by enhancing revenue generation via growth in high quality new lending, diversification to less capital intensive banking and other financial services (such as insurance and the digital economy) as well as prudent management of the Group's liquidity

· Achieve a lean operating model; by ongoing focus on efficiency through further automations facilitated by digitisation

· Maintain robust asset quality; by maintaining high quality new lending via strict underwriting criteria, normalising cost of risk and reducing other impairments

· Enhance organisational resilience and ESG (Environmental, Social and Governance) agenda; by leading the transition of Cyprus to a sustainable future and building a forward-looking organisation embracing ESG in all aspects.

The Group's targets for 2023 are set out below:

The 2024 targets are expected to be updated with FY2023 publication of financial results.

E. Financial Results - Statutory Basis

Unaudited Interim Consolidated Income Statement

The following financial information for the nine 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)