Bk. Cyprus Hldg Regulatory News (BOCH)

Announcement

Group Financial Results for the nine months ended 30 September 2019

Nicosia, 26 November 2019

Key Highlights for the nine months ended 30 September 2019

Good Capital Position

·; Total Capital ratio of 17.9% pro forma for disposal of investment in CNP and Voluntary Staff Exit Plan (VEP) (18.2% as reported)

·; CET1 ratio of 14.9% pro forma for disposal of investment in CNP and VEP (15.2% as reported)

Balance Sheet Repair Continues at Pace

·; NPEs of €4.1 bn (€2.0 bn net); 73% reduction since 2014

·; Gross NPE ratio reduced to 31%, coverage increased to 51%

·; Organic NPE reduction continued ahead of guidance (€227 mn in 3Q2019; €684 mn in 9M2019)

·; REMU sales of €355 mn in 9M2019

·; Good momentum in efforts to accelerate de-risking with further portfolio sales

Active Liquidity Management

·; Deposits flat qoq at €16.5 bn

·; Loan to deposit ratio at 66%

·; Liquidity surplus reduced to €3.0 bn on TLTRO repayment

·; Liquidity management strategy underway for specific customer groups

Positive Performance in 3Q2019

·; New lending of €491 mn for 3Q2019 and €1.6 bn for 9M2019

·; Total Income of €162 mn, Operating profit of €63 mn

·; Recurring income from on-going insurance business (€12 mn in 3Q2019; €42 mn in 9M2019)

·; Cost of risk at 0.90%

·; Underlying profit of €18 mn for 3Q2019 and €35 mn for 9M2019

·; Profit after tax of €19 mn for 3Q2019 and €116 mn for 9M2019

Cost Management Actions in 4Q2019 Supported by Digital Transformation

·; Successful completion of VEP in 4Q2019 at one-off cost of €79 mn, supported by the on-going Digital Transformation Programme

·; Full time employees reduced by 11%

·; Gross annual savings in staff costs of 13% (€28 mn)

·; Branch footprint rationalisation continues; further 8% reduction in number of branches by the year end

·; 75% of transactions (involving deposits, cash withdrawals and transfers) through digital channels; 54% increase in active mobile banking users since June 2017

Group Chief Executive Statement 

"Our results this quarter reflect continuing progress against our core objective of balance sheet repair and normalisation of our Bank.

Following the completion of the sale of c.€2.7 bn non-performing loans in Project Helix in June, which added 140 bps of capital in the second quarter, the continued organic NPE reduction remains ahead of our organic target of c.€800 mn for 2019. The organic NPE reduction in the third quarter of the year amounted to €227 mn, bringing the total organic reduction in the nine months of 2019 to €684 mn. This represents the eighteenth consecutive quarter of organic NPE reductions.

Since the peak in 2014, we have now reduced the stock of NPEs by 73% to €4.1 bn. This stock of NPEs is now covered by 51% loan credit losses. Overall, since 2014 we have managed a reduction in NPEs of €10.9 bn, of which €8.2 bn has been through organic actions.

The Bank's capital position remains good and well in excess of our regulatory requirements. As at 30 September 2019, pro forma for the sale of our investment in CNP and the voluntary staff exit plan, our capital ratios (IFRS 9 transitional) were CET1 of 14.9% and Total Capital ratio of 17.9%.

During the quarter our deposits remained broadly flat at €16.5 bn and we reduced our cost of deposits by a further 5 bps. Overall, we reduced our cost of deposits by 57 bps since January 2018. In the third quarter of 2019, our new lending in Cyprus grew 20% from the prior year to €491 mn, helping support the continued growth in the Cypriot economy. Overall in the first nine months of 2019, we lent €1.6 bn to customers. Our loan to deposit ratio at the quarter-end stood at 66%. 

During the third quarter of the year, the Group generated total income of €162 mn and a positive operating result of €63 mn. The underlying result was a profit after tax of €18 mn, whilst the reported profit after tax for the third quarter was €19 mn. After the net loss from the sale of our investment in CNP of €21 mn and the net impact from the reversal of impairments of €101 mn, the reported profit after tax for the first nine months of the year amounted to €116 mn.

Our on-going insurance business provides recurring income for the Group and, following the disposal of our investment in CNP, it remains well positioned for growth over the medium term.

The changed interest rate environment in Europe continues to present a challenge to our profitability levels. In response, we remain focused on actively managing our funding costs and reducing our cost base. We have made progress in these areas this quarter.

In September, we decided to early repay ECB funding in the form of TLTRO of €830 mn, given the comfortable liquidity position. The repayment is expected to result in savings as these funds were deposited at negative interest rates. The Bank continues to operate with a significant liquidity surplus, which at the end of the third quarter amounted to €3.0 bn.

In October, we completed a voluntary staff exit plan through which c.470 applicants were approved to leave at a total one-off cost of c.€79 mn to be recorded in the fourth quarter, reducing the number of our employees by c.11%, whilst gross annual savings are estimated at c.€28 mn or c.13% of staff costs. In addition, we continue our branch footprint rationalisation as we expect to reduce the number of our branches by a further 8% by the year end, further improving our operating model. We remain focused on further improvement in efficiency.

These actions have been supported by our on-going Digital Transformation Programme. The adoption of digital products and services continues to grow and gain momentum. Today, 75% of transactions involving deposits, cash withdrawals and transfers, are performed through digital channels, whilst the number of active users of mobile banking has increased by 54% since June 2017.

The Bank is returning to strength, through a disciplined approach to balance sheet repair, the disposal of non-core businesses and cost rationalisation through digital transformation. Good progress has been made throughout the year, however there remains more to do and we are focused on delivering balance sheet de-risking at pace and further efficiency gains across our cost base. Our strategy of making the Bank stronger, safer and future-focused is unchanged. This will enable us to continue to support the strengthening Cypriot economy, which expanded by 3.1% during the first nine months of the year.

I am looking forward to sharing my perspectives and vision for the future of our Bank with the release of the full year financial results."

Panicos Nicolaou

Commentary and Comparative Information

The Group adopted the accounting standard IFRS 16 'Leases' on 1 January 2019. The impact on adoption was an increase in assets of €37 mn and an increase in liabilities of €37 mn with no impact on retained earnings or equity of the Group. The effect of the adoption of IFRS 16 remains subject to change until the Group finalises its financial statements for the year ended 31 December 2019, the year of initial application.

Comparative information was restated following the change in the classification of properties which are leased out under operating leases as investment properties. In relation to these properties, an amount of €103 mn was reclassified from 'Stock of property' to 'Investment Properties'.

Reclassifications to comparative information were also made for unrecognised interest on previously credit impaired loans which have cured during the period amounting to €24 mn. This was reclassified from 'Net interest income' to 'Credit losses to cover credit risk on loans and advances to customers' in line with an IFRIC discussion, which has taken place in November 2018 (Presentation of unrecognised interest following the curing of a credit impaired financial asset (IFRS 9)). The corresponding amount for the nine months ended 30 September 2019 stood at €12 mn.

A.1. Balance Sheet Analysis

A.1.1 Capital Base  

Total equity excluding non-controlling interests totalled €2,454 mn at 30 September 2019, compared to €2,442 mn at 30 June 2019 and €2,341 mn at 31 December 2018. Shareholders' equity totalled €2,234 mn at 30 September 2019, compared to €2,222 mn at 30 June 2019 and €2,121 mn at 31 December 2018.

The Common Equity Tier 1 capital (CET1) ratio on an IFRS 9 transitional basis stood at 15.2% at 30 September 2019 (and 14.9% pro forma for the sale of investment in CNP Cyprus Insurance Holdings Ltd (CNP) (referred to as "pro forma for CNP") and for the voluntary staff exit plan (VEP), collectively referred to as "pro forma for CNP and VEP"), compared to 14.9% at 30 June 2019 (and 15.2% pro forma for CNP) and to 11.9% at 31 December 2018 (adjusted to take into account the deferred tax assets (DTAs) which were fully phased in as of 1 January 2019). During 3Q2019 the CET1 ratio was positively affected mainly by the decrease in risk weighted assets (RWAs). The CET1 ratio as at 30 September 2019 includes unreviewed profits for the nine months ended 30 September 2019.

The Group has elected to apply the EU transitional arrangements for regulatory capital purposes (EU Regulation 2017/2395) where the impact on the impairment amount from the initial application of IFRS 9 on the capital ratios is phased-in gradually. The amount added each year decreases based on a weighting factor until the impact of IFRS 9 is fully absorbed back to CET1 at the end of the five years. The impact on the capital ratios for the year 2018 was 5% of the impact on the impairment amounts from the initial application of IFRS 9, increasing to 15% (cumulative) for the year 2019. The CET1 ratio on a fully-loaded basis amounts to 13.6% at 30 September 2019 and 13.3% pro forma for CNP and VEP, compared to 13.3% at 30 June 2019 (and 13.5% pro forma for CNP) and to 10.1% at 31 December 2018 (and 13.5% pro forma for DTC and Helix). On a transitional basis and on a fully phased-in basis, after the five year period of transition is complete, the impact of IFRS 9 is expected to be manageable and within the Group's capital plans.

As at 30 September 2019, the Total Capital ratio stood at 18.2% (and 17.9% pro forma for CNP and VEP), compared to 17.8% at 30 June 2019 (and 18.1% pro forma for CNP) and to 14.9% at 31 December 2018.

The Group's capital ratios are above the minimum CET1 regulatory capital requirement of 10.5% (comprising a 4.5% Pillar I requirement, a 3.0% Pillar II requirement, the Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer of 0.5%) and the overall Total Capital requirement of 14.0%, comprising an 8.0% Pillar I requirement (of which up to 1.5% can be in the form of Additional Tier 1 capital and up to 2.0% in the form of Tier 2 capital), a 3.0% Pillar II requirement (in the form of CET1), the Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer of 0.5%. The ECB has also provided non-public guidance for an additional Pillar II CET1 buffer.

Pillar II add-on capital requirements derive from the context of the Supervisory Review and Evaluation Process (SREP), which is a point in time assessment, and are therefore subject to change over time.

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

Following the annual SREP performed by the ECB in 2019 and based on the pre-notification received in September 2019, the Group's minimum phased-in CET1 capital ratio and Total Capital ratio remain unchanged, when ignoring the phasing-in of the Other Systemically Important Institution Buffer. The Group's phased-in CET1 capital ratio is expected to be 11.0%, comprising a 4.5% Pillar I requirement, a 3.0% Pillar II requirement, the Capital Conservation Buffer of 2.5% (fully phased-in as of 1 January 2019) and the Other Systemically Important Institution Buffer of 1.0%. The Group's Total Capital requirement is expected to be 14.5%, comprising an 8.0% Pillar I requirement, a 3.0% Pillar II requirement, the Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer of 1.0%. The new SREP requirements are expected to be effective from January 2020 and remain subject to ECB final confirmation.

The EBA final guidelines on SREP and supervisory stress testing and the Single Supervisory Mechanism's (SSM) 2018 SREP methodology provide that own funds held for the purposes of Pillar II Guidance cannot be used to meet any other capital requirements (Pillar 1, Pillar II requirement or the combined buffer requirements), and therefore cannot be used twice. Following the Annual Supervisory Review and Evaluation Process (SREP) performed by the ECB in 2019 and based on the pre-notification received in September 2019, the new provisions are expected to be effective from January 2020 and remain subject to ECB final confirmation.

The Group capital ratios remain above the SREP requirements.

Based on the SREP decisions of prior years, the Company and the Bank were under a regulatory prohibition for equity dividend distribution and therefore no dividends were declared or paid during years 2018 and 2017. Following the 2018 SREP decision, the Company and the Bank are still under equity dividend distribution prohibition. This prohibition does not apply if the distribution is made via the issuance of new ordinary shares to the shareholders, which are eligible as CET1 capital. No prohibition applies to the payment of coupons on any AT1 capital instruments issued by the Company or the Bank.

Additional Tier 1

In December 2018, the Company proceeded with the issuance of €220 mn of Additional Tier 1 Capital Securities (AT1). AT1 constitutes an unsecured and subordinated obligation of the Company. The coupon is at 12.50% and is payable semi-annually. The first coupon payment to AT1 holders was made in June 2019 and was recognised in retained earnings.

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) were adopted by the Cyprus Parliament on 1 March 2019 and published in the Official Gazette of the Republic on 15 March 2019. The law amendments cover the income tax losses transferred from Laiki Bank to the Bank in March 2013. The introduction of CRD IV in January 2014 and its subsequent phasing-in led to a more capital intensive treatment of this DTA for the Bank. The law amendments have resulted in improved regulatory capital treatment, under Capital Requirements Regulation (EU) No. 575/2013 ("CRR"), of the DTA amounting to c.€285 mn or a CET1 uplift of c.190 bps.

Project Helix

In June 2019, Project Helix was completed resulting in a positive impact of c.140 bps on both the Group's CET1 and Total Capital ratios, mainly from the release of risk weighted assets. Project Helix had an overall net positive impact on the Group capital ratios of c.60 bps.

Sale of investment in CNP Cyprus Insurance Holdings Ltd

In October 2019, the sale of the Group's investment in its associate CNP Cyprus Insurance Holdings Limited ("CNP") was completed, resulting in a positive impact of c.30 bps on both the Group's CET1 and Total Capital ratios, mainly from the release of risk weighted assets. The shareholding had been acquired as part of the acquisition of certain operations of Laiki Bank in 2013 and was sold to CNP Assurances S.A. for a cash consideration of €97.5 mn.

Voluntary Staff Exit Plan

In October 2019, the Group completed a voluntary staff exit plan with an estimated cost of €79 mn which will be recognised in the consolidated income statement in the fourth quarter, resulting in a negative impact of c.60 bps on both the Group's CET1 and Total Capital ratios. 

Pro forma capital ratios

With the completion of the sale of the Group's investment in its associate CNP and the voluntary staff exit plan (VEP), both of which took place in 4Q2019, the CET1 ratio (IFRS 9 transitional basis) of 15.2% as at 30 September 2019 changes to 14.9% pro forma for CNP and VEP. The Total Capital ratio of 18.2% as at 30 September 2019 changes to 17.9% pro forma for CNP and VEP.

Share premium reduction of the Bank

The Bank will proceed (subject to approvals mainly by the Court of Cyprus and the ECB) with a capital reduction process which will result in the reclassification of c.€551 mn of the Bank's share premium account balance as distributable reserves which shall be available for distribution to the shareholders of the Bank, resulting in total net distributable reserves of c.€1 bn on a pro forma basis (30 September 2019). The reduction of capital will not have any impact on regulatory capital or the total equity position of the Bank or the Group.

The distributable reserves provide the basis for the calculation of distributable items under the CRR, which provides that coupons on AT1 capital instruments may only be funded from distributable items.

A.1.2 Funding and Liquidity

Funding

Funding from Central Banks

At 30 September 2019, the Bank had no funding from central banks. At 30 June 2019, the Bank's funding from central banks amounted to €830 mn, which related to ECB funding (at the same level as at 31 March 2019 and 31 December 2018), comprising solely of funding through the Targeted Longer-Term Refinancing Operations (TLTRO II).

In September 2019, the Bank decided to early repay the ECB funding, given its comfortable liquidity position. The repayment is expected to result in savings for the Bank as these funds were deposited at negative interest rates.

Deposits 

Customer deposits totalled €16,473 mn at 30 September 2019, compared to €16,377 mn at 30 June 2019 and €16,844 mn at 31 December 2018.

The Bank's deposit market share in Cyprus reached 34.6% as at 30 September 2019, compared to 34.7% as at 30 June 2019. Customer deposits accounted for 78% of total assets at 30 September 2019.

The Loan to Deposit ratio (L/D) stood at 66% as at 30 September 2019, compared to 67% as at 30 June 2019 and to a peak of 151% as at 31 March 2014. The L/D ratio was reduced by 7 p.p. upon completion of Project Helix in 2Q2019, compared to 74% as at 31 March 2019 when ignoring the classification of the Helix portfolio as a disposal group held for sale (and to 72% at 31 December 2018 on the same basis).

Subordinated Loan Stock

At 30 September 2019 the Bank's subordinated loan stock (including accrued interest) amounted to €268 mn (compared to €261 mn at 30 June 2019 and €271 mn as at 31 December 2018) and relates to unsecured subordinated Tier 2 Capital Notes of nominal value €250 mn, issued by the Bank in January 2017.

Liquidity

At 30 September 2019 the Group Liquidity Coverage Ratio (LCR) stood at 218% (compared to 253% at 30 June 2019 and 231% at 31 December 2018) and was in compliance with the minimum regulatory requirement of 100%. 

The liquidity surplus at 30 September 2019 decreased to €3.0 bn, from €3.8 bn at 30 June 2019, following the repayment of ECB funding amounting to €830 mn. At 30 June 2019, the liquidity surplus had increased to €3.8 bn, from €2.7 bn at 31 March 2019, reflecting a €1.2 bn increase in liquidity on Helix completion.

The Net Stable Funding Ratio (NSFR) has not yet been introduced. It will become a regulatory indicator when CRR2 is enforced, currently expected in 2021, with the limit set at 100%. At 30 September 2019, the Group's NSFR, on the basis of Basel ΙΙΙ standards, stood at 122% (compared to 128% at 30 June 2019 and 119% at 31 December 2018).

A.1.3 Loans

Group gross loans totalled €13,035 mn at 30 September 2019, compared to €13,072 mn at 30 June 2019, €15,882 mn at 31 March 2019 and €15,900 mn at 31 December 2018. Gross loans in Cyprus totalled €12,942 mn at 30 September 2019. The reduction in gross loans by 18% since the beginning of the year is attributed mainly to the completion of Project Helix (sale of €2.8 bn of gross loans of which €2.7 bn related to non-performing loans) and to a lesser extent to the completion of Project Velocity (sale of €30 mn gross loans as at the date of disposal, relating wholly to non-performing loans) in 2Q2019. New loans granted in 3Q2019 reached €491 mn, bringing the new loans granted in 9M2019 to €1,602 mn, exceeding new lending in Cyprus in 9M2018.

At 30 September 2019, the Group net loans and advances to customers totalled €10,971 mn (compared to €10,949 mn at 30 June 2019, €10,955 mn at 31 March 2019 pro forma for Helix (and Velocity) and €10,922 mn at 31 December 2018 on the same basis).

The Bank is the single largest credit provider in Cyprus with a market share of 40.8% at 30 September 2019, compared to 41.3% at 30 June 2019 and 46.7% at 31 March 2019, with the reduction in 2Q2019 reflecting the derecognition of the Helix portfolio on completion.

A.1.4 Loan portfolio quality

Tackling the Group's loan portfolio quality remains the top priority for management. The Group continues to make steady progress across all asset quality metrics and the loan restructuring activity continues. The Group has been successful in engineering restructuring solutions across the spectrum of its loan portfolio.

Non-performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced by €227 mn or 5% during 3Q2019, bringing the total organic reduction in NPEs in 9M2019 to €684 mn, ahead of the target for organic NPE reduction of c.€800 mn for 2019. NPEs at 30 September 2019 amounted to €4,085 mn, compared to €4,312 mn at 30 June 2019 and €7,419 mn at 31 December 2018.

The NPEs account for 31% of gross loans as at 30 September 2019, compared to 33% as at 30 June 2019, 46% as at 31 March 2019, ignoring the classification of the Helix (and Velocity) portfolio as disposal groups held for sale, and 47% at 31 December 2018 (on the same basis).

The NPE coverage ratio improved to 51% at 30 September 2019, compared to 50% at 30 June 2019, 48% at 31 March 2019 pro forma for Helix and 47% at 31 December 2018 on the same basis. Ignoring the classification of the Helix (and Velocity) portfolios as disposal groups held for sale, the NPE coverage ratio as at 31 March 2019 stood at 53% and at 31 December 2018 stood at 52%.

When taking into account tangible collateral at fair value, NPEs are fully covered.

Overall, the Group has recorded organic NPE reductions for eighteen consecutive quarters and expects the organic reduction of NPEs to continue in the next quarter, in line with the target of c.€800 mn for 2019. 

The Group remains focused on continuing to improve its asset quality position and to seek solutions, both organic and inorganic, to make the Bank a stronger and safer institution, capable of supporting the local economy.

Project Helix

In June 2019, the Group announced the completion of Project Helix, that refers to the sale of a portfolio of loans with a gross book value of €2.8 bn (of which €2.7 bn related to non-performing loans) (the "Portfolio") secured by real estate collateral to certain funds affiliated with Apollo Global Management LLC, the agreement for which was announced on 28 August 2018.

Upon completion of Project Helix, the Group's gross NPEs were c.70% lower than its peak in 2014. Project Helix reduced the NPE ratio by c.11 p.p. to 33% as at 30 June 2019.

Cash consideration of c.€1.2 bn was received on completion, reflecting adjustments resulting from, inter alia, loan repayments received on the Portfolio since the reference date of 31 March 2018.

The participation of the Bank in the senior debt in relation to financing the Transaction was syndicated down from the initial level of €450 mn to c.€45 mn, representing c.4% of the total acquisition funding.

ESTIA

In July 2018 the Government announced a scheme aimed at addressing NPEs backed by primary residence, known as ESTIA (the 'Scheme'). The ESTIA eligible portfolio of c.€0.83 bn of retail core NPEs, refers to the potentially eligible portfolio following on-going detailed assessment based on the Bank's available data on Open Market Value (OMV) and NPE status. Eligibility criteria relate primarily to the OMV of the residence, total income and net wealth of the household. These will act as a clear definition of socially protected borrowers, acting as an enabler against strategic defaulters. In accordance with the Scheme, the eligible loans are to be restructured to the lower of the contractual balance and the OMV. The Government will subsidise one third of the instalment of the restructured loan, subject to the borrowers servicing their restructured loans.

In July 2019 the Memorandum of Understanding was signed by the institutions and the Government for participation in the Scheme, which was officially launched in September 2019. According to the updated timeline provided by the Government in November 2019, application submissions will continue until the end of the year, with evaluation by the institutions running concurrently until mid-January 2020. The participating institutions will offer restructuring solutions to the applicants until the end of January 2020 and simultaneously the applications will be reviewed and approved by the Government, with the process expected to finish by mid-May 2020. The 1st payment of the state subsidy instalment is expected to occur between December 2019 and June 2020 (please refer to slide 7 of the Results Presentation for the nine months ended 30 September 2019).

The Scheme is expected to resolve part of the ESTIA-eligible portfolio (487 applications (c.€120 mn) have been received by the Bank until 22 November 2019), to identify non-viable customers for which alternative restructuring solutions are being considered and to facilitate the resolution of the remaining customers mainly by focusing on realising collateral through consensual and non-consensual foreclosures. 

Project Velocity 

In June 2019, the Bank completed the sale of a non-performing loan portfolio of primarily retail unsecured exposures, with a contractual balance of €245 mn and a gross book value of €34 mn as at 30 September 2018 (known as "Project Velocity" or the "Sale") to APS Delta s.r.o. This portfolio comprised 9,700 heavily delinquent borrowers, including 8,800 private individuals and 900 small-to-medium-sized enterprises. The gross book value of this portfolio as at the date of disposal was €30 mn. The Sale was broadly neutral to both the profit and loss account and to capital.

Additional strategies to accelerate de-risking

The Group continues to assess the potential to accelerate the decrease in NPEs on its balance sheet through additional sales of NPEs. To that extent the Group has, during the second half of 2019, embarked on a preparation phase to review the feasibility of NPE reduction structures with the aim of identifying the option that best meets the Group's strategic objectives. The preparation phase involves defining the relevant NPE portfolio, evaluation of real estate collaterals, data remediation and enhancement of data tapes, borrower information memorandums, legal due diligence and transaction structuring options. For the purposes of completing the workstreams outlined above and in order to conclude on the best possible structure, the Group has engaged international advisors, and is proceeding to engage in high level discussions via the signing of confidentiality agreements with various third parties, including financial investors and investment banks, that may be interested in pursuing a possible collaboration with the Group. A range of potential outcomes of this preparation phase is possible, including outright sales (including the Bank retaining a portion of the related financing). Any potential transactions are expected to involve in total a portfolio of NPEs in excess of €2 bn by gross book value. The Group is not committed to any outcome arising from this preparation phase, which is currently expected to be finalised in the first half of 2020.

A.1.5 Real Estate Management Unit (REMU)

The Real Estate Management Unit (REMU) on-boarded €159 mn of assets in 9M2019 (down by 49% yoy), via the execution of debt for asset swaps and repossessed properties. The focus for REMU is increasingly shifting from on-boarding of assets resulting from debt for asset swaps towards the disposal of these assets. The Group completed organic disposals of €159 mn in 9M2019 (compared to €154 mn in 9M2018), resulting in a profit on disposal of €26 mn for 9M2019. During the nine months ended 30 September 2019, the Group executed sale-purchase agreements (SPAs) with contract value of €195 mn (433 properties), excluding the sale of the Cyreit. In addition, the Group signed SPAs for disposals of assets with contract value of €65 mn. 

Completion of sale of Cyreit

In November 2018, the Bank signed an agreement for the disposal of its entire holding in the investment shares of the Cyreit Variable Capital Investment Company PLC (Cyreit). During 2Q2019, the Group completed the sale of the Cyreit (21 properties), recognising a loss on disposal of c.€1 mn. The total proceeds from the disposal of Cyreit were €160 mn.

Completion of Project Helix

With the completion of Project Helix in 2Q2019, properties with carrying value of €109 mn, which were included in the portfolio for the NPE sale (Helix), were derecognised as of 30 June 2019. As at 31 March 2019, properties with carrying value of €98 mn were included in the portfolio for the NPE sale (Helix), compared to €74 mn as at 31 December 2018.

Change in classification of properties which are leased out under operating leases

In 2Q2019, the Group decided to classify the leased properties acquired in exchange of debt and leased out under operating leases as 'Investment Properties' instead of 'Stock of property'. This change was applied retrospectively, resulting in the restatement of comparatives.

As a result of the above change in classification, properties with carrying value of €103 mn as at 31 December 2018 were reclassified from the stock of properties (measured at the lower of cost and net realisable value under IAS 2) to investment properties (measured at fair value under IAS 40). These properties continue to be managed by REMU. The carrying value of such properties as at 30 June 2019 was €118 mn.

This change in classification had no material impact on the Group's comparative retained earnings and a cumulative impact of €1 mn gain was recognised under 'Net gains from revaluation and disposal of investment properties and on disposal of stock of properties' in 2Q2019.

Assets held by REMU

As at 30 September 2019, assets held by REMU had a carrying value of €1,513 mn (comprising properties of €1,399 mn classified as 'Stock of property' and €114 mn as 'Investment Properties'), compared to €1,548 mn as at 30 June 2019 (comprising properties of €1,430 mn classified as 'Stock of property' and €118 mn as 'Investment Properties') and to €1,530 mn as at 31 December 2018 (comprising properties of €1,427 mn classified as 'Stock of property' and €103 mn as 'Investment Properties').

In addition to assets held by REMU, properties classified as 'Investment properties' with carrying value of €24 mn as at 30 September 2019, 30 June 2019 and as at 31 December 2018, relate to legacy properties held by the Bank before the set-up of REMU in January 2016.

A.1.6 Non-core overseas exposures

The remaining non-core overseas net exposures (including both on-balance sheet and off-balance sheet exposures) at 30 September 2019 are as follows:

The Group continues its efforts for further deleveraging and disposal of non-essential assets and operations in Greece, Romania and Russia.

In accordance with the Group's strategy to exit from overseas non-core operations, the operations of the branch in Romania were terminated in January 2019, following the completion of deregistration formalities with respective authorities.

During 3Q2019 the disposal of the overseas exposure in Serbia, comprising loans and properties, with a carrying value of €8 mn was completed.

In addition to the above, as at 30 September 2019, there were overseas exposures of €279 mn in Greece, relating to both loans and properties (compared to €311 mn at 30 June 2019 and €144 mn at 31 December 2018), not identified as non-core exposures, since they are considered by management as exposures arising in the normal course of business.

A.2. Income Statement Analysis

A.2.1 Total income

Net interest income (NII) and net interest margin (NIM) for 9M2019 amounted to €260 mn (up 4% yoy) and 1.92% respectively (up by 8 bps yoy). NII for 3Q2019 amounted to €90 mn (compared to €85 mn for 2Q2019) and increased by 5% qoq, mainly due to increased interest cash collections not previously recognised. In addition, the NII was negatively affected by the continued pressure on lending rates and positively affected by the reduction of cost of deposits. The NIM for 3Q2019 stood at 1.99% increased by 10 bps qoq, resulting mainly from the increase in net interest income.

Average interest earning assets for 9M2019 amounted to €18,103 mn, flat yoy. Quarterly average interest earning assets for 3Q2019 amounted to €17,962 mn compared to €18,149 mn for 2Q2019, down by 1%, primarily driven by the repayment of ECB funding.

Non-interest income for 9M2019 amounted to €235 mn, comprising net fee and commission income of €111 mn, net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates of €34 mn, net insurance income of €42 mn, net gains from revaluation and disposal of investment properties and on disposal of stock of properties of €26 mn and other income of €22 mn. Net fee and commission income for 9M2019 amounted to €111 mn, decreased by 9% yoy (€122 mn for 9M2018), mainly due to the decreased volume of business from the International Business Units (IBUs) in 2019.

Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates of €34 mn for 9M2019, comprising mainly net foreign exchange gains of €21 mn and net gains on revaluation of financial instruments of €13 mn, decreased by 34% yoy mainly due to one-off gain on disposal of bonds during 1Q2018 amounting to €19 mn. Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates totalled €8 mn for 3Q2019, compared to €16 mn for 2Q2019, down by 49% qoq. The decrease qoq is driven mainly by one-off revaluation gains on financial instruments in 2Q2019.  

Net insurance income amounted to €42 mn for 9M2019, compared to €38 mn for 9M2018, up by 11% yoy, reflecting increased income and positive investment returns in 2Q2019. Net insurance income amounted to €12 mn for 3Q2019, compared to €18 mn for 2Q2019, down by 34% qoq mainly due to a one-off amount of c.€2.5 mn arising from the reduction of the discount rate, following an improvement in the yield of assets, other revaluation gains and lower insurance claims during 2Q2019.

Net gains from revaluation and disposal of investment properties and on disposal of stock of properties for 9M2019 amounted to €26 mn, comprising a net profit from the disposal of stock properties of €24 mn (REMU gains) and a net gain from revaluation of €2 mn (compared to net gains of €15 mn for 9M2018). Net gains from revaluation and disposal of investment properties and on disposal of stock of properties for 3Q2019 amounted to €10 mn compared to €12 mn in the previous quarter. REMU profit remains volatile.

Total income for 9M2019 amounted to €495 mn, at similar levels to the previous year. Total income for 3Q2019 amounted to €162 mn, compared to €177 mn in 2Q2019, down by 9% qoq.

A.2.2 Total expenses

Total expenses for 9M2019 were €307 mn (compared to €286 mn for 9M2018), 54% of which related to staff costs(€167 mn), 40% to other operating expenses (€122 mn) and 6% (€18 mn) to special levy and contribution to Single Resolution Fund (SRF).

Total operating expenses for 9M2019 were €289 mn, increased by 8% yoy, compared to €268 mn for 9M2018. Total operating expenses for 3Q2019 were €93 mn, decreased by 7% qoq, compared to €99 mn in 2Q2019.

Staff costs of €167 mn for 9M2019 increased by 8% yoy (compared to €154 mn in 9M2018) mainly driven by the increase in employer's social insurance contributions from the beginning of the year and the additional contributions to the new general healthcare system which commenced in March 2019. Staff costs for 3Q2019 amounted to €55 mn, at similar levels as the previous quarter.

The Group employed 4,134 persons as at 30 September 2019 (compared to 4,155 persons as at 30 June 2019 and 4,146 persons as at 31 December 2018), including 108 persons relating to the Helix transaction, whilst full migration and transfer to the buyer is expected to conclude soon after the year end. The staff costs related to these persons are included under 'Profit/(loss) relating to NPE sale (Helix)' in the underlying basis.

In October 2019, the Group completed a voluntary staff exit plan ("VEP" or "the Plan"), through which c.470 applicants (including six persons relating to the Helix transaction) were approved to leave at a total cost of c.€79 mn, expected to be recorded in the consolidated income statement in the fourth quarter. Following the completion of the Plan, the overall number of employees is reduced by c.11%, whilst the gross annual savings are estimated at c.€28 mn or c.13% of staff costs (excluding the 108 persons relating to the Helix transaction). These gross annual savings do not include any impact from the renewal of the collective agreement for 2019, which remains under discussion.

Other operating expenses for 9M2019 were €122 mn, increased by 7% yoy, mainly due to higher property related costs and higher depreciation / amortization, resulting from increased capital expenditure, following the Digital Transformation Programme. Other operating expenses for 3Q2019 were €38 mn, compared to €43 mn for 2Q2019 (down by 12% qoq), mainly due to seasonality and lower marketing expenses.

The cost to income ratio excluding special levy and contribution to Single Resolution Fund for 3Q2019 was 57%, compared to 56% for 2Q2019, principally reflecting the increase in non-interest income in 2Q2019. Cost management, including containment of staff costs, remains a key focus going forward.

A.2.3 Profit before tax and non-recurring items

Operating profit for 9M2019 was €188 mn, compared to €208 mn for 9M2018, down by 10% yoy, mainly due to the increase in total operating expenses.

The loan credit losses for 9M2019 totalled €117 mn (compared to €104 mn for 9M2018 up by 12% yoy), reflecting further balance sheet de-risking. The loan credit losses for 3Q2019 amounted to €30 mn, compared to €40 mn for 2Q2019, down by 26% qoq, due to the IFRS 9 model recalibration in 2Q2019.

The annualised loan credit losses charge (cost of risk) for 9M2019, following the completion of NPE sales which led to the reduction of gross loans by €2.8 bn, accounted for 1.19% of gross loans, compared to an annualised loan credit losses charge of 1.00% for 9M2018, on the same basis, reflecting further de-risking and IFRS 9 model volatility. The annualised loan credit losses charge (cost of risk) for 3Q2019, accounted for 0.90% of gross loans, compared to an annualised loan credit losses charge of 1.23% for 2Q2019, on the same basis, due to the IFRS 9 model recalibration in 2Q2019.

At 30 September 2019, the allowance for expected loan credit losses, including fair value adjustment on initial recognition and credit losses on off-balance sheet exposures totalled €2,086 mn (compared to €2,145 mn at 30 June 2019, €2,227 mn at 31 March 2019 pro forma for Helix and €2,254 mn at 31 December 2018 on the same basis) and accounted for 16.0% of gross loans (at similar levels with 30 June 2019, and also with 31 March 2019 and 31 December 2018 on the same basis). 

Impairments of other financial and non-financial assets for 9M2019 amounted to €9 mn, compared to €12 mn for 9M2018. Reversal of impairments of other financial and non-financial assets for 3Q2019 amounted to €1 mn (compared to impairments of €9 mn for 2Q2019) mainly relating to a reversal of ECL (expected credit losses) charge on financial instruments driven by reduction of certain exposures.

Provisions for litigation, regulatory and other matters for 9M2019 totalled €3 mn, compared to €9 mn for 9M2018. Provisions for litigation, regulatory and other matters for 3Q2019 totalled €6 mn, compared to a reversal of €3 mn for 2Q2019, which related to the reversal of provisions of previously provided cases with a favourable outcome.

A.2.4 Profit/(loss) after tax

The tax charge for 9M2019 is €1 mn, compared to a tax charge of €4 mn a year earlier, primarily due to lower taxable profit in the current period. The tax charge for 3Q2019 amounted to €1 mn compared to a tax credit of €2 mn in 2Q2019.

Profit after tax and before non-recurring items for 9M2019 was €56 mn, compared to a profit of €82 mn for 9M2018, down by 32% yoy. Profit after tax and before non-recurring items for 3Q2019 was €27 mn, at similar levels to the previous quarter.

Advisory and other restructuring costs - excluding discontinued operations and NPE sale (Helix) for 9M2019 amounted to €21 mn, compared to €26 mn for 9M2018, down by 18% yoy.

Profit after tax arising from the organic operations of the Group for 9M2019 amounted to €35 mn, compared to €56 mn for 9M2018, down by 38% yoy. Profit after tax arising from the organic operations of the Group for 3Q2019 amounted to €18 mn, compared to a €21 mn for the 2Q2019.

The net result of the sale of the Helix portfolio, comprising the interest income, non-interest income, staff costs, other operating expenses and loan credit losses related to Project Helix for 3Q2019 was a profit of €1 mn, compared to a profit of €4 mn for the previous quarter, bringing the net result from the Project for 9M2019 to €1 mn, compared to a net loss of €105 mn for 9M2018.

Loss on remeasurement of investment in associate classified as held for sale (CNP) net of share of profit from associates totalled €21 mn for 9M2019, comprising a loss on remeasurement of investment in associate classified as held for sale of €26 mn and a share of profit from associates of €5 mn (compared to a share of profit from associates of €8 mn in 9M2018). In early October 2019, the Group completed the sale of its entire shareholding of 49.9% in its associate CNP Cyprus Insurance Holdings Limited (CNP) that had been acquired as part of the acquisition of certain operations of Laiki Bank in 2013, for a cash consideration of €97.5 mn.

Reversal of impairment of DTA and impairment of other tax receivables totalled €101 mn for 9M2019, comprising the positive impact of €109 mn following amendments to the Income Tax legislation in Cyprus adopted in March 2019, and an impairment of €8 mn relating to Greek tax receivables adversely impacted from legislative changes. The carrying value of the remaining receivable at the quarter end was c.€5 mn.

Profit after tax attributable to the owners of the Company for 9M2019 was €116 mn, compared to a loss of €37 mn for 9M2018. Profit after tax attributable to the owners of the Company for 3Q2019 was €19 mn, compared to a profit of €2 mn in 2Q2019.

B. Operating Environment

Following robust growth in 2016-2018 averaging about 5% annually, economic expansion in Cyprus continued into 2019 at a slowing pace with real Gross Domestic Product (GDP) increasing by 3.1% on average in the first three quarters of the year seasonally adjusted (3.3% in the first quarter, 3.1% in the second and by 3.0% in the third quarter - Cyprus Statistical Service). The deceleration was driven by slowing activity in the traditional sectors including tourism and construction. From the demand side the slowdown was driven by a deteriorating external imbalance. Excluding registrations of ships, net exports have been contributing negatively to real GDP growth in 2018 and the first half of 2019. Exports of goods declined in the first half of the year. Government consumption surged in the first half and fixed investment other than transport equipment which fluctuates with ship registrations, increased significantly driven by construction related activities.

Frequency indicators point to sustained economic activity. In the labour market total employment increased by 5% in the first half of the year (Labour Force Survey), driven by full-time hirings, and the unemployment rate dropped to 6.8% in the third quarter when seasonally adjusted (Eurostat). Consumer inflation decelerated in the ten months to October rising by 0.3% compared with 1.4% in 2018, mainly due to lower transport costs, but also due to the limited pricing power in most categories of goods and services with the exception of housing. Tourist arrivals increased marginally by 0.6% in the year to October despite declines from traditional source countries like Russia, Germany and Greece. There was a significant increase in arrivals from non-European sources. Tourist receipts had dropped by 1.7% in the year to August, which marks a recovery from a steeper drop earlier in the year. In the construction sector, building permits remained strong in the year to July increasing 42% in terms of volume which mainly reflects developments in the hotel sector. The production index in construction was up 15% in the first half of the year driven by building activity that recorded a corresponding increase of 23%. On the demand side, the volume of retail sales decelerated in the year to August, rising by 3.2%, compared to a 6.6% in the same period the year before.

Fiscal performance has been strengthening driven by rising public revenues and constrained expenditures. The general government budget surplus rose to 3.0% of GDP in 2018 excluding the fiscal burden associated with the orderly resolution of the Cyprus Cooperative Bank. The budget surplus continued to increase in the first three quarters of 2019. Public debt remains high and rose further in 2018 to €21.3 bn or 100.6% of GDP, as a result of the fiscal burden noted above. However, a combination of a sustained budget surplus, rising expected inflation and low debt service costs, will be supporting an accelerated decline in the public debt to GDP ratio in the medium term.

In the banking sector, funding conditions remained favourable and the stock of NPEs continued to decline. Specifically, the stock of NPEs declined from €20.9 bn at the end of December 2017 to €10.4 bn at the end of December 2018 after Bank of Cyprus' loans sale and the resolution of the Cyprus Cooperative Bank. The stock of NPEs was €9.8 bn at the end of June 2019 and the ratio to gross loans was 30%, marginally lower than 30.5% at the end of December 2018, despite a further drop in loans outstanding.

Going forward, downside risks derive from the external environment and the structure of the domestic economy which is characterised by a large foreign balance relative to the GDP. The slowing of global trade, uncertainties over Brexit and fragilities in the EU are having an impact. Brexit presents downside risks to the Cyprus economy given close trade and investment links. Economic growth is expected to remain positive, but to soften. Growth is expected to average 3.1% in 2019 and slow down further in 2020 and 2021 to 2.6% and 2.3% respectively, according to the European Commission (Autumn 2019 Forecasts). Employment is expected to continue to rise, but at a slower pace than in recent years, and the unemployment rate is expected to continue to drop to slightly below 6% in 2021 (Autumn 2019 Forecasts). Investment is expected to be strengthening, but high imports are expected to limit the contribution to growth from the external sector. Exports growth is expected to decelerate relative to 2014 - 2018 against a less favourable international environment. Price inflation will be about 0.2% in 2019 and will remain low in the medium term, expected to rise in later years as capacity utilisation will be tightening.

The economy will continue to be challenged by legacy problems to some degree, but the real challenge will be the transformation of the economy towards higher value added activities that will support higher productivity growth and improved competitiveness. The primary challenges therefore will be, to further de-risk the economy by reducing public debt and the remaining stock of non-performing loans; to safeguard fiscal space so as to be able to respond to unforeseen circumstances; and to pursue additional structural reforms especially in the judiciary and public administration domains that will improve the investment environment and in the process induce productivity boosting investments.

The sovereign risk ratings of the Cyprus Government improved considerably in the recent period reflecting expectations of a sustained decline in public debt as a ratio to GDP, expected further declines in non-performing exposures and a more stable price environment following a protracted period of deflation and low inflation. In November 2018 Fitch Ratings upgraded its Long-Term Issuer Default ratings for Cyprus to investment grade (BBB-) with stable outlook. In October 2019, Fitch affirmed its rating and upgraded its outlook to positive. In July 2018 Moody's Investors Service upgraded Cyprus' sovereign rating to Ba2 from Ba3 with a stable outlook. In September 2019 Moody's affirmed its rating and upgraded its outlook to positive citing improvements in bank asset quality and fiscal strength. S&P Global Ratings maintains an investment grade rating (BBB-) with a stable outlook since September 2018.

C. Business Overview

As the Cypriot operations account for 99% of gross loans and 100% of customer deposits (after the disposal of the UK operations in 2018), the Group's financial performance is highly correlated to the economic and operating conditions in Cyprus and is expected to consequently benefit from the country's recovery. Most recently, at the end of July 2019, Standard and Poor's affirmed their long-term issuer credit rating on the Bank of 'B+' (stable outlook). In June 2019, Moody's Investors Service affirmed the Bank's long-term deposit rating of B3 (positive outlook). In March 2019, Fitch Ratings affirmed their long-term issuer default rating of B- (positive outlook). The positive outlook reflects expectations of further improvements in the Bank's financial fundamentals, mainly asset quality over the next 12-18 months, in the context of an improved operating environment in Cyprus. The key drivers for the rating actions were the improvement in the Bank's financial fundamentals, mainly in asset quality, and its funding position.

Tackling the Bank's loan portfolio quality is of utmost importance for the Group. The Group has been successful in engineering restructuring solutions across the spectrum of its loan portfolio, and expects the organic reduction of residual NPEs to continue ahead of the target of c.€800 mn for 2019, as portfolio size and business line mix has changed radically upon completion of the Project Helix. In parallel, the Group continues to actively explore strategies to further accelerate de-risking, including further portfolio sales. To that extent, the Group is in an advanced stage of a preparation phase of reviewing NPE reduction structures. A range of potential outcomes of this preparation phase is possible, including outright sales (including the Bank retaining a portion of the related financing). Any potential transactions are expected to involve in total a portfolio of NPEs in excess of €2 bn by gross book value. The Group is not committed to any outcome arising from this preparation phase, which is currently expected to be finalised in the first half of 2020.

The July 2018 foreclosure law amendments have expedited the process and limited options to frustrate execution. In July 2019, the Cyprus Parliament voted through certain changes to the 2018 law which, in the most part, seek to (a) provide additional checks and balances where banks are seeking to foreclose small loans (amendments have not yet passed into law, as the President of the Republic has referred these to the Supreme Court, based on legal advice from the Attorney General that elements thereof are unconstitutional. Discussions are on-going, including, inter alia, with the Ministry of Finance, the CBC and the Financial Ombudsman, aiming to introduce amendments to the foreclosure and loan restructuring framework that are acceptable to all stakeholders.

The strategic focus of the Group is to reshape its business model to grow in the core Cypriot market through prudent new lending. As at 30 September 2019, the Bank's capital position remains good. The Group expects to continue to be able to support the recovery of the Cyprus economy through the provision of new lending. Growth in new lending in Cyprus is focused on selected industries that are more in line with the Bank's target risk profile, such as tourism, trade, real estate, professional services, information/communication technologies, energy, education and green projects. The Group is currently exploring ways to grow its new lending, including careful, modest new lending in shipping, syndicated loans, as well as other initiatives. New lending in the nine months to 30 September 2019 reached €1.6 bn.

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

Management is also placing emphasis on diversifying income streams by optimising fee income from international transaction services, wealth management and insurance. The Group's insurance companies, EuroLife Ltd and General Insurance of Cyprus Ltd operating in the sectors of life and general insurance respectively, are leading players in the insurance business in Cyprus, with such businesses providing a recurring income, further diversifying the Group's income streams. The insurance income net of claims and commissions for 9M2019 amounted to €42 mn, up by 11% yoy, contributing to 18% of non-interest income.

In order to further optimise its funding structure, the Bank continues to focus on the shape and cost of deposit franchise, taking advantage of the increased customer confidence towards the Bank, as well as improving macroeconomic conditions. The cost of deposits has been reduced by 57 bps to 19 bps over the last 21 months. Consideration of a liquidity management strategy for specific customer groups is underway.

In common with other European banks, the changed interest rate environment presents a challenge to the Group's profitability. A key focus for management this year and going forward is the active management of funding costs and on-going running expenses, including the containment of staff costs. The Digital Transformation Programme that started in 2017 is beginning to deliver an improved customer experience (see section below) and the branch network is half the size it was in 2013. Furthermore, the branch footprint rationalisation continues and it is expected that the number of branches will be further reduced by 8% by the year end, further improving the Bank's operating model. The management remains focused on further improvement in efficiency.

Digital Transformation

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

In the last few months, various new features were introduced on the new mobile app, such as managing standing orders and direct debits, the ability to transfer amounts over €150 through QuickPay via the use of Digipass, login through biometric authentication and viewing own accounts with UK banks. Soon customers will also be able to keep track of their accounts with Cypriot banks in the Bank's mobile app. Also, financial management tools have been introduced that allow clients to use the 1Bank service to better manage their finances. In addition, Mastercard holders will soon be able to make secure and fast payments through Apple Pay (iOS) and later through BoC Wallet (Android).

The launch of the new Cards and Payments systems that will allow the Group to offer customised solutions and improve the customer banking experience is being finalised. For example, in 2020 the Group will be able to offer new features through mobile banking, such as the ability for the customer to freeze their credit or debit card in the event of a loss (freeze and unfreeze), and the ability to determine a maximum limit for specific transactions (e.g. spend up to €500 in supermarkets).

The adoption of digital products and services continues to grow and gain momentum, compared to two years ago, when the Digital Transformation Programme began. Today, 75% of transactions involving deposits, cash withdrawals and internal/external transfers, are performed through digital channels (with the corresponding rate two years before reaching 65%). Regarding the use of mobile banking, the number of active users increased by 54% from June 2017.

In 2020 there will also be changes in the workplace with the introduction of new technologies and tools that will drastically change the employee experience, improving collaboration and knowledge sharing across the organisation.

D. Strategy and Outlook

The Group remains on track for implementing its strategic objectives aiming to become a stronger, safer and a more focused institution capable of supporting the recovery of the Cypriot economy and delivering appropriate shareholder returns in the medium term.

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

·; Materially reduce the level of delinquent loans

·; Further optimise the funding structure

·; Maintain an appropriate capital position by internally generating capital

·; Focus on the core Cyprus market

·; Achieve a lean operating model

·; Deliver value to shareholders and other stakeholders

E. Statutory Financial Results

Unaudited Interim Consolidated Income Statement

Unaudited Interim Consolidated Statement of Comprehensive Income

Unaudited Interim Consolidated Balance Sheet

The Group adopted the accounting standard IFRS 16 Leases on 1 January 2019. The impact on adoption was an increase in assets of €37,474 thousand and an increase in liabilities of €37,474 thousand with no impact on retained earnings or equity of the Group. The effect of the adoption of IFRS 16 remains subject to change until the Group finalises its financial statements for the year ended 31 December 2019, the year of initial application.

Comparative information was restated following the change in the classification of properties which are leased out under operating leases as investment properties. In relation to these properties, an amount of €103,531 thousand was reclassified from 'Stock of property' to 'Investment properties' relating to balances as at 31 December 2018. The disclosures on the change in accounting policy are presented in the Consolidated Condensed Interim Financial Statements for the six months ended 30 June 2019 within the Interim Financial Report.

Reclassifications to comparative information were also made for unrecognised interest on previously credit impaired loans which have cured during the period amounting to €24,346 thousand. This was reclassified from 'Net interest income' to 'Credit losses to cover credit risk on loans and advances to customers' in line with an IFRIC discussion, which did not take place until November 2018 (Presentation of unrecognised interest following the curing of a credit impaired financial asset (IFRS 9)). The corresponding amount for the nine months ended 30 September 2019 stood at €12,337 thousand.

Unaudited Interim Consolidated Statement of Changes in Equity

F. Notes

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

\* This is the profit after tax, before the loss on remeasurement of investment in associate classified as held for sale (CNP) net of share of profit from associates, and the reversal of impairment of DTA and impairment of other tax receivables.

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

F.2 Customer deposits

The analysis of customer deposits is presented below: