Bk. Cyprus Hldg Regulatory News (BOCH)

Announcement

Group Financial Results for the year ended 31 December 2022

and Updated Financial Targets

Nicosia, 31 March 2023

A.  Group Financial Results - Statutory Basis

Audited Consolidated Income Statement for the year ended 31 December 2022

A. Group Financial Results - Statutory Basis (continued)

Audited Consolidated Balance Sheet as at 31 December 2022

* Comparative information was restated following certain changes in the presentation of the primary statements. More information is provided in Note 2.1 of the Consolidated Financial Statements for the year ended 31 December 2022.

Commentary on Underlying Basis

The financial information presented in this Section provides an overview of the Group financial results for the year ended 31 December 2022 on an 'underlying basis', which the management believes best fits the true measurement of the performance and position of the Group, as this presents separately exceptional and one-off items.

Reconciliations between the statutory basis and the underlying basis are included in Section B.1 'Unaudited reconciliation of consolidated income statement for the year ended 31 December 2022 between statutory basis and underlying basis' and will also be available in the Annual Financial Report for the year ended 31 December 2022 under 'Definitions and Explanations on Alternative Performance Measures', to facilitate the comparability of the underlying basis to the statutory information.

Please note the following in relation to the disclosure of pro forma figures and ratios throughout this announcement.

Project Helix 3 refers to the agreement the Group reached in November 2021 with funds affiliated with PIMCO, for the sale of a portfolio of gross loans with gross book value of €555 mn (of which €551 mn relate to NPEs), as well as real estate properties with book value of €88 mn, as at 30 September 2022. Project Helix 3 was completed in November 2022.

Project Sinope refers to the agreement the Group reached in December 2021 for the sale of a portfolio of NPEs with gross book value of €12 mn, as well as properties in Romania with carrying value of €0.6 mn as at 31 December 2021. Project Sinope was completed in August 2022.

Any references to pro forma figures and ratios as at 30 September 2022 refer to Project Helix 3 whilst references to pro forma figures and ratios as at 31 December 2021 refer to both Project Helix 3 and Project Sinope and will be referred to as "Pro forma for held for sale" or "Pro forma for HFS".

B. Group Financial Results- Underlying Basis (continued)

B.1 Unaudited reconciliation of consolidated income statement for the year ended 31 December 2022 between statutory basis and underlying basis

\* This is the profit after tax (attributable to the owners of the Company), before the provisions/net profit relating to NPE sales, related restructuring and other costs, and restructuring costs related to Voluntary Staff Exit Plans (VEP).

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

B. Group Financial Results - Underlying Basis (continued)

B.2. Balance Sheet Analysis

B.2.1 Capital Base

Total equity excluding non-controlling interests totalled €2,079 mn as at 31 December 2022 compared to €2,017 mn as at 30 September 2022, and to €2,059 mn at 31 December 2021. Shareholders' equity totalled €1,859 mn as at 31 December 2022 compared to €1,797 mn as at 30 September 2022 and to €1,839 mn at 31 December 2021.

The Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at 15.4% as at 31 December 2022, compared to 14.2% as at 30 September 2022 and 14.7% pro forma for Helix 3 and to 15.1% as at 31 December 2021 (and 15.8% pro forma for held for sale portfolios (referred to as 'pro forma for HFS')). During 4Q2022, CET1 ratio was positively affected by pre-provision income and the reduction in risk weighted assets (mainly as a result of the completion of Project Helix 3), and negatively affected by provisions and impairments as well as the payment of AT1 coupon.

The Group has elected to apply the EU transitional arrangements for regulatory capital purposes (EU Regulation 2017/2395) where the impact on the impairment amount from the initial application of IFRS 9 on the capital ratios is phased-in gradually, with the impact being fully phased-in (100%) by 1 January 2023. The final phasing-in of the impact of the impairment amount from the initial application of IFRS 9 is 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 26 bps on Group's CET1 ratio as at 31 December 2022. The reduction of the impact since 30 September 2022 is mainly the result of impairments recognised during the quarter.

The CET1 ratio on a fully loaded basis amounted to 14.7% as at 31 December 2022 compared to 13.5% as at 30 September 2022 (and 13.9% pro forma for Helix 3), and to 13.7% as at 31 December 2021 (and 14.3% pro forma for HFS).

The CET1 ratio including the final impact of IFRS 9 phasing in on 1 January 2023 and also the €50 mn dividend relating to IFRS 17, distributed to the Bank in February 2023 is estimated at 15.2%.

The Total Capital ratio stood at 20.6% as at 31 December 2022, compared to 19.1% as at 30 September 2022 (and 19.8% pro forma for Helix 3), and to 20.0% as at 31 December 2021 (and 20.8% pro forma for HFS).

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

The Group's minimum phased-in CET1 capital ratio requirement as at 31 December 2022 was set at 10.10% comprising a 4.50% Pillar I requirement, a 1.83% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.25% and the Countercyclical Buffer (CcyB) of 0.02%. The Group's minimum phased-in Total Capital ratio requirement as at 31 December 2022 was set at 15.03% comprising an 8.00% Pillar I requirement, of which up to 1.50% can be in the form of AT1 capital and up to 2.00% in the form of T2 capital, a 3.26% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.25% and the CcyB of 0.02%. The Pillar 2 included an add-on of 0.26% relating to the ECB's prudential provisioning expectations as per the 2018 ECB Addendum and subsequent ECB announcements and press release in July 2018 and August 2019. Pillar II add-on capital requirements derive from the SREP, which is a point in time assessment, and are therefore subject to change over time. The ECB had also provided revised lower non-public guidance for an additional Pillar II CET1 buffer (P2G) for 2022.

The Bank has been designated as an Other Systemically Important Institution (O-SII) by the Central Bank of Cyprus (CBC) in accordance with the provisions of the Macroprudential Oversight of Institutions Law of 2015, and since November 2021 the O-SII buffer has been set to 1.50%. This buffer is being phased-in gradually, having started from 1 January 2019 at 0.50%. The O-SII buffer as at 31 December 2022 stood at 1.25% and has been fully phased-in on 1 January 2023. 

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

Following the annual SREP performed by the ECB in 2022 and based on the 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 ignoring 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%.

B. Group Financial Results - Underlying Basis (continued)

B.2. Balance Sheet Analysis (continued)

B.2.1 Capital Base (continued)

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

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

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

Following the 2022 SREP decision effective from 1 January 2023, the equity dividend distribution prohibition was lifted for both the Company and the Bank, with any dividend distribution being subject to regulatory approval.

Other equity instruments

At 31 December 2022, the Group's other equity instruments amounted to €220 mn flat both to the prior quarter and prior year and relates to Additional Tier 1 Capital Securities (the "AT1 securities").

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

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

Voluntary Staff Exit Plan

In July 2022, the Group completed a Voluntary Staff Exit Plan, resulting in a negative impact of c.95 bps both on the Group's CET1 and Total Capital ratios as at 30 September 2022. For further information please refer to Section B.3.2 "Total expenses".

Project Helix 3

In November 2022, Project Helix 3 was completed resulting in a positive capital impact of c.50 bps on the Group's CET1 ratio mainly from the release of risk weighted assets on completion. For further information please refer to Section B.2.5 "Loan portfolio quality".

Legislative amendments for the conversion of DTA to DTC

Legislative amendments allowing for the conversion of specific deferred tax assets (DTA) into deferred tax credits (DTC) became effective in March 2019. The 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.

B. Group Financial Results - Underlying Basis (continued)

B.2. Balance Sheet Analysis (continued)

B.2.1 Capital Base (continued)

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

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

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

B.2.2 Regulations and Directives

B.2.2.1 The 2021 Banking Package (CRR III and CRD VI and BRRD)

In October 2021, the European Commission adopted legislative proposals for further amendments to the Capital Requirements Regulation (CRR), CRD IV and the BRRD (the "2021 Banking Package"). Amongst other things, the 2021 Banking Package would implement certain elements of Basel III that have not yet been transposed into EU law. The 2021 Banking Package is subject to amendment in the course of the EU's legislative process; and its scope and terms may change prior to its implementation. In addition, in the case of the proposed amendments to CRD IV and the BRRD, their terms and effect will depend, in part, on how they are transposed in each member state. As a general matter, it is likely to be several years until the 2021 Banking Package begins to be implemented (currently expected in 2025); and certain measures are expected to be subject to transitional arrangements or to be phased in over time. 

B.2.2.2 Bank Recovery and Resolution Directive (BRRD)

Minimum Requirement for Own Funds and Eligible Liabilities (MREL)

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

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

The MREL ratio of the Bank as at 31 December 2022, calculated according to the SRB's eligibility criteria currently in effect and based on the Bank's internal estimate, stood at 21.42% of risk weighted assets (RWA) and at 10.13% of LRE. As at 1 January 2023, the MREL ratio stood at 20.52% of RWA and 9.8% of LRE, calculated on the same basis. The MREL ratio expressed as a percentage of risk weighted assets does not include capital used to meet the CBR amount, which stands at 3.77% since 1 January 2022 and is expected to increase to 4.02% on 1 January 2023.

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

B. Group Financial Results - Underlying Basis (continued)

B.2. Balance Sheet Analysis (continued)

B.2.3 Funding and Liquidity

Funding

Funding from Central Banks

At 31 December 2022, the Bank's funding from central banks amounted to €1,977 mn, which relates to ECB funding, comprising solely of funding through the Targeted Longer-Term Refinancing Operations (TLTRO) III, compared to €2,952 mn at 30 September 2022 and to €2,970 mn as at 31 December 2021.

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

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

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

The Group recognised an additional net NII benefit of c.€8 mn from the TLTRO III borrowing for the period 24 June 2022 to 22 November 2022, of which c.€5 mn was recognised in the income statement in 4Q2022.

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

Deposits

Customer deposits totalled €18,998 mn at 31 December 2022 (compared to €18,792 mn at 30 September 2022 and to €17,531 mn at 31 December 2021) broadly flat in the fourth quarter and increased by 8% since the year end. 

The Bank's deposit market share in Cyprus reached 37.2% as at 31 December 2022, compared to 37.1% as at 30 September 2022 and to 34.8% as at 31 December 2021. Customer deposits accounted for 75% of total assets and 81% of total liabilities at 31 December 2022 (4 p.p. up since 31 December 2021).

The net loans to deposits (L/D) ratio stood at 52% as at 31 December 2022 (compared to 55% as at 30 September 2022 and to 57% as at 31 December 2021 on the same basis), reflecting the ongoing increase in customer deposits and the derecognition of Helix 3 portfolio following completion.

Subordinated liabilities

At 31 December 2022, the Group's subordinated liabilities (including accrued interest) amounted to €302 mn (compared to €317 mn at 30 September 2022 and €340 mn at 31 December 2021) 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 31 December 2022, the carrying value of the Group's debt securities in issue (including accrued interest) amounted to €298 mn (compared to €299 mn at 30 September 2022 and €303 mn at 31 December 2021) and relate to senior preferred notes.

B. Group Financial Results - Underlying Basis (continued)

B.2. Balance Sheet Analysis (continued)

B.2.3 Funding and Liquidity (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 31 December 2022, the Group Liquidity Coverage Ratio (LCR) stood at 291% (compared to 300% at 30 September 2022 and to 298% at 31 December 2021), well above the minimum regulatory requirement of 100%. The LCR surplus as at 31 December 2022 amounted to €7.2 bn (compared to €6.8 bn at 30 September 2022 and €6.3 bn at 31 December 2021), well positioned to benefit from further interest rate increases. The increase in liquidity surplus in 4Q2022 reflects primarily the increase in customer deposits and the cash consideration received with Helix 3 completion.

At 31 December 2022, the Group Net Stable Funding Ratio (NSFR) stood at 168% (compared to 160% at 30 September 2022 and 147% at 31 December 2021), well above the minimum regulatory requirement of 100%.

B.2.4 Loans

Group gross loans totalled €10,217 mn at 31 December 2022, compared to €10,913 mn at 30 September 2022 and €10,856 mn at 31 December 2021, reduced by 6% since the beginning of the year attributed mainly to the completion of Project Helix 3.

New lending granted in Cyprus reached €444 mn for 4Q2022 (compared to €489 mn for 3Q2022, €537 mn for 2Q2022 and €622 mn for 1Q2022) and totalled a record of €2,092 mn for FY2022 (compared to €1,792 mn for FY2021) up by 17% yoy, whilst maintaining strict lending criteria. The yoy increase is driven by the increase in lending activity across all sectors, with corporate being the main driver. New lending in 4Q2022 comprised €234 mn of corporate loans, €165 mn of retail loans (of which €122 mn were housing loans), €44 mn of SME loans and €1 mn of shipping and international loans. 

At 31 December 2022, the Group net loans and advances to customers totalled €9,953 mn (compared to €10,088 mn at 30 September 2022 and €9,836 mn at 31 December 2021, excluding those classified as held for sale), increased by 1% since the beginning of the year.

The Bank is the largest credit provider in Cyprus with a market share of 40.9% at 31 December 2022, compared to 41.1% at 30 September 2022 and 38.8% at 31 December 2021, increased by 2 p.p. yoy despite the derecognition of Helix 3 portfolio following completion.

B.2.5 Loan portfolio quality

The Group has continued to make steady progress across all asset quality metrics. As the balance sheet de-risking is largely complete, the Group's priorities remain unchanged; maintaining high quality new lending with strict underwriting standards and preventing asset quality deterioration following the ongoing macroeconomic uncertainty.

The loan credit losses for 4Q2022 totalled €11 mn (excluding 'Provisions/net (loss)/profit relating to NPE sales'), compared to €13 mn for 3Q2022 and totalled €47 mn for FY2022, compared to €66 mn for FY2021. Further details regarding loan credit losses are provided in Section B.3.3 'Profit before tax and non-recurring items'.

The elevated inflation combined with the rising interest rate environment are expected to weigh on the purchasing power of the Bank's customers. Despite these persisting pressures there are no signs of asset quality deterioration to date. While defaults have been limited, the additional monitoring and provisioning for sectors 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.

B. Group Financial Results - Underlying Basis (continued)

B.2. Balance Sheet Analysis (continued)

B.2.5 Loan portfolio quality (continued)

Non-performing exposures reduction

Non-performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced by €607 mn, or 60% in 4Q2022, compared to a reduction of €150 mn in 3Q2022, to €411 mn at 31 December 2022 (compared to €1,018 mn at 30 September 2022 and €1,343 mn at 31 December 2021). The reduction in 4Q2022 is mainly driven by the completion of Project Helix 3 of €550 mn and the net organic NPE reductions of €57 mn (inflows minus outflows).

As a result, the NPEs account for 4.0% of gross loans as at 31 December 2022, compared to 9.3% at 30 September 2022 and 12.4% as at 31 December 2021.

The NPE coverage ratio stands at 69% at 31 December 2022, compared to 60% as at 30 September 2022 and 59% as at 31 December 2021. When taking into account tangible collateral at fair value, NPEs are fully covered.

Project Helix 3

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

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

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

Project Sinope

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

Overall, since the peak in 2014 and following the completion of Helix 3, the stock of NPEs has been reduced by €14.6 bn or 97% to €0.4 bn and the NPE ratio by 59 percentage points, from 63% to 4%.

B.2.6 Fixed income portfolio

Fixed income portfolio amounts to €2,500 mn as at 31 December 2022, compared to €2,259 mn as at 30 September 2022 and €1,925 mn as at 31 December 2021, increased by 30% since the beginning of the year. The portfolio represents 10% of total assets and comprises €2,046 mn (82%) carrying value measured at amortised cost and €454 mn (18%) at fair value through other comprehensive income ('FVOCI').

During FY2022 the Group recognised fair value losses of c.€10 mn directly to Group's equity for the fixed income portfolio measured at 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 bond portfolio has low average duration of c.2 years and high average rating at A2 or at Aa3 when Cyprus government bonds are excluded. The fair value of the amortised cost fixed income portfolio as at 31 December 2022 amounts to €1,953 mn. Despite the recent volatility in the financial markets the fair value of the amortised cost fixed income portfolio relative to its carrying value has not changed materially.

B.2.7 Real Estate Management Unit (REMU)

The Real Estate Management Unit (REMU) is focused on the disposal of on-boarded properties resulting from debt for asset swaps. Cumulative sales since the beginning of 2017 amount to €1.5 bn and exceed properties on-boarded in the same period of €1.4 bn.

The Group completed disposals of €162 mn in FY2022 (compared to €140 mn in FY2021), resulting in a profit on disposal of €16 mn for FY2022 (compared to a profit of €14 mn for FY2021). Asset disposals are across all property classes, with half of sales by value in FY2022 relating to land.

During FY2022, the Group executed sale-purchase agreements (SPAs) for disposals of 674 properties with contract value of €184 mn, compared to SPAs for disposals of 703 properties, with contract value of €149 mn for FY2021.

In addition, the Group had a strong pipeline of €70 mn by contract value as at 31 December 2022, of which €47 mn related to SPAs signed (compared to a pipeline of €109 mn as at 31 December 2021, of which €47 mn related to SPAs signed).

REMU on-boarded €86 mn of assets in FY2022 (compared to additions of €34 mn in FY2021), via the execution of debt for asset swaps and repossessed properties.

The carrying value of assets held by REMU that were classified as "non-current assets and disposal groups held for sale" since 2021 and amounting to €88 mn as at 30 September 2022 were derecognised with the completion of Project Helix 3. They comprised stock of properties of €83 mn and investment properties of €5 mn.

As at 31 December 2022, assets held by REMU had a carrying value of €1,116 mn (comprising properties of €1,041 mn classified as 'Stock of property' and €75 mn as 'Investment properties'), compared to €1,215 mn as at 31 December 2021 (comprising properties of €1,112 mn classified as 'Stock of property' and €103 mn as 'Investment properties').

B. Group Financial Results - Underlying Basis (continued)

B.2. Balance Sheet Analysis (continued)

B.2.7 Real Estate Management Unit (REMU) (continued)

Assets held by REMU

B. Group Financial Results - Underlying Basis (continued)

B.3. Income Statement Analysis

B.3.1 Total income

Net interest income (NII) for FY2022 amounted to €370 mn (including NII of c.€12 mn relating to Helix 3 which was completed in November 2022), compared to €296 mn in FY2021. The yoy increase of 25% reflects positive gearing to higher rates and to a lesser extent the growth of the performing loan book and fixed income portfolio, notwithstanding the foregone NII on the Helix 2 portfolio (c.€15 mn in FY2021). Net interest income (NII) for 4Q2022 amounted to €136 mn, compared to €89 mn for 3Q2022, up 53% qoq, driven by the immediate liquid assets repricing (including fixed income portfolio) and Euribor repricing.

Average interest earning assets (AIEA) for FY2022 amounted to €22,483 mn, up by 10% yoy driven by the increase in liquid assets as a result of the increase in deposits by €1.5 bn yoy and the increase in the fixed income portfolio by c.€0.6 bn yoy. Quarterly average interest earning assets for 4Q2022 decreased by 1%, driven by the repayment of the TLTRO III borrowing of €1 bn in December 2022.

Net interest margin (NIM) for FY2022 amounted to 1.65% (compared to 1.45% for FY2021) supported by the rising interest rate environment. Net interest margin (NIM) for 4Q2022 stood at 2.36%, up 83 bps qoq, attributed by the repricing of liquid assets and loans.

Non-interest income for FY2022 amounted to €329 mn (compared to €285 mn for FY2021, up by 16% yoy), comprising net fee and commission income of €192 mn, net foreign exchange gains and net gains/(losses) on financial instruments of €36 mn, net insurance income of €71 mn, net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of €13 mn and other income of €17 mn. The yoy increase is driven by higher net fee and commission income, higher insurance income net of claims and commissions and higher net foreign exchange gains and net gains/(losses) on financial instruments.

Non-interest income for 4Q2022 amounted to €92 mn (compared to €83 mn for 3Q2022, up by 11% qoq), comprising net fee and commission income of €50 mn, net foreign exchange gains and net gains/(losses) on financial instruments of €12 mn, net insurance income of €23 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 €5 mn. The qoq increase relates mainly to higher insurance income net of claims and commissions.

Net fee and commission income for FY2022 amounted to €192 mn, (compared to €172 mn for FY2021, up 12% yoy), driven by the introduction of a revised price list in February 2022 and the extension of liquidity fees to a wider customer group in March 2022. Liquidity fees were fully abolished in December 2022. Net fee and commission income for FY2022 includes an amount of c.€6 mn relating to a NPE sale-related servicing fee, for a transitional period ending in 1Q2023.

B. Group Financial Results - Underlying Basis (continued)

B.3. Income Statement Analysis (continued)

B.3.1 Total income (continued)

Net fee and commission income for 4Q2022 amounted to €50 mn, up 4% qoq (compared to €48 mn for 3Q2022) due to higher non-transactional fees partially offset by the phasing out of the liquidity fees in December 2022.

Net foreign exchange gains and net gains/(losses) on financial instruments of €36 mn for FY2022 (comprising net foreign exchange gains of €31 mn and net gains on financial instruments of €5 mn), compared to €25 mn for FY2021 (comprising net foreign exchange gains of €16 mn and net gains on financial instruments of €9 mn). The increase of 45% yoy reflects higher foreign exchange gains through FX swaps.Net foreign exchange gains and net gains/(losses) on financial instruments are volatile profit contributors.

Net foreign exchange gains and net gains/(losses) on financial instruments amounted to €12 mn for 4Q2022, compared to €13 mn in the previous quarter, impacted by one-off gain of c.€5.5 mn of a financial instrument in the previous quarter and higher foreign exchange gains in the fourth quarter.

Net insurance income amounted to €71 mn for FY2022, compared to €61 mn for FY2021, up 17% yoy mainly due to increased new business and the positive changes in valuation assumptions, partially offset by higher insurance claims.

Net insurance income amounted to €23 mn for 4Q2022, up 53% qoq, driven by exceptionally strong new business, the positive changes in valuation assumptions and lower insurance claims.

Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties for FY2022 amounted to €13 mn (comprising net gains on disposal of stock of properties of €16 mn, and net losses from revaluation of investment properties of €3 mn), broadly flat compared to the previous year.

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

Total income for FY2022 amounted to €699 mn, compared to €581 mn for FY2021 (up 20% yoy), mainly driven by the increases in the net interest income, net fee and commission income and insurance income net of claims and commissions as explained above. Total income for 4Q2022 stood at €228 mn, compared to €172 mn for 3Q2022, up by 33% qoq, reflecting mainly the increased net interest income by 53% qoq.

B. Group Financial Results - Underlying Basis (continued)

B.3. Income Statement Analysis (continued)

B.3.2 Total expenses

Total expenses for FY2022 were €381 mn (compared to €383 mn for FY2021), down 1% yoy, 50% of which related to staff costs (€190 mn), 40% to other operating expenses (€153 mn) and 10% to special levy on deposits and other levies/contributions (€38 mn). Total expenses for 4Q2022 were €100 mn, compared to €91 mn for 3Q2022, up 9% qoq. The increase is driven by the 25% qoq increase in other operating expenses.

Total operating expenses for 4Q2022 were €89 mn (compared to €81 mn for 3Q2022) up 8% qoq driven by inflationary pressures and seasonally higher other operating expenses. Total operating expenses totalled €343 mn for FY2022, compared to €347 mn for FY2021 (down by 1% yoy), remaining under control on the back of successful completion of efficiency actions, despite elevated inflation.

Staff costs for FY2022 were €190 mn, compared to €202 mn for FY2021, down 6% yoy, resulting from the Voluntary Staff Exit Plans that took place during 2022. Staff costs for 4Q2022 amounted to €44 mn down 6% qoq mainly due to saving from the completion of the VEP in July 2022 partially offset by the impact of the introduction of new pay grading structure and long-term incentive plan. The VEP led to the reduction of the Group's full time employees by 16%, at a total cost of €104 mn of which €101 mn was recorded in the consolidated income statement in 3Q2022. Following the completion of the VEP, the gross annual savings are estimated at c.€37 mn or 19% of staff costs with a payback period of 2.7 years. The estimated savings of the VEP are expected to be partially offset by the renewal of the collective agreement in 2023.

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

The Group employed 2,889 persons as at 31 December 2022 compared to 2,955 persons as at 30 September 2022 and 3,438 persons as at 31 December 2021.

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

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

B. Group Financial Results - Underlying Basis (continued)

B.3. Income Statement Analysis (continued)

B.3.2 Total expenses (continued)

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. For the year ended 31 December 2022, the Group recognised in the Group's Income Statement an expense of less than €0.5 mn regarding the Plan. Based on the market value of these awards on the grant date, the expense deferred to future periods is estimated to c.€1.1 mn. Actual amounts to be expensed in future periods may vary, e.g., due to forfeiture of awards.

Other operating expenses for FY2022 were €153 mn, compared to €145 mn for FY2021, up 5% yoy, driven by inflationary pressures. Other operating expenses for 4Q2022 amounted to €45 mn, compared to €35 mn for 3Q2022, up by 25% qoq reflecting seasonally higher professional fees, marketing expenses and IT costs and inflationary pressures.

Special levy on deposits and other levies/contributions for FY2022 amounted to €38 mn (compared to €36 mn for FY2021) up 6% yoy, driven by the increase in deposits of €1.5 bn yoy. Special levy on deposits and other levies/contributions for 4Q2022 were €11 mn broadly flat qoq, reflecting mainly the net impact of a levy in the form of an annual guarantee fee relating to the expected revised Income Tax legislation of €4.8 mn recorded in 4Q2022 (see Section B.2.1 'Capital Base') and the contribution of the Bank to the Deposit Guarantee Fund (DGF) of €3 mn which relates to 2H2022 and was recorded in 3Q2022, in line with IFRSs.

The cost to income ratio excluding special levy on deposits and other levies/contributions for FY2022 was 49%, compared to 60% for FY2021. The cost to income ratio excluding special levy on deposits and other levies/contributions for 4Q2022 was 38%, compared to 47% for 3Q2022. The qoq decrease of 9 p.p. is driven by the higher total income.

The cost to income ratio excluding special levy on deposits and other levies/contributions for 2023 is expected to decrease to mid-40s, reflecting management's ongoing focus on efficiency and cost discipline in an inflationary environment. This target includes a commitment of maintaining total operating expenses of a range between €350-360 mn, reflecting some upward pressure on costs from investments in transformation and digitalisation and the renewal of collective agreement in 2023. The cost to income ratio excluding special levy on deposits and other levies/contributions for 2024 is expected to remain around similar levels to 2023.

B. Group Financial Results - Underlying Basis (continued)

B.3. Income Statement Analysis (continued)

B.3.3 Profit before tax and non-recurring items

Operating profit for 4Q2022 amounted to €128 mn (compared to €81 mn for 3Q2022) and totaled €318 mn for FY2022, up 62% yoy, driven mainly the significant increase in net interest income in the fourth quarter. 

Loan credit losses for FY2022 totaled €47 mn, compared to €66 mn for FY2021 (down by 30% yoy). Loan credit losses for 4Q2022 amounted to €11 mn compared to €13 mn for 3Q2022, down 10% qoq.

Cost of risk for FY2022 was 44 bps, compared to a cost of risk of 57 bps for FY2021, down by 13 bps reflecting strong asset quality performance in 2022. Cost of risk for 4Q2022 accounted for 42 bps broadly flat on the prior quarter.

At 31 December 2022, the allowance for expected loan credit losses, including residual fair value adjustment on initial recognition and credit losses on off-balance sheet exposures (please refer to Section F. 'Definitions & Explanations' for definition) totalled €282 mn (compared to €610 mn at 30 September 2022 and €792 mn at 31 December 2021) and accounted for 2.8% of gross loans (compared to 5.6% (2.8% pro forma for Helix 3) and 7.3% (4.5% pro forma for HFS) of gross loans at 30 September 2022 and 31 December 2021 respectively).

Impairments of other financial and non-financial assets for FY2022 amounted to €33 mn, compared to €36 mn for FY2021, down by 9% yoy. Impairments of other financial and non-financial assets for 4Q2022 amounted to €13 mn, compared to €7 mn for 3Q2022, driven by higher impairments on specific, large, illiquid REMU stock properties.

Provisions for pending litigations, regulatory and other matters (net of reversals) for FY2022 amounted to €11 mn, compared to a reversal of €2 mn for FY2021. Provisions for pending litigations, regulatory and other matters (net of reversals) for 4Q2022 amounted to €8 mn compared to €2 mn for 3Q2022, impacted by a one-off charge of c.€5.5 mn in relation to a revised approach on pending litigation fees.

Profit before tax and non-recurring items for FY2022 totalled €227 mn, compared to €98 mn for FY2021 (more than doubled yoy). Profit before tax and non-recurring items for 4Q2022 amounted to €96 mn compared to €59 mn for 3Q2022 (up by 67% qoq).

B. Group Financial Results - Underlying Basis (continued)

B.3. Income Statement Analysis (continued)

B.3.4 Profit/(loss) after tax (attributable to the owners of the Company)

The tax charge for 4Q2022 is €16 mn, up 94% qoq and totalled to €36 mn for FY2022, compared to €5 mn for FY2021.

Profit after tax and before non-recurring items (attributable to the owners of the Company) for FY2022 is €188 mn, compared to €91 mn for FY2021. Return on Tangible Equity (ROTE) before non-recurring items calculated using 'profit after tax and before non-recurring items (attributable to the owners of the Company)' amounts to 11.3% ('recurring ROTE') for FY2022, compared to 5.5% for FY2021. Profit after tax and before non-recurring items (attributable to the owners of the Company) for 4Q2022 amounted to €79 mn, reflecting a ROTE before non-recurring items of 19.1%, compared to €50 mn for 3Q2022 (and a ROTE before non-recurring items of 11.7%).

Advisory and other restructuring costs - organic for FY2022 amounted to €11 mn, compared to €22 mn for FY2021, down by 48% yoy mainly due to ad-hoc cost related to the tender offer for Existing Tier 2 Capital Notes amounting to €12 mn in FY2021. Advisory and other restructuring costs - organic for 4Q2022 amounted to €1 mn, compared to €5 mn for 3Q2022 and relate to the transformation programme and other strategic projects of the Group.

Profit after tax arising from the organic operations (attributable to the owners of the Company) for FY2022 amounted to €177 mn, compared to €69 mn for FY2021. Profit after tax arising from the organic operations (attributable to the owners of the Company) for 4Q2022 is €78 mn, compared to €45 mn for 3Q2022, up 78% qoq.

Provisions/net profit/(loss) relating to NPE sales for FY2022 amounted to a profit of €1 mn, compared to a loss of €7 mn for FY2021 (relating to Helix 2 and Helix 3). Provisions/net profit/(loss) relating to NPE sales for 4Q2022 was a net profit of €2 mn, compared to a net loss of €1 mn in 3Q2022.

Restructuring and other costs relating to NPE sales for FY2022 was €3 mn, compared to €16 mn for FY2021 (relating to the agreements for the sale of portfolios of NPEs). Restructuring and other costs relating to NPE sales for 4Q2022 is nil compared to €2 mn for 3Q2022.

Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) amounted to €104 mn for FY2022, compared to €16 mn for FY2021. For further details please refer to Section B.3.2 'Total expenses'.

Profit/(loss) after tax attributable to the owners of the Company for FY2022 was a profit of €71 mn, compared to a profit of €30 mn for FY2021. ROTE stands at 4.3% for FY2022, compared to 1.8% for FY2021.  Profit/(loss) after tax attributable to the owners of the Company for 4Q2022 amounted to a profit €80 mn, compared to a loss of €59 mn for 3Q2022.

C. Operating Environment

Recent developments in financial markets, particularly in the United States but also in Europe to a lesser extent have been unprecedented. The failures of the two banks in the United States, the California-based Silicon Valley Bank and the New-York based Signature Bank, prompted the forceful intervention of the authorities to pre-empt the risk of financial instability in the banking system. Since 10 March 2023, the US Federal Deposit Insurance Corporation (the "FDIC") and state regulators have taken control of the two banks.

The authorities have also taken additional measures to prevent a broader run-on bank deposits. This included invoking a systemic risk clause that allowed the US authorities to guarantee all deposits in the two banks beyond the $250.000 insured cap guarantee by the FDIC. The US Federal Reserve also established a new lending facility that provides banks access to liquidity against eligible collateral but without the need to take a haircut.

The failures of the SVB and Signature banks were the result of the banks taking advantage of previous low interest rates, in search for yield, purchasing large amounts of long-dated fixed rate assets. This strategy had begun to cause financial losses in the context of interest hikes.

In Switzerland, Credit Suisse was exposed to the same sort of concerns as global banks, as Credit Suisse has done some large investments which led to large losses. Their troubles were compounded when clients particularly from the wealth management and private banking branch, concerned mostly about capital preservation started pulling their money out. Credit Suisse was bought by UBS, another Swiss bank, after a deal brokered by the Swiss government, which included liquidity assistance from the Swiss National Bank and partial losses guarantees from the government. Following the Credit Suisse deal, the Single Resolution Board, the European Banking Authority and ECB Banking Supervision issued a statement welcoming the comprehensive set of actions taken recently by the Swiss authorities in order to ensure financial stability and noting that the European banking sector is resilient, with robust levels of capital and liquidity.

Inflation remains persistently high and will remain high for longer as ECB president Lagarde remarked in a press conference following the meeting of the Governing Council 16 March 2023, which decided to increase the three key ECB interest rates by 50 basis points. The main refinancing operations rate is now 3.5% compared with zero percent less than a year ago.

Energy influences in harmonised inflation have declined but food costs have risen and other influences not directly energy or food related have also risen. Harmonised inflation in the Euro area was 8.4% in 2022 and remained at about the same levels in January and February 2023. Inflation excluding energy and food accelerated from 3.9% in 2022 to 5.3% in January and 5.6% in February. In Cyprus harmonised inflation was 8.1% in 2022 and dropped to 6.8% and 6.7% respectively in January and February. Harmonised inflation excluding energy and food remained elevated in January and February at 4.9% and 5.3% respectively. Cyprus does not use gas for energy consumption or electricity production and is entirely dependent on oil, the price of which has not risen as much as that of natural gas. ECB staff now sees inflation for the Euro area averaging 5.3% in 2023, 2.9% in 2024, and 2.1% in 2025.

In a challenging international environment, the Cypriot economy has shown considerable resilience. The contraction of 4.4% in 2020 was modest compared to other southern countries. The economy rebounded strongly in 2021, with real GDP growing by 6.6%. Growth remained strong in 2022 averaging 5.6% which is well above the euro area average. In the fourth quarter of 2022, economic growth stood at 4.5%. Growth in 2022 was driven by the continuing recovery in the tourism sector, and growth in other services sectors mainly information and communications, professional activities and finance and insurance. On the demand side, growth in the year was driven by private consumption and investment, especially inventory accumulation, while the external sector made a negative contribution due to faster growth in imports. Total investment includes transport equipment, which includes ship registrations.

Tourist activity recovered strongly during the year. Arrivals reached 3.2 million persons, or 80% of the corresponding arrivals in 2019. Receipts reached €2.4 billion in the year, or c.90% of corresponding receipts in 2019. The increase in arrivals was mainly due to increases from the United Kingdom and, to a lesser extent, from other European countries and Israel. Travel from Russia and Ukraine has been affected by the war and sanctions.

Cyprus received the first disbursement from the Recovery and Resilience Facility of €157 million in September 2021, following the approval of the National Recovery Plan in July of the previous year. This was a pre-financing of 13% of the total disbursements for the period 2021-26. Furthermore, the European Commission disbursed the first payment of €85 million to Cyprus under the Recovery and Resilience Facility, in December 2022 following the passage of conditional legislation in parliament. 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 and to improve the efficiency of public and local administrations, and of the judicial system.

C. Operating Environment (continued)

On the fiscal side, the recovery in 2021 is underpinned by a significant increase in general government revenue and a relative decline in government expenditure. As a result, the budget deficit narrowed to 1.7% of GDP from a deficit of 5.8% of GDP in 2020, reflecting government measures to support the economy in the midst of a deep recession induced by the Covid pandemic. Developments in 2022 were favourable for public finances. Revenues grew by 14.5% while expenditures increased by considerably less, by 4.1%, generating a significant surplus of 2.3% of GDP. Part of the increase in revenues is a windfall related to the energy crisis, but overall, the current state of public finances is positive. Public debt dropped to 86.5% of GDP in 2022 from 101% of GDP in 2021. In the longer term, public debt dynamics will depend on interest rate developments, inflation, and growth.

The banking sector has undergone significant restructuring since the financial crisis of 2013. Banks have reduced their foreign exposures, significantly shrunk their balance sheets, increased their capital buffers, and restructured and refocused their domestic operations. Prudential supervision has been strengthened and a new legal framework for private debt restructuring, including the sale of loans, is now in place. Total non-performing exposures (NPEs) at the end of November 2022 amounted to €2.7 billion, or 10.5% of gross loans. NPEs at the end of 2021 amounted to €3 billion or 11.1% of gross loans. 47.8% of total NPEs at the end of November 2022 were restructured facilities and the coverage ratio was 52.2%. Private debt has continued to decline since mid-2012, shrinking by more than half by the end of December 2022. The decline reflects the long process of deleveraging since the start of the financial crisis and includes the sale or transfer of non-performing loans in recent years. Private debt, as measured by loans to residents excluding the government, stands at 80% of nominal GDP at the end of December 2022. Pure new business lending, which excludes renegotiated amounts, reached €3.2 billion in 2022 as a whole, exactly the same level as pure new lending in 2019. Cypriot banks are excessively liquid, and the bulk of these excess deposits are held overnight at the ECB. 

Cyprus' current account deficit narrowed from 10.1% of GDP in 2020 to 6.8% in 2021 and is estimated at 9.6% in 2022 according to the European Commission's autumn forecast. From 2023 onwards, the deficit is expected to gradually narrow as services revenues recover and EU recovery and resilience funds are credited to the secondary income account. However, the current account deficit will remain higher than pre-pandemic levels in the medium term, partly due to strong import growth linked to higher energy prices and EU investment plans, which will weigh on the trade balance. The size of the country's deficits is partly structural, a consequence of special purpose vehicles domiciled in Cyprus.

Sovereign ratings

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

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

In October 2022, DBRS Morningstar affirmed the Republic of Cyprus's Long-Term Foreign and Local Currency - Issuer Ratings at BBB (low) and maintained the trend Stable. The affirmation is supported by a stable political environment, the government's sound fiscal and economic policies and the favourable government debt profile. The stable outlook balances recent favourable fiscal dynamics against downside risks for the economic outlooks (including further escalation of the crisis in Ukraine).

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

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

D. Business Overview

Credit ratings

The Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. In December 2022, Fitch Ratings upgraded the Bank's long-term issuer default rating to B+ from B-, whilst maintaining the positive outlook. The two-notch upgrade reflects improved Bank's asset quality, supported by the completion of Project Helix 3 together with the organic reduction of impaired assets. The upgrade is also underpinned by Fitch's view of the resilience of the Cypriot's economy, even in light of growing economic uncertainties. In October 2022, Moody's Investors Service upgraded the Bank's long-term deposit rating to Ba2 from Ba3, maintaining the positive outlook. The main drivers for this upgrade are the resilience of the Cypriot economy, that is supporting the operating conditions of the banking system to external shocks and the gradual improvement in credit conditions. In September 2022, S&P Global Ratings raised the long-term issuer credit rating of the Bank to BB- from B+ and revised the outlook to stable from positive. The upgrade reflects the improvement in asset quality and easing economic risks.

Upgrade of financial targets

The Group is a diversified, leading, financial and technology hub in Cyprus. During 2022 the Group delivered positive financial results and exceeded its 2022 financial targets, confirming the sustainability of its business model with well-diversified revenues and disciplined cost containment despite inflationary pressures. Overall the Group achieved a recurring ROTE of 11.3% for the year. The positive performance is expected to continue in 2023, leading to an upgrade of targeted ROTE to over 13% from over 10% facilitated by the Group's positive gearing to rising interest rates, improved efficiencies, healthy loan portfolio and robust capital position. Therefore, the intention to commence meaningful dividend distributions from 2023 onwards, subject to regulatory approval and market conditions is reiterated. The Group expects to achieve ROTE over 13% for 2024, on the back of stabilising margins and growth of the loan portfolio.

Favourable interest rate environment

The structure of the Group's balance sheet is geared towards higher interest rates facilitating immediate growth in net interest income. As at 31 December 2022, cash balances with ECB (excluding TLTRO of c.€2.0 bn) amounted to c.€7.6 bn, well positioned to benefit from further interest rate rises. The repricing of the reference rates gradually benefits the interest income on loans, as over 95% of the Group's loan portfolio is variable rate as at 31 December 2022. The Group benefited from the steep and fast increase of interest rates in 2022. The net interest income for FY2022 stood at €370 mn, reflecting an increase of 25% yoy. Factoring in the expectations for the evolution of the interest rates, the net interest income guidance for 2023 is upgraded and the net interest income is now expected to grow by 40-50% year on year. This incorporates assumptions of continuing to rebuild the fixed income portfolio, increased costs of funding, gradual increase in cost of deposits and gradual change in deposit mix towards time deposits. Following the completion of Project Helix 3 and the end of TLTRO III favourable terms, an overall amount of c.€28 mn, will not be repeated in net interest income for 2023. The growth in the fixed income portfolio is expected to broadly offset foregone net interest income from TLTRO III and higher wholesale funding costs.

Growing revenues in a more capital efficient way

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

The Group has continued to provide high quality new lending in FY2022 via prudent underwriting standards. Growth in new lending in Cyprus has been focused on selected industries in line with the Bank's target risk profile.

During the year ended 31 December 2022, new lending amounted to a record of €2.1 bn, up by 17% yoy, returning to pre-pandemic levels. The yoy increase is driven by increased activity across all sectors, with corporate being the main driver. As a result, the net performing loan book expanded to €9.6 bn up by 3% yoy, despite uncertainties in the macroeconomic environment. However, due to the continuing interest rate rises, demand for new loans is expected to slow down in 2023. The short-term net interest income is expected to be supported primarily by asset repricing and higher investments in securities.    

As at 31 December 2022, the fixed income portfolio of the Group amounted to €2.5 bn, up by 30% on the prior year and represents 10% of total assets. The portfolio comprises highly rated fixed rate bonds with low average duration, giving the Group the flexibility to take advantage of rising interest rates. The completion of the balance sheet de-risking and the Group's comfortable liquidity position is expected to allow the Group to continue expanding the fixed income portfolio in 2023, subject to market conditions.

D. Business Overview (continued)

Growing revenues in a more capital efficient way (continued)

The fixed income portfolio consists of €2,046 mn measured at amortised cost and €454 mn at FVOCI. During FY2022 the Group recognised fair value losses of c.€10 mn directly to Group's equity for the fixed income portfolio measured at FVOCI. The fixed income portfolio measured at amortised cost are held to maturity and therefore no fair value gains/losses are recognised in the Group's income statement or equity. This bond portfolio has low average duration of c.2 years and high average rating at A2 at Aa3 when Cyprus government bonds are excluded. The fair value of the amortised cost fixed income portfolio as at 31 December 2022 amounts to €1,953 mn. Despite the recent volatility in the financial markets the fair value of the amortised cost fixed income portfolio relative to its carrying value has not changed materially.

Separately, the Group focuses to continue improving revenues through multiple less capital-intensive initiatives, with a focus on fees and commissions, insurance and non-banking opportunities, leveraging on the Group's digital capabilities. In 1Q2022, a revised price list for charges and fees was implemented and liquidity fees were extended to a wider customer group. The net fee and commission income for FY2022 remained strong at €192 mn, reflecting an increase of 12% yoy. The net fee and commission income for FY2022 included c.€16 mn from the liquidity fees which were fully abolished in December 2022 and c.€6 mn of servicing fee relating to a NPE sale that will be phased out in 1Q2023.

Net fee and commission income is also enhanced by transaction fees from the Group's subsidiary, JCC Payment Systems Ltd (JCC), a leading player in the card processing business and payment solutions, 75% owned by the Bank. JCC's net fee and commission income contributed 8% of total non interest income and amounted to €27 mn in FY2022, up 22% yoy, backed by strong transaction volume.

The Group's insurance companies, EuroLife Ltd (Eurolife) and Genikes Insurance of Cyprus Ltd (GI) are respectively leading players in the life and general insurance business in Cyprus, and have been providing a recurring and improving income, further diversifying the Group's income streams. The insurance income net of claims for FY2022 contributed 22% of non-interest income and amounted to €71 mn, up 17% yoy, driven by exceptionally strong new business in life insurance and the positive changes in valuation assumptions, partially offset by higher insurance claims. Specifically, Eurolife increased its total regular income by 17% yoy, whilst GI increased its gross written premiums by 11% yoy. Following the adoption of IFRS 17, total profits will remain unchanged. However, the new standard will impact the timing of when profits emerge, improving the predictability of profit over the long-term and is expected to result in a modest annual negative impact on the contribution to profits of the Group's insurance business in the near term. For information on IFRS 17 please refer to the relevant subsection below.

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

Lean operating model

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

The efficiency actions of the Group in 2022 to maintain operating expenses under control in an inflationary environment included further branch footprint optimisation and substantial streamline of workforce. In July 2022 the Group successfully completed a Voluntary Staff Exit Plan (VEP) through which 16% of the Group's full-time employees were approved to leave at a total cost of €101 mn. Following the completion of the VEP, the gross annual savings were estimated at c.€37 mn or 19% of staff costs with a payback period of 2.7 years. Additionally in January 2022 one of the Bank's subsidiaries completed a small-scale targeted Voluntary Staff Exit Plan (VEP), through which a small number of full-time employees were approved to leave at a total cost of €3 mn. In relation to branch restructuring, during 2022 the Group has reduced the number of branches by 20 to 60, a reduction of 25%. Through these successful initiatives, the Group has delivered ahead of schedule on its commitment to reduce its workforce by c.15% and its number of branches by 25%. As a result, the cost to income ratio excluding special levy on deposits and other levies/contributions for FY2022 was reduced to 49%, 11 p.p. down compared to previous year, surpassing its target of low-50s for 2022.

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

D. Business Overview (continued)

Lean operating model (continued)

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. For the year ended 31 December 2022, the Group recognised in the Group's Income Statement an expense of less than €0.5 mn regarding the Plan. Based on the market value of these awards on the grant date, the expense deferred to future periods is estimated to c.€1.1 mn. Actual amounts to be expensed in future periods may vary, e.g., due to forfeiture of awards.

The cost to income ratio excluding special levy on deposits and other levies/contributions for 2023 is expected to decrease to mid-40s, reflecting management's ongoing focus on efficiency and cost discipline in an inflationary environment. This target includes a commitment of maintaining total operating expenses of a range between €350-360 mn, reflecting some upward pressure on costs from investments in transformation and digitalisation and the renewal of collective agreement in 2023. The cost to income ratio excluding special levy on deposits and other levies/contributions for 2024 is expected to remain around similar levels to 2023.

Transformation plan

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

Digital transformation

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

During 4Q2022, the Bank continued to enrich and improve its digital portfolio with new innovative services to its customers. The introduction of the QuickLoan new lending products available through the Group's digital channels (Mobile App and Internet Banking), further differentiates the Bank within the Cypriot market and enhances its status as a digital leader in banking. The introduction of QuickLoan allows the Bank's retail customers to apply for a loan and have an instant update of the approval status of their application.

The adoption of digital products and services continued to grow and gained momentum in the fourth quarter of 2022 and beyond. As at the end of December 2022, 93.9% of the number of transactions involving deposits, cash withdrawals and internal/external transfers were performed through digital channels (up by 27.5 p.p. from 66.4% in September 2017 when the digital transformation programme was initiated). In addition, 81.7% of individual customers were digitally engaged (up by 21.5 p.p. from 60.2% in September 2017), choosing digital channels over branches to perform their transactions. As at the end of December 2022, active mobile banking users and active QuickPay users have grown by 12.8% and 31.3% respectively over the last 12 months. The highest number of QuickPay users to date was recorded in December 2022 with 169 thousand active users. Likewise, the highest number of QuickPay payments was recorded in December 2022 with 565 thousand transactions.

Asset quality

Balance sheet de-risking was largely completed in 2022, marked by the completion of Project Helix 3 which refers to the sale of non-performing exposures with gross book value of €550 mn as at the date of completion. Project Helix 3 represents a further milestone in the delivery of one of the Group's strategic priorities of improving asset quality through the reduction of NPEs. Overall, since the beginning of 2022, and including organic NPE reductions of €360 mn, the Group reduced its NPEs by 69% and its NPE ratio from 12.4% to 4.0% delivering the 2022 NPE ratio target of sub-5%. As a result, the Group's priorities remain intact, maintaining high quality new lending with strict underwriting standards and preventing asset quality deterioration in this uncertain outlook.

The cost of risk target and NPE ratio target display conservative assumptions on both NPE inflows and provisioning to weather the ongoing macroeconomic uncertainty. Although there are currently no signs of asset quality deterioration, the cost of risk target of 50-80 bps and NPE ratio target of sub 5% remain unchanged for 2023. The cost of risk is expected to start normalising from 2024 onwards to around 40-50 bps.

D. Business Overview (continued)

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

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

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

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

● Become carbon neutral by 2030

● Become Net Zero by 2050

● Steadily increase Green Asset Ratio

● Steadily increase Green Mortgage Ratio

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

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

Environmental Pillar

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

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

The Bank in 2022 launched a low emission vehicle loan product (either hybrid or electric) and intends to further expand its range of environmentally friendly products that are expected to be launched in 2023. In addition, the Group has set up a Sustainable Finance Framework which will facilitate the issuance of Green, Social or Sustainable bonds. The proceeds from such bonds will be allocated to eligible activities and products designated in the Sustainable Finance Framework.

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

D. Business Overview (continued)

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

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

Social Pillar

At the centre of the Group's leading social role lie its investments in the Bank of Cyprus Oncology Centre (with an overall investment of c.€70 mn since 1998, whilst 60% of diagnosed cancer cases in Cyprus are being treated at the Centre), the work of SupportCY Network, which was developed in 2020, the contribution of the Bank of Cyprus Cultural Centre in promoting the cultural heritage of the island, and the Work of IDEA Innovation Centre. The Cultural Centre undertook a number of innovative projects such as 'AISTHISEIS' - Multi sensory museum experience for people with disabilities and Faneromeni Arts Festival promoting youth. The IDEA Innovation Centre provided education to 7,000 entrepreneurs, invested c.€4 mn in start-up business creation and supported creation of 82 new companies to date. Staff have continued to engage in voluntary initiatives to support charities, foundations, people in need and initiatives to protect the environment.

The Group has continued to upgrade its staff's skill set by providing training and development opportunities to all staff, and capitalising on modern delivery methods. In 2022, the Group heightened its emphasis on staff wellness by offering webinars, team building activities and family events with sole purpose to enhance mental, physical, financial and social health, attended by 1,424 employees through its 'Well at Work program'.

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 will continue to evolve, so as to better address the Group's evolving ESG needs. The Group's regulatory compliance continues to be an undisputed priority.

The Board composition of the Company and the Bank is diverse, with 40% of the Board members being female as at 31 December 2022. The Board displays a strong skill set stemming from broad international experience. Moreover, the Bank aspires to achieve a representation of at least 30% women in Group's management bodies (Defined as the EXCO and the Extended EXCO) by 2030. As at 31 December 2022, there is a 27% representation of women in Group's management bodies and a 39% representation of women at key positions below the Extended EXCO level (defined as positions between Assistant Manager and Manager).

D. Business Overview (continued)

IFRS 17

IFRS 17, is effective from 1 January 2023, and impacts the phasing of profit recognition for insurance contracts. The Group's insurance-related retained earnings will be restated and the reporting of insurance new business revenue will be spread over time, as the Group provides service to its policyholders (versus recognised up-front under current accounting standards), with the quantum and timing of the impact dependent on, inter alia, the amount and mix of new business and extent of assumption changes in any given year following implementation.

· Under IFRS 17, there will be no present value of in-force life insurance contracts ('PVIF') asset recognised. Instead, the estimated future profit will be included in the measurement of the insurance contract liability as the contractual service margin ('CSM') and this will be gradually recognised in revenue as services are provided over the duration of the insurance contract. While the profit over the life of an individual contract will be unchanged, its emergence will be later under IFRS 17.

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

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

The Group continues to make progress on the implementation of IFRS 17 and assessing the impact on the financial statements.

On transition the following impact has been estimated:

a) the removal of value in force from the life insurance business (including associated deferred tax liability) of c.€101 mn as per the Group's consolidated balance sheet as at 31 December 2022, which will reduce Group accounting equity by a respective amount (with no impact on the Group regulatory capital or tangible equity), and

b) the remeasurement of insurance assets and liabilities and the creation of a contractual service margin (CSM) liability is estimated to result in an increase in the equity of the insurance business of the Group (predominantly relating to the life insurance business of the Group) in the range of €70-80 mn as at 1 January 2022, which is a consequence of life insurance products. The estimated effect on equity of the insurance business of the Group as at 1 January 2023 (roll forwarding the impact on 2022 profits and taking into consideration other movements in reserves in 2022) is an increase in the range of €50-60 mn, compared to the closing equity as at 31 December 2022 as reported under the previous accounting standard, IFRS4.

As a result of the benefit arising from IFRS 17 on 1 January 2023 as referred to in (b) above, 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.

The adoption of IFRS 17 is expected to result in a modest annual negative impact on the contribution to profits of the Group's insurance business in the near term.

D. Business Overview (continued)

Ukrainian crisis

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

Direct impact

The Group does not have any banking operations in Russia or Ukraine, following the sale of its operations of Ukraine in 2014 and in Russia in 2015. The Group has run down its legacy net exposure to less than €1 mn as at 31 December 2022 in Russia through write-offs and provisions.

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

The Group has limited direct exposure with loans related to Ukraine, Russia and Belarus, representing 0.4% of total assets or c.1% of net loans as at 31 December 2022. The net book value of these loans stood at €108 mn as at 31 December 2022, of which €98 mn are performing, whilst the remaining were classified as NPEs well before the current crisis. The portfolio is granular and secured mainly by real estate properties in Cyprus.

Customer deposits related to Ukrainian, Russian and Belarusian customers account for only 6% of total customer deposits as at 31 December 2022. This exposure is not material, given the Group's strong liquidity position. The Group operates with a significant surplus liquidity of €7.2 bn (LCR ratio of 291%) as at 31 December 2022.

Indirect impact

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

Cyprus has no energy dependence on Russia as it imports oil from Greece, Italy and the Netherlands; however it is indirectly affected by pricing pressures in the international energy markets. The focus on renewables increases, marked by a steady improvement in contribution at 18% in 2022 (compared to 16% in 2021).

Professional services account for c.10% of GDP (based on FY2021) of which some relate to Russia or Ukraine and thus expected to be adversely impacted. There is however no credit risk exposure as the sector is not levered.

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

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

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

E. Strategy and Outlook

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

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

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

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

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

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

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

E. Strategy and Outlook (continued)

E. Strategy and Outlook (continued)

During 2022 the Group delivered strong financial results, exceeding its 2022 financial targets. This was marked by the recovery of revenues driven by the expansion in net interest income, lower operating expenses despite inflationary pressures and strong performance in asset quality, delivering NPE ratio of sub-5%. As a result the Group achieved a double-digit recurring ROTE in 2022, building momentum throughout the year.

In 2023 the momentum is expected to continue, leading to an upgrade of targeted ROTE to over 13% from over 10% facilitated by the positive gearing to rising interest rates, improved efficiencies, healthy loan portfolio and robust capital position. This lays the foundations to commence meaningful dividend distributions from 2023 onwards, subject to regulatory approval and market conditions. The Group expects to achieve ROTE over 13% for 2024, on the back of stabilising margins and growth of the loan portfolio.

F. Definitions & Explanations