Bk. Cyprus Hldg Regulatory News (BOCH)

Announcement

Group Financial Results for the quarter ended 31 March 2017

Nicosia, 30 May 2017

Group Chief Executive Statement

"The Bank continues to make good progress in its journey back to strength. Our results this quarter reflect our strategy of continued attention to balance sheet de-risking and, consequently, we continued to direct substantially all our operating profitability to increased coverage levels on delinquent exposures. Despite this, and despite accommodating the €18 mn non-recurring Competition Commission fine which we intend to contest vigorously, the Bank posted a modest positive result in the quarter.

Momentum in risk reduction continued. This is the eighth consecutive quarter we delivered a further material reduction in non-performing loans. In 1Q2017 we reduced NPEs by a further €662 mn and we reduced 90+ DPD by €298 mn. We expect the reduction in non-performing loans to continue and we are actively exploring a number of avenues to accelerate this reduction. When taking into account tangible collateral at fair value, both 90+ DPD and NPEs are fully covered.

We were pleased to start the year with the complete repayment of Emergency Liquidity Assistance (ELA), a successful return to the debt capital markets and the listing of shares on the London Stock Exchange.

The Bank's deposit base is now adequate to fund loan balances. Our loan to deposit ratio stands at 95% and deposit balances are stable. During the quarter our Liquidity Coverage Ratio reached European Central Bank compliance levels. The Bank's capital position was improved by the issuance of €250 mn of Tier 2 capital in January 2017. As at 31 March 2017, our Total Capital Ratio stood at 15.6% and our fully loaded CET 1 ratio stood at 14.0%.

We are pleased to see the Cypriot economy continuing to recover and to note that we continue to maintain strong market shares in lending and deposit-taking in Cyprus. We continue to lend into the Cyprus economy. New lending in the quarter was €690 mn, up by 89% on the FY2016 quarterly average of €365 mn."

John Patrick Hourican

Financial Results

Interim Condensed Consolidated Income Statement - Underlying Basis

Interim Condensed Consolidated Balance Sheet

A. Analysis of Group Financial Results for the quarter ended 31 March 2017

A.1 Balance Sheet Analysis

A.1.1 Capital Base

Shareholders' equity totalled €3,079 mn at 31 March 2017, compared to €3,071 mn at 31 December 2016. The Common Equity Tier 1 capital (CET1) ratio (transitional basis) stood at 14.4% at 31 March 2017, compared to 14.5% at 31 December 2016. During 1Q2017 CET1 ratio was positively affected by the reduction in risk weighted assets (RWA), but was negatively affected by the deferred tax asset phasing-in. Adjusting for Deferred Tax Assets, the CET1 ratio on a fully-loaded basis totalled 14.0% at 31 March 2017, increased by 10 basis points when compared to 13.9% at 31 December 2016. At the quarter end, the Total Capital ratio stood at 15.6%, increased by 100 basis points when compared to 14.6% at 31 December 2016, positively affected by the issuance of €250 mn of Tier 2 capital in January 2017.

The Group's capital ratios are comfortably above the minimum CET1 regulatory capital ratio of 9.50% (comprising of a 4.5% Pillar I requirement, a 3.75% Pillar II requirement and a phased-in CCB of 1.25%) and the overall Total Capital Ratio requirement of 13.00%, comprising of a Pillar I requirement of 8% (of which up to 1.5% can be in the form of Additional Tier 1 capital and up to 2.0% in the form of Tier 2 capital), a Pillar II requirement of 3.75% (in the form of CET1), as well as a phased-in CCB of 1.25%. The European Central Bank (ECB) has also provided non-public guidance for an additional Pillar II CET1 buffer.

On 18 January 2017, Bank of Cyprus Holdings Public Limited Company (BOC Holdings) became the new parent of the Group. This transaction did not result in any change of economic substance and hence did not have any effect on the total equity of the Group. The Group financial results reflect the difference in the amounts of share capital, share premium and capital reduction reserves as an adjustment in equity.

A.1.2 Funding and Liquidity

Funding

Funding from Central Banks

At 31 March 2017, the Bank's funding from central banks totalled €870 mn, which relates wholly to ECB funding, compared to funding from central banks at 31 December 2016 of €850 mn, which comprised ELA of €200 mn and ECB funding of €650 mn. The ECB funding of €870 mn at the quarter end comprises €830 mn through Targeted Longer-Term Refinancing Operations (TLTRO II) and €40 mn through Longer-Term Refinancing Operations (LTRO).

In January 2017 the Bank fully repaid ELA. This is another significant milestone in the Bank's journey back to strength since 2013 and was achieved through a number of actions including the extensive deleveraging of non-core assets and operations, the equity raise in 2014, the significant increase in customer deposits over the past two years, the repayment and maturity of Cyprus Government bonds and the conversion of assets into ECB eligible collateral.

Deposits

Group customer deposits totalled €16,537 mn at 31 March 2017, compared to €16,510 mn at 31 December 2016. During the quarter, deposits remained broadly stable affected by seasonality. Cyprus deposits stood at €15,076 mn at31 March 2017, accounting for 91% of Group customer deposits. Customer deposits in Cyprus increased by €33 mn during 1Q2017, largely driven by the increase in local deposits. The Bank's deposit market share in Cyprus reached 30,8% at 31 March 2017. Customer deposits accounted for 74% of total assets at 31 March 2017. The Loan to Deposit ratio (L/D) stood at 95% at 31 March 2017, at the same levels as at the year end, compared to a high of 151% at 31 March 2014.

Liquidity

As at 31 March 2017 the Group Liquidity Coverage Ratio (LCR) stood at 84% (compared to 49% at 31 December 2016) and is in compliance with the minimum regulatory requirement of 80%. As at 31 March 2017, the Bank was not in compliance with the local regulatory liquidity requirements with respect to its operations in Cyprus. The Net Stable Funding Ratio (NSFR ratio) is currently expected to be introduced on 1 January 2018, with a minimum requirement of 100%. As at 31 March 2017 the Group's NSFR, on the basis of Basel ΙΙΙ standards, was 98% (compared to 95% at 31 December 2016). After repayment of ELA in January 2017, the Group is focusing on measures to improve its liquidity position and remains on track to exceed the minimum requirement by 1 January 2018 with respect to LCR, which will increase to 100% as of that date, and NSFR.

In January 2017, the Bank issued a €250 million unsecured and subordinated Tier 2 Capital Note (Note) under the Bank's EMTN Programme. The Note was priced at par with a coupon of 9.25%. The Note matures on 19 January 2027. The Bank has the option to redeem the Note early on 19 January 2022, subject to applicable regulatory consents.

A. Analysis of Group Financial Results for the quarter ended 31 March 2017 (continued)

A.1 Balance Sheet Analysis (continued)

A.1.3 Loans

Group gross loans totalled €20,011 mn at 31 March 2017, compared to €20,130 mn at 31 December 2016. Gross loans in Cyprus totalled €18,063 mn at 31 March 2017 and accounted for 90% of Group gross loans. The Bank is the single largest credit provider in Cyprus with a 39.1% loan market share at 31 March 2017. Gross loans in the UK amounted to €1,435 mn at 31 March 2017 and accounted for 7% of Group total gross loans. New loan originations for the Group reached €690 mn for the 1Q2017 (of which €502 mn were granted in Cyprus and €188 mn by the UK subsidiary), up by 89% on the FY2016 quarterly average of €365 mn.

At 31 March 2017, Group net loans and advances to customers totalled €15,714 mn (31 December 2016: €15,649 mn), of which an amount with carrying value of €21 mn was classified as held for sale as at 31 March 2017 in line with IFRS 5.

A.1.4 Loan portfolio quality

Tackling the Group's loan portfolio quality remains the top priority for management. The Group continues to make steady progress across all asset quality metrics and the loan restructuring activity continues. The Group has been successful in engineering sustainable restructuring solutions across the spectrum of its loan portfolio. There is a shift of focus on the Retail and SME portfolios, as well as the terminated NPEs (in the Recoveries department), with recoveries via foreclosures to unlock solutions with problematic cases and non-cooperative borrowers, and collections via the specialised unit Retail Arrears Management and other available tools to ensure early and continuous engagement with clients.

Loans in arrears for more than 90 days (90+ DPD) were reduced by €298 mn (4% reduction qoq) in 1Q2017. The decrease was the result of restructuring activity, debt for asset swaps and write offs. 90+ DPD stood at €8,011 mn at 31 March 2017, accounting for 40% of gross loans (90+ DPD ratio), compared to 41% at 31 December 2016. The provisioning coverage ratio of 90+ DPD stood at 54% at 31 March 2017, in line with the previous quarter end. When taking into account tangible collateral at fair value, 90+ DPD loans are fully covered. The provisioning coverage ratio of 90+ DPD, calculated with reference to the contractual balances of customers, totalled 67% at 31 March 2017, same as at 31 December 2016.

Non-performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced by€662 mn or 6% during 1Q2017 to €10,372 mn at 31 March 2017, accounting for 52% of gross loans, compared to 55% at 31 December 2016. This is the third consecutive quarter during which the quarterly reduction of NPEs exceeded the reduction of 90+ DPD mainly due to the curing of restructured performing NPEs that met the exit criteria following satisfactory performance post their restructuring. We expect the reduction in non-performing loans to continue and we are actively exploring a number of avenues to accelerate this reduction. The provisioning coverage ratio of NPEs stood at 42% at 31 March 2017, up from 41% at 31 December 2016. When taking into account tangible collateral at fair value, NPEs are fully covered. The provisioning coverage ratio of NPEs, calculated with reference to the contractual balances of customers, stood at 55% at 31 March 2017, compared to 54% at 31 December 2016.

A. Analysis of Group Financial Results for the quarter ended 31 March 2017 (continued)

A.1 Balance Sheet Analysis (continued)

A.1.4 Loan portfolio quality (continued)

A.1.5 Real Estate Management Unit

The Real Estate Management Unit (REMU) on-boarded €128 mn of assets in 1Q2017, via the execution of debt for asset swaps, down by 33% qoq. The focus for REMU is increasingly shifting from on-boarding of assets resulting from debt for asset swaps towards the disposal of these assets. The Group completed disposals of €110 mn in 1Q2017, compared to €56 mn in 4Q2016 (up by 98% qoq) and €166 mn in FY2016. As at 31 March 2017, assets held by REMU had a carrying value of €1.4 bn.

A. Analysis of Group Financial Results for the quarter ended 31 March 2017 (continued)

A.1 Balance Sheet Analysis (continued)

A.1.5 Real Estate Management Unit (continued)

A.1.6 Non-core overseas exposures

As part of its deleveraging strategy, and through specific, deliberate and well-timed actions, the Bank has managed to reduce its risk profile, to enhance its liquidity position and to improve its capital position.

The remaining non-core overseas net exposures (including both on-balance sheet and off-balance sheet exposures) at 31 March 2017 are as follows:

In accordance with Group's strategy to exit from overseas non-core operations, the operations of the Bank of Cyprus branch in Romania are expected to be terminated during 2017, subject to regulatory approvals. The remaining assets and liabilities of the branch will be transferred to other entities of the Group.

In addition to the above, at 31 March 2017 there were overseas exposures of €54 mn in Romania (€57 mn as at 31 December 2016) and €195 mn in Greece (€189 mn as at 31 December 2016), not identified as non-core exposures, since they are considered by management as exposures arising in the normal course of business.

A.2 Income Statement Analysis

A.2.1 Total income

Net interest income (NII) and net interest margin (NIM) for 1Q2017 amounted to €156 mn and 3.33% respectively. NII was down by 3% compared to €162 mn for 4Q2016 and down by 15% compared to €185 mn a year earlier, reflecting the low interest rate environment and the lower volume of loans primarily as a result of the debt for asset swaps. The NIM for 1Q2017 was at 3.33% compared to 3.37% for 4Q2016 and 3.63% a year earlier.

Quarterly average interest earning assets for 1Q2017 amounted to €19,027 mn, at similar levels to the previous quarter and down by 7% yoy, largely due to debt for asset swaps.

Non-interest income for 1Q2017 was €77 mn, comprising primarily net fee and commission income of €43 mn, net foreign exchange income and net gains on financial instruments of €11 mn and net insurance income of €10 mn. Non-interest income for 1Q2017 was lower by 9% qoq, driven by the 21% qoq drop in net fee and commission income reflecting quarterly seasonality along with the non-recurrence of some fees and commissions. Non-interest income for 1Q2017 was increased by 29% yoy, largely driven by the new and increased commission charges introduced in 4Q2016. Net insurance claims totalled €10 mn for 1Q2017, up by 7% qoq. The remaining component of non-interest income for 1Q2017 was a profit of €24 mn (compared to €20 mn for the previous quarter), which includes a net gain of €11 mn on the disposal of assets by REMU.

Total income for 1Q2017 amounted to €233 mn, compared to €246 mn for 4Q2016 (5% reduction qoq) and €244 mn for 1Q2016 (4% reduction yoy), with the reduction primarily reflecting the reduction in NII.

A.2.2 Total expenses

Total expenses for 1Q2017 were €107 mn, 50% of which related to staff costs (€54 mn), 39% to other operating expenses (€41 mn) and 11% to special levy and contribution to Single Resolution Fund (SRF) (€12 mn). Total expenses for 1Q2017 were €107 mn, compared to €98 mn a quarter earlier. Total operating expenses for 1Q2017 amounted to €95 mn, at similar levels to the previous quarter and the previous year. The special levy and contribution to the SRF for 1Q2017 of €12 mn includes an amount of €6.4 mn of the 2017 annual contribution to the SRF, which was fully booked during 1Q2017 in line with IFRSs. The cost to income ratio for 1Q2017 was 46%, compared to 40% for 4Q2016. Excluding the special levy and contribution to the SRF, the cost to income ratio for 1Q2017 was 41%, compared to 38% for 4Q2016.

A.2 Income Statement Analysis (continued)

A.2.3 Profit before tax and restructuring costs

Operating profit for 1Q2017 was €126 mn, compared to €148 mn for 4Q2016 (down by 15% qoq) and €143 mn for 1Q2016 (down by 12% yoy). The decrease mainly reflects the lower net interest income and the contribution to the SRF.

Provisions for 1Q2017 totalled €64 mn, compared to €103 mn for 4Q2016 (down by 38% qoq) and to €62 mn for 1Q2016 (up by 2% yoy), reflecting the Bank's continued strategy for directing operating profitability to faster de-risk the balance sheet. The annualised provisioning charge for 1Q2017 accounted for 1.3% of gross loans, compared to a provisioning charge of 1.7% for FY2016. The annualised provisioning charge for 1Q2017 including impairments of other financial assets accounted for 1.7% of gross loans, at the same levels for FY2016.

At 31 March 2017, accumulated provisions, including fair value adjustment on initial recognition and provisions for off-balance sheet exposures, totalled €4,334 mn (compared to €4,519 mn at 31 December 2016) and accounted for 21.7% of gross loans (compared to 22.4% at 31 December 2016). The decrease in 1Q2017 accumulated provisions of €185 mn primarily relates to increased restructuring activity and write offs. The reduction of accumulated provisions in the previous quarter amounted to €184 mn.

Impairments of other financial and non-financial assets for 1Q2017 totalled €32 mn (compared to €13 mn for 4Q2016) and were primarily affected by impairment charges relating to legacy exposures of €23 mn and impairment losses of stock of properties in Cyprus and Romania of €8 mn.

Provisions for litigation and regulatory matters for 1Q2017 amounted to €17 mn compared to €18 mn for 4Q2016. The elevated levels in 1Q2017 relate mainly to a fine imposed by the Cyprus Commission for the Protection of Competition. The fine relates to complaints filed in 2010 relating to the Bank's alleged abuse of its dominant market position in its cards business. The elevated levels in 4Q2016 were primarily driven by the increase in provisions for litigation and regulatory matters relating mainly to redress charges for the UK operations.

A.2.4 Profit after tax

Profit after tax and before restructuring costs for 1Q2017 totalled €9 mn compared to €18 mn in 4Q2016 (down by 47% qoq) and €67 mn in 1Q2016 (down by 86% yoy).

Advisory, VEP and other restructuring costs for 1Q2017 totalled €7 mn compared to €16 mn for 4Q2016 (down by 55% qoq) and €17 mn for 1Q2016 (down by 58% yoy). The elevated levels in the previous year relate mainly to the London listing project.

Profit after tax attributable to the owners of the Bank for 1Q2017 was €2 mn, in line with 4Q2016 and compared to €50 mn for 1Q2016.

B. Operating Environment

Cyprus real GDP increased by 3,3% year-on-year in the first quarter of 2017 when seasonally adjusted, according to the flash estimates of the Statistical Service of the Republic of Cyprus. Growth in the first quarter was better than expected and well balanced, driven mainly by the services sectors particularly tourism, transport and trade. Construction and manufacturing activity continued to recover.

The outlook for the Cyprus economy over the medium term remains positive. The recovery is broadly based, funding conditions in the banking system have improved markedly, the stock of non-performing loans is decreasing and the unemployment rate has been declining.

According to medium term forecasts by the International Monetary Fund (World Economic Outlook, April 2017) and the European Commission (Spring Forecasts 2017) growth over the medium term will remain within a range between 2% and 3% in real terms.

Upside factors relate to a longer period of low oil prices, further improvement of economic fundamentals in the euro area and stronger investment spending as property prices are stabilising and as projects in tourism, energy and public works are being implemented.

Downside risks to the growth projections are associated with high levels of non-performing exposures, a loss of momentum in structural reforms with associated risks for public finances and a return of inflation. Downside risks may also be associated with a deterioration of the external environment for Cyprus. This may involve a continuation of the recession in Russia in conditions of protracted declines in oil prices; weaker than expected growth in the euro area as a result of worsening global economic conditions, and slower growth in the UK with a weakening of the pound as a result of uncertainty resulting from Brexit. The direct consequences on Cyprus from Brexit, will mostly emanate from tourist activity. The possible loss of UK tourist arrivals may be mitigated at least in part, by increases in arrivals of tourists from other destinations as airline connectivity improves. Political uncertainty in Europe triggered by a British exit or by the refugee crisis could also lead to increased economic uncertainty and undermine economic confidence.

In this context of a strengthening economy and narrowing imbalances, the Cyprus government benefited from a series of rating upgrades. Most recently on 17 March 2017, S&P Global Ratings upgraded the Cyprus sovereign to BB+ from BB, the previous upgrade being six months before, in September 2016. This is one notch below investment grade.

C. Business Overview

With the Cypriot operations accounting for 90% of gross loans and 91% of customer deposits, the Group's financial performance is highly correlated to the economic and operating conditions in Cyprus and will consequently benefit from the country's recovery.

The strategic focus of the Group is to reshape its business model to grow in the core Cypriot market through prudent new lending and carefully developing the UK franchise. Growth in new lending is focused on selected industries that are more in line with the Bank's target risk profile, such as tourism, trade, professional services, information/communication technologies, energy, education and green projects. The Bank is currently looking to carefully expand its UK operations, remaining consistent with the Group's overall credit appetite and regulatory environment. With selective presences in London and Birmingham and a predominantly retail funded franchise, the UK strategy is to support its core proposition in the property market, specifically targeting the professional buy-to-let market and further expanding its mortgage business and its savings, current accounts and trade-related products for SMEs, professionals and Cypriot residents.

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

Management is also placing emphasis on diversifying income streams by boosting fee income from international transaction services, wealth management and insurance. The Group's insurance companies, EuroLife Ltd and General Insurance of Cyprus Ltd operating in the sectors of life and general insurance respectively, constitute a leading player in the insurance business in Cyprus, with such businesses providing a recurring income, further diversifying the Bank's income streams. The insurance income net of insurance claims for 1Q2017 amounted to €10 mn (compared to €14 mn for 1Q2016), contributing to 14% of non-interest income.

In order to further improve its funding structure, the Bank is stepping up its efforts to grow lower cost deposits, and take advantage of the increased customer confidence towards the Bank, as well as improving macroeconomic conditions. The Bank's strong capital position and overall improvement in its financial position enhance its funding options.

On 19 January 2017, BOC Holdings was admitted to listing and trading on the London Stock Exchange ("LSE") and the Cyprus Stock Exchange ("CSE"). The listing on the LSE is another significant milestone in the execution of the Group's strategy. It is expected to improve the liquidity of the Group's stock, which will enhance the Group's visibility and lead to a broader base of investors capable of supporting the Group in the long-term. This will further enhance the confidence of all stakeholders in the Group. BOC Holdings continues to work towards a premium listing on the LSE, and intends to apply for a step up to the premium segment of the LSE at a future date, with the intention of becoming eligible for inclusion in the FTSE UK Index series.

D. Outlook

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

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

· Materially reduce the level of delinquent loans

· Further improve the funding structure

· Maintain an appropriate capital position by internally generating capital

· Focus on the core Cyprus market and the UK operations

· Achieve a lean operating model

· Deliver value to shareholders and other stakeholders

D. Outlook (continued)

The table below shows the Group's performance against the Medium Term Targets.

* The annualised provisioning charge for 1Q2017 including impairments of other financial assets accounted for 1.7% of gross loans, at the same levels for FY2016

** The net fee and commission income over total income for December 2016 excludes non-recurring fees of approximately €7 mn.

*** The cost to income ratio for 1Q2017 excluding the special levy and contribution to the SRF was 41%, compared to 38% for 4Q2016.  

E. Statutory Financial Results

Condensed consolidated Income Statement for the quarter ended 31 March 2017

F. Notes

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

The reclassification difference between the underlying and statutory bases relates to €24 mn expenses (€17 mn are shown as Provisions for litigation and regulatory matters and €7 mn as Advisory and other restructuring costs), which for the purpose of management reporting are monitored and reported below the operating profit.

F.2. Credit risk concentration of gross loans and advances to customers

Geographical and industry concentrations of Group gross loans and advances to customers are presented below:

F.2. Credit risk concentration of gross loans and advances to customers (continued)

Restructuring major corporate business line includes customers with exposures over €100,000 thousand, whereas restructuring corporate business line includes customers with exposures between €6,000 thousand and €100,000 thousand.

F3. Credit quality of gross loans and advances to customers

The following table presents the credit quality of the Group's gross loans and advances to customers:

Past due loans are those with delayed payments or in excess of authorised credit limits. Impaired loans are those which are not considered fully collectable and for which a provision for impairment has been recognised on an individual basis or for which incurred losses exist at their initial recognition or customers in Debt Recovery.

During the quarter ended 31 March 2017 the total non-contractual write-offs recorded by the Group amounted to €100,836 thousand (year 2016: €517,694 thousand). The remaining gross loan balance of these customers as at 31 March 2017 was €105,044 thousand (31 December 2016: €305,591 thousand), of which €7,848 thousand(31 December 2016: €19,651 thousand) were past due for more than 90 days but not impaired and €66,198 thousand (31 December 2016: €130,964 thousand) were impaired

Loans and advances to customers that are past due but not impaired

The fair value of the collateral that the Group holds (to the extent that it mitigates credit risk) in respect of loans and advances to customers that are past due but not impaired as at 31 March 2017 is€1,805,545 thousand (31 December 2016: €1,762,528 thousand). The fair value of the collateral is capped to the gross carrying value of the loans and advances to customers.

F3. Credit quality of loans and advances to customers (continued)

Impaired loans and advances to customers

The fair value of the collateral presented above has been computed based on the extent that the collateral mitigates credit risk and has been capped to the gross carrying value of the loans and advances to customers.

Interest income on impaired loans

Interest income from loans and advances to customers includes interest on the recoverable amount of impaired loans and advances to customers amounting to €37,519 thousand (corresponding period of 2016: €54,270 thousand).

F4. Provision for impairment of loans and advances to customers

The movement in provisions for impairment of loans and advances is as follows:

The above table does not include the fair value adjustment on initial recognition of loans acquired from Laiki Bank and provisions for impairment on financial guarantees and commitments which are part of other liabilities on the balance sheet.

Assumptions have been made about the future changes in property values, as well as the timing for the realisation of the collateral and for taxes and expenses on the repossession and subsequent sale of the collateral. Indexation has been used to estimate updated market values of properties, while assumptions were made on the basis of a macroeconomic scenario for future changes in property values. The timing of recovery from real estate collaterals has been estimated to be on average 3 years, with the exception of specific cases for which, based on specific facts and circumstances, a different period has been used and for customers in Debt Recovery where an average 6 year period has been used. In accordance with the Loan Impairment and Provisioning Procedures Directives of 2014 and 2015 of the CBC, the cumulative average future change in property values during the period has been capped to zero. The average liquidity haircut and selling expenses used in the provisions calculation is 10% of the current market value of the property for those collaterals for which the increase in their value is capped to zero and 10% of the projected market value of the property for those collaterals for which their value is expected to drop. 

F4. Provision for impairment of loans and advances to customers (continued)

The above assumptions are also influenced by the ongoing regulatory dialogue the Bank maintains with its lead regulator, the ECB, and other regulatory guidance and interpretations issued by various regulatory and industry bodies such as the ECB and EBA, which provide guidance and expectations as to relevant definitions and the treatment/classification of certain parameters/assumptions used in the estimation of provisions.

Any changes in these assumptions or difference between assumptions made and actual results could result in significant changes in the amount of required provisions for impairment of loans and advances.

F5. Pending litigation, claims and regulatory matters

The Group in the ordinary course of business is subject to enquiries and examinations, requests for information, audits, investigations and legal and other proceedings by regulators, governmental and other public bodies, actual and threatened, relating to the suitability and adequacy of advice given to clients or the absence of advice, lending and pricing practices, selling and disclosure requirements, record keeping, filings and a variety of other matters. In addition, as a result of the deterioration of the Cypriot economy and banking sector in 2012 and the subsequent Restructuring of the Company in 2013 as a result of the Bail-in Decrees, the Company is subject to a large number of proceedings and investigations that either precede, or result from the events that occurred during the period of the Bail-in Decrees. Most ongoing investigations and proceedings of significance relate to matters arising during the period prior to the issue of the Bail-in Decrees. Provisions have been recognised for those cases where the Group is able to estimate probable losses. Where an individual provision is material, the fact that a provision has been made is stated. Any provision recognised does not constitute an admission of wrongdoing or legal liability. While the outcome of these matters is inherently uncertain, management believes that, based on the information available to it, appropriate provisions have been made in respect of legal proceedings and regulatory matters.

On 22 May 2017, the Cyprus Commission for the Protection of Competition imposed a fine of €18 mn against the Bank. The fine relates to complaints filed in 2010 relating to the Bank's alleged abuse of its dominant market position in its cards business. The Bank disagrees with the decision of the Commission and intends to legally appeal against this decision through all available court processes. A fine of €1.7 mn has also been imposed to JCC Payment Systems Ltd (JCC), a card-processing business currently 75% owned by the Bank.

F6. Liquidity reserves

The below table sets out the Group's liquidity reserves:

Investments under Liquidity Reserves are shown at market value net of haircut (as prescribed by regulators) in order to reflect the actual liquidity value that can be obtained. The Liquidity Reserves exclude Local Government of Cyprus Issues. Liquid investments include off balance sheet Bank of England Treasury Bills acquired by Bank of Cyprus UK Ltd through the encumbrance of customer loans with the Bank of England. Under LCR Liquidity Reserves, all Cyprus Government Bonds remain eligible for inclusion as Level 1 assets given that they are issued by a Member State. LCR does not require liquid assets to be eligible as collateral for central bank operations and are included at market value.

F7. Capital management

F7.1. Capital position

The capital position of the Group under CRD IV/CRR basis (after applying the transitional arrangements) is presented below.

During 1Q2017 CET1 ratio was positively affected by the reduction in risk weighted assets (RWA), but was negatively affected by the deferred tax asset phasing-in.

The Group's capital ratios are comfortably above the minimum CET1 regulatory capital ratio of 9.50% (comprising of a 4.5% Pillar I requirement, a 3.75% Pillar II requirement and a phased-in CCB of 1.25%) and the overall Total Capital Ratio requirement of 13.00%, comprising of a Pillar I requirement of 8% (of which up to 1.5% can be in the form of Additional Tier 1 capital and up to 2.0% in the form of Tier 2 capital), a Pillar II requirement of 3.75% (in the form of CET1), as well as a phased-in CCB of 1.25%. The ECB has also provided non-public guidance for an additional Pillar II CET1 buffer.

F7. Capital management (continued)

F7.2. Overview of risk weighted assets

The rows not applicable to the Group are not presented in the table above.

The main changes in RWAs are observed in lines 2 and 24. The RWA movement observed in line 2 relates to balance sheet movements in improved risk weights on loans and advances to banks which are mainly affected by the counterparty rating and exposure maturities. The decrease in line 24 relates to the exclusion from the calculation of the capital requirement for operational risk in relation to operations in Russia, which were sold in 2015, following permission granted by the regulatory authorities at the beginning of January 2017.