Bk. Cyprus Hldg Regulatory News (BOCH)

Announcement

Group Financial Results for the nine months ended 30 September 2020

and Medium-Term Strategic Targets

Nicosia, 27 November 2020

Key Highlights for the nine months ended 30 September 2020

COVID-19 Developments

· Cypriot economy more resilient in 3Q2020 than anticipated earlier in the year

· We continue to support the recovery of the Cypriot economy

· New lending of €288 mn for 3Q2020 recovering post lockdown, driven by retail housing, reaching c.€1 bn for 9M2020

· Careful on-going monitoring of credit quality of loans under moratorium

Positive Performance in 3Q2020

· Total income of €137 mn; operating profit of €44 mn

· Cost of risk of 97 bps

· Profit after tax of €4 mn

Operating Efficiency

· Total operating expenses (excluding special levy and contributions to SRF and DGF) at €84 mn for 3Q2020, up by 4% qoq as more normal business operations have resumed post lockdown, and €249 mn for 9M2020 down by 13% yoy

· Cost to income ratio (excluding special levy and contributions to SRF and DGF) at 62% for 3Q2020 and 59% for 9M2020

Good Capital, Strong Liquidity

· CET1 ratio of 14.7% and Total Capital ratio of 18.2% (both pro forma for Helix 2 and on a transitional basis)

· Deposits at €16.4 bn, broadly flat qoq

· Significant surplus liquidity of €4.1 bn (LCR at 256%)

Balance Sheet Repair Continues

· Organic NPE reduction of €230 mn for 3Q2020, with pace returning to pre-lockdown levels

· €0.9 bn NPE sale (Helix 2) agreed in August 2020

· NPEs reduced to €2.4 bn (€1.0 bn net), pro forma for Helix 2

· Gross NPE ratio reduced to 21% (10% net) and coverage maintained at 59%, all pro forma for Helix 2

Strategy and Outlook

· Clear path to reduce NPE ratio to single digit by end of 2022 and to c.5% in the medium term

· Enhance revenues in a more capital efficient way, capitalising on strong market position

· Improve operating efficiency through leaner operations, digitisation and automation

· Initiate MREL issuance and refinance Tier 2, subject to market conditions

· Position the Bank on the path for sustainable profitability delivering shareholders returns; target of ROTE of c.7% in the medium term

Group Chief Executive Statement

"Signs of economic recovery to pre-pandemic levels marked the third quarter of the year, with the Cypriot economy showing more resilience than initially anticipated, proving its open, small and flexible characteristics. However, as the number of new COVID-19 cases has increased in recent weeks, local restrictions have been re-imposed to contain the spread, which is likely to lead to some loss of momentum in economic recovery in the fourth quarter. The latest news for an effective vaccine is encouraging, which in time should support a return to more normal conditions.

Our strategic priorities of strengthening our balance sheet and improving our asset quality and efficiency, while supporting our customers, colleagues and community through COVID-19 remain unchanged.

During the third quarter of the year we continued to support the Cypriot economy and extended a further €288 mn in new loans, up by over 20% compared to the previous quarter, as new demand increased post lockdown, driven by retail housing, supported by the Government's interest rate subsidy scheme. Overall, we have granted c.€1 bn new loans in the first nine months of the year.

During the third quarter of the year, we generated total income of €137 mn and a positive operating result of €44 mn. Cost of risk was maintained at below 100 bps. Q3 was profitable and the profit after tax for the quarter was €4 mn. The overall result for the nine months was a loss after tax of €122 mn, when including the loss on Project Helix 2 and loan credit losses for potential future NPE sales, both recorded in the previous quarter.

In the nine months of the year we reduced our total operating expenses by €40 mn or 13% on a yearly basis, reflecting our on-going efforts to contain costs. The quarterly increase of 4% is reflective of the lower cost base in the second quarter as a result of the restrictive measures for COVID-19.

The Bank's capital position remains good and comfortably in excess of our regulatory requirements. As at 30 September 2020, our capital ratios (on a transitional basis) were 18.2% for the Total Capital ratio and 14.7% for CET1 ratio, both pro forma for Helix 2. Our liquidity position also remains strong as we continue to operate with a significant surplus of €4.1 bn (LCR at 256%). Deposits on our balance sheet remained broadly flat in the quarter at €16.4 bn.

During the third quarter of the year we maintained our focus on dealing with legacy issues. The pace of organic NPE reduction returned to pre-lockdown levels, as we reduced NPEs further by €230 mn, bringing the total organic reduction in the first nine months of the year to over €500 mn. Together with the sales of loans achieved earlier this year (Helix 2 and Velocity 2), we have substantially reduced NPEs by €1.5 bn in the first nine months of 2020. Overall, since the peak in 2014, we have now reduced the stock of delinquent loans by €12.6 bn or 84% to €2.4 bn (on a pro forma basis) and our NPE ratio from 63% to 21% (on a pro forma basis). NPE coverage was maintained at 59%, reducing the residual risk on our balance sheet to €1 bn.

We remain committed to completing the de-risking of the balance sheet and we will continue to assess the potential to accelerate NPE reduction through additional sales. At the same time, we continue to monitor the credit quality of loans under moratorium.

Although there remains uncertainty in the broader operating environment as a result of the pandemic, our vision for the future of the Bank is clear, together with our confidence in delivering our strategic objectives.

Bank of Cyprus has been through a period of considerable change and we are now laying the foundations for delivering greater shareholder value. Our near term priorities include the completion of our balance sheet de-risking and ensuring our cost base remains appropriate whilst further investing in our digital capabilities; and our medium term priorities include capitalising on our strong market position, enhancing revenues, driving down costs and navigating a clear path to sustainable profitability."

Panicos Nicolaou

Commentary on Underlying Basis

The financial information presented in this Section provides an overview of the Group financial results for the nine months ended 30 September 2020 on the 'underlying basis' which the management believes best fits the true measurement of the performance and position of the Group.

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

With respect to the 'Balance Sheet Analysis', please note the following in relation to the disclosure of pro forma figures and ratios with respect to Project Helix 2 (as explained below). All relevant figures are based on 30 September 2020 financial results, unless otherwise stated. Numbers on a pro forma basis are based on the 30 September 2020 underlying basis figures and are adjusted for Project Helix 2 and assume completion of the transaction, which remains subject to customary regulatory and other approvals. Where numbers are provided on a pro forma basis this is stated.

Project Helix 2 refers to the agreement the Group reached in August 2020 with funds affiliated with Pacific Investment Management Company LLC ("PIMCO"), for the sale of a portfolio of loans with gross book value of €0.9 bn. Further details on the transaction are provided in Section A.1.5 'Loan Portfolio quality'.

In addition, the following change was made in the underlying basis, when compared with previous disclosures.

Reclassifications effected to comparative information were made so that 'advisory and other restructuring costs' for 9M2019 of c.€6.5 mn (relating to the Project Helix 2 loan portfolio, classified as held for sale as at 30 September 2020), were reclassified as non-recurring items within 'Provisions/net loss relating to NPE sales, including restructuring expenses' in the underlying basis.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis

A.1.1 Capital Base

Total equity excluding non-controlling interests totalled €2,106 mn at 30 September 2020, compared to €2,095 mn at 30 June 2020 and €2,260 mn at 31 December 2019. Shareholders' equity totalled €1,886 mn at 30 September 2020, compared to €1,875 mn at 30 June 2020 and €2,040 mn at 31 December 2019.

The Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at 14.6% at 30 September 2020 and 14.7% pro forma for the Project Helix 2 sale agreement signed in 3Q2020 (referred to as "pro forma for Helix 2"), compared to 14.3% at 30 June (and 14.4% pro forma for Helix 2) and to 14.8% at 31 December 2019. During 3Q2020, the CET1 ratio was further positively impacted by the amendments to the capital regulations in relation to the temporary treatment of unrealised loss on certain financial instruments and IFRS 9, introduced in June 2020 in response to COVID-19 by c.10 bps.

The Group has elected to apply the EU transitional arrangements for regulatory capital purposes (EU Regulation 2017/2395) where the impact on the impairment amount from the initial application of IFRS 9 on the capital ratios is phased-in gradually. The amount added each year decreases based on a weighting factor until the impact of IFRS 9 is fully absorbed back to CET1 at the end of the five years. The impact on the capital position for the year 2018 was 5% of the impact on the impairment amounts from the initial application of IFRS 9, increasing to 15% (cumulative) for the year 2019 and to 30% (cumulative) for the year 2020. In June 2020, Regulation (EU) 2020/873, regarding certain adjustments in response to the COVID-19 pandemic, came into force, extending the IFRS 9 transitional arrangements and introducing further relief measures to CET1, such as allowing to temporarily add back unrealised gains or losses on certain financial instruments measured at fair value through other comprehensive income. Further details are set out further below under 'Implications on capital from the Outbreak of COVID-19'.

The CET1 ratio on a fully loaded basis amounted to 12.8% as at 30 September 2020 and 12.9% pro forma for Helix 2, compared to 12.6% as at 30 June 2020 and 12.7% pro forma for Helix 2, and to 13.1% as at 31 December 2019. On a transitional basis and on a fully phased-in basis, after the transition period is complete, the impact of IFRS 9 is expected to be manageable and within the Group's capital plans.

The Total Capital ratio stood at 18.1% as at 30 September 2020 (and 18.2% pro forma for Helix 2), compared to 17.8% as at 30 June 2020 (and 17.9% pro forma for Helix 2), and to 18.0% as at 31 December 2019.

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

In the context of ECB's capital easing measures for COVID-19, the Bank received an amendment to the December 2019 SREP decision effective as of 12 March 2020, reducing the Group's minimum phased-in Common Equity Tier 1 (CET1) capital ratio to 9.7% (comprising a 4.5% Pillar I requirement, a 1.7% Pillar II requirement, the Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer of 1.0%), following the frontloading of the new rules on the Pillar II Requirement composition, to allow banks to use Additional Tier 1 (AT1) capital and Tier 2 (T2) capital to meet Pillar II Requirements and not only by CET1, initially scheduled to come into effect in January 2021.

The SREP Total Capital Requirement remained unchanged at 14.5%, comprising an 8.0% Pillar I requirement (of which up to 1.5% can be in the form of AT1 capital and up to 2.0% in the form of T2 capital), a 3.0% Pillar II requirement (in the form of CET1), the Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer of 1.0%. The ECB has also provided non-public guidance for an additional Pillar II CET1 buffer. Pillar II add-on capital requirements derive from the context of the SREP, which is a point in time assessment, and are therefore subject to change over time. The final 2019 SREP decision became effective on 1 January 2020.

In accordance with the provisions of the Macroprudential Oversight of Institutions Law of 2015, the CBC is the responsible authority for the designation of banks that are Other Systemically Important Institutions (O-SIIs) and for the setting of the O-SII buffer requirement for these systemically important banks. The Group has been designated as an O-SII and the O-SII buffer currently set by the CBC for the Group is 2%. This buffer is being phased-in gradually, having started from 1 January 2019 at 0.5% and increasing by 0.5% every year thereafter, until being fully implemented (2.0%). In April 2020, the CBC decided to delay the phasing-in (0.5%) of the O-SII buffer on 1 January 2021 and 1 January 2022 by 12 months. Consequently, the O-SII buffer will be fully phased-in on 1 January 2023, instead of 1 January 2022 as originally set.

In November 2020, the Group received communication from the ECB according to which no SREP decision will be issued for the 2020 SREP cycle and that the 2019 SREP will remain in force, hence leaving the Group's capital requirements unchanged, as well as other requirements established by the 2019 SREP decision. The communication follows relevant announcement by the ECB earlier in the year that ECB will be taking a pragmatic approach towards the SREP for the 2020 cycle.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.1 Capital Base (continued)

Further analysis on the recent developments on the regulatory capital ratios due to the COVID-19 outbreak is set out further below under 'Implications on capital from the Outbreak of COVID-19'.

The European Banking Authority (EBA) final guidelines on SREP and supervisory stress testing and the Single Supervisory Mechanism's (SSM) 2018 SREP methodology provide that own funds held for the purposes of Pillar II Guidance cannot be used to meet any other capital requirements (Pillar I, Pillar II requirements or the combined buffer requirement), and therefore cannot be used twice. Following the 2019 SREP decision, the new provisions became effective since January 2020.

Based on the SREP decisions of prior years, the Company and the Bank were under a regulatory prohibition for equity dividend distribution and therefore no dividends were declared or paid during years 2019 and 2018. Following the 2020 SREP communication, the Company and the Bank are still under equity dividend distribution prohibition as the 2019 SREP decision remains in force. 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.

The ECB, as part of its supervisory role, has completed an onsite inspection and review on the value of the Group's foreclosed assets with reference date 30 June 2019. The findings, which relate to a possible prudential charge of up to c.50 bps, are currently being reviewed by the Bank's Joint Supervisory Team and no decision has been communicated to the Bank at this stage. The size and timing of the prudential charge (if any) that the Bank may be requested to take in order to address the findings of this review remain uncertain and will depend in part on the Bank's progress in de-risking its balance sheet.

Share premium reduction

Bank

The Bank, having obtained approval by its shareholders, the ECB and the Court of Cyprus, implemented a capital reduction process in October 2020, which resulted in the reclassification of c.€619 mn of the Bank's share premium balance as distributable reserves. Such reduction of capital will not have any impact on regulatory capital or the total equity position of the Bank or the Group.

The distributable reserves provide the basis for the calculation of distributable items under the Capital Requirements Regulation (EU) No. 575/2013 (CRR), which provides that coupons on AT1 capital instruments may only be funded from distributable items.

Company

The Company (Bank of Cyprus Holdings PLC), following relevant resolution of its shareholders at the May 2020 AGM and subsequent approval by the ECB and the Irish High Court, implemented a capital reduction process in November 2020, which resulted in the reclassification of €700 mn of the Company's share premium balance as distributable reserves. Such capital reduction will not have any impact on regulatory capital or the total equity position of the Company, the Bank or the Group. 

The distributable reserves provide the basis for the calculation of distributable items under the CRR, which provides that coupons on AT1 capital instruments may only be funded from distributable items recognised in the audited full year financial statements. The distributable reserves and distributable items created pursuant to the capital reduction process are expected to be reflected in the audited financial statements for the financial year ended 31 December 2020.

Project Helix 2

In August 2020, the Group signed an agreement for the sale of a portfolio of loans with gross book value of €0.9 bn, known as Project Helix 2. Loan credit losses in relation to the agreement of c.€68 mn, including transaction costs were recognised during 2Q2020. At completion, currently expected in 1H2021, and including the losses recognised in 2Q2020, the transaction is expected to have a negative impact of c.40 bps on the Group's CET1 ratio. Upon the full payment of the deferred consideration and without taking into consideration any positive impact from the earnout, depending on the performance of the portfolio, the transaction is expected to have an overall positive capital impact of c.10 bps on the Group's CET1 ratio.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.1 Capital Base (continued)

Further NPE sales in the future

The Group remains committed to assess the potential to accelerate the decrease in NPEs through further NPE sales in the future and in the context of IFRS 9, the Bank recognised additional loan credit losses of €21 mn in 2Q2020 (compared to nil in 3Q2020 and 1Q2020), resulting in a decrease on the Group's CET1 ratio of c.14 bps in 2Q2020. On completion of an NPE trade, the Group's capital ratios would benefit from any associated RWA reduction, subject to regulatory approval.

Legislative amendments for the conversion of DTA to DTC

Legislative amendments allowing for the conversion of specific deferred tax assets (DTA) into deferred tax credits (DTC) were adopted by the Cyprus Parliament and published in the Official Gazette of the Republic in March 2019. The law amendments cover the utilisation of income tax losses transferred from Laiki Bank to the Bank in March 2013. The introduction of CRD IV in January 2014 and its subsequent phasing-in led to a more capital-intensive treatment of this DTA for the Bank. The law amendments resulted in an improved regulatory capital treatment, under CRR, of the DTA amounting to c.€285 mn or a CET1 uplift of c.190 bps in March 2019.

The Group understands that, 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 is considering the adoption of modifications to the Law, potentially including requirements for an additional annual fee over and above the 1.5% annual guarantee fee already acknowledged, to maintain the conversion of such DTAs into tax credits. In anticipation of such modifications the Group recorded an additional amount of €13 mn in 4Q2019 by way of an estimated additional fee (for the years 2018 and 2019), bringing the total guarantee fee recognised for FY2019 to €19 mn.

The Group, in anticipation of modifications in the Law, acknowledges that such increased annual fee may be required to be recorded on an annual basis until expiration of such losses in 2028. The determination and conditions of such amount will be prescribed in the Law to be amended and the amount determined by the Government on an annual basis. Amendments to the Law will need to be adopted by the Cyprus Parliament and published in the Official Gazette of the Republic for the amendments to be effective. The Group, however, understands that contemplated amendments to the Law may provide that the minimum fee to be charged will be 1.5% of the annual instalment and can range up to a maximum amount of €10 mn per year. The Group estimates that such increased fees could range up to €5.3 mn per year (for each tax year in scope i.e. since 2018) although the Group understands that such fee may fluctuate annually as to be determined by the Ministry of Finance.

Project Helix

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

Sale of investment in CNP Cyprus Insurance Holdings Ltd

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

Voluntary Staff Exit Plan

In October 2019, the Group completed a voluntary staff exit plan (VEP) at a total cost of €81 mn, recorded in the consolidated income statement in 4Q2019, resulting in a negative impact of c.60 bps on both the Group's CET1 and Total Capital ratios. 

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.1 Capital Base (continued)

Implications on capital from the Outbreak of COVID-19

The Group continues to closely monitor developments in, and the effects of COVID-19 on both the global and Cypriot economy. The ECB announced a package of positive measures that should help to support the capital position of the Bank, in order to secure favourable conditions of financing for the economy with the aim to mitigate the effects of the crisis. Specifically, the measures increase the Group's capital base available to absorb potential losses due to the crisis. In addition, the early adoption of CRD V for the composition of the Pillar II Requirement provide flexibility regarding the Group's compliance with the minimum capital requirement of Pillar II.

In the context of the ECB's capital easing measures for COVID-19, the Bank received an amendment to the December 2019 SREP decision effective as of 12 March 2020, reducing the Group's minimum phased-in CET1 capital ratio to 9.7%. In addition, the ECB announced that banks are temporarily allowed to operate below the level of Pillar II Guidance (P2G), the capital conservation buffer (CCB) and the countercyclical buffer. The CBC has set the level of the countercyclical buffer for Cyprus at 0% for the years 2020 and 2019. In July 2020, the ECB committed to allow banks to operate below the P2G and the combined buffer requirement until at least end of 2022, without automatically triggering supervisory actions.

In addition, in April 2020, the CBC decided to delay the phasing-in of the O-SII buffer. Further details are given above.

In June 2020, Regulation (EU) 2020/873, in response to the COVID-19 pandemic, came into force, bringing forward some of the capital-relieving measures that were due to come into force at a later stage and introducing modifications as part of the wider efforts of competent authorities to provide the support necessary to the institutions. The main amendments affecting the Group's own funds relate to the acceleration of the implementation of the new SME discount factor under CRR II introduced in June 2020, instead of June 2021, extending the IFRS 9 transitional arrangements and introducing further relief measures to CET1, advancing the application of prudential treatment of software assets as amended by CRR II, and introducing temporary treatment of unrealized gains and losses to exposures to central governments, regional governments or local authorities, measured at fair value through other comprehensive income.

With respect to the SME discount factor, banks will be required to hold less capital against SMEs as revised capital discount factors come into effect. These changes became effective in June 2020 and added 44 bps to capital as at 30 June 2020.

The amendments to the existing IFRS 9 transitional arrangements relate to the extension of the transitional period for the recalculation of the transitional adjustment on credit losses on Stages 1 and 2 loans (dynamic component). A 100% add back of IFRS 9 provisions is allowed for the years 2020 and 2021 reducing to 75% in 2022, to 50% in 2023 and to 25% in 2024. The calculation at each reporting period is to be made against Stage 1 and Stage 2 provisions as at 1 January 2020, instead of 1 January 2018. The calculation of the static component has not been amended. These amendments became effective in June 2020 and added 11 bps to capital as at 30 September 2020.

In relation to the prudential treatment of intangibles, software assets will no longer need to be deducted in full in CET1 calculations, subject to certain criteria. The relevant technical standards have been issued by the EBA and need to be adopted by the European Commission, expected in 4Q2020.

Finally, institutions may remove from the calculation of their CET1 the amount of unrealised gains and losses accumulated since 31 December 2019 accounted for as 'fair value changes of debt instruments measured at fair value through other comprehensive income' in the balance sheet, corresponding to exposures to central governments, to regional governments or to local authorities and to public sector entities, excluding those financial assets that are credit-impaired, subject to a scaling factor set at 100% from January to December 2020, at 70% from January to December 2021 and at 40% from January to December 2022. The Bank applies the temporary relief as of 3Q2020 and contributed 6 bps to capital as at 30 September 2020.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.2. Regulations and Directives

A.1.2.1 Revised rules on capital and liquidity (CRR II and CRD V)

On 27 June 2019, the revised rules on capital and liquidity (CRR II and CRD V) came into force. As an amending regulation, the existing provisions of CRR apply, unless they are amended by CRR II. Member states are required to transpose the CRD V into national law. Certain provisions took immediate effect (primarily relating to Minimum Requirement for Own Funds and Eligible Liabilities, MREL), but most changes will start to apply from mid-2021. Certain aspects of CRR II are dependent on final technical standards to be issued by the EBA and adopted by the European Commission. The key changes introduced consist of, among others, changes to qualifying criteria for CET1, AT1 and Tier 2 instruments, introduction of requirements for MREL and a binding Leverage Ratio requirement and a Net Stable Funding Ratio (NSFR). 

A.1.2.2 Bank Recovery and Resolution Directive (BRRD)

Minimum Requirement for Own Funds and Eligible Liabilities (MREL)

The Bank Recovery and Resolution Directive (BRRD) requires that from January 2016 EU member states shall apply the BRRD's provisions requiring EU credit institutions and certain investment firms to maintain a minimum requirement for own funds and eligible liabilities (MREL), subject to the provisions of the Commission Delegated Regulation (EU) 2016/1450. On 27 June 2019, as part of the reform package for strengthening the resilience and resolvability of European banks, the BRRD ΙΙ came into effect and must be transposed into national law. 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 May 2020, the Bank received formal notification from the CBC in its capacity as National Resolution Authority, of the final decision by the Single Resolution Board (SRB), for the binding minimum requirement for own funds and eligible liabilities (MREL) for the Bank, determined as the preferred resolution point of entry. The MREL requirement was set at 28.36% of risk weighted assets as of 30 June 2019 and must be met by 31 December 2025. This MREL requirement would be equivalent to 18.54% of total liabilities and own funds (TLOF) as at 30 June 2019. The MREL requirement is in line with the Bank's expectations, and largely in line with its funding plans.

This decision is based on the current legislation, is expected to be updated annually and could be subject to subsequent changes by the resolution authorities, especially considering that next year's decision will be under the BRRD II, which among others may affect the quantum of the MREL requirement, the final compliance period and the subordination requirements, and is expected to impose a binding interim target for 1 January 2022.

The MREL ratio of the Bank as at 30 September 2020, calculated according to SRB's eligibility criteria currently in effect and based on the Bank's internal estimate, stood at 18.55% of RWAs.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.3 Funding and Liquidity

Funding

Funding from Central Banks

At 30 September 2020, the Bank's funding from central banks amounted to €997 mn, which relates to ECB funding, comprising solely of funding through the Targeted Longer-Term Refinancing Operations (TLTRO III) (compared to no funding from central banks as at 31 December 2019). In June 2020, the Bank borrowed €1 bn from the fourth TLTRO III operation, despite its comfortable liquidity position, given the favourable borrowing rate, in combination with the relaxation of collateral terms.

Deposits 

Customer deposits totalled €16,384 mn at 30 September 2020 (compared to €16,303 mn at 30 June 2020 and €16,692 mn at 31 December 2019), remaining broadly flat in the third quarter and reduced by 2% since the year end.

The Bank's deposit market share in Cyprus reached 35.0% as at 30 September 2020, at similar levels as at 30 June 2020 and 31 December 2019. Customer deposits accounted for 76% of total assets and 85% of total liabilities at 30 September 2020 (compared to 79% of total assets and 89% of total liabilities at 31 December 2019).

The net Loans to Deposit ratio (L/D) stood at 63% as at 30 September 2020 (compared to 64% as at 30 June 2020 and 31 December 2019). The L/D ratio had reached a peak of 151% as at 31 March 2014. 

Subordinated Loan Stock

At 30 September 2020 the Bank's subordinated loan stock (including accrued interest) amounted to €267 mn (compared to €261 mn at 30 June 2020 and €272 mn at 31 December 2019) and relates to unsecured subordinated Tier 2 Capital Notes of nominal value €250 mn, issued by the Bank in January 2017.

Liquidity

At 30 September 2020 the Group Liquidity Coverage Ratio (LCR) stood at 256% (compared to 257% at 30 June 2020 and 208% at 31 December 2019), in compliance with the minimum regulatory requirement of 100%. 

The liquidity surplus in LCR at 30 September 2020 amounted to €4.1 bn (compared to €3.9 bn at 30 June 2020 and €3.2 bn at 31 December 2019). The increase in 9M2020 is driven mainly by the borrowing of €1 bn TLTRO III in June 2020.

The Net Stable Funding Ratio (NSFR) has not yet been introduced. It will be enforced as a regulatory ratio under CRR II in 2021, with the limit set at 100%. At 30 September 2020, the Group's NSFR, on the basis of Basel ΙΙΙ standards, stood at 135% (compared to 134% at 30 June 2020 and 127% at 31 December 2019).

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.3 Funding and Liquidity (continued)

Regulatory measures to mitigate the impact of COVID-19 crisis on banks' liquidity position

Resulting from the outbreak of COVID-19, the ECB has adopted a broad set of policy measures to mitigate the economic impact of the crisis and to ensure that its directly supervised banks can continue to fulfil their role in funding the real economy. The main measures which have a direct or indirect impact on the liquidity position of banks are summarised below:

· The ECB allows banks to operate below the defined level of 100% of the LCR until at least end-2021.

· Collateral easing measures: The package included a set of collateral easing measures, which resulted in increasing the banks' borrowing capacity at the ECB operations and improving the liquidity buffers due to the lower haircuts applied to the ECB eligible collaterals the bank holds, that consist of bonds and Additional Credit Claims (ACC). The collateral easing packages are designed mainly as temporary measures, that will remain in place until September 2021 with the flexibility to be extended or modified. Furthermore, the ECB enlarged the scope of the ACC framework, increasing the universe of eligible loans. In addition, the ECB announced changes in collateral rules, temporarily accepting collaterals with a rating below investment grade, up to a certain rating level.

· Favourable terms of LTRO operations: the package contained measures to provide liquidity support to the euro area financial system, such as a series of LTROs which ran from March to June 2020 so participants could shift their outstanding LTRO amounts to TLTRO III, as well as significant favourable amendments in the terms and characteristics of TLTRO III. Furthermore, a new series of additional longer-term refinancing operations, called Pandemic Emergency longer-term refinancing operations (PELTROs), were introduced with an interest rate of 25 basis points below the average rate applied in the Eurosystem's main refinancing operations (currently 0%) over the life of the respective PELTROs that are maturing in the third quarter of 2021.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.4 Loans

Group gross loans totalled €12,309 mn at 30 September 2020, compared to €12,491 mn at 30 June 2020 and €12,822 mn at 31 December 2019. Gross loans of the Group's Cyprus operations totalled €12,237 mn at 30 September 2020 accounting for 99% of Group gross loans. Pro forma for Helix 2, gross loans are reduced by €882 mn to €11,427 mn as at 30 September 2020.

New loans granted in Cyprus reached €977 mn for 9M2020, compared to €1,602 mn for 9M2019, down by 39% yoy, impacted by the outbreak of COVID-19. New loans granted in Cyprus reached €288 mn for 3Q2020, compared to €238 mn for 2Q2020 (up by 21% qoq) and to €491 mn for 3Q2019 (down by 41% yoy). The qoq increase reflects demand for new loans picking up post lockdown, driven by retail housing loans.

At 30 September 2020, the Group net loans and advances to customers totalled €10,047 mn (compared to €10,104 mn at 30 June 2020 and €10,722 mn at 31 December 2019). In addition, at 30 September 2020 net loans and advances to customers of €349 mn were classified as held for sale in line with IFRS 5 and relate to Project Helix 2 (€340 mn) and Helix Tail (€9 mn), compared to €362 mn as at 30 June 2020 relating to Project Helix 2 (€352 mn) and Helix Tail (€10 mn) and to €26 mn as at 31 December 2019 relating to Helix Tail and Velocity 2.

The Bank is the single largest credit provider in Cyprus with a market share of 41.5% at 30 September 2020, compared to 41.7% at 30 June 2020 and to 41.1% at 31 December 2019.

A.1.5 Loan portfolio quality

Tackling the Group's loan portfolio quality remains a top priority for management. The Group has continued to make steady progress across all asset quality metrics and the loan restructuring activity has continued despite challenges brought upon by COVID-19. The Group has been successful in engineering restructuring solutions across the spectrum of its loan portfolio.

Non-performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced by €230 mn or 7% during 3Q2020, compared to a reduction of €270 mn in 2Q2020 (comprising an organic reduction of NPEs of €137 mn and a reduction through the completion of Project Velocity 2 of €133 mn) despite the COVID-19 lockdown in March 2020, to €3,238 mn at 30 September 2020 (compared to €3,468 mn at 30 June 2020 and €3,880 mn at 31 December 2019). The Group has recorded organic NPE reductions for twenty-two consecutive quarters. Pro forma for Helix 2, NPEs are reduced by a further €864 mn to €2,374 mn on the basis of 30 September 2020 figures.

The NPEs account for 26% of gross loans as at 30 September 2020, compared to 28% as at 30 June 2020 and 30% at 31 December 2019, on the same basis, i.e. including the NPE portfolios classified as "Non-current assets and disposal groups held for sale". Pro forma for Helix 2 the NPE ratio is reduced to 21% on the basis of 30 September 2020 figures.

The NPE coverage ratio improved to 60% at 30 September 2020, compared to 59% at 30 June 2020 and 54% at 31 December 2019, on the same basis, i.e. including the NPE portfolios classified as "Non-current assets and disposal groups held for sale". When taking into account tangible collateral at fair value, NPEs are fully covered. Pro forma for Helix 2 the NPE coverage ratio is reduced to 59% on the basis of 30 September 2020 figures.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.5 Loan portfolio quality (continued)

Project Helix 2

In August 2020, the Group signed an agreement for the sale of a portfolio of loans with gross book value of c.€898 mn (of which €886 mn related to non-performing exposures) as at 30 June 2020, known as Project Helix 2. This portfolio had a contractual balance of €1.46 bn as at the reference date of 30 September 2019 and comprises mainly retail and small-to-medium-sized enterprises, secured by real estate collateral. This portfolio is classified as a disposal group held for sale since 30 June 2020 and it includes other assets (comprising properties and cash already received since the reference date) amounting to c.€34 mn as at 30 June 2020.

The gross consideration amounts to 46% of the gross book value as at 30 June 2020 and 29% of the contractual balance, payable in cash, of which 35% is payable at completion, currently expected in 1H2021, and the remaining 65% is deferred without any conditions attached. The deferred component is payable in three broadly equal instalments over 48 months from completion. The consideration can be increased through an earnout arrangement, depending on the performance of the portfolio.

This portfolio will be transferred to a licensed Cypriot Credit Acquiring Company (the "CyCAC") by the Bank. The shares of the CyCAC will then be acquired by certain funds affiliated with Pacific Investment Management Company LLC (PIMCO), the purchaser of the portfolio.

Following a transitional period where servicing will be retained by the Bank, it is intended that the servicing of the portfolio will be carried out by a third party servicer selected and appointed by the CyCAC. Arrangements in relation to the migration of servicing from the Bank to the servicer, including the timing of the migration, remain under discussion between the parties.

Project Helix 2 accelerates the Group's strategy of de-risking its balance sheet, by reducing its stock of NPEs by 27% to €2,374 mn pro forma on the basis of the 30 September 2020 figures, and its NPE ratio by 5 p.p., to 21% pro forma on the basis of the 30 September 2020 figures.

Project Velocity 2

In May 2020, the Group completed the sale of a non-performing loan portfolio of primarily retail unsecured exposures, with a contractual balance of €398 mn and gross book value of €144 mn as at the reference date of 31 August 2019 (known as Project Velocity 2) to B2Kapital Cyprus Ltd. This portfolio comprised c.10.000 borrowers, including c.8.400 private individuals and c.1.600 small-to-medium-sized enterprises. The gross book value of this portfolio as at the date of disposal was €133 mn. The sale was broadly neutral to both the profit and loss and to capital.

Project Helix

In June 2019, the Group announced the completion of Project Helix, that refers to the sale of a portfolio of loans with a gross book value of €2.8 bn (of which €2.7 bn related to non-performing loans) secured by real estate collateral to certain funds affiliated with Apollo Global Management LLC, the agreement of which was announced on 28 August 2018. Cash consideration of c.€1.2 bn was received on completion, reflecting adjustments resulting from, inter alia, loan repayments received on the Helix portfolio since the reference date of 31 March 2018. The participation of the Bank in the senior debt in relation to financing the transaction was syndicated down from the initial level of €450 mn to c.€45 mn, representing c.4% of the total acquisition funding. Upon completion, the NPE ratio was reduced by c.11 p.p. to 33% as at 30 June 2019, c.70% lower than its peak in 2014.

Project Velocity 1

In June 2019, the Group completed the sale of a non-performing loan portfolio of primarily retail unsecured exposures, with a contractual balance of €245 mn and a gross book value of €34 mn as at the reference date of 30 September 2018 (known as Project Velocity 1) to APS Delta s.r.o. This portfolio comprised 9,700 heavily delinquent borrowers, including 8,800 private individuals and 900 small-to-medium-sized enterprises. The gross book value of this portfolio as at the date of disposal was €30 mn. The sale was broadly neutral to both the profit and loss and to capital.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.5 Loan portfolio quality (continued)

ESTIA

In July 2018 the Government announced a scheme aimed at addressing NPEs backed by primary residence, known as ESTIA (the 'Scheme'). Approximately one thousand completed applications were received corresponding to retail core NPEs of c.€250 mn. The Scheme is expected to resolve c.€93 mn of these NPEs, to identify non-viable customers for which alternative restructuring solutions are being considered (including by the Government) corresponding to c.€96 mn of these NPEs, and to facilitate the resolution of the remaining customers, mainly by focusing on realising collateral through consensual and non-consensual foreclosures. All figures are as per the latest available data in November 2020.

Additional strategies to accelerate de-risking

The Group remains committed to assess the potential to accelerate the decrease in NPEs through further NPE sales in the future and in the context of IFRS 9, other than the loan credit losses of €68 mn recorded in 2Q2020 for Project Helix 2, the Bank recognised additional loan credit losses of €21 mn in 2Q2020 as a result of potential further NPE sales in the future. In December 2019, additional loan credit losses of €75 mn had been recognised as a result of the anticipated balance sheet de-risking at the time.

As at 30 September 2020, a portfolio of credit facilities related to Project Helix of mainly secured non-performing exposures (known as 'Helix Tail') with gross book value of €37 mn (compared to €44 mn as at 30 June 2020 and €46 mn as at 31 December 2019), was classified as a disposal group held for sale.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.6 Real Estate Management Unit (REMU)

The Real Estate Management Unit (REMU) on-boarded €74 mn of assets in 9M2020 (down by 53% yoy), via the execution of debt for asset swaps and repossessed properties. The focus for REMU has shifted from on-boarding of assets resulting from debt for asset swaps towards the disposal of these assets. The Group completed organic disposals of €48 mn in 9M2020 (compared to €159 mn in 9M2019), resulting in a profit on disposal of €6 mn for 9M2020 (compared to a profit on disposal of €26 mn for 9M2019).

During the nine months ended 30 September 2020, the Group executed sale-purchase agreements (SPAs) for disposals with contract value of €56 mn (320 properties), compared to €195 mn (433 properties) for 9M2019, excluding the sale of Cyreit. In addition, the Group had signed SPAs for disposals of assets with contract value of €54 mn as at 30 September 2020, compared to €53 mn as at 30 June 2020 and €65 mn as at 30 September 2019.

Project Helix 2

Stock of property with a carrying value of €11 mn as at 30 September 2020 and as at 30 June 2020 is classified as non-current assets and disposal groups held for sale as it is included in the Helix 2 portfolio.

Completion of sale of Cyreit

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

Completion of Project Helix

With the completion of Project Helix in 2Q2019, properties with a carrying value of €109 mn, in the Project Helix portfolio, were derecognised as of 30 June 2019.

Assets held by REMU

As at 30 September 2020, assets held by REMU had a carrying value of €1,467 mn (comprising properties of €1,358 mn classified as 'Stock of property' and €109 mn as 'Investment properties'), compared to €1,456 mn as at 30 June 2020 (comprising properties of €1,344 mn classified as 'Stock of property' and €112 mn as 'Investment properties') and to €1,490 mn as at 31 December 2019 (comprising properties of €1,378 mn classified as 'Stock of property' and €112 mn as 'Investment properties').

In addition to assets held by REMU, properties classified as 'Investment properties' with carrying value of €21 mn as at 30 September 2020 (compared to €23 mn as at 30 June 2020 and to €24 mn as at 31 December 2019), relate to legacy properties held by the Bank before the set-up of REMU in January 2016.

A. Group Financial Results - Underlying Basis (continued)

A.1. Balance Sheet Analysis (continued)

A.1.6 Real Estate Management Unit (REMU) (continued)

A.1.7 Non-core overseas exposures

The remaining non-core overseas net exposures (including both on-balance sheet and off-balance sheet exposures) at 30 September 2020 are as follows:

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

In addition to the above, as at 30 September 2020, there were overseas exposures of €270 mn in Greece, relating to both loans and properties (compared to €269 mn at 30 June 2020 and to €265 mn at 31 December 2019), not identified as non-core exposures, since they are considered by management as exposures arising in the normal course of business.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis

A.2.1 Total income

Net interest income (NII) and net interest margin (NIM) for 9M2020 amounted to €250 mn and 1.87% respectively, down by 4% year on year, mainly due to the lower volume of new loans. NII and NIM for 3Q2020 amounted to €82 mn (compared to €83 mn for 2Q2020) and 1.79% (compared to 1.88% for 2Q2020) respectively.

Average interest earning assets for 9M2020 amounted to €17,865 mn, down by 1% yoy, mainly driven by the reduction in net loans. Quarterly average interest earning assets for 3Q2020 amounted to €18,191 mn, compared to €17,690 mn for 2Q2020 (up by 3% qoq), following the increase of liquid assets resulting from the participation in TLTRO III in June 2020, partly offset by the reduction in net loans.

Non-interest income for 9M2020 amounted to €175 mn (compared to €235 mn in 9M2019, down by 25% yoy), comprising net fee and commission income of €106 mn, net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates of €14 mn, net insurance income of €42 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 €11 mn. Non-interest income for 3Q2020 amounted to €55 mn (compared to €60 mn for 2Q2020) down by 9% qoq, negatively impacted by lower insurance fees and revaluation loss on financial instruments, partly offset by an increase in net fees and commission income.

Net fee and commission income for 9M2020 amounted to €106 mn, compared to €111 mn for 9M2019, reflecting the COVID-19 lockdown in 1H2020. Net fee and commission income for 3Q2020 amounted to €35 mn, compared to €33 mn for 2Q2020, as transactional volumes gradually recovered post the COVID-19 lockdown.

Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates of €14 mn for 9M2020 (comprising net foreign exchange gains of €15 mn and net revaluation losses on financial instrument transactions of €1 mn) decreased by 59% yoy. The yoy decrease is mainly driven by lower net revaluation gains and lower net foreign exchange gains in 9M2020. Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates of €2 mn for 3Q2020 (comprising net foreign exchange gains of €4 mn and net revaluation losses on financial instrument transactions of €2 mn) decreased by 76% qoq, driven by higher revaluation loss on financial instruments in 3Q2020 (c.€7 mn) and higher net foreign exchange gains.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.1 Total income (continued)

Net insurance income of €42 mn for 9M2020, remained flat yoy. Net insurance income of €13 mn for 3Q2020, compared to €18 mn for 2Q2020 (down by 28% qoq), mainly due to lower claims in 2Q2020 as a result of the lockdown and lower management fee income from unit-linked funds in 3Q2020 reflecting the performance of the market.

Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties for 9M2020 amounted to €2 mn (comprising a profit on disposal of stock of properties of €6 mn and loss from revaluation of investment properties of €4 mn), compared to €26 mn in 9M2019, impacted by the COVID-19 lockdown. Net gains from revaluation and disposal of investment properties and on disposal of stock of properties for 3Q2020 amounted to €2 mn (compared to net losses of €1 mn in 2Q2020), as sales volume gradually picked up in 3Q2020 post COVID-19 lockdown. REMU profit remains volatile.

Total income for 9M2020 amounted to €425 mn, compared to €495 mn for 9M2019 (down by 14% yoy). Total income for 3Q2020 amounted to €137 mn, compared to €143 mn for 2Q2020.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.2 Total expenses

Total expenses for 9M2020 were €273 mn (compared to €307 mn for 9M2019 and down by 11% yoy), 53% of which related to staff costs (€145 mn), 38% to other operating expenses (€104 mn) and 9% (€24 mn) to special levy and contributions to Single Resolution Fund (SRF) and Deposit Guarantee Fund (DGF). The yoy decrease is driven by lower other operating expenses and lower staff costs.

Total operating expenses for 9M2020 were €249 mn, compared to €289 mn for 9M2019 (down by 13% yoy). Total operating expenses for 3Q2020 were €84 mn, compared to €81 mn for 2Q2020 (up by 4% qoq).

Staff costs of €145 mn for 9M2020 decreased by 12% yoy (compared to €167 mn in 9M2019), mainly driven by cost savings following the completion of the voluntary staff exit plan (VEP) in 4Q2019, through which c.11% of the Group's full-time employees were approved to leave at a total cost of €81 mn, recorded in the consolidated income statement in 4Q2019. The annual savings net of the impact from the renewal of the collective agreement for 2019 and 2020, are estimated at €23 mn or 11% of staff costs. Staff costs of €49 mn for 3Q2020 increased by 5% qoq (compared to €47 mn in 2Q2020), following the normalisation of staff costs post COVID-19 lockdown measures in 2Q2020 (special annual leaves to vulnerable groups and suspension of the contribution to the national health system).

The Group employed 3,577 persons as at 30 September 2020 (compared to 3,579 as at 30 June 2020 and 3,672 as at 31 December 2019, including c.100 persons relating to Project Helix who were transferred to the buyer upon full migration in January 2020). The staff costs related to these persons are included under 'Provisions/net loss relating to NPE sales, including restructuring expenses' in the underlying basis.

Other operating expenses for 9M2020 were €104 mn, decreased by 15% yoy from €122 mn in 9M2019, mainly due to lower consultancy, marketing and property-related expenses in 9M2020. Other operating expenses for 3Q2020 were €35 mn, at similar levels as 2Q2020.

Special levy and contributions to Single Resolution Fund (SRF) and Deposit Guarantee Fund (DGF) for 9M2020 was €24 mn, compared to €18 mn in 9M2019 (increased by 28% yoy). Special levy and contributions to Single Resolution Fund (SRF) and Deposit Guarantee Fund (DGF) for 3Q2020 was €9 mn, compared to €6 mn in 2Q2020 (increased by 42% qoq). The increase of €6 mn yoy and of €3 mn qoq is driven by the contribution of the Bank to the Deposit Guarantee Fund (DGF) of which €3 mn relates to 1H2020 and €3 mn relates to 2H2020 and is recorded in 1Q2020 and 3Q2020 respectively, in line with IFRSs.

As from 1 January 2020 and until 3 July 2024 the Bank is subject to contribution to the Deposit Guarantee Fund (DGF) on a semi-annual basis. The contributions are calculated based on the Risk Based Methodology (RBM) as approved by the management committee of the Deposit Guarantee and Resolution of Credit and Other Institutions Schemes (DGS) and is publicly available on the CBC's website. In line with the RBM, the contributions are broadly calculated on the covered deposits of all authorised institutions and the target level is to reach at 0.8% of these deposits by 3 July 2024.

The cost to income ratio excluding special levy and contributions to Single Resolution Fund (SRF) and Deposit Guarantee Fund (DGF) for 9M2020 was 59%, broadly flat yoy. The cost to income ratio excluding special levy and contributions to SRF and DGF for 3Q2020 was 62%, compared to 57% in 2Q2020, reflecting a 4% qoq increase in total operating expenses and a 5% qoq decrease in total income.

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.3 (Loss)/profit before tax and non-recurring items

Operating profit for 9M2020 was €152 mn, compared to €188 mn for 9M2019, down by 19% yoy. Operating profit for 3Q2020 was €44 mn, compared to €56 mn for 2Q2020, down by 23% qoq, reflecting a 7% qoq increase in total expenses and a 5% qoq decrease in total income.

The loan credit losses for 9M2020 totalled €118 mn, broadly flat yoy. The loan credit losses for 3Q2020 totalled €31 mn, compared to €23 mn for 2Q2020 (up by 28% qoq). Regarding the economic effects of COVID-19, the impact of IFRS 9 Forward Looking Information (FLI) driven by the deterioration of the macroeconomic outlook, resulted in a €5 mn charge included in 3Q2020 loan credit losses (compared to charges of €10 mn and €28 mn included in 2Q2020 and 1Q2020 loan credit losses respectively).

The annualised loan credit losses charge (cost of risk) for 9M2020 accounted for 1.25% of gross loans, of which 45 bps reflect the deterioration of the macroeconomic outlook in 9M2020 (compared to an annualised loan credit losses charge of 1.19% for 9M2019).

At 30 September 2020, the allowance for expected loan credit losses, including residual fair value adjustment on initial recognition and credit losses on off-balance sheet exposures totalled €1,933 mn (compared to €2,043 mn at 30 June 2020 and €2,096 mn at 31 December 2019) and accounted for 15.7% of gross loans (compared to 16.4% at 30 June 2020 and 16.3% at 31 December 2019). The decrease in the allowance for expected loan credit losses in 3Q2020 amounted to €110 mn (compared to a decrease of €66 mn in 2Q2020).

Impairments of other financial and non-financial assets for 9M2020 amounted to €36 mn (compared to €9 mn for 9M2019) and for 3Q2020 to €7 mn (compared to €25 mn for 2Q2020). The increased impairments in 2Q2020 related mainly to specific, large, illiquid REMU properties.

Provisions for litigation, claims, regulatory and other matters for 9M2020 totalled €4 mn, compared to €3 mn for 9M2019. Provisions for litigation, claims, regulatory and other matters for 3Q2020 were nil, compared to €2 mn for 2Q2020. 

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.4 (Loss)/profit after tax (attributable to the owners of the Company)

The tax charge for 9M2020 is €7 mn, compared to €1 mn for 9M2019. The tax charge for 3Q2020 is €2 mn, compared to €3 mn for 2Q2020.

Loss after tax and before non-recurring items (attributable to the owners of the Company) for 9M2020 was €9 mn, compared to a profit of €56 mn for 9M2019. Profit after tax and before non-recurring items (attributable to the owners of the Company) for 3Q2020 was €4 mn, compared to a profit of €7 mn for 2Q2020.

Advisory and other restructuring costs - organic for 9M2020 amounted to €9 mn, compared to €14 mn for 9M2019. Advisory and other restructuring costs - organic for 3Q2020 amounted to €3 mn, at the same level as for 2Q2020.

Loss after tax arising from the organic operations (attributable to the owners of the Company) for 9M2020 amounted to €18 mn, compared to a profit of €42 mn for 9M2019. Profit after tax arising from the organic operations (attributable to the owners of the Company) for 3Q2020 amounted to €1 mn, compared to €4 mn for 2Q2020.

Provisions/net loss relating to NPE sales, including restructuring expenses for 9M2020 amounts to €104 mn (compared to €6 mn for 9M2019) and for 3Q2020 amounts to a reversal of provisions of €3 mn (compared to provisions/net loss of €104 mn for 2Q2020). The amount of €104 mn for 2Q2020 included mainly the loan credit losses in relation to the then anticipated Project Helix 2 agreement of €68 mn and additional loan credit losses of €21 mn as a result of potential further NPE sales in the future. Restructuring costs relating to NPE sales of €1 mn for 2Q2020 were also included (Nil for 3Q2020).

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

A. Group Financial Results - Underlying Basis (continued)

A.2. Income Statement Analysis (continued)

A.2.4 (Loss)/profit after tax (attributable to the owners of the Company) (continued)

The reversal of impairment of DTA and impairment of other tax receivables totalled €101 mn for 9M2019, comprising the net positive impact of €109 mn following amendments to the Income Tax legislation in Cyprus adopted in March 2019, and an impairment of €8 mn relating to Greek tax receivables adversely impacted from legislative changes. The carrying value of the remaining receivable as at 30 September 2020 was €5 mn (compared to €5 mn as at 30 June 2020 and 31 December 2019).

Loss after tax attributable to the owners of the Company for 9M2020 was €122 mn, compared to a profit of €116 mn for 9M2019. Profit after tax attributable to the owners of the Company for 3Q2020 was €4 mn, compared to a loss of €100 mn for 2Q2020.

B. Operating Environment

The COVID-19 pandemic is having a significant adverse effect on the global economy with economic contraction only moderated by aggressive monetary and fiscal policies. An effective vaccine, however, and latest news in this area are encouraging, will allow a return to normality much more quickly and change the economic outlook. Public finances will remain strained, and economies by and large, will exhibit low growth amidst low inflation and rising debt levels until the pandemic is brought under control.

According to the IMF's World Economic Outlook (Autumn 2020), the global economy in 2020 will contract by 4.2% when the world effects of the pandemic will be felt the most. Global disruptions will be significant and global trade will drop. Real GDP will contract across all regions in 2020, but more importantly so in the advanced economies and the Euro Area, than in emerging and developing economies. In the US, output is expected to contract by 4.3% compared with marginally positive growth expected in China.

The eurozone economy recorded a steep collapse in the first half of 2020 wiping out all growth since the global financial crisis. Italy, Portugal, Spain and France were hit the worst. Northern core countries like Germany, the Netherlands, Austria and Denmark were less affected. There has been a substantial recovery in the third quarter, but output is still declining on a year-on-year basis.

Cyprus' economic recovery following the crisis of 2012-2014 has been relatively solid. Real GDP expanded by 4.6% annually on average in the period 2015-2019, and unemployment dropped to 6.7% seasonally adjusted, in the fourth quarter of 2019. The COVID-19 pandemic is having a severe impact on economic activity particularly in sectors that are more open to international travel and trade. Tourist activity has been most affected. Total arrivals in the year to September 2020 for which actual data is available dropped by 84% from a year earlier and revenues by 87% through to August 2020. Real GDP dropped by 12.3% in the second quarter and by 4.4% in the third, after rising by 1.5% in the first quarter and by 3.1% in the whole of 2019. In addition to tourism, the contraction was driven by the trade and transport, manufacturing and the construction sectors.

On the expenditure side the contraction was driven by a steep drop in fixed investment, and to a lesser extent by a drop also in private consumption. Exports of goods and services also dropped steeply. The contraction was moderated by higher government consumption and by a steep drop in imports.

Real GDP is estimated to contract by 6.2% in 2020 and to recover by 3.7% and by 3% respectively in 2021 and 2022 according to the European Commission (European Forecasts, Autumn 2020). Economic activity is expected to be rebounding from the third quarter of 2020, but the pace of recovery will be constrained by Cyprus' heavy dependence on the travel and tourism sectors which will continue to face disruption until an effective vaccine is produced.

Unemployment which stood at 7% in the second quarter of the year (Eurostat) was contained by the Government's jobs protection schemes and business subsidies, but it might rise moderately in 2021 as support schemes are scaled back. Weak consumer confidence, moderately higher unemployment rate and lower wages combined are expected to limit private consumption at a slower pace than for output overall. Private consumption is expected to recover as confidence improves. Public consumption is also expected to moderate in 2021, following a steep rise in 2020 that reflected the Government's substantial fiscal response to the COVID-19 pandemic.

Gross fixed investment is influenced by ship registrations and de-registrations and so tends to be highly volatile from quarter to quarter. However, the decline in construction activity in the year and the uncertainty that prevailed led to a significant contraction in fixed investment. As uncertainty is reduced and as existing multi-year projects are revived, particularly in the tourism sector, fixed investment is expected to rise.

The termination of the investor citizenship scheme is expected to reduce demand for high-end residences, and thus may have a modest adverse effect on the building part of fixed investment. The scheme in itself was beneficial for the Cyprus economy mostly for its indirect effects on macroeconomic stabilisation. Its direct growth contribution was positive but modest. Economic conditions are now significantly different than when the investor for citizenship scheme was introduced.

Consumer inflation was moderate in the first quarter of the year and turned negative in the remainder of the year to October 2020. In total for the ten months, consumer prices declined by 0.7% reflecting weak domestic demand, lower energy prices in world markets, and the cut to the VAT rate for the tourism sector in July-December 2020. Consumer inflation will likely remain around current levels or a little lower for the remainder of the year. The current monetary and fiscal stimulus are not expected to feed into higher prices as people are still saving more and spending less. However, as the economy starts to emerge from recession in 2021, and as energy prices start to strengthen, inflation is expected to pick up gradually.

The current account balance is expected to deteriorate in 2020 as the services and incomes surplus shrinks sharply and the trade deficit narrows only modestly. The collapse of travel and transport earnings are causing a steep drop in the services surplus. The current account imbalance is expected to narrow from 2021 onwards as service earnings start to recover and EU recovery funds are credited in the secondary income account. Oil prices will likely be rising in the medium term, but remain low by the standards of recent years, thus helping to restrict the trade deficit relative to GDP.

B. Operating Environment (continued)

Cyprus recorded a fiscal surplus of 1.5% of GDP in 2019, which reduced the debt-to-GDP ratio to 94% from 99.2% at the end of 2018. The outbreak of the COVID-19 pandemic and the measures introduced to contain it and support companies and employment, are expected to push the budget into deficit which is expected to be substantial. Spending will be significantly higher in the year and tax revenues will be lower amidst the deep recession. As a result, the general government budget is expected to post a significant deficit of about 6.1% of GDP according to the European Commission and the debt to rise to 112.6% of GDP. The budget deficit is expected to contract in 2021-2022 as the economy strengthens and the Government scales back spending as a share of GDP. Also, the public debt ratio is expected to start to decline from 2021 onwards.

The potential realisation of contingent liabilities is a risk to public finances, in particular the large exposure of the state to the implementation of the National Health System (NHS). Other risks stem from the explicit contingent liabilities of the state through the asset protection schemes provided to Hellenic Bank in the context of the sale and dissolution of the Cooperative Central Bank in 2018.

The ECB has been overly accommodative since the global financial crisis of 2008 and particularly after 2012 to preserve the currency union. In response to the COVID-19 crisis, the ECB extended its quantitative easing programme and negative interest rates, and introduced additional measures, most importantly the Pandemic Emergency Purchase Programme (PEPP). This programme was initiated in March 2020 with an initial size of €750 bn and has been increased to €1.35 trillion in June 2020 and extended until at least mid-2021. The maturing principal payments from securities purchased under the PEPP will be reinvested until at least the end of 2022. The ECB also maintains ample liquidity in the banking system through its refinancing operations, but also by easing the rules around collateral that banks can use in exchange for central bank liquidity. The ECB is strongly committed to preventing financial fragmentation in the eurozone which keeps funding costs low and minimises the risk of a sovereign debt crisis in highly leveraged economies. The ECB is therefore the lender of last resort, but the size of the current crisis requires large scale fiscal intervention by governments and EU-led regional transfers.

In April 2020, the EU introduced a significant fiscal programme totalling €540 bn. This consisted of the European Stability Mechanism (ESM) Pandemic crisis support for €240 bn; the European Investment Bank (EIB) guarantee fund for loans to SMEs for €200 bn; and the SURE employment support for €100 bn.

In July 2020, following three days of intense negotiations, the governments of the 27 member states of the European Union reached an agreement on the initial proposals of the European Commission for a COVID-19 recovery programme. This consists of a €750 bn fund that will be incorporated into the EU's seven-year budget framework 2021-2027. A total of €390 bn will be allotted as grants (instead of the initial proposal for €500 bn grants), and the remaining €360 bn will be allotted as loans. The European Commission will be allowed to borrow from debt markets and will primarily aid southern countries hit hard by the pandemic, including Cyprus.

Private debt continued to decline in 2020 both in absolute terms and in relation to GDP. Total outstanding balances of non-financial companies and households dropped further in the year to September 2020 to €23.5 bn, for which data is available, driven by restructuring measures and reductions in non-performing loans. Private debt still exceeds GDP on a gross basis and drops marginally below GDP on a net basis. This contrasts with the start of the crisis at the end of 2012, when private debt outstanding was 2.5x GDP.

The stock of NPEs in the Cypriot banking system declined from €20.9 bn at the end of December 2017 to €10.4 bn as at end-December 2018 after the sale of loans by the Bank (Project Helix) and the resolution of the Cyprus Cooperative Bank. NPEs dropped to €9.1 bn at the end of December 2019 and further to €6.7 bn at the end of June 2020, which consisted of €3.3 bn from households and €3.0 bn from non-financial companies, with financial companies comprising the remaining €0.4 bn. The ratio of NPEs to gross loans was 22.3% at the end of June 2020 from 28.0% at end-December 2019 and 30.5% at end December-2018. The share of restructured facilities was 46.6% and the coverage ratio stood at 55.3% at the end of June 2020. More visibility on the impact of the pandemic on the loan asset quality of the banking sector is expected after the expiration of the loan moratorium at the end of the year.

Sovereign ratings

The sovereign risk ratings of the Cyprus Government improved considerably in recent years reflecting improvements in economic resilience and consistent fiscal outperformance. Cyprus demonstrated policy commitment to correcting fiscal imbalances through reform and restructuring of its banking system. Fitch Ratings maintains a Long-Term Issuer Default rating of investment grade at BBB- since November 2018, affirmed in April and October 2020. Its outlook was upgraded to positive in October 2019 and revised it to stable in April 2020, reflecting the significant impact the global COVID-19 pandemic might have on the Cyprus economy and fiscal position. S&P Global Ratings maintains an investment grade rating of BBB- with a stable outlook since September 2018. The rating and the outlook were affirmed in March and September 2020. Moody's Investors Service maintains a long-term credit rating of Ba2 since July 2018 and a positive outlook since September 2019. In June 2020 Moody's Investors Service issued their Regular Update on their credit opinion for the Cyprus Sovereign and revised their forecasts for the Cyprus economy in view of the COVID-19 outbreak. According to the opinion, the outbreak will weigh on near term growth and fiscal prospects, but the impact on the credit profile is expected to be temporary. Most recently, in November 2020, DBRS Ratings affirmed the Republic of Cyprus's Long-Term Foreign and Local Currency - Issuer Ratings at BBB (low) with a stable trend.

C. Business Overview

The Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. In November 2020, Moody's Investors Service affirmed the Bank's long-term deposit rating of B3 (positive outlook). In October 2020, Fitch Ratings affirmed their long-term issuer default rating of B- (negative outlook). In April 2020, Fitch Ratings revised their outlook to negative, reflecting the significant impact the outbreak of COVID-19 might have on the Cypriot economy and consequently on the Bank. In July 2020, Standard and Poor's affirmed their long-term issuer credit rating on the Bank of 'B+' (stable outlook).

The Group continues to deliver on its strategic priorities while supporting its customers, colleagues and community in which it operates through the COVID-19 crisis, ensuring at the same time that all of its branches operate in accordance with the guidelines and recommendations issued by the Ministry of Health.

Additionally, the Group continues to closely monitor developments in, and the effects of COVID-19 on both the global and Cypriot economy. Signs of economic recovery to pre-pandemic levels marked the third quarter of the year, with the Cypriot economy showing more resilience than initially anticipated, proving its open, small and flexible characteristics. However, as the number of new COVID-19 cases has increased in recent weeks, local restrictions have been re-imposed to contain the spread, which is likely to lead to some loss of momentum in economic recovery in the fourth quarter. The latest news for an effective vaccine is encouraging, which in time should support a return to more normal conditions.

The changed economic environment resulted in lower levels of economic activity and credit formation, which gradually recovered in the third quarter of the year. In common with other European banks, the prolonged low interest rate environment also continues to present a challenge to the Group's profitability. As a consequence of the pandemic, the Bank has updated its macroeconomic assumptions underlying the IFRS 9 calculation of loan credit losses in 9M2020 in line with the relevant regulatory guidance, resulting in increased organic loan credit losses for 9M2020 of €43 mn. As at 30 September 2020, the Bank expects, under the base scenario, the Cypriot economy to contract by 6.0% in 2020, with gradual recovery from 2021 onwards, with GDP growth of 4.0% for 2021. The Bank's projections are in line with those published by the IMF, the Cyprus Ministry of Finance, the European Commission and the Economics Research Centre of the University of Cyprus.

The Bank's medium-term strategic priorities remain clear, with a sustained focus on strengthening its balance sheet, and improving asset quality and efficiency, whilst maintaining a good capital position, in order to continue to play a vital role in supporting the recovery of the Cypriot economy. The Group continues to explore opportunities to improve efficiency through its digital transformation programme in order to provide products and services while reducing operating costs.

Upon the outbreak of COVID-19 in March 2020, the Pandemic Incident Management Plan (PIMP) of the Group was invoked and a dedicated team has been monitoring the situation domestically and globally and providing guidance on health and safety measures, travel advice and business continuity for the Group. Local government guidelines are being followed in response to the virus.

In accordance with the Pandemic Plan, the Group adopted a set of measures to ensure minimum disruption to its operations. The measures comprise rules for quarantine for vulnerable employees due to health conditions and for those returning from epicentres of the infection. The Group replaced face-to-face meetings with telecommunications, adjusting the customary etiquette of personal contact, including those with customers. Staff of critical functions have been split into separate locations. In addition, to ensure continuity of business, a number of employees have been working from home and the remote access capability has been upgraded significantly. Additionally, the Group follows strict rules of hygiene, increased intensity of cleaning and disinfection of spaces, and other measures to protect the health and safety of staff and customers. Some of these measures were gradually relaxed in 3Q2020. However, as the number of new COVID-19 cases has increased in recent weeks and local restrictions have been re-imposed to contain the spread, these measures are now becoming stricter and close monitoring of the situation continues.

Also, the potential economic implications for the sectors where the Group is active in are being assessed in order to identify possible mitigating actions for supporting the economy, such as supporting viable affected businesses and households with new lending to cover liquidity, working capital, capital expenditure and investments related to the activity of the borrower.

The package of policy measures announced by the ECB and the European Commission, as well as the unprecedented fiscal and other measures of the Cyprus Government, should help reduce the negative impact and support the recovery of the Cypriot economy.

As part of the measures to support borrowers affected by COVID-19 and the wider Cypriot economy, the Cyprus Parliament voted for the suspension of loan repayments for interest and principal for the period to the end of the year, for all eligible borrowers with no arrears for more than 30 days as at the end of February 2020. Over 25,000 customers were approved, relating to gross loans of c.€5.9 bn as at 30 September 2020 (comprising gross loans to individuals of €2.1 bn and gross loans to businesses of €3.8 bn), representing 65% of total gross loans excluding the legacy book.

C. Business Overview (continued)

The Group continues to monitor the credit quality of loans under moratorium (payment holiday). A review campaign was initiated in May 2020 for gross loans of €5.2 bn. Approximately 80% of the review campaign has been completed with no significant change in the 'unlikely to pay' (UTP) status. However, as stricter measures - with a direct impact on the economy - are being imposed in recent weeks following the increase in the number of new COVID-19 cases, the monitoring and review of the credit quality of loans under moratorium remain both on-going and dynamic. In addition, borrowers representing 31% of loans of private individuals under moratorium have paid at least one instalment by 31 October 2020. These payments of instalments during FY2020 are accounted for as prepayments towards FY2021 instalments.

The strategic focus of the Group on asset quality, funding, capital and efficiency aims to ensure that it maintains its financial strength.

Tackling the Bank's loan portfolio quality is of utmost importance for the Group. Despite the challenging market conditions resulting from the outbreak of COVID-19, the Group signed an agreement for the sale of a portfolio of loans with gross book value of c.€898 mn (of which €886 mn related to non-performing exposures) as at 30 June 2020, known as Project Helix 2, another significant disposal of NPEs by the Bank. The combined de-risking actions in the first nine months of 2020, including Project Helix 2, have reduced NPEs by €1.5 bn on a pro forma basis. Overall, since the peak in 2014, the stock of NPEs has been reduced by €12.6 bn or 84% to €2.4 bn and the NPE ratio is reduced to 21%.

Project Helix 2 marks further progress against delivering on the Group's strategic objectives of becoming a stronger, safer and more efficient institution. The Group is now better positioned to manage the challenges resulting from the impact of the ongoing COVID-19 crisis, and to support the recovery of the Cypriot economy.

The Group remains committed to further de-risking of the balance sheet and it will continue to seek solutions to achieve this. The Group will continue to assess the potential to accelerate the decrease in NPEs on the balance sheet through additional sales of NPEs. At the same time, following the outbreak of COVID-19 the Group will remain focused on arresting any potential asset quality deterioration and early managing arrears.

The foreclosure process which had been suspended following the outbreak of COVID-19, from 18 March 2020 until 31 August 2020, in line with the decision of the Association of Cyprus Banks, resumed on 1 September 2020.

The Group continues to provide high quality new loans via prudent underwriting standards and 99% of new exposures in Cyprus since 2016 are performing. Growth in new lending in Cyprus has been focused on selected industries more in line with the Bank's target risk profile, such as tourism, trade, real estate, professional services, information/communication technologies, energy, education and green projects, and following the outbreak of COVID-19, the focus remains to support the Cypriot economy in order to overcome this crisis. During the quarter ended 30 September 2020, new lending amounted to €288 mn, increased by 21% qoq as demand is picking up post the COVID-19 lockdown and driven by retail housing in the context of the Government scheme for interest rate subsidy. The pipeline for new housing loans is strong at over €148 mn as at mid-November 2020 (compared to over €65 mn as at mid-August 2020 published with the 2Q2020 financial results).

Following the outbreak of COVID-19, the sectors most adversely affected are tourism, trade, transport and construction. The Group has a well - diversified performing loan portfolio. As at 30 September 2020, the Group's non-legacy loan book exposure to tourism was limited to €1.1 bn, out of a total non-legacy loan book of €9.1 bn. Respectively, the Group's non-legacy loan book exposure to trade was also €1.0 bn, whilst to construction was limited to €0.5 bn.

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

Management is also placing emphasis on diversifying income streams by optimising fee income from international transaction services, wealth management and insurance. The Group's insurance companies, EuroLife Ltd and General Insurance of Cyprus Ltd (GIC) operating in the sectors of life and general insurance respectively, are leading players in the insurance business in Cyprus, and have been providing a stable, recurring fee income, further diversifying the Group's income streams. The insurance income net of claims and commissions for 9M2020 amounted to €42 mn, flat yoy, contributing to 24% of non-interest income.

In order to further optimise its funding structure, the Bank continues to focus on the shape and cost of deposit franchise, taking advantage of the increased customer confidence towards the Bank. The cost of deposits has been reduced by 70 bps to 6 bps over the last 33 months. The reduction in the cost of deposits amounts to 10 bps in 9M2020, compared to a reduction of 22 bps in 9M2019.

C. Business Overview (continued)

In addition, there are efforts underway to improve credit spreads, despite competition pressures. Moreover, liquidity fees for specific customer groups were introduced in March 2020. The introduction of liquidity fees to a broader group of corporate clients, that was delayed due to the COVID-19 pandemic, is expected to be implemented in 1Q2021. In August 2020 the Ministry of Finance issued three decrees, setting a limit on charges and fees charged in a calendar year to accounts with certain characteristics and for certain transactions, effected in November 2020. The revision of fees and commission charges is underway, whilst transactional fee volumes are expected to recover to pre-COVID-19 levels, as the Cypriot economy recovers. Finally, in June 2020, the Bank borrowed €1 bn from the fourth TLTRO III operation, despite its comfortable liquidity position, given the favourable borrowing rate, in combination with the relaxation of collateral terms. The annual potential benefit to the net interest income is estimated at €5 mn.

A key focus of the Group remains the active management of funding costs and on-going running expenses. The Digital Transformation Programme that started in 2017 has begun to deliver an improved customer experience (see section below), whilst the branch footprint rationalisation to date, further improved the Bank's operating model. The number of branches was reduced by 18% in 2019 and the branch network is now less than half the size it was in 2013. Management remains focused on further improvement in efficiency.

Digital Transformation

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

In recent months, a number of new features have been introduced within the Bank of Cyprus mobile app. Users can now use the app to apply and obtain an eIDAS-certified digital signature which enables them to electronically sign documents on any device, at any time. Additionally, a new feature has been introduced whereby 1bank users are able to top-up their CYTA and Epic telephony cards through the Bank's mobile app. Moreover, a new method for contacting 1bank subscribers is now in place. Users now have the option to receive push notifications in place of SMS messages for certain alerts. Push notifications are an instant, more secure channel that incurs no message specific cost to the bank. At this point in time, alerts relating to card purchases and ATM withdrawals are offered, however more of our alerts will gradually become available. The ability to send push notifications has been released in September 2020. Up to now, approximately 15,000 subscribers have been enrolled to receive Push Notifications.

The adoption of digital products and services continued to grow and gain momentum in 2020. As at the end of October 2020, 83.5% of the number of transactions involving deposits, cash withdrawals and internal/external transfers were performed through digital channels (up by 19 p.p from 65% in September 2017 when the digital transformation programme was initiated). Regarding the use of mobile banking, the number of active users increased by 20% in 2019, and by a further 17% in the ten months to the end of October 2020. In addition, the rate of QuickPay active users has been steadily increasing. The highest number of active users in 2020 to date was recorded in October 2020 with c.81,000 active users. Likewise, the highest number of payments was also recorded in October 2020 with 197,000 transactions.

In 2020, as a result of the COVID-19 restrictive measures, a reduction in cash withdrawals and deposits performed through the branch network has been observed. An increase in the adoption of digital products and services and in digital subscriber penetration has also been observed as more customers have gained access to digital channels and more cards have been issued. As at the end of October 2020, 74% of customers were digitally engaged (up by 14 p.p. from 60% since the digital transformation programme was initiated in September 2017). A further increase is expected in 4Q2020 driven by the increase in the number of subscribers and the number of cards that have been issued.

As part of the Bank's ambition to be one of the cornerstones of the digital economy, customers have been enabled to authorise the release of their identification details to the Government, using the internet banking credentials thus enabling a digital registration on the Government Gateway Portal (Ariadni), where they can use electronic services that are made available by the Government of Cyprus (up until now citizens needed to be physically present to identify themselves).

In addition, Bank of Cyprus is the first Bank in the EU to offer its customers the ability to obtain a Qualified Digital Signature through the BoC mobile app without the need of physical presence. A Qualified Digital Signature has the same legal effect as the physical signature and thus can be used to sign digitally any document. Signing can be done substantially faster than before and offers an enhanced customer experience. The Bank currently offers the signing of some of the Bank's documentation with the use of a Digital Signature and has a roadmap in place to gradually offer the digital signing of the majority of the Bank's documents.

Furthermore, as part of the Digital Transformation Programme, major changes are underway in relation to enabling a modern and more efficient workplace. New technologies and tools have been introduced that will drastically change the employee experience, improving collaboration and knowledge sharing across the organisation. Further enhancements will be implemented in 2021 and the full impact will be seen over the coming months.

D. Strategy and Outlook

The strategic objectives for the Group are to become a stronger, safer and a more efficient institution capable of supporting the recovery of the Cypriot economy and delivering appropriate shareholder returns in the medium term.

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

· Complete balance sheet de-risking

· 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

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

D. Strategy and Outlook (continued)

Although there remains uncertainty in the broader economic environment as a result of the pandemic, the Management remains confident in delivering on the strategic objectives for the Group.

The Group has been through a period of considerable change and is now laying the foundations for delivering appropriate shareholder returns in the medium term.

Specifically, the near-term priorities include completing the balance sheet de-risking, whilst managing the post-pandemic NPE inflow; positioning the Bank on the path for sustainable profitability; ensuring the cost base remains appropriate, whilst further investing in the digital transformation programme in order to modernise the BOC franchise; addressing the challenges from low rates and surplus liquidity; and initiating MREL issuance and refinancing of Tier 2 subject to market conditions.

The medium-term priorities include delivering sustainable profitability and shareholder returns, enhancing revenues by capitalising on the Group's market leading position; enhancing operating efficiency; and optimising capital management.

The Group's medium-term strategic targets are set out below.

1. Return on Tangible Equity (ROTE) is calculated as Profit after Tax divided by Shareholders' equity minus intangibles assets.

2. Total operating expenses comprise staff costs and other operating expenses. Total operating expenses do not include the special levy or contributions to the Single Resolution Fund (SRF) or Deposit Guarantee Fund (DGF) and do not include any advisory or other restructuring costs.

Maintaining a strong capital base has been a key priority for management over the past few years and this remains equally important for the Group going forward. The business plan is based on maintaining a CET1 ratio of at least 13% over the entire period of the plan. The Group's capital is to be supported by organic capital generation and by focus on less capital-intensive businesses, the further reduction of high intensity risk weighted assets and the Helix 2 risk weighted asset benefit upon full repayment of deferred consideration. At the same time, factors that could potentially have a negative impact on the Group's capital ratios include the IFRS 9 phasing-in, any potential regulatory impacts, as well as one-off cost optimisation charges. Until the completion of the de-risking and the restructuring of the business, there may be volatility in the capital ratios due to the timing of potential future impacts from regulatory changes and one-off restructuring costs.

The Group has a clear strategy in place, leveraging on its strong customer base, its renewed customer trust, its market leadership position, and further developing digital knowledge and infrastructure, in order to complete the turnaround of its business and set the Bank on a path for profitability and delivering value for shareholders.

E. Financial Results - Statutory Basis

Unaudited Interim Consolidated Income Statement

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Statement of Comprehensive Income

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Balance Sheet

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Balance Sheet (continued)

Comparative information was restated as follows:

· 'Fee and commission income' and 'Fee and commission expense' as restated, include elimination of intragroup amounts between 'Fee and commission income' and 'Fee and commission expense' amounting to €2,194 thousand, in line with the respective restatement made in Note 10 of the annual consolidated financial statements for the year ended 31 December 2019, in order to reflect the impact in the nine month comparative period.

· Levy in the form of a guarantee fee relating to the revised income tax legislation, Income Tax Law Amendment 28 (I) of 2019 enacted on 1 March 2019, of €6,255 thousand has been reclassified from 'Fee and commission expense' to 'Special levy on deposits on credit institutions in Cyprus, contribution to Single Resolution Fund and other levies'. The restatement was made in line with the presentation in the annual consolidated financial statements for the year ended 31 December 2019, when the levy in the form of a guarantee fee was presented for the first time in the line of 'Special levy on deposits on credit institutions in Cyprus, contribution to Single Resolution Fund and other levies'.

· Comparative information for 'Turnover' was restated to include the effect of the change in the 'Fee and commission income' as described above.

The above restatements are consistent with the presentation of such amounts in the Consolidated Financial Statements for the year ended 31 December 2019 within the 2019 Annual Financial Report and these did not have an impact on the results for the period or the equity of the Group.

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Statement of Changes in Equity

E. Financial Results - Statutory Basis (continued)

Unaudited Interim Consolidated Statement of Changes in Equity (continued)

F. Notes

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