Bk. Cyprus Hldg Regulatory News (BOCH)

Contents

Page

Board of Directors and Executives

1

Forward Looking Statements and Notes

2

Interim Management Report

3

Consolidated Condensed Interim Financial statements

Interim Consolidated Income Statement

33

Interim Consolidated Statement of Comprehensive Income

34

Interim Consolidated Balance Sheet

35

Interim Consolidated Statement of Changes in Equity

36

Interim Consolidated Statement of Cash Flows

38

Notes to the Consolidated Condensed Interim Financial Statements

1. Corporate information

40

2. Unaudited financial statements

40

3. Summary of significant accounting policies

40

4. Going concern

42

5. Operating environment

44

6. Significant and other judgements, estimates and assumptions

45

7. Segmental analysis

52

8. Net (losses)/gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates

59

9. Staff costs and other operating expenses

60

10. Credit losses of financial instruments and impairment of non‑financial assets

61

11. Income tax

62

12. Earnings per share

64

13. Investments

64

14. Derivative financial instruments

65

15. Fair value measurement

66

16. Loans and advances to customers

71

17. Stock of property

71

18. Prepayments, accrued income and other assets

72

19. Non‑current assets and disposal groups held for sale

73

20. Funding from central banks

74

21. Customer deposits

75

22. Loan stock

76

23. Accruals, deferred income, other liabilities and other provisions

77

24. Share capital

77

25. Pending litigation, claims, regulatory and other matters

79

26. Contingent liabilities

84

27. Cash and cash equivalents

85

28. Analysis of assets and liabilities by expected maturity

86

29. Risk management ‑ Credit risk

87

30. Risk management ‑ Market risk

108

31. Risk management ‑ Liquidity risk and funding

110

32. Capital management

114

33. Related party transactions

115

34. Group companies

117

35. Acquisitions and disposals of subsidiaries

120

36. Investments in associates and joint venture

120

37. Events after the reporting period

121

Independent Review Report to the Bank of Cyprus Holdings Public Limited Company

122

Additional Risk and Capital Management Disclosures

124

Definitions and explanations of Alternative Performance Measures Disclosures

144

Board of Directors of Bank of Cyprus Holdings Public Limited Company

Efstratios‑Georgios Arapoglou

CHAIRMAN

Lyn Grobler

VICE‑CHAIRPERSON

Arne Berggren

Dr. Michael Heger

Panicos Nicolaou

Ioannis Zographakis

Maria Philippou

Nicos Sofianos (appointed on 14 May 2020 ‑ approved by ECB on 26 February 2021)

Paula Hadjisotiriou

Constantine Iordanou (appointed on 28 September 2020, subject to ECB approval)

Eliza Livadiotou (appointed on 28 September 2020, subject to ECB approval)

Executive Committee

Panicos Nicolaou

CHIEF EXECUTIVE OFFICER

Dr. Charis Pouangare

DEPUTY CHIEF EXECUTIVE OFFICER

Eliza Livadiotou

EXECUTIVE DIRECTOR FINANCE

Demetris Th. Demetriou

CHIEF RISK OFFICER

Michalis Athanasiou

EXECUTIVE DIRECTOR GLOBAL CORPORATE BANKING & MARKETS

Louis Pochanis

EXECUTIVE DIRECTOR INSURANCE BUSINESS

Demetris Chr. Demetriou

ACTING EXECUTIVE DIRECTOR RESTRUCTURING AND RECOVERIES DIVISION (subject to ECB approval)

Anna Sofroniou

EXECUTIVE DIRECTOR REAL ESTATE MANAGEMENT UNIT

Nicolas Scott Smith

EXECUTIVE DIRECTOR CORPORATE FINANCE SOLUTIONS

Company Secretary

Katia Santis

Legal Advisers as to matters of Irish Law

Arthur Cox

Legal Advisers as to matters of English and US Law

Sidley Austin LLP

Legal Advisers as to matters of Cypriot Law

Chryssafinis & Polyviou LLC

Statutory Auditors

PricewaterhouseCoopersOne Spencer DockNorth Wall QuayDublin 1D01 X9R7Ireland

Registered Office

10 Earlsfort Terrace

Dublin 2

D02 T380

Ireland

BANK OF CYPRUS HOLDINGS GROUP

Forward Looking Statements and Notes

This document contains certain forward looking statements which can usually be identified by terms used such as 'expect', 'should be', 'will be' and similar expressions or variations thereof or their negative variations, but their absence does not mean that a statement is not forward looking. Examples of forward‑looking statements include, but are not limited to, statements relating to the Bank of Cyprus Holdings Group's (the Group) near term and longer term future capital requirements and ratios, intentions, beliefs or current expectations and projections about the Group's future results of operations, financial condition, expected impairment charges, the level of the Group's assets, liquidity, performance, prospects, anticipated growth, provisions, impairments, business strategies and opportunities. By their nature, forward‑looking statements involve risk and uncertainty because they relate to events, and depend upon circumstances, that will or may occur in the future. Factors that could cause actual business, strategy and/or results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward‑looking statements made by the Group include, but are not limited to: general economic and political conditions in Cyprus and other European Union (EU) Member States, interest rate and foreign exchange fluctuations, legislative, fiscal and regulatory developments and information technology, litigation and other operational risks, adverse market conditions, the impact of outbreaks, epidemics or pandemics, such as the COVID‑19 pandemic and ongoing challenges and uncertainties posed by the COVID‑19 pandemic for businesses and governments around the world. Should any one or more of these or other factors materialise, or should any underlying assumptions prove to be incorrect, the actual results or events could differ materially from those currently being anticipated as reflected in such forward looking statements. The forward‑looking statements made in this document are only applicable as at the date of publication of this document. Except as required by any applicable law or regulation, the Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statement contained in this document to reflect any change in the Group's expectations or any change in events, conditions or circumstances on which any statement is based.

Non‑IFRS performance measures

Bank of Cyprus Holdings Public Limited Company's (the Company) management believes that the non‑IFRS performance measures included in this document provide valuable information to the readers of the Interim Financial Report as they enable the readers to identify a more consistent basis for comparing the Group's performance between financial periods and provide more detail concerning the elements of performance which management is most directly able to influence or are relevant for an assessment of the Group. They also reflect an important aspect of the way in which the operating targets are defined and performance is monitored by the Group's management. However, any non‑IFRS performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as the key measures of the 30 June position. Refer to 'Definitions and explanations on Alternative Performance Measures Disclosures' on pages 144 to 155 of the Interim Financial Report for the six months ended 30 June 2021 for further information, reconciliations with Consolidated Condensed Interim Financial Statements and calculations of non‑IFRS performance measures included throughout this document and the most directly comparable IFRS measures.

The Interim Financial Report for the six months ended 30 June 2021 is available on the Group's website www.bankofcyprus.com (Investor Relations/Financial Results).

Commentary on underlying basis

The financial information presented below provides an overview of the Group financial results for the six months ended 30 June 2021 on the 'underlying basis' which the management believes best fits the true measurement of the performance and position of the Group, as this presents separately the exceptional and one‑off items. Reconciliations between the statutory basis and the underlying basis are included in section 'Reconciliation of the Consolidated Condensed Interim Income Statement for the six months ended 30 June 2021 between statutory and underlying basis' below and in 'Definitions and explanations on Alternative Performance Measures Disclosures' of this Interim Financial Report for the six months ended 30 June 2021 to facilitate the comparability of the underlying basis to the statutory information.

The below definitions are used in the commentary that follows the presentation of the underlying basis financial information:

NPE sales: NPE sales refer to sales of NPE portfolios completed, as well as contemplated and potential future sale transactions, as the Group continues to work with its advisors towards the sale of portfolios of NPEs, to further accelerate the decrease in NPEs on the balance sheet through additional sales, irrespective of whether or not they meet the held for sale classification criteria at the reporting dates.

Project Helix 2: 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 billion (Helix 2 Portfolio A), as well as to the agreement the Group reached with PIMCO in January 2021 for the sale of an additional portfolio of loans with gross book value of €0.5 billion (Helix 2 Portfolio B). Project Helix 2 sale was completed in June 2021. In relation to the disclosure of pro‑forma figures and ratios as at 31 December 2020 with respect to Project Helix 2, where numbers are provided on a pro‑forma basis this is stated. Further details of the transaction are provided in 'Loan portfolio quality' under the 'Balance Sheet Analysis' section below.

Project Helix: Project Helix refers to the sale of a portfolio of loans with a gross book value of €2.8 billion completed in June 2019.

Six months ended30 June

€ million

20211

20201

Net interest income

152

168

Net fee and commission income

84

71

Net foreign exchange gains and net gains on financial instruments transactions and disposal/dissolution of subsidiaries and associates

8

12

Insurance income net of insurance claims and commissions

31

29

Net gains from revaluation and disposal of investment properties and on disposal of stock of properties

6

- 

Other income

7

8

Total income

288

288

Staff costs

(101)

(96)

Other operating expenses

(70)

(69)

Special levy on deposits and other levies/contributions

(15)

(15)

Total expenses

(186)

(180)

Operating profit

102

108

Loan credit losses

(35)

(87)

Impairments of other financial and non‑financial assets

(11)

(29)

Provisions for litigation, claims, regulatory and other matters

(4)

(4)

Total loan credit losses, impairments and provisions

(50)

(120)

Profit/(loss) before tax and non‑recurring items 

52

(12)

Tax

(1)

(5)

(Profit)/loss attributable to non‑controlling interests

- 

4

Profit/(loss) after tax and before non‑recurring items (attributable to the owners of the Company)

51

(13)

Advisory and other restructuring costs‑organic

(18)

(6)

Profit/(loss) after tax ‑ organic (attributable to the owners of the Company)

33

(19)

Provisions/net loss relating to NPE sales, including restructuringexpenses2

(32)

(107)

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

1

(126)

Key Performance Ratios3

Net interest margin (annualised)

1.56%

1.90%

Cost to income ratio

64%

62%

Cost to income ratio excluding special levy on deposits and other levies/contributions

59%

57%

Operating profit return on average assets (annualised)

0.9%

1.0%

Basic earnings/(losses) per share attributable to the owners of the Company (€ cent)

0.17

(28.16)

Basic earnings/(losses) after tax and before non‑recurring items per share attributable to the owners of the Company (€ cent)4

11.24

(2.93)

1The financial information is derived from and should be read in conjunction with the accompanied Consolidated Condensed Interim Financial Statements.

2'Provisions/net loss relating to NPE sales, including restructuring expenses' refer to the net loss on transactions completed, net loan credit losses on transactions under consideration, as well as the restructuring costs relating to these trades.

3Including the NPE portfolios classified as 'Non‑current assets and disposal groups held for sale'.

4As of 30 June 2021, management monitors 'Basic earnings/(losses) per share attributable to the owners of the Company' calculated using 'Profit/(loss) after tax and before non‑recurring items (attributable to the owners of the Company)', rather than 'Profit/(loss) after tax - organic (attributable to the owners of the Company)' which was previously the case, as management believes it is a more appropriate measure of monitoring recurring performance, as it excludes 'Advisory and other restructuring costs - organic' which do not relate to the underlying or recurring business of the Group as a banking and financial services institution, but mainly to the cost of the Tier 2 Capital Notes tender offer of €12.4 million, as well as certain costs relating to restructuring activities BOC PCL has associated with the organic reduction of NPEs, which have been decreasing as the level of NPEs is being reduced.

€ million

30 June20211

31 December 20201

Cash and balances with central banks

8,227

5,653

Loans and advances to banks

436

403

Debt securities, treasury bills and equity investments

2,198

1,913

Net loans and advances to customers

9,967

9,886

Stock of property

1,285

1,350

Investment properties

127

128

Other assets

1,960

1,550

Non‑current assets and disposal groups held for sale

11

631

Total assets

24,211

21,514

Deposits by banks

401

392

Funding from central banks

2,985

995

Customer deposits

16,801

16,533

Loan stock

645

272

Other liabilities

1,309

1,247

Total liabilities

22,141

19,439

Shareholders' equity

1,826

1,831

Other equity instruments

220

220

Total equity excluding non‑controlling interests

2,046

2,051

Non‑controlling interests

24

24

Total equity

2,070

2,075

Total liabilities and equity

24,211

21,514

Key Balance Sheet figures and ratios2

30 June2021

31 December 2020

Gross loans (€ million)

10,893

12,261

Allowance for expected credit losses (€ million)

947

1,902

Customer deposits (€ million)

16,801

16,533

Loans to deposits ratio (net)

59%

63%

NPE ratio

14.6%

25.2%

NPE coverage ratio

60%

62%

Leverage ratio

7.8%

8.8%

Capital ratios and risk weighted assets2

Common Equity Tier 1 (CET1) ratio (transitional for IFRS 9)3

14.22%

14.80%

Total capital ratio

19.23%

18.35%

Risk weighted assets (€ million)

11,048

11,636

1The financial information is derived from and should be read in conjunction with the accompanied Consolidated Condensed Interim Financial Statements.

2Including the NPE portfolios classified as 'Non‑current assets and disposal groups held for sale', where relevant.

3The CET1 fully‑loaded ratio as at 30 June 2021 amounts to 12.91% compared to 12.94% as reported and 13.26% pro‑forma for Helix 2 (Portfolios A and B) as at 31 December 2020.

€ million

Underlying basis

NPEsales

Other

Statutorybasis

Net interest income

152

-

-

152

Net fee and commission income

84

-

-

84

Net foreign exchange gains and net gains/(losses) on financial instrument transactions and disposal/dissolution of subsidiaries and associates

8

-

(16)

(8)

Insurance income net of claims and commissions

31

-

-

31

Net gains from revaluation and disposal of investment properties and on disposal of stock of properties

6

-

-

6

Other income

7

-

-

7

Total income

288

-

(16)

272

Total expenses

(186)

(16)

(10)

(212)

Operating profit

102

(16)

(26)

60

Loan credit losses

(35)

(16)

4

(47)

Impairments of other financial and non‑financial assets

(11)

-

-

(11)

Provisions for litigation, claims, regulatory and other matters

(4)

-

4

-

Profit before tax and non‑recurring items 

52

(32)

(18)

2

Tax

(1)

-

-

(1)

Profit after tax and before non‑recurring items (attributable to the owners of the Company)

51

(32)

(18)

1

Advisory and other restructuring costs‑organic

(18)

-

18

-

Profit after tax ‑ organic* (attributable to the owners of the Company)

33

(32)

-

1

Provisions/net loss relating to NPE sales, including restructuring expenses

(32)

32

-

-

Profit after tax (attributable to the owners of the Company)

1

-

-

1

\* This is the profit after tax (attributable to the owners of Company), before the provisions/net loss relating to NPE sales, including restructuring expenses.

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

NPE sales

· Total expenses include restructuring costs of €10 million and other expenses of €6 million relating to the agreements for the sale of portfolios of NPEs and are presented within 'Provisions/net loss relating to NPE sales, including restructuring expenses' under the underlying basis.

· Loan credit losses under the statutory basis include the loan credit losses relating to Project Helix 2 of €2 million and an amount of €14 million which represents the effect of discounting the deferred consideration receivable from Project Helix 2 on initial recognition, and are disclosed under non‑recurring items within 'Provisions/net loss relating to NPE sales, including restructuring expenses' under the underlying basis.

Other reclassifications

· Net losses on loans and advances to customers at FVPL of approximately €3.5 million included in 'Loan credit losses' under the underlying basis are included in 'Net (losses)/gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates' under the statutory basis. Their classification under the underlying basis is done in order to align their presentation with the loan credit losses on loans and advances to customers at amortised cost.

· Net loss on the early redemption of subordinated loan stock of approximately €12 million included in 'Net (losses)/gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates' under the statutory basis is included in 'Advisory and other restructuring costs‑organic' under the underlying basis, since it represents a one‑off item.

· Advisory and other restructuring costs of approximately €6 million included in 'Other operating expenses' under the statutory basis are separately presented under the underlying basis since they comprise mainly fees to external advisors in relation to customer loan restructuring activities.

· Provisions for litigation, claims, regulatory and other matters amounting to €4 million included in 'Other operating expenses' under the statutory basis, are separately presented under the underlying basis, since they mainly relate to a provision set aside for a potential penalty on investigation by the ECB (Note 25.2 of the Consolidated Condensed Interim Financial Statements).

Total equity excluding non‑controlling interests totalled €2,046 million at 30 June 2021, compared to €2,051 million at 31 December 2020. Shareholders' equity totalled €1,826 million at 30 June 2021, compared to €1,831 million at 31 December 2020.

The Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at 14.22% at 30 June 2021, compared to 14.80% at 31 December 2020 and 15.16% pro forma for Project Helix 2 (Portfolios A and B) as at 31 December 2020. 

During the six months ended 30 June 2021, the CET1 ratio was negatively affected mainly by the phasing‑in of IFRS 9 transitional adjustments on 1 January 2021, the prudential charge relating to the Group's foreclosed assets (see below), the cost relating to the tender process for the existing Tier 2 Capital Notes and provisions and impairments, and was positively affected by the pre‑provision income, the impact of the completion of Project Helix 2 and the decrease in risk‑weighted assets (RWAs).

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 back to CET1 each year decreases based on a weighting factor until the impact of IFRS 9 is fully absorbed at the end of the five years. The impact on the capital position for year 2018 was 5% of the impact on the impairment amount from the initial application of IFRS 9, increased to 15% (cumulative) for year 2019, 30% (cumulative) for year 2020 and 50% (cumulative) for year 2021. This will increase to 75% (cumulative) for year 2022 and will be fully phased in (100%) by 1 January 2023. The phasing‑in of the impairment amount from the initial application of IFRS 9 had a negative impact of approximately 45 bps on the CET1 ratio on 1 January 2021.

The CET1 ratio on a fully loaded basis amounted to 12.91% as at 30 June 2021, compared to 12.94% as at 31 December 2020 (and 13.26% pro forma for Helix 2). On a transitional basis and on a fully phased‑in basis, after the transition period is completed, the impact of IFRS 9 is expected to be manageable and within the Group's capital plans.

The Total Capital ratio stood at 19.23% as at 30 June 2021, compared to 18.35% as at 31 December 2020 (and 18.74% pro forma for Helix 2). 

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

In the context of the European Central Bank's (ECB's) capital easing measures for COVID‑19, in April 2020, BOC PCL 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, 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 SREP, which is a point in time assessment, and are therefore subject to change over time.

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

In accordance with the provisions of the Macroprudential Oversight of Institutions Law of 2015, the Central Bank of Cyprus (CBC) is the responsible authority for the designation of banks that are Other Systemically Important Institutions (O‑SIIs) and for the setting of the O‑SII buffer requirement for these systemically important banks. BOC PCL has been designated as an O‑SII and the O‑SII buffer currently set by the CBC 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 March 2020, 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 (CCyb). In July 2020, the ECB committed to allow banks to operate below the P2G and the combined buffer requirement (CCB, CCyb and O‑SII buffer) until at least end of 2022, without automatically triggering supervisory actions.

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 as of 1 January 2020.

Based on the SREP decisions of prior years, the Company and BOC PCL were under a regulatory prohibition for equity dividend distribution and therefore no dividends were declared or paid during 2020. Following the 2020 SREP communication, the Company and BOC PCL are still under equity dividend distribution prohibition as the 2019 SREP decision (as amended in April 2020) 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 BOC PCL.

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 relate to a prudential charge which will decrease based on BOC PCL's progress in disposing the properties in scope. The amount has been directly deducted from own funds as at 30 June 2021 resulting in a decrease in the Group's CET1 ratio by approximately 44 bps as at 30 June 2021.

The Group participated in the ECB SREP Stress Test of 2021, the results of which were published by the ECB on 30 July 2021. For further information please refer to 'Additional Risk and Capital Management Disclosures' of the 'Interim Financial Report 2021'.

Project Helix 2

In June 2021, the Group completed Project Helix 2 (Portfolios A and B), which refers to the sale of portfolios of loans with a total gross book value of €1,331 million on completion (of which €1,305 million relate to non‑performing exposures), secured over real estate collateral, to funds affiliated with Pacific Investment Management Company LLC ('PIMCO'), the agreements for which were announced on 3 August 2020 and on 18 January 2021.

The consideration for the sale amounts to approximately €560 million, of which approximately €165 million were received in cash by completion. The remaining amount is payable in four instalments up to December 2025 without any conditions attached. The consideration reflects adjustments resulting from, inter alia, loan repayments received on the Portfolios since the reference date of 30 September 2019. The consideration can be increased through an earnout arrangement, depending on the performance of each of the Portfolios.

The capital impact of Project Helix 2 on the Group's CET1 ratio during the second quarter of 2021 is an increase of approximately 20 bps, of which approximately 10 bps arises on completion. Post completion, the transaction is expected to have an additional positive capital impact of approximately 64 bps on the Group's CET1 ratio on the basis of 30 June 2021 figures, upon the full payment of the deferred consideration and without taking into consideration any positive impact from the earnout, thus making the transaction overall capital accretive.

Further details are provided in section 'Loan portfolio quality' below.

Tier 2 Capital Notes

In April 2021, the Company issued €300 million unsecured and subordinated Tier 2 Capital Notes (the 'New T2 Notes').

Immediately after, the Company and BOC PCL entered into an agreement pursuant to which the Company on‑lent to BOC PCL the entire €300 million proceeds of the issue of the New T2 Notes (the 'Tier 2 Loan') on terms substantially identical to the terms and conditions of the New T2 Notes. The Tier 2 Loan constitutes an unsecured and subordinated obligation of BOC PCL.

The New T2 Notes were priced at par with a fixed coupon of 6.625% per annum, payable annually in arrears and resettable on 23 October 2026. The maturity date for the New T2 Notes is 23 October 2031. The Company will have the option to redeem the New T2 Notes early on any day during the six‑month period from 23 April 2026 to 23 October 2026, subject to applicable regulatory consents.

At the same time, BOC PCL invited the holders of its €250 million Fixed Rate Reset Tier 2 Capital Notes due in January 2027 (the 'Existing T2 Notes') to tender their Existing T2 Notes for purchase by BOC PCL at a price of 105.50%. As a result, a cost of €12 million was recorded in the income statement during the six months ended 30 June 2021, whilst at the same time forfeiting the relevant obligation for future coupon payments. This cost resulted in a negative impact of 11 bps on the Group's CET1 ratio as at 30 June 2021. Existing T2 Notes of €43 million in aggregate nominal amount remain outstanding as at 30 June 2021.

The issuance of the New T2 Notes has resulted in the increase of the Group's Total Capital ratio by approximately 123 bps as at 30 June 2021, including approximately 29 bps relating to the outstanding Existing T2 Notes as at 30 June 2021. The Existing T2 Notes are redeemable at the option of BOC PCL (subject to applicable regulatory consents) in January 2022.

Legislative amendments for the conversion of DTA to DTC

Legislative amendments allowing for the conversion of specific deferred tax assets (DTA) into deferred tax credits (DTC) became effective in March 2019. The law amendments cover the utilisation of income tax losses transferred from Laiki Bank to BOC PCL 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 BOC PCL. With this legislation, institutions are allowed to treat such DTAs as not 'relying on future profitability' according to CRD IV and as a result such DTAs are not deducted from CET1, hence improving a credit institution's capital position.

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, 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.

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 million per year. The Group estimates that such increased fees could range up to €5.3 million 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. In this respect, an amount of €3 million was recorded in the fourth quarter of 2020 to bring the total amount provided for years 2018‑2020 to €16 million, being the maximum expected increased amount for these years.

Voluntary Staff Exit Plan

In December 2020, the Group completed a targeted voluntary staff exit plan (VEP) at a total cost of €6 million, recorded in the consolidated income statement in the fourth quarter of 2020, resulting in a negative impact of approximately 5 bps on the Group's CET1 ratio as at 31 December 2020. For further information please refer to section 'Total expenses' further below.

Regulations and Directives

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 this was an amending regulation, the existing provisions of CRR apply, unless they are amended by CRR II. Being a Regulation, CRR II is directly applicable in each member state. Member states were required to transpose the CRD V into national law. CRD V was transposed and implemented in Cyprus law in early May 2021. Certain provisions took immediate effect (primarily relating to Minimum Requirement for Own Funds and Eligible Liabilities, MREL), and most changes became effective as of June 2021. The key changes introduced consist of, among others, changes to qualifying criteria for CET1, AT1 and Tier 2 instruments, introduction of MREL requirements and binding Leverage Ratio and Net Stable Funding Ratio (NSFR) requirements.

Some of the amendments were introduced in June 2020 as part of the 'CRR quick‑fix' which brought forward certain CRR II changes in light of the challenges posed to the banking sector by the COVID‑19 pandemic. The key measures in the CRR quick fix include an extension of the IFRS 9 transitional arrangements for the dynamic component by two years, the introduction of a prudential filter on exposures to central governments, regional governments or local authorities of FVOCI, the acceleration of CRR II amendments to exempt certain software assets from capital deduction and to revise the SME discount factors.

Bank Recovery and Resolution Directive (BRRD)

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

Minimum requirement for own funds and eligible liabilities (MREL)

In April 2021, BOC PCL received notification from the Single Resolution Board (SRB) of the final decision for the binding minimum requirement for own funds and eligible liabilities (MREL) for BOC PCL, determined as the preferred resolution point of entry.

As per the decision, the MREL requirement is set at 23.32% of risk weighted assets and 5.91% of Leverage Ratio Exposure (LRE) and must be met by 31 December 2025. Furthermore, BOC PCL must comply by 1 January 2022 with an interim requirement of 14.94% of risk weighted assets and 5.91% of LRE. The own funds used by BOC PCL to meet the Combined Buffer Requirement (CBR) will not be eligible to meet its MREL requirements expressed in terms of risk‑weighted assets. The above requirements replace those that were previously applicable. BOC PCL must comply with the MREL requirement at the consolidated level, comprising of BOC PCL and its subsidiaries.

In June 2021, BOC PCL executed its inaugural MREL transaction issuing €300 million of senior preferred notes (the 'SP Notes'). The SP Notes were priced at par with a fixed coupon of 2.50% per annum, payable annually in arrears and resettable on 24 June 2026. The maturity date of the SP Notes is 24 June 2027 and BOC PCL may, at its discretion, redeem the SP Notes on 24 June 2026, subject to meeting certain conditions as specified in the Terms and Conditions, including applicable regulatory consents. The SP Notes comply with the criteria for MREL and contribute towards BOC PCL's MREL requirements.

The MREL ratio of BOC PCL as at 30 June 2021, calculated according to the SRB's eligibility criteria currently in effect and based on BOC PCL's internal estimate, stood at 18.53% of risk weighted assets (RWA) and at 10.17% of LRE.

The issuance of the SP Notes contributed to BOC PCL's MREL ratio as a percentage of RWA as at 30 June 2021 by approximately 272 bps. BOC PCL's MREL ratio as at 30 June 2021 includes 39 bps relating to the Existing T2 Notes of €43 million that remain outstanding as at 30 June 2021 and are redeemable at the option of BOC PCL (subject to applicable regulatory consents) in January 2022.

The MREL ratio expressed as a percentage of risk weighted assets does not include capital used to meet the CBR amount, currently at 3.5% and expected to increase to 4% on 1 January 2022.

The successful Tier 2 capital refinancing in April 2021 and the inaugural issuance of MREL‑compliant senior notes in June 2021 are part of BOC PCL's funding plan to meet the interim and final MREL requirements. The MREL interim requirement of 1 January 2022 has already been achieved.

Funding and Liquidity

Funding

Funding from Central Banks

At 30 June 2021, the BOC PCL's funding from central banks amounted to €2,985 million, which relates to ECB funding, comprising solely of funding through the Targeted Longer‑Term Refinancing Operations (TLTRO) III, compared to €995 million as at 31 December 2020.

In June 2021, BOC PCL borrowed an amount of €300 million under the eighth TLTRO III operation, increasing the borrowing under TLTRO III to €3.0 billion, as BOC PCL had already borrowed an amount of €1.7 billion under the seventh TLTRO III operation in March 2021 and an amount of €1 billion under the fourth TLTRO III operation in June 2020, despite its comfortable liquidity position, given the favourable borrowing terms, in combination with the relaxation of collateral requirements.

Based on internal estimations (subject to confirmation from the CBC), BOC PCL has exceeded the benchmark net lending threshold in the period 1 March 2020 to 31 March 2021 and is therefore expected to qualify for a beneficial rate for the period from June 2020 to June 2021. BOC PCL estimates the NII benefit from its TLTRO III borrowing for the period from June 2020 to June 2021 at approximately €7 million, recognised over the respective period in the income statement.

The potential NII benefit from the TLTRO III borrowing for the period from June 2021 to June 2022 amounts to approximately €15 million, based on current ECB rates and provided that BOC PCL meets the net lending thresholds.

Deposits

Customer deposits totalled €16,801 million at 30 June 2021, compared to €16,533 million at 31 December 2020, increased by approximately 2% since the year end.

BOC PCL's deposit market share in Cyprus reached 34.6% as at 30 June 2021, compared to 35.0% at 31 December 2020. Customer deposits accounted for 69% of total assets and 76% of total liabilities at 30 June 2021, compared to 77% of total assets and 85% of total liabilities at 31 December 2020.

The net Loans to Deposits (L/D) ratio stood at 59% as at 30 June 2021, compared to 63% as at 31 December 2020. The decrease was mainly due to the completion of Project Helix 2 and the increase in deposits during the six months ended 30 June 2021.

Loan Stock

At 30 June 2021 the Group's loan stock (including accrued interest) amounted to €645 million, compared to €272 million at 31 December 2020, and relates to unsecured subordinated Tier 2 Capital Notes and senior preferred notes.

In April 2021, the Company issued €300 million unsecured and subordinated Tier 2 Capital Notes (the 'New T2 Notes'). In addition, Existing T2 Notes of €43 million remain outstanding as at 30 June 2021. For further information please refer to section 'Capital Base' above.

In June 2021, BOC PCL executed its inaugural MREL transaction issuing €300 million of senior preferred notes (the 'SP Notes'). For further information please refer to section 'Minimum requirement for own funds and eligible liabilities' above.

Liquidity

At 30 June 2021 the Group Liquidity Coverage Ratio (LCR) stood at 303%, compared to 254% at 31 December 2020, above the minimum regulatory requirement of 100%. The liquidity surplus in LCR at 30 June 2021 amounted to €5.7 billion, compared to €4.2 billion at 31 December 2020. The increase in the six months ended 30 June 2021 is mainly due to the issuance of €300 million senior preferred notes, the completion of Project Helix 2, the increase in deposits and the increase in the TLTRO III borrowing.

The NSFR is calculated as the amount of 'available stable funding' (ASF) relative to the amount of 'required stable funding' (RSF). The regulatory limit, enforced in June 2021, has been set at 100% as per CRR II. The NSFR weights under CRR II do not have material deviations from those under Basel III guidelines which the Group followed prior to CRR II enforcement. At 30 June 2021 the Group's NSFR stood at 150%, compared to 139% at 31 December 2020.

Loans

Group gross loans totalled €10,893 million at 30 June 2021, compared to €12,261 million at 31 December 2020, reduced by 11% since the year‑end following the completion of Project Helix 2. Gross loans of the Group's Cyprus operations totalled €10,840 million at 30 June 2021 accounting for almost all of the Group gross loans.

New lending granted in Cyprus reached €894 million during the six months ended 30 June 2021, up by 30% compared to 30 June 2020. New lending in the first half of 2021 comprised €395 million of corporate loans, €331 million of retail loans (of which €226 million were housing loans), €105 million of SME loans and €63 million of shipping and international loans. New corporate loans have increased faster in the second quarter of 2021 compared to the respective quarter of 2020, as the economic activity continues to improve. At the same time, demand for retail housing loans remains strong, supported by Government schemes.

At 30 June 2021, the Group net loans and advances to customers totalled €9,967 million, compared to €9,886 million at 31 December 2020. At 30 June 2021, there were no loans and advances to customers classified as held for sale, whereas, at 31 December 2020 net loans and advances to customers of €493 million were classified as held for sale in line with IFRS 5 and related to Project Helix 2 (€485 million, comprising €310 million relating to Portfolio A and €175 million relating to Portfolio B) and Helix Tail (€8 million).

BOC PCL is the single largest credit provider in Cyprus with a market share of 39.1% at 30 June 2021, compared to 41.9% at 31 December 2020. The decrease as at 30 June 2021 is mainly due to the completion of Project Helix 2.

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. The Group's near‑term priorities include completing the balance sheet de‑risking, whilst managing the post‑pandemic NPE inflow.

The loan credit losses for the six months ended 30 June 2021 totalled €35 million (excluding 'Provisions/net loss relating to NPE sales, including restructuring expenses'), compared to €87 million in the six months ended 30 June 2020. Further details regarding loan credit losses are provided in section 'Profit/(loss) before tax and non‑recurring items' below.

Loan moratorium

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 (loan moratorium) for the period to the end of the year 2020, for all eligible borrowers with no arrears for more than 30 days as at the end of February 2020. The payment holiday for all these loans expired on 31 December 2020.

Performing loans as at 30 June 2021 under expired payment deferrals amounted to €4.9 billion, compared to €5.3 billion as at 31 December 2020, of which €4.8 billion or 96% had an instalment due by 12 August 2021 with a strong performance; 96% present no arrears (of which €0.5 billion have been restructured) and only 4% are in arrears (of which 95% are less than 30 days‑past‑due).

Performing loans to private individuals as at 30 June 2021 under expired payment deferrals amounted to €1.8 billion, of which 98% had an instalment due by 12 August 2021. Of those, 92% present no arrears (of which approximately €28 million have been restructured) and only 8% are in arrears (of which 96% are less than 30 days‑past‑due).

Similarly, performing loans to businesses as at 30 June 2021 under expired payment deferrals amounted to €3.15 billion, of which 95% had an instalment due by 12 August 2021. Of those, 99% present no arrears (of which €0.47 billion have been restructured, mostly in the tourism sector) and only 1% are in arrears.

In the six months ended 30 June 2021, net reclassifications of €131 million of loans under expired payment deferrals were made from Stage 1 to Stage 2, following reclassifications of €675 million of loans under expired payment deferrals from Stage 1 to Stage 2 as a result of management overlays and restructurings, and reclassifications of €544 million of loans under expired payment deferrals from Stage 2 to Stage 1, mainly due to the good performance after the expiry of the payment deferrals. In addition, reclassifications of €30 million of loans under expired payment deferrals were made mainly from Stage 2 to Stage 3 during the six months ended 30 June 2021. References made to 'loans under expired payment deferrals' in this paragraph include current accounts and overdrafts.

BOC PCL will continue to monitor this portfolio closely, to ensure that potential difficulties in the repayment ability are identified at an early stage, and appropriate solutions are provided to viable customers. To that end, BOC PCL has enhanced its monitoring process to include transactional analysis to establish funds availability to meet upcoming instalments and daily monitoring of arrears and excesses, as well as NPEs inflows and outflows.

BOC PCL has a strong track record in dealing with restructurings. Targeted restructuring solutions are offered to alleviate pandemic‑related short‑term cash flow burden, following rigorous assessment of repayment ability. To date, most restructurings relate to tourism.

Loan impairments related to COVID‑19 amounting to €12.5 million were included in loan credit losses of €35 million for the six months ended 30 June 2021. Overall, in the year ended 31 December 2020, the impact of IFRS 9 forward looking information (FLI) driven by the update of the macroeconomic assumptions resulted in a €54 million charge (43 bps) included in the loan credit losses of €149 million (cost of risk of 1.18%).

Finally, the provision coverage of Stage 3 loans under payment deferrals that expired on 31 December 2020 of approximately 22% as at 30 June 2021 is considered to be adequate, as it is higher than the coverage of re‑performing NPEs (NPEs in the pipeline to exit, subject to meeting all exit criteria) of 19%.

The table below presents the loans under payment deferrals that expired on 31 December 2020, by IFRS 9 staging.

IFRS 9 staging for expired loan payment deferrals (€ billion) 

30 June2021

31 December2020

Stage 1

3.58

3.96

Stage 2

1.62

1.58

Stage 3

0.25

0.33

Total (includes overdrafts and current accounts)

5.45

5.87

A second scheme for the suspension of loan repayments for interest and principal (loan moratorium) was launched in January 2021 for customers impacted by the second lockdown. Payment deferrals were offered to the end of June 2021, however, the total months under loan moratorium, including the loan moratorium offered in 2020, could not exceed a total of nine months. The application period expired on 31 January 2021 and loans of approximately €20 million were approved for the second moratorium. Close monitoring of the credit quality of loans in moratoria continues.

Following the outbreak of COVID‑19, the sectors most adversely affected are tourism, trade, transport, manufacturing and construction. The Group has a well - diversified performing loan portfolio. For further information on the Group's non‑legacy loan book exposure to tourism and trade and the performance of these loans after the expiry of the loan moratorium, please refer to section 'Business Overview'.

Non‑performing exposure reduction

Non‑performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced by €1,497 million during the six months ended 30 June 2021 to €1,589 million compared to €3,086 million at 31 December 2020. The reduction comprises of €1,305 million NPEs as at the completion of Project Helix 2 (as explained further below), net organic NPE reductions of €171 million and further net NPE reductions of €21 million relating to Project Helix 2 loans during the period until completion. The organic NPE reduction in the six months ended 30 June 2021 was impacted by the COVID‑19 lockdown.

The NPEs account for 14.6% of gross loans as at 30 June 2021, compared to 25.2% as at 31 December 2020, driven by the completion of Project Helix 2.

The NPE coverage ratio stands at 60% at 30 June 2021, compared to 62% at 31 December 2020, following the completion of Project Helix 2. When taking into account tangible collateral at fair value, NPEs are fully covered.

As of 1 January 2021, the new regulation on Definition of Default has been implemented, affecting NPE exposures and the calculation of Days‑Past‑Due. The impact of these changes on the Group on 1 January 2021 is immaterial.

30 June 2021

31 December 2020

€ million

% gross loans

€ million

% gross loans

NPEs as per EBA definition

1,589

14.6%

3,086

25.2%

Of which, in pipeline to exit: ‑ NPEs with forbearance measures, no arrears*

212

1.9%

303

2.5%

\* The analysis is performed on a customer basis.

Project Helix 2

In June 2021, the Group completed Project Helix 2 (Portfolios A and B), which refers to the sale of portfolios of loans with a total gross book value of €1,331 million as at the completion date (of which €1,305 million relate to non‑performing exposures) ('Portfolios A and B'), secured over real estate collateral, and stock of properties with carrying value amounting to €73 million to funds affiliated with Pacific Investment Management Company LLC ('PIMCO'), the agreements for which were announced on 3 August 2020 and on 18 January 2021. BOC PCL retains the servicing of these Portfolios for a transitional period, currently expected to end in early fourth quarter 2021 against a servicing fee.

The consideration for the sale amounts to approximately €560 million, of which approximately €165 million were received in cash by completion. The remaining amount is payable in four instalments up to December 2025 without any conditions attached. The consideration reflects adjustments resulting from, inter alia, loan repayments received on the Portfolios since the reference date of 30 September 2019. The consideration can be increased through an earnout arrangement, depending on the performance of each of the Portfolios.

Project Helix 2 represents a further milestone in the delivery of one of the Group's strategic priorities of improving asset quality through the reduction of NPEs. Project Helix 2 (Portfolios A and B) reduces the NPE ratio by approximately 9 percentage points. Overall, since the peak in 2014, the stock of NPEs has been reduced by €13.4 billion or 89% and the NPE ratio by 48.3 percentage points, from 62.9% to 14.6%.

Additional strategies to accelerate de‑risking

The Group remains committed to further de‑risking its balance sheet and will continue to seek solutions to achieve this. The Group continues to work with its advisors towards the sale of portfolios of NPEs in the future, to further accelerate the decrease in NPEs on the balance sheet through additional sales of NPEs.

Real Estate Management Unit (REMU)

The Real Estate Management Unit (REMU) is focused on the disposal of on‑boarded properties resulting from debt for asset swaps. The Group completed disposals of €76 million in the six months ended 30 June 2021 (30 June 2020: €24 million), resulting in a profit on disposal of €7 million for the six months ended 30 June 2021 (six months ended 30 June 2020: profit on disposal of €3 million), following the relaxation of restrictive measures. Asset disposals are across all property classes, with 54% of sales by value in the six months ended 30 June 2021 relating to land.

During the six months ended 30 June 2021, the Group executed sale‑purchase agreements (SPAs) for disposals with contract value of €85 million (387 properties), compared to €27 million (170 properties) for the six months ended 30 June 2020. In addition, the Group had a strong pipeline of €85 million by contract value as at 30 June 2021, of which €48 million related to SPAs signed, compared to a pipeline of €68 million as at 30 June 2020, of which €53 million related to SPAs signed.

REMU on‑boarded €21 million of assets in the six months ended 30 June 2021, compared to additions of €30 million in the six months ended 30 June 2020, via the execution of debt for asset swaps and repossessed properties.

Details with respect to the prudential charge relating to the onsite inspection findings are provided in section 'Capital Base' above.

Assets held by REMU

As at 30 June 2021, assets held by REMU had a carrying value of €1,404 million (comprising properties of €1,285 million classified as 'Stock of property' and €119 million as 'Investment properties'), compared to €1,473 million as at 31 December 2020 (comprising properties of €1,350 million classified as 'Stock of property' and €123 million as 'Investment properties').

In addition to assets held by REMU, properties classified as 'Investment properties' with carrying value of €8 million as at 30 June 2021 (compared to €5 million as at 31 December 2020), relate to legacy properties held by the Group before the set‑up of REMU in January 2016.

Total income

Net interest income (NII) for the six months ended 30 June 2021 amounted to €152 million compared to €168 million for the six months ended 30 June 2020, down by 9%, mainly due to continuing pressure from the low interest rate environment, lower volume of loans, as well as lower interest collections on NPEs partially offset by the reduction in cost of deposits and the increase in TLTRO III in March 2021.

The net interest income (NII) includes an amount of approximately €15 million for the six months ended 30 June 2021 which relates to the net interest income of the loans included in Helix 2 (Portfolios A and B) which has been derecognised as of 30 June 2021, following completion in June 2021. The reduction in NII as a result of the completion of Project Helix 2 will be partially offset by an amount of €5 million in the second half of 2021 and approximately €8.5 million per annum in 2022‑2023 relating to the unwinding of the net present value and interest income of the deferred consideration, reducing thereafter on the basis of repayments and assuming no early repayment in 2023.

Average interest earning assets for the six months ended 30 June 2021 amounted to €19,652 million, up by 11% compared to 30 June 2020, driven by the increase in liquid assets following the increase in the borrowing under TLTRO III by €2.0 billion in the six months ended 30 June 2021. 

Net interest margin (NIM) for the six months ended 30 June 2021 amounted to 1.56%, compared to 1.90% for the six months period ended 30 June 2020, negatively impacted by the decrease in NII and the increase in average interest earning assets. Adjusting for the TLTRO III of €3.0 billion (i.e. removing the TLTRO III from the average interest earning assets and the respective benefit recognised over the period from the net interest income), the NIM amounts to 1.71% for the six months ended 30 June 2021.

Non‑interest income for the six months ended 30 June 2021 amounted to €136 million compared to €120 million for the six months ended 30 June 2020, up by 12%, comprising net fee and commission income of €84 million, net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates of €8 million, net insurance income of €31 million, net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of €6 million and other income of €7 million. The increase compared to 30 June 2020 is driven by higher net fee and commission income, as well as higher REMU disposal gains and lower revaluation losses on investment properties. 

Net fee and commission income for the six months ended 30 June 2021 amounted to €84 million, compared to €71 million for the six months ended 30 June 2020. The increase in net fee and commission income during the six months ended 30 June 2021 was mainly due to the extension of liquidity fees to a broader pool of customers and the introduction of a revised price list in February 2021, as well as higher volume of transactions following the lockdown. Net fee and commission income for the six months ended 30 June 2021 also includes approximately €5 million relating to an NPE sales‑related servicing fee, for a transitional period currently expected to end in early fourth quarter 2021 and a fee of approximately €2 million relating to a specific client transaction.

Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates of €8 million for the six months ended 30 June 2021 (comprising net foreign exchange gains of €7 million and net gains on financial instrument transactions of €1 million), compared to €12 million for the six months ended 30 June 2020. The decrease is mainly driven by the lower net foreign exchange gains in the first half of 2021, impacted by the lockdown.

Net insurance income of €31 million for the six months ended 30 June 2021, compared to €29 million for the six months ended 30 June 2020, driven by lower claims and improved commissions in the life insurance business. 

Net gains from revaluation and disposal of investment properties and on disposal of stock of properties for the six months ended 30 June 2021 amounted to €6 million (comprising a profit on disposal of stock of properties of €7 million and net losses from revaluation of investment properties of €1 million), compared to nil in the six months ended 30 June 2020 (comprising of a profit on disposal of stock of properties of approximately €3 million and net losses from revaluation of investment properties of €2 million), which had been impacted by the lockdown measures.

Total income for the six months ended 30 June 2021 amounted to €288 million and remained broadly flat compared to 30 June 2020.

Total expenses

Total expenses for the six months ended 30 June 2021 were €186 million, compared to €180 million for the six months ended 30 June 2020. 54% of total expenses related to staff costs (€101 million), 38% to other operating expenses (€70 million) and 8% (€15 million) to special levy on deposits and other levies/contributions. The increase of 3% compared to 30 June 2020 is driven by the increase in staff costs. More information on these is provided further below.

Total operating expenses for the six months ended 30 June 2021 were €171 million, compared to €165 million for the six months ended 30 June 2020.

Staff costs for the six months ended 30 June 2021 were €101 million, increased by 5% compared to €96 million for the six months ended 30 June 2020. Staff costs for the six months ended 30 June 2020 reflected cost savings from the measures relating to the COVID‑19 lockdown (special annual leaves to vulnerable groups and suspension of the contribution to the national health system). The Group employed 3,558 as at 30 June 2021, compared to 3,573 as at 31 December 2020. 

In December 2020, the Group completed a targeted voluntary staff exit plan (VEP) with a total cost of €6 million, recorded in the consolidated income statement in the fourth quarter of 2020 (as a non‑recurring item in the underlying basis). The gross annual savings are estimated at approximately €2 million or approximately 1% of staff costs.

In July 2021, BOC PCL reached agreement with the Cyprus Union of Bank Employees for the renewal of the collective agreement for the years of 2021 and 2022. The agreement relates to certain changes including the introduction of a new pay grading structure linked to the value of each position of employment, and of a performance‑related pay component as part of the annual salary increase, both of which have been long‑standing objectives of BOC PCL and are in line with market best‑practice. This renewal is expected to increase staff costs for 2021 and 2022 by 3‑4% per annum, in line with the impact of renewals in previous years. The Group's medium‑term guidance, which includes maintaining annual 'total operating expenses' below €350 million, remains unchanged.

Other operating expenses for the six months ended 30 June 2021 were €70 million, compared to €69 million for the six months ended 30 June 2020.

Special levy on deposits and other levies/contributions for the six months ended 30 June 2021 amounted to €15 million, which remained broadly flat compared to 30 June 2020.

The cost to income ratio excluding special levy on deposits and other levies/contributions for the six months ended 30 June 2021 was 59%, compared to 57% for the six months ended 30 June 2020, up by 2 percentage points. Adjusting for the interest income on the Helix 2 Portfolios, the cost to income ratio excluding special levy on deposits and other levies/contributions for the six months ended 30 June 2021 increases to 62%, compared to 60% for the six months ended 30 June 2020. The cost to income ratio excluding special levy on deposits and other levies/contributions is expected to rise in the near term as revenues remain under pressure and operating expenses increase due to higher IT/digitisation investment costs, whilst it is expected to decrease to mid‑50% in the medium term.

Profit/(loss) before tax and non‑recurring items

Operating profit for the six months ended 30 June 2021 was €102 million, compared to €108 million for the six months ended 30 June 2020, down by 6%.

Loan credit losses for the six months ended 30 June 2021 totalled €35 million, compared to €87 million for the six months ended 30 June 2020.

The annualised loan credit losses charge (cost of risk) for the six months ended 30 June 2021 accounted for 0.61% of gross loans, of which 21 bps reflect loan impairments related to COVID‑19 (compared to an annualised loan credit losses charge of 1.39% for the six months ended 30 June 2020, of which 59 bps reflect loan impairments related to COVID‑19). Cost of risk for the second quarter of 2021 amounted to 52 bps (€15 million), of which 12 bps (€3.5 million) reflect loan impairments related to COVID‑19, compared to a cost of risk of 66 bps (€20 million) for the first quarter of 2021, of which 29 bps (€9 million) reflect loan impairments related to COVID‑19. Further details on the loan moratorium are provided in section 'Loan portfolio quality' above.

At 30 June 2021, the allowance for expected loan credit losses, including residual fair value adjustment on initial recognition and credit losses on off‑balance sheet exposures totalled €947 million, compared to €1,902 million at 31 December 2020, and accounted for 8.7% of gross loans (compared to 15.5% at 31 December 2020 including portfolios held for sale). The decrease in the allowance for expected loan credit losses in the six months ended 30 June 2021 resulted from the completion of Project Helix 2.

Impairments of other financial and non‑financial assets for the six months ended 30 June 2021 amounted to €11 million, compared to €29 million for the six months ended 30 June 2020. The decrease was driven by lower revaluation losses on properties.

Provisions for litigation, claims, regulatory and other matters for the six months ended 30 June 2021 totalled €4 million, at the same level as for the six months ended 30 June 2020. The charge for provisions for litigation, claims, regulatory and other matters for in the six months ended 30 June 2021 includes an amount of €3 million that relates mainly to a potential fine to be imposed on BOC PCL relating to the findings of a regulatory investigation with regards to transfer of liquidity by BOC PCL to its subsidiaries in the period 2016‑2017, allegedly without prior regulatory approval.

Profit before tax and non‑recurring items for the six months ended 30 June 2021 totalled €52 million, compared to a loss of €12 million for the six months ended 30 June 2020.

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

The tax charge for the six months ended 30 June 2021 is €1 million, compared to €5 million for the six months ended 30 June 2020. 

Profit after tax and before non‑recurring items (attributable to the owners of the Company) for the six months ended 30 June 2021 was €51 million, compared to a loss of €13 million for the six months ended 30 June 2020. Return on Tangible Equity (ROTE) before non‑recurring items calculated using 'profit after tax and before non‑recurring items (attributable to the owners of the Company)' amounts to 6.1% for the six months ended 30 June 2021. 

Advisory and other restructuring costs ‑ organic for the six months ended 30 June 2021 amounted to €18 million, compared to €6 million for the six months ended 30 June 2020. Advisory and other restructuring costs ‑ organic for the six months ended 30 June 2021 include an amount of €12 million that relates to the cost of the tender offer for existing Tier 2 Capital Notes (due January 2027) with aggregate nominal amount of €207 million, thereby forfeiting the relevant obligation for future coupon payments.

Profit after tax arising from the organic operations (attributable to the owners of the Company) for the six months ended 30 June 2021 amounted to €33 million, compared to a loss of €19 million for the six months ended 30 June 2020. 

Provisions/net loss relating to NPE sales, including restructuring expenses for the six months ended 30 June 2021 was €32 million, compared to €107 million for the six months ended 30 June 2020. Provisions/net loss relating to NPE sales, including restructuring expenses for the six months ended 30 June 2021 include an amount of €14 million relating to the completion mechanics for Project Helix 2, expected to unwind over time in 'net interest income' until the full payment of the deferred consideration. Restructuring costs relating to NPE sales of €10 million and other expenses of €6 million for the six months ended 30 June 2021 were also included, compared to €4 million and €12 million respectively for the six months ended 30 June 2020. 

Profit after tax attributable to the owners of the Company for the six months ended 30 June 2021 was €1 million, compared to a loss of €126 million for the six months ended 30 June 2020.

Following a contraction by 5.1% in 2020 and a modest drop by 2.1% in the first quarter of 2021, year‑on‑year, real GDP seasonally adjusted in Cyprus increased steeply by 12.9% in the second quarter. This partly reflects base effects given that second quarter GDP in 2020 had dropped by 12.5%. Growth was driven by the sectors that were most severely impacted by the pandemic the year before, namely tourism, construction, manufacturing, transport and trade. The recovery under way appears solid, and the outlook for the medium term is positive. Driven by the gradual recovery of the tourism sector and other business services, and supported by the EU's resilience and recovery funds, real GDP is expected to grow by approximately 5.5% in 2021 according to the Ministry of Finance (significantly higher than initially anticipated; approximately 3.6% in April 2021) and 4.3% in 2021 and by 3.8% in 2022 according to the European Commission's latest summer European forecasts. 

In the EU as well, the GDP contraction in the first quarter of the year was marginal, and milder than initially anticipated. Second quarter growth rates are not yet available for all countries, but preliminary results reported thus far, point to a very strong rebound, reflecting the impact of the lifting of restrictions during the quarter. Consumer confidence and service sector activity picked up sharply, catching up with already resurgent manufacturing activity. The European Commission, in their summer European forecasts, expects annual GDP growth of 4.8% in 2021 and 4.5% in 2022.

At another development, the ECB kept its policy stance unchanged at its meeting on 22 July 2021 and reaffirmed its commitment to continue purchases under the pandemic emergency purchase programme at a 'significantly higher pace'. The most important change was the adjustment of the forward guidance on interest rates as a consequence of its strategic review which was announced in early July. The main decision was to adopt a symmetric 2% inflation target compared with previously defined price stability of inflation below but close to 2%. Hence, inflation that temporarily surpasses 2% will not automatically trigger a policy tightening.

Recovery in international tourism in Cyprus has started to accelerate from July 2021. Tourist arrivals in July 2021 increased significantly compared to July 2020 (+358% year‑on‑year) and reached 54% of the levels in July 2019. Tourist arrivals in August and September 2021 are expected to show similar trends. The reduction in international tourist arrivals in 2021 compared to the pre‑pandemic levels of 2019 is expected to be partially offset by domestic tourism.

Other short‑term indicators point in the direction of strong recovery in the year on average. Indices of construction activity increased strongly and building permits were up in January‑May by 35.4% and 38.2% respectively for volume and dwellings. The index of industrial production was up 9.6% in January‑May driven by a 12.2% increase in manufacturing. On the demand side, the volume of retail sales excluding vehicles were up by 8.2% also in January‑May and total vehicle registrations increased by 18.6% in the second quarter. In housing, total sales almost doubled in the second quarter after more than halving in the same period the year before.

Consumer inflation rose to 3.1% in the second quarter after dropping by 1.4% in the first and rose by 4.0% in July, bringing the seven‑month year‑on‑year average to 1.1%. The acceleration of inflation in the second quarter was driven by clothing items, housing, and transportation costs. The latter two reflect higher energy and shipping costs.

Public finances deteriorated sharply in 2020 as a result of the government's response to the coronavirus pandemic. Cyprus recorded a deficit of 5.7% of GDP in 2020 compared with a surplus of 1.5% of GDP in 2019. The budget deficit can be expected to moderate in 2021, but to remain sizeable nonetheless, and to diminish subsequently as the economy strengthens and the government scales back its spending. Public debt rose to 119.1% of GDP in 2020 and can be expected to decline gradually in the medium term.

In the banking sector, total non‑performing exposures at the end of May 2021 were €5.16 billion compared with €5.14 billion at the end of December 2020. Non‑performing exposures were 18.0% of gross loans at the end of May 2021 compared with 17.7% of gross loans at end December 2020 and 28.0% at the end of 2019. The non‑performing exposures ratio in the non‑financial companies' segment was 14.8% at the end of May 2021 and that for households was at 23.7%. The coverage ratio was 51.2% at the end of May 2021.

Following the financial crisis of 2012‑2014, economic recovery was relatively solid and real GDP increased at an annual pace of 4.6% on average in 2015‑2019. The coronavirus pandemic reversed some of these gains and real GDP contracted by 5.1% in 2020. The contraction was less steep than the Eurozone average of 6.4% despite Cyprus' considerable exposure to the pandemic shock and its impact on travel and tourism. Tourist arrivals and receipts declined by about 85% in 2020.

The impact was mitigated by strong government support for households and businesses. The European Commission forecasts a strong recovery in 2021‑2022 driven mainly by domestic demand. Most restrictions were lifted in May 2021 and a partial rebound in tourist activity will help restore the economy to growth especially in the second half of the year. The main risk concerns the epidemiological outlook, however the Government's vaccination plan is well underway.

Real economic activity in the medium term is expected to be supported by the recovery in tourism and to be aided by higher investment activity linked with the Recovery and Resilience Fund through which Cyprus is set to receive €1.2 billion or 5.5% of its GDP in 2021‑2026. Effectiveness will depend on the implementation of structural reforms, mainly to improve the efficiency of the judiciary and of the public and local administration. Effectiveness will also depend on absorption capacity and whether the funds are directed towards productive investment and activities. Separately, in August 2021, the European Commission approved the loan government guarantee scheme of approximately €1.0 billion to facilitate liquidity (guarantee of 70%); the amended legislation is pending approval by Parliament.

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.

Most recently in July 2021, Moody's Investors Service upgraded the Government of Cyprus' long‑term issuer and senior unsecured ratings to Ba1 from Ba2 (since July 2018) and changed the outlook from positive to stable. The primary driver for the upgrade was the material improvement in the underlying credit strength of the domestic banking system, which also reduces the risks of a systemic banking crisis.

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, and in March 2021. In March 2021, S&P Global Ratings affirmed its rating and outlook, balancing the risks from the pandemic's protracted adverse impact on growth, fiscal, and banking sector performance against benefits of the EU's Recovery and Resilience Facility (RRF) transfers, as well as further improvement in the government's debt profile.

Fitch Ratings maintains a Long‑Term Issuer Default rating of investment grade at BBB‑ since November 2018, affirmed in April and October 2020, and in March 2021. Its outlook was upgraded to positive in October 2019 and revised to stable in April 2020, reflecting the significant impact the global COVID‑19 pandemic might have on the Cyprus economy and fiscal position. The stable outlook was affirmed in March 2021.

In May 2021, DBRS Ratings confirmed Cyprus' Long‑Term Foreign and Local Currency Issuer Ratings at BBB (low) with a stable trend reflecting a balanced view on the risks despite the deterioration in public finances caused by the COVID‑19 pandemic. According to the ratings firm, Cyprus' ratings are supported by a prudent public debt management framework, a good track record in fiscal deficit reduction, Eurozone membership fostering sustainable macroeconomic policies, and openness to investment encouraging a favourable business environment.

Credit ratings

The Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. In July 2021, Moody's Investors Service upgraded BOC PCL's long‑term deposit rating to B1 from B3, maintaining the positive outlook. In January 2021, 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 BOC PCL. In July 2020, Standard and Poor's affirmed their long‑term issuer credit rating on BOC PCL of B+ (stable outlook).

COVID‑19 impact

The Group continues to closely monitor developments in, and the effects of COVID‑19 on both the global and Cypriot economy. Strong recovery in economic activity marked the second quarter of the year, against the backdrop of increasing vaccination coverage across Cyprus and relaxation of restrictions. At the same time, the Group has continued its focus on providing support to its customers, colleagues and community.

Statistics are encouraging, as 78% of the adult population in Cyprus have been vaccinated with the first dose and 74% have completed their vaccination regime, (Ministry of Health, as of 28 August 2021).

Upon the outbreak of COVID‑19 in March 2020, the Pandemic Incident Management Plan of the Group was invoked and a dedicated team (Pandemic Incident Management 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, which are still in place according to the current pandemic status, to ensure minimum disruption to its operations. The Pandemic Incident Management Team and the Crisis Management Committee continue to closely monitor the dynamic COVID‑19 pandemic developments and status. 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 has 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, whilst at the same time maintaining relevant control procedures to ensure authorisation in line with the Group's governance structure. 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.

The potential economic implications for the sectors in which the Group is active have been assessed and possible mitigating actions for supporting the economy have been identified, 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, have helped and should continue to 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 (loan moratorium) for the period to the end of the year 2020, for all eligible borrowers with no arrears for more than 30 days as at the end of February 2020. The payment holiday for all these loans expired on 31 December 2020.

Performing loans as at 30 June 2021 under expired payment deferrals amounted to €4.9 billion (compared to €5.3 billion as at 31 December 2020), of which €4.8 billion or 96% had an instalment due by 12 August 2021 with a strong performance, 96% present no arrears (of which €0.5 billion have been restructured) and 4% are in arrears.

Further details are provided in section 'Loan portfolio quality' above. Close monitoring of the credit quality of these loans continues and customers with early arrears are offered solutions. BOC PCL has a strong track record in dealing with restructurings. Targeted restructuring solutions are offered to alleviate pandemic‑related short‑term cash flow burden, following rigorous assessment of repayment ability.

Following the outbreak of COVID‑19, the sectors most adversely affected are tourism being the sector with the highest impact, and trade, transport, manufacturing and construction with medium impact. The Group has a well - diversified performing loan portfolio.

As at 30 June 2021, the Group's non‑legacy loan book exposure to tourism was limited to €1.14 billion (out of a total non‑legacy loan book of €9.4 billion), of which approximately €0.93 billion of performing loans as at 30 June 2021 were under expired payment deferrals. 94% of those had an instalment due by 12 August 2021 and of those, approximately 100% present no arrears (of which approximately €281 million have been restructured).

Tourism is demonstrating signs of recovery. Tourist arrivals in July 2021 have increased by 358% year‑on‑year and amount to 54% of July 2019 levels, whilst the reduction in international tourist arrivals in 2021 compared to 2019 is expected to be partly offset by domestic tourism. It is important to note, that the majority of 'accommodation' customers entered the crisis with significant liquidity, following strong performance in recent years and that 96% of the tourism portfolio is secured by property. Close monitoring of developments continues.

Respectively, as at 30 June 2021 the Group's non‑legacy loan book exposure to trade was €0.91 billion, of which €0.32 billion of performing loans as at 30 June 2021 were under expired payment deferrals. 94% of those had an instalment due by 12 August 2021 and of those, 97% present no arrears (of which €10 million have been restructured) and 3% present arrears. It is important to note that approximately 29% of the exposure to trade relates to lower‑risk essential retail services, not materially impacted by the pandemic.

Strategic priorities for the medium term

BOC PCL'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 grow revenues in a more capital efficient way and to improve efficiency through its digital transformation programme in order to provide products and services while reducing operating costs. In addition, BOC PCL is looking to enhance its 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 agenda priorities.

Completing balance sheet de‑risking

Tackling BOC PCL's loan portfolio quality is of utmost importance for the Group.

In June 2021, the Company completed Project Helix 2 (Portfolios A and B), which refers to the sale of portfolios of loans with a total gross book value of €1,331 million as at the completion date (of which €1,305 million relate to non‑performing exposures) ('Portfolios A and B'), secured over real estate collateral, to funds affiliated with Pacific Investment Management Company LLC ('PIMCO'), the agreements for which were announced on 3 August 2020 and on 18 January 2021.

Project Helix 2 represents a further milestone in the delivery of one of the Group's strategic priorities of improving asset quality through the reduction of NPEs. Project Helix 2 (Portfolios A and B) reduces the NPE ratio by approximately 9 percentage points. Overall, since the peak in 2014, the stock of NPEs has been reduced by €13.4 billion or 89% and the NPE ratio by 48.3 percentage points, from 62.9% to 14.6%.

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 further support the recovery of the Cypriot economy.

The Group remains committed to further de‑risking its balance sheet and will continue to seek solutions to achieve this. The Group continues to work with its advisors towards the sale of portfolios of NPEs in the future, to further accelerate the decrease in NPEs on the balance sheet through additional sales of NPEs. At the same time, following the outbreak of COVID‑19 and the expiration of the 2020 loan moratorium at the end of year 2020, the Group continues to closely monitor the performance of loans under expired payment deferrals and nearly eight months after deferral expiry, the performance is better than initially expected.

Following the outbreak of COVID‑19, all foreclosures were suspended between March - August 2020, and then between January - March 2021, but only for specific categories including primary residences with open market value up to €350 thousand. In early May 2021, further legislation was enacted by the Cyprus Parliament by which foreclosures were suspended until the end of July 2021, for primary residences with open market value up to €500 thousand, premises of very small businesses (with annual turnover up to €2 million and less than 10 employees), and agricultural fields with open market value up to €250 thousand. Parliament voted a further suspension with smaller scope until the end of October 2021 for primary residences with open market value up to €350 thousand, premises of very small businesses (with annual turnover up to €750 thousand and less than 10 employees), and agricultural fields with open market value up to €100 thousand. This legislation has not as yet been enacted and it has been forwarded to the Supreme Court to decide on whether or not the suspension is in line with the constitution.

Growing revenues in a more capital efficient way

The accelerated de‑risking of the balance sheet increases pressure on revenues in the near term. There are multiple initiatives underway to increase net interest income and less capital‑intensive non‑interest income, with a focus on fees, insurance and non‑banking business.

The Group continues to provide high quality new loans via prudent underwriting standards. Growth in new lending in Cyprus has been focused on selected industries more in line with BOC PCL's target risk profile, and following the outbreak of COVID‑19, the focus remains to support the Cypriot economy in order to overcome the crisis. During the six months ended 30 June 2021, new lending amounted to €894 million, increased by 30% compared to the same period last year, as demand for new loans is picking up, driven mainly by corporate (up by 30% year‑on‑year for the six months ended 30 June 2021), as economic activity continues to improve. At the same time, the demand for retail housing loans remains above pre‑COVID levels, supported by the Government interest rate subsidy scheme. The pipeline for new housing loans remains strong at over €100 million as at mid‑August 2021, whilst new housing loans of approximately €220 million have been approved by BOC PCL since the beginning of the scheme until end‑July 2021.

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

In common with other European banks, the prolonged low interest rate environment also continues to present a challenge to the Group's profitability. Over the medium‑term, the Group aims to grow its performing book by approximately 10%, as well as to grow shipping and international corporate lending with prudency.

At the same time, in order to further optimise its funding structure, BOC PCL continues to focus on the shape and cost of deposit franchise, taking advantage of the increased customer confidence towards BOC PCL. The cost of deposits has been reduced by 73 bps to 3 bps since December 2017. Moreover, liquidity fees for specific customer groups were introduced in March 2020. The introduction of liquidity fees to a broader group of corporate clients, which was delayed due to the COVID‑19 pandemic, was implemented as of 1 February 2021. Separately, a new price list for charges and fees was also implemented as of 1 February 2021, with the positive impact from both initiatives to be estimated at approximately €13 million per annum. Transactional fee volumes have started to recover gradually to pre‑COVID levels, as the Cypriot economy recovers.

In the medium‑term, the Group aims to increase the average product holding through cross selling to the under‑penetrated customer base, as well as to introduce the Digital Economy Platform to generate new revenue sources, through leveraging BOC PCL's market position, knowledge and digital infrastructure.

Management is 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 non‑life 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 the six months ended 30 June 2021 amounted to €31 million (up 7% year‑on‑year), contributing to 23% of non‑interest income. Furthermore, there are initiatives underway to enhance revenues from the insurance business in the medium‑term, in order to deliver sustainable profitability and shareholder returns.

In the medium‑term, EuroLife Ltd aims to improve total regular income mainly by extending its customer base and using a new distribution philosophy, as well as enhancing digital capabilities. To date, Eurolife has adjusted characteristics of specific products to improve its profitability and launched a new loan product that can be combined with credit facilities of other local banks. At the same time, the agency force has increased by 13% year‑on‑year and the average productivity per agent has also increased. New incentives for cross selling have been given and new products have been launched, leveraging on the close collaboration with BOC PCL, whilst e‑alteration has been implemented.

In the medium‑term, GIC aims to increase its gross written premiums mainly by leveraging on BOC PCL's customer base through revamping its bancassurance channel, and by focusing on high margin products. Efficiencies through enhancing digital capabilities are also expected in the medium‑term. To date, GIC has increased high‑margin products such as Fire by 10% year‑on‑year and Liability by 22%, as well as the profitable part of the motor segment, by 7%. In addition, automated paperless digital processes have been launched and relationship managers for commercial clients have been introduced. Finally, incentivisation of the agency force has been put in place and new portals for bancassurance and agents has been introduced in the second quarter of 2021.

In the six months ended 30 June 2021, BOC PCL participated in TLTRO III by borrowing an additional amount of €2.0 billion, increasing its participation to €3.0 billion, despite its comfortable liquidity position, given the favourable borrowing terms, in combination with the relaxation of collateral requirements. BOC PCL estimates the NII benefit from its TLTRO III borrowing for the period from June 2020 to June 2021 at approximately €7 million. The potential NII benefit for the period from June 2021 to June 2022 amounts to approximately €15 million, based on current ECB rates and provided BOC PCL meets the net lending thresholds.

Improving operating efficiencies

The Digital Transformation Programme that started in 2017 has begun to deliver an improved customer experience, whilst the branch footprint rationalisation to date, has further improved BOC PCL's operating model. The branch network is now less than half the size it was in 2013.

Management remains focused on further improvement in efficiency, through further branch footprint rationalisation, further exit solutions to release full time employees, containment of restructuring costs following the completion of balance sheet de‑risking, enhancement of procurement control, as well as reduction of total operating expenses by approximately 10% compared to the financial year 2019 over the medium term despite inflation, facilitated by the Digital Transformation Programme.

The Group continues to work towards becoming a more customer centric organisation. A Transformation Office has been established at the beginning of the year further reinforcing the commitment to BOC PCL's modernisation agenda. The transformation programme will enable the implementation of the strategy with key shifts focusing on a leaner and more efficient operating model, profitability and optimisation of the client service and distribution models with an emphasis on the customer.

Digital Transformation

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

In the last few months, a number of new features promoting self‑service functionalities have been made available to subscribers through BOC PCL's mobile banking app. The second phase of the digital KYC review was rolled out, which included the functionality of the automatic and live ID verification process. This allows the users to update their personal information, including the Identity Card and passport information, held by BOC PCL, through their mobile app. In many cases, updates are performed in real time without a staff member having to review them, thus contributing in operational savings as well. Additionally, the users have now the ability to purchase home and motor insurance products from GIC, through a seamless and easy flow in BOC PCL's mobile application. This offers more options and additional services to BOC PCL's customers through the digital channels. Finally, customers have now the ability to receive directions and navigation to the branches and ATM network quickly and easily through the mobile application.

The adoption of digital products and services continued to grow and gained momentum in the second quarter of 2021 and in July 2021. As at the end of July 2021, 86.6% of the number of transactions involving deposits, cash withdrawals and internal/external transfers were performed through digital channels (up by approximately 22.0 percentage points from 64.6% in September 2017 when the digital transformation programme was initiated). In addition, 77.0% of individual customers were digitally engaged (up by approximately 17.4 percentage points from 59.6% in September 2017), choosing digital channels over branches to perform their transactions. As at the end of July 2021, active mobile banking users and active QuickPay users have grown by 18% and 53% respectively in the last 12 months. The highest number of QuickPay users to date was recorded in July 2021 with 112 thousand active users. Likewise, the highest number of QuickPay payments was recorded in July 2021 with 321 thousand transactions.

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.

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

As part of its responsibility to a wider group of stakeholders, the Group aims to enhance its organisational resilience and ESG (Environmental, Social and Governance) agenda and is working towards building a forward‑looking organisation with a clear strategy supported by effective corporate governance aligned with ESG agenda priorities.

Earlier this year a dedicated executive committee, the Sustainability Committee, was set up, that will oversee the ESG agenda of the Group, review the evolution of the Group's ESG strategy, monitor the development and implementation of the Group's ESG objectives and the embedding of ESG priorities in the Group's business targets.

In order to further strengthen BOC PCL's corporate responsibility regarding the protection of the environment BOC PCL is proceeding with the launch of 'environmentally friendly' loan products to promote investment in energy saving and environmentally friendly products and services.

BOC PCL maintains a rating of A (on a scale of AAA‑CCC) in the MSCI ESG Ratings assessment since June 2020.

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 agenda priorities

KEY STRATEGIC PILLARS

ACTION TAKEN IN THE FIRST HALF OF 2021 AND TO DATE

PLAN OF ACTION

Complete balance sheet de‑risking

· Completion of Project Helix 2 (sale NPE portfolio with gross book value of €1.3 billion) in June 2021 reducing NPE ratio by approximately 9 percentage points

· For further information, please refer to section 'Loan portfolio quality' and section 'Business Overview'

· Continue to work with advisors towards the sale of portfolios of NPEs in the future, to further accelerate NPE reduction through additional NPE sales

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)

· Liquidity fees to corporate clients, that was delayed due to the COVID‑19 pandemic, was implemented as of 1 February 2021

· New price list for charges and fees was implemented as of 1 February 2021

· For further information, please refer to section 'Business Overview'

· Mitigating actions against NII challenges put in place, e.g. growing performing book and pricing away/price correctly deposits

· Enhance fee and commission income, e.g. on‑going review of price list for charges and fees, increase average product holding through cross selling, new sources of revenue through introduction of Digital Economy Platform

· Profitable insurance business with further opportunities to grow, e.g. focus on high margin products, leverage on BOC PCL's strong franchise and customer base for more targeted cross selling enabled by DT

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

· Renewal of collective agreement for 2021‑2022 is expected to increase staff costs for 2021 and 2022 by 3‑4% per annum, in line with the impact of renewals in previous years. However, when taking into consideration the impact from the various efficiency initiatives, the Group's medium‑term guidance, which includes maintaining annual 'total operating expenses' below €350 million, remains unchanged.

· Further developments in the Digital Transformation Programme

· For further information, please refer to section 'Business Overview'

· Offer exit solutions to release full time employees

· Achieve further branch footprint rationalisation 

· Contain restructuring costs following completion of balance sheet de‑risking

· Enhance procurement control

· Reduce total operating expenses by approximately 10% over the medium term despite inflation

KEY STRATEGIC PILLARS

ACTION TAKEN IN THE FIRST HALF OF 2021 AND TO DATE

PLAN OF ACTION

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 agenda priorities

· BOC PCL reached agreement with the Cyprus Union of Bank Employees for the renewal of the collective agreement in respect of 2021 and 2022.The agreement relates to certain changes including the introduction of a new pay grading structure linked to the value of each position of employment, and of a performance‑related pay component as part of the annual salary increase, both of which have been long‑standing objectives of BOC PCL and are in line with market best‑practice.

· For further information, please refer to section 'Business Overview'

· Enhanced structure and corporate governance

· Focus on our people

· Priority on ESG agenda, e.g. introduction of 'environmentally friendly' loan products

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

The Group's near‑term priorities include completing the balance sheet de‑risking, whilst managing the post‑pandemic NPE inflow; positioning BOC PCL on the path for sustainable profitability; ensuring the cost base remains appropriate, whilst further investing in the digital transformation programme in the near term in order to modernise BOC PCL's franchise (in fact, the cost to income ratio is expected to rise in the near term as revenues remain under pressure and operating expenses increase due to higher digitisation investment costs, and to reduce to mid‑50s% in the medium term); addressing the challenges from low rates and surplus liquidity.

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:

Strategic Targets for

Key Metrics

2022

Medium‑Term

Profitability

Return on Tangible Equity (ROTE)1

~7%

Total operating expenses2

Asset Quality

NPE ratio

~5%

Cost of risk

70‑80 bps

Capital

Supported by CET1 ratio of

at least 13%

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

2. Total operating expenses comprise staff costs and other operating expenses. Total operating expenses do not include the special levy on deposits or other levies/contributions 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 Group's 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 payment of the deferred consideration. At the same time, factors that could potentially have a negative impact on the Group's capital ratios in addition to IFRS 9 phasing‑in, include 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 BOC PCL on a path for profitability and delivering value for shareholders.

Going concern

The Directors have made an assessment of the Group's ability to continue as a going concern for a period of 12 months from the date of approval of these Consolidated Financial Statements.

The Directors have concluded that there are no material uncertainties which would cast significant doubt over the ability of the Group, the Company and BOC PCL to continue to operate as a going concern for a period of 12 months from the date of approval of these Consolidated Financial Statements.

In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources. Specifically, the Group's Financial Plan approved by the Board in November 2020 (the 'Plan') incorporates the impact of the COVID‑19. The Group has sensitised its projection to cater for downside scenarios and has used conservative economic inputs to develop its medium‑term strategy. The Group is working towards materialising its Financial Plan. Reforecast exercises are carried out to consider the impact of latest developments.

Capital

The following items have been considered in relation to the Group's capital adequacy throughout the period of the going concern assessment:

· The Common Equity Tier 1 (CET1) ratio and the Total Capital ratio on a transitional basis at 30 June 2021 are higher than the SREP requirements (Note 5.1).

· The Group's capital position which allows further risk reduction and recalibration of the cost base. The Group remains focused to implement the actions contemplated in the Financial Plan.

· The capital relief measures announced by the ECB, the EBA, the CBC, the Cyprus Government and the Eurogroup in order to allow banks to absorb the impact of the COVID‑19 outbreak and support the real economy.

· The successful completion of Project Helix 2 which has positively contributed to the Group's capital base.

· The successful refinancing of Tier 2 capital, further optimising the capital structure of the Group.

Funding and liquidity

The following items have been considered in relation to the Group's liquidity position throughout the period of the going concern assessment:

· The Group is in compliance with the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) and are significantly above the minimum requirements.

· The Group is monitoring its liquidity position and is considering ways to further reduce deposits' cost.

· The various measures of regulators which aim to mitigate the impact of COVID‑19.

· The Group's successful issuance of €300 million of senior preferred notes.

Economic environment

· As the Cypriot operations account for 99% of gross loans and 100% of customer deposits, the Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. The sovereign risk ratings of the Cyprus Government improved considerably in recent years, reflecting expectations of a sustained decline in public debt as a ratio to GDP, expected further declines in non‑performing exposures and a more stable price environment following a protracted period of deflation and low inflation. The risk profile of the country deteriorated in 2020 as a result of the coronavirus pandemic and measures to mitigate its impact on the economy, but the rating outlook remains stable to positive reflecting expectations of a return to growth and stabilising underlying dynamics in public finances. Following the severe recession in 2020 there will be recovery in 2021, which will be partial, and it will take until 2022 for real GDP to return to its pre‑crisis levels.

· In July 2021, Moody's Investors Service ('Moody's') has upgraded the Government of Cyprus' long‑term issuer and senior unsecured ratings to Ba1 from Ba2. The outlook has been changed to stable from positive. The key drivers of Cyprus' rating upgrade were the reduction in Cyprus' exposure to event risks because of a decrease in banking sector risks, and the resilience of the economy to the pandemic shock and robust medium‑term GDP growth prospects being supported by sizeable European funds. Moody's expect the economy to recover robustly with an average GDP growth of 4.0% in 2021‑2022 reaching the pre‑pandemic level of economic activity again in 2022. In March 2021, S&P affirmed its rating (BBB‑) and its outlook to stable.

· With respect to BOC PCL's ratings, Moody's upgraded in July 2021 BOC PCL's long‑term deposit rating to 'B1' from 'B3', with the outlook on BOC PCL's long‑term deposit rating maintained positive. In January 2021, Fitch Ratings affirmed their long term issuer credit rating of BOC PCL of 'B ' and outlook of BOC PCL to negative. Negative outlook reflecting that risks remain skewed to the downside in the medium term, if recession proves deeper or the recovery weaker than Fitch's forecasts. In July 2020, S&P affirmed their long‑term issuer credit rating on BOC PCL of 'B+' and the short‑term issuer credit rating of 'B', with a stable outlook, expressing the view that the enhanced capital reserves and the good liquidity position of BOC PCL will allow it to withstand the current shock and absorb the effects of the increasing pressure on revenues and credit losses.

· The global and domestic macroeconomic conditions as a result of the COVID‑19 crisis are the primary risk factors for the Cyprus economy and the banking sector. Adverse developments regarding growth, fiscal policy, unemployment, tourism and real estate prices, could have a negative impact on the Group's capital adequacy and its liquidity. Management closely monitors the developments and the impact they may have on the Group's operations and financial performance.

Like other financial organisations, the Group is exposed to risks, the most significant of which are credit risk, liquidity risk, market risk (arising from adverse movements in exchange rates, interest rates and security prices) and insurance risk. The Group monitors, manages and mitigates these risks through various control mechanisms. Information relating to Group principal risks and risk management is set out in Notes 29 to 31 of the Consolidated Condensed Interim Financial Statements, in the 'Additional Risk and Capital Management Disclosures' which form part of the Interim Financial Report for the six months ended 30 June 2021 and in the Interim Pillar III disclosures 2021.

The Group is also exposed to litigation risk, arising from claims, investigations, regulatory and other matters. Further information is disclosed in Note 25 to these Consolidated Condensed Interim Financial Statements and in 'Additional Risk and Capital Management Disclosures' which form part of the Interim Financial Report for the six months ended 30 June 2021.

Additionally, the Group is exposed to the risk on changes in the fair value of property which is held either for own use or as stock of property or as investment property. Stock of property is predominately acquired in exchange of debt and is intended to be disposed of in line with the Group's strategy. Further information is disclosed in Note 17 to these Consolidated Condensed Interim Financial Statements.

The Group activities are mainly in Cyprus therefore the Group's performance is impacted by changes in the Cyprus operating environment as described in the 'Operating environment' section of this Interim Management Report.

In addition, details of the significant judgements, estimates and assumptions which may have a material impact on the Group's financial performance and position are set out in Note 6 to these Consolidated Condensed Interim Financial Statements.

Details of the financial instruments and hedging activities of the Group are set out in Note 14 to these Consolidated Condensed Interim Financial Statements.

COVID‑19 and its longer term impacts on the economy and the Group's financial performance remain uncertain. Specifically, COVID‑19 could have an adverse impact across risks including the credit portfolio, operational risk, people, capital, funding and liquidity. The Group is closely monitoring the effects of COVID‑19 and impact on its operations, businesses and financial performance, including liquidity and capital usage. The effects of COVID‑19 are described in the 'Business Overview' section of this Interim Management Report.

The risk factors discussed above and in the reports identified above should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. There may be risks and uncertainties of which the Group is not aware or which the Group does not consider significant, but which may become significant. As a result of the challenging conditions in global markets due to COVID‑19, the growing threat from cyber‑attack and unknown risks, the precise nature of all risks and uncertainties that the Group faces cannot be predicted as many of these risks are outside of the Group's control.

Renewal of collective agreement

In July 2021, BOC PCL reached agreement with the Cyprus Union of Bank employees for the renewal of the collective agreement for the years of 2021 and 2022. The agreement relates to certain changes including the introduction of a new pay grading structure linked to the value of each position of employment, and of a performance related pay component as part of the annual salary increase, both of which have been long‑standing objectives of BOC PCL and are in line with market best‑practice.

There were no other material events after the balance sheet date.

The Directors are responsible for preparing the Interim Financial Report in accordance with International Accounting Standard (IAS) 34 on 'Interim Financial Reporting' as adopted by the European Union, the Transparency (Directive 2004/109/EC) Regulations 2007, as amended, Part 2 (Transparency Requirements) of the Central Bank (Investment Market Conduct) Rules 2019 and the Disclosure Guidance and Transparency Rules of the UK's Financial Conduct Authority.

Each of the Directors, whose names and functions are listed on page 1, confirms that to the best of each person's knowledge and belief:

· the Consolidated Condensed Interim Financial Statements, prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU, give a true and fair view of the assets, liabilities and financial position of the Group at 30 June 2021, and its profit for the period then ended; and

· the Interim Financial Report includes a fair review of:

a. important events that have occurred during the first six months of the year, and their impact on the Consolidated Condensed Interim Financial Statements;

b. a description of the principal risks and uncertainties for the next six months of the financial year;

c. details of any related party transactions that have materially affected the Group's financial position or performance in the six months ended 30 June 2021; and

d. any changes in the related parties' transactions described in the last annual report that could have a material effect on the financial position or performance of the Group in the first six months of the current financial year.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included in the Company's website. Legislation in Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Six months ended30 June

2021

2020

Notes

€000

€000

Turnover

7

391,367

376,652

Interest income

179,272

198,749

Income similar to interest income

17,626

24,398

Interest expense

(28,670)

(31,998)

Expense similar to interest expense

(16,015)

(23,349)

Net interest income

152,213

167,800

Fee and commission income

87,610

74,909

Fee and commission expense

(3,753)

(3,664)

Net foreign exchange gains

6,550

10,543

Net (losses)/gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates

8

(14,076)

4,848

Insurance income net of claims and commissions

31,068

28,915

Net losses from revaluation and disposal of investment properties

(1,381)

(2,329)

Net gains on disposal of stock of property

7,372

2,676

Other income

6,597

8,043

272,200

291,741

Staff costs

9

(100,866)

(96,208)

Special levy on deposits and other levies/contributions

9

(15,255)

(15,323)

Other operating expenses

9

(95,588)

(94,564)

60,491

85,646

Net gains on derecognition of financial assets measured at amortised cost

1,053

2,617

Credit losses to cover credit risk on loans and advances to customers

10

(48,349)

(183,711)

Credit losses of other financial instruments

10

(3,814)

(626)

Impairment net of reversals of non‑financial assets

10

(7,398)

(28,584)

Profit/(loss) before share of profit/(loss) from associates

1,983

(124,658)

Share of profit/(loss) from associates

36

137

(206)

Profit/(loss) before tax

2,120

(124,864)

Income tax

11

(968)

(4,259)

Profit/(loss) after tax for the period

1,152

(129,123)

Attributable to:

Owners of the Company

739

(125,618)

Non‑controlling interests

413

(3,505)

Profit/(loss) for the period

1,152

(129,123)

Basic and diluted profit/(loss) per share attributable to the owners of the Company (€ cent)

12

0.2

(28.2)

Six months ended30 June

2021

2020

Notes

€000

€000

Profit/(loss) for the period

1,152

(129,123)

Other comprehensive income (OCI)

OCI that may be reclassified in the consolidated income statement in subsequent periods

Fair value reserve (debt instruments)

Net gains/(losses) on investments in debt instruments measured at fair value through OCI (FVOCI)

2,258

(18,438)

Transfer to the consolidated income statement on disposal

- 

(3,653)

2,258

(22,091)

Foreign currency translation reserve

(Loss)/profit on translation of net investments in foreign branches and subsidiaries

(5,003)

10,723

Profit/(loss) on hedging of net investments in foreign branches and subsidiaries

14

3,867

(9,496)

Transfer to the consolidated income statement on dissolution/disposal of foreign branches and subsidiaries

(63)

110

(1,199)

1,337

Total OCI that may be reclassified in the consolidated income statement in subsequent periods

1,059

(20,754)

OCI not to be reclassified in the consolidated income statement in subsequent periods

Fair value reserve (equity instruments)

Net gains/(losses) on investments in equity instruments designated at FVOCI

576

(217)

576

(217)

Property revaluation reserve

Deferred tax

11

(40)

(541)

(40)

(541)

Actuarial gains/(losses) on the defined benefit plans

Remeasurement gains/(losses) on defined benefit plans

6,431

(4,022)

Total OCI not to be reclassified in the consolidated income statement in subsequent periods

6,967

(4,780)

Other comprehensive income/(loss) for the period net of taxation

8,026

(25,534)

Total comprehensive income/(loss) for the period

9,178

(154,657)

Attributable to:

Owners of the Company

8,780

(151,003)

Non‑controlling interests

398

(3,654)

Total comprehensive income/(loss) for the period

9,178

(154,657)

30 June2021

31 December2020

Assets

Notes

€000

€000

Cash and balances with central banks

27

8,227,491

5,653,315

Loans and advances to banks

27

436,091

402,784

Derivative financial assets

14

8,343

24,627

Investments

13

882,743

1,876,009

Investments pledged as collateral

13

1,315,329

37,105

Loans and advances to customers

16

9,966,542

9,886,047

Life insurance business assets attributable to policyholders

518,094

474,187

Prepayments, accrued income and other assets

18

685,162

249,877

Stock of property

17

1,284,820

1,349,609

Deferred tax assets

11

303,390

341,360

Investment properties

127,149

128,088

Property and equipment

260,813

272,474

Intangible assets

184,650

185,256

Investments in associates and joint venture

36

-

2,462

Non‑current assets and disposal groups held for sale

19

10,696

630,931

Total assets

24,211,313

21,514,131

Liabilities

Deposits by banks

400,681

391,949

Funding from central banks

20

2,985,225

994,694

Derivative financial liabilities

14

42,153

45,978

Customer deposits

21

16,801,251

16,533,212

Insurance liabilities

708,373

671,603

Accruals, deferred income, other liabilities and other provisions

23

355,819

359,892

Pending litigation, claims, regulatory and other matters

25

155,765

123,615

Loan stock

22

645,099

272,152

Deferred tax liabilities

11

46,465

45,982

Total liabilities

22,140,831

19,439,077

Equity

Share capital

24

44,620

44,620

Share premium

24

594,358

594,358

Revaluation and other reserves

214,163

209,153

Retained earnings

972,533

982,513

Equity attributable to the owners of the Company

1,825,674

1,830,644

Other equity instruments

24

220,000

220,000

Total equity excluding non‑controlling interests

2,045,674

2,050,644

Non‑controlling interests

24,808

24,410

Total equity

2,070,482

2,075,054

Total liabilities and equity

24,211,313

21,514,131

Mr. E.G. Arapoglou

Chairman

Mr. P. Nicolaou

Chief Executive Officer

Mr. N. Sofianos

Director

Mrs. E. Livadiotou

Executive Director Finance

Attributable to the owners of the Company

Sharecapital

(Note 24)

Sharepremium

(Note 24)

Treasury shares

(Note 24)

Retainedearnings

Property revaluation reserve

Financialinstrumentsfair value reserve

Life insurance in‑force business reserve

Foreign currency translation reserve

Total

Other equity instruments

(Note 24)

Non‑ controlling interests

Totalequity

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

1 January 2021

44,620

594,358

(21,463)

982,513

79,515

22,894

110,401

17,806

1,830,644

220,000

24,410

2,075,054

Profit for the period

- 

- 

- 

739

- 

- 

- 

- 

739

- 

413

1,152

Other comprehensive income/(loss) after tax for the period

- 

- 

- 

6,431

(30)

2,834

- 

(1,194)

8,041

- 

(15)

8,026

Total comprehensive income/(loss) after tax for the period

- 

- 

- 

7,170

(30)

2,834

- 

(1,194)

8,780

- 

398

9,178

Increase in value of in‑force life insurance business

- 

- 

- 

(3,886)

- 

- 

3,886

- 

- 

- 

-

- 

Tax on increase in value of in‑force life insurance business

- 

- 

- 

486

- 

- 

(486)

- 

- 

- 

-

- 

Payment of coupon to AT1 holders (Note 24)

- 

- 

- 

(13,750)

- 

- 

- 

- 

(13,750)

- 

-

(13,750)

30 June 2021

44,620

594,358

(21,463)

972,533

79,485

25,728

113,801

16,612

1,825,674

220,000

24,808

2,070,482

Attributable to the owners of the Company

Sharecapital

(Note 24)

Sharepremium

(Note 24)

Treasury shares

(Note 24)

Retainedearnings

Property revaluation reserve

Financialinstrumentsfair valuereserve

Life insurancein‑forcebusinessreserve

Foreigncurrencytranslationreserve

Total

Otherequityinstruments

 (Note 24)

Non‑ controlling interests

Totalequity

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

1 January 2020

44,620

1,294,358

(21,463)

490,286

79,286

33,900

102,051

16,927

2,039,965

220,000

28,662

2,288,627

Loss for the period

- 

- 

- 

(125,618)

- 

- 

- 

- 

(125,618)

- 

(3,505)

(129,123)

Other comprehensive (loss)/income after tax for the period

- 

- 

- 

(4,022)

(406)

(22,300)

- 

1,343

(25,385)

- 

(149)

(25,534)

Total comprehensive (loss)/income after tax for the period

- 

- 

- 

(129,640)

(406)

(22,300)

- 

1,343

(151,003)

- 

(3,654)

(154,657)

Increase in value of in‑force life insurance business

- 

- 

- 

(1,771)

- 

- 

1,771

- 

- 

- 

-

- 

Tax on increase in value of in‑force life insurance business

- 

- 

- 

221

- 

- 

(221)

- 

- 

- 

-

- 

Change in the holding of Undertakings for Collective Investments in Transferable Securities (UCITS) Fund

- 

- 

- 

(19)

- 

- 

- 

- 

(19)

- 

-

(19)

Payment of coupon to AT1 holders (Note 24)

- 

- 

- 

(13,750)

- 

- 

- 

- 

(13,750)

- 

-

(13,750)

30 June 2020

44,620

1,294,358

(21,463)

345,327

78,880

11,600

103,601

18,270

1,875,193

220,000

25,008

2,120,201

Six months ended30 June

2021

2020

Net cash flow from operating activities

Note

€000

€000

Profit/(loss) before tax

2,120

(124,864)

Adjustments for:

Share of (profit)/loss from associates

(137)

206

Credit losses to cover credit risk on loans and advances to customers and net gains on derecognition of financial assets measured at amortised cost

47,296

181,094

Depreciation of property and equipment and amortisation of intangible assets

17,591

18,802

Change in value of in‑force life insurance business

(3,886)

(1,771)

Credit losses of other financial instruments

10

3,814

626

Amortisation of discounts/premiums and interest on debt securities 

(10,273)

(14,869)

Dividend income

(462)

(172)

Loss/(profit) from revaluation of debt securities designated as fair value hedges

7,886

(5,408)

Net gains on disposal on investments in debt securities

- 

(2,865)

Net gains on disposal of investment properties

(243)

(234)

Interest on subordinated loan stock

11,699

11,602

Negative interest on loans and advances to banks and central banks

13,141

8,035

Impairment of stock of property and other non‑financial assets

10

7,398

28,584

Negative interest on funding from central banks

(9,469)

-

Loss on disposal/dissolution of subsidiaries and associates

8

880

184

Loss on early redemption of subordinated loan stock

8

12,433

-

Net gains on disposal of stock of property

(7,372)

(2,676)

Loss on sale and write offs of property and equipment and intangible assets

62

60

Interest expense on lease liability

44

255

Net losses from revaluation of investment properties and investment properties held for sale

1,624

2,563

94,146

99,152

Net (increase)/decrease in loans and advances to customers and other accounts

(126,271)

78,916

Net increase/(decrease) in customer deposits and other accounts

363,275

(564,310)

331,150

(386,242)

Tax paid

(813)

(267)

Net cash from/(used) in operating activities

330,337

(386,509)

Cash flows from investing activities

Purchases of debt and equity securities

(603,791)

(433,314)

Proceeds on disposal/redemption of investments:

‑ debt securities

304,328

354,498

‑ equity securities and mutual funds

662

-

Interest received from debt securities

11,660

15,945

Dividend income from equity securities

462

172

Proceeds on disposal of Project Helix 2

19

144,300

-

Proceeds on disposal of Velocity 2 portfolio

- 

13,409

Proceeds on disposal of subsidiaries and associates

9,084

-

Purchases of property and equipment

(942)

(2,624)

Purchases of intangible assets

(4,840)

(4,608)

Proceeds on disposals of property and equipment and intangible assets

1,138

19

Proceeds on disposals of investment properties

2,577

2,091

Net cash used in investing activities

(135,362)

(54,412)

Cash flow from financing activities

Payment of AT1 coupon

24

(13,750)

(13,750)

Net proceeds of funding from central banks

20

2,000,000

1,000,000

Repayments of subordinated loan stock

(223,627)

-

Proceeds from the issue of loan stocks (net of costs)

596,056

-

Interest on subordinated loan stock

(23,125)

(23,188)

Interest on funding from central banks

(13,141)

(8,035)

Principle elements of lease payments

(3,901)

(4,715)

Net cash from financing activities

2,318,512

950,312

Net increase in cash and cash equivalents

2,513,487

509,391

Cash and cash equivalents

1 January

5,890,135

5,130,863

Foreign exchange adjustments

(10,100)

(1,010)

Net increase in cash and cash equivalents

2,513,487

509,391

30 June

27

8,393,522

5,639,244

Non cash transactions

Repossession of collaterals

During the six months ended 30 June 2021, the Group acquired properties by taking possession of collaterals held as security for loans and advances to customers of €24,692 thousand (six months ended 30 June 2020: €30,799 thousand).

Disposal of Project Helix 2

During the six months ended 30 June 2021 and upon the completion of the disposal of Project Helix 2, the Group recognised an amount of €381,567 thousand in other financial assets, which represents the fair value of the deferred consideration receivable for the transaction (the 'DPP'). Please refer to Note 18 for further details.

Bank of Cyprus Holdings Public Limited Company (the 'Company') was incorporated in Ireland on 11 July 2016, as a public limited company under company number 585903 in accordance with the provisions of the Companies Act 2014 of Ireland (Companies Act 2014). Its registered office is 10 Earlsfort Terrace, Dublin 2, D02 T380, Ireland.

The Company is the holding company of the Bank of Cyprus Public Company Limited ('BOC PCL'). The Bank of Cyprus Holdings Group (the 'Group') comprises the Company, its subsidiary BOC PCL and the subsidiaries of BOC PCL.

The Company is tax resident in Cyprus. The principal activities of BOC PCL and its subsidiary companies (the BOC Group) involve the provision of banking services, financial services, insurance services and the management and disposal of property predominately acquired in exchange of debt.

BOC PCL is a significant credit institution for the purposes of the SSM Regulation and has been designated by the CBC as an 'Other Systemically Important Institution' (O‑SII). The Group is subject to joint supervision by the ECB and the CBC for the purposes of its prudential requirements.

The shares of the Company are listed and trading on the London Stock Exchange (LSE) and the Cyprus Stock Exchange (CSE).

The Consolidated Condensed Interim Financial Statements are available at the registered office of Bank of Cyprus Holdings Public Limited Company and on the Group's website www.bankofcyprus.com (Investor Relations).

Consolidated Condensed Interim Financial Statements

The Consolidated Condensed Interim Financial Statements of the Company for the six months ended 30 June 2021 (the Consolidated Financial Statements) were authorised for issue by a resolution of the Board of Directors on 31 August 2021.

The Consolidated Financial Statements have been prepared in both the English and the Greek language. In case of a difference or inconsistency between the two, the English version prevails.

The Consolidated Financial Statements have not been audited by the Group's external auditors.

The Group's external auditors have conducted a review in accordance with the International Standard on Review Engagements 2410 'Review of Interim Financial Information performed by the Independent Auditor of the Entity'.

The Consolidated Financial Statements have been prepared on a historical cost basis, except for properties held for own use and investment properties, investments at fair value through other comprehensive income (FVOCI), financial assets (including loans and advances to customers and investments) at fair value through profit or loss (FVPL) and derivative financial assets and derivative financial liabilities that have been measured at fair value, non‑current assets held for sale measured at fair value less costs to sell and stock of property measured at net realisable value where this is lower than cost. The carrying values of recognised assets and liabilities that are hedged items in fair value hedges, and otherwise carried at cost, are adjusted to record changes in fair value attributable to the risks that are being hedged.

Presentation of the Consolidated Financial Statements

The Consolidated Financial Statements are presented in Euro (€) and all amounts are rounded to the nearest thousand, except where otherwise indicated. A comma is used to separate thousands and a dot is used to separate decimals.

The Group presents its balance sheet broadly in order of liquidity. An analysis regarding expected recovery or settlement of assets and liabilities within twelve months after the balance sheet date and more than twelve months after the balance sheet date is presented in Note 28.

Comparative information

Comparative information was restated in relation to the presentation of 'Credit risk concentration of loans and advances to customers' as detailed in Note 29. In addition, comparative information was restated in relation to the presentation of segmental analysis as detailed in Note 7. The above restatements did not have an impact on the results for the period or the equity of the Group.

The Consolidated Financial Statements have been prepared in accordance with the International Accounting Standard (IAS) applicable to interim financial reporting as adopted by the European Union (EU) (IAS 34), the Transparency (Directive 2004/109/EC) Regulations 2007, as amended, Part 2 (Transparency Requirements) of the Central Bank (Investment Market Conduct) Rules 2019 and the Disclosure Guidance and Transparency Rules of the UK's Financial Conduct Authority.

The Consolidated Financial Statements do not comprise statutory financial statements for the purposes of the Companies Act 2014 of Ireland. The Company's statutory financial statements for the purposes of Chapter 4 of Part 6 of the Companies Act 2014 of Ireland for the year ended 31 December 2020, upon which the auditors have expressed an unqualified opinion, were published on 29 March 2021 and are expected to be delivered to the Registrar of Companies of Ireland within 56 days from 30 September 2021.

The Consolidated Financial Statements do not include all the information and disclosures required for the annual financial statements and should be read in conjunction with the Annual Consolidated Financial Statements of Bank of Cyprus Holdings Group for the year ended 31 December 2020, prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, which are available at the Group's website (www.bankofcyprus.com).

The accounting policies adopted are consistent with those followed for the preparation of the annual consolidated financial statements for the year ended 31 December 2020, except for the adoption of new and amended standards and interpretations as explained in Note 3.3.1.

The Group applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2021. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

The Group has adopted the new standards, amendments and interpretations to the extent that they were relevant for the Group. The relevant and significant new standards for the Group are explained below.

IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 - Amendments relating to Interest Rate Benchmark Reform (Phase 2 amendments)

IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 were amended in August 2020, which are effective for periods beginning on or after 1 January 2021 with earlier adoption permitted. The Interest Rate Benchmark Reform-Phase 2 amendments deal with issues affecting financial reporting during the implementation of the benchmark rate reform. The objective of the amendments is to provide certain reliefs to companies when changes are made to the contractual cash flows or hedging relationships resulting from interest rate benchmark reform. The amendments also provide additional temporary exceptions from applying specific hedge accounting requirements of IAS 39 and IFRS 9 to hedge accounting relationships, which will generally allow hedging accounting relationships directly affected by the BMR reform to continue.

Changes in the basis for determining contractual cash flows

Change in the basis of determining the contractual cash flows of a financial instrument that are required by the reform is accounted for by updating the effective interest rate, without the recognition of an immediate gain or loss. This practical expedient is only applied where the change to the contractual cash flows is necessary as a direct consequence of the reform and the new basis for determining the contractual cash flows is economically equivalent to the previous basis.

For additional changes made to the basis for determining the contractual cash flows of a financial instrument to those required by the reform, the practical expedient is applied first, after which the normal IFRS 9 requirements for modifications of financial instruments is applied.

Hedge accounting

The IAS 39 requirements in respect of hedge accounting have been amended in two phases. The Phase 1 amendments, which were adopted by the Group in 2019, provide relief to the hedge accounting requirements prior to changing a hedge relationship due to the interest rate benchmark reform. The Phase 2 amendments provide relief when changes are made to hedge relationships as a result of the interest rate benchmark reform. The Group may apply the following reliefs where changes are made to hedge relationships as a result of the BMR reform:

· Under a temporary exception, changes to the hedge designation and hedge documentation due to the interest rate benchmark reform would not constitute the discontinuation of the hedge relationship nor the designation of a new hedging relationship.

· In respect of the retrospective hedge effectiveness assessment, the Group may elect on a hedge‑by‑hedge basis to reset the cumulative fair value changes to zero when the exception to the retrospective assessment ends (Phase 1 relief). Any hedge ineffectiveness will continue to be measured and recognised in full in profit or loss.

· Amounts accumulated in the cash flow hedge reserve would be deemed to be based on the alternative benchmark rate (on which the hedge future cash flows are determined) when there is a change in basis for determining the contractual cash flows.

· For hedges of groups of items (such as those forming part of a macro cash flow hedging strategy), the amendments provide relief for items within a designated group of items that are amended for changes directly required by the reform.

· In respect of whether a risk component of a hedged item is separately identifiable, the amendments provide temporary relief to entities to meet this requirement when an alternative risk free rate (RFR) financial instrument is designated as a risk component. These amendments allow entities upon designation of the hedge to assume that the separately identifiable requirement is met if the entity reasonably expects the RFR risk will become separately identifiable within the next 24 months. This relief applies to each RFR on a rate‑by‑rate basis and starts when the entity first designates the RFR as a non‑contractually specified risk component.

These amendments did not have a significant impact on the Group during the six months ended 30 June 2021. Please refer to Note 30 for further information.

The Directors have made an assessment of the Group's ability to continue as a going concern for a period of 12 months from the date of approval of these Consolidated Financial Statements.

The Directors have concluded that there are no material uncertainties which would cast significant doubt over the ability of the Group, the Company and BOC PCL to continue to operate as a going concern for a period of 12 months from the date of approval of these Consolidated Financial Statements.

In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows, capital requirements and capital resources. Specifically, the Group's Financial Plan approved by the Board in November 2020 (the 'Plan') incorporates the impact of the COVID‑19. The Group has sensitised its projection to cater for downside scenarios and has used conservative economic inputs to develop its medium‑term strategy. The Group is working towards materialising its Financial Plan. Reforecast exercises are carried out to consider the impact of latest developments.

Capital

The following items have been considered in relation to the Group's capital adequacy throughout the period of the going concern assessment:

· The Common Equity Tier 1 (CET1) ratio and the Total Capital ratio on a transitional basis at 30 June 2021 are higher than the SREP requirements (Note 5.1).

· The Group's capital position which allows further risk reduction and recalibration of the cost base. The Group remains focused to implement the actions contemplated in the Financial Plan.

· The capital relief measures announced by the ECB, the EBA, the CBC, the Cyprus Government and the Eurogroup in order to allow banks to absorb the impact of the COVID‑19 outbreak and support the real economy.

· The successful completion of Project Helix 2 which has positively contributed to the Group's capital base.

· The successful refinancing of Tier 2 capital, further optimising the capital structure of the Group.

Funding and liquidity

The following items have been considered in relation to the Group's liquidity position throughout the period of the going concern assessment:

· The Group is in compliance with the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) and are significantly above the minimum requirements.

· The Group is monitoring its liquidity position and is considering ways to further reduce deposits' cost.

· The various measures of regulators which aim to mitigate the impact of COVID‑19.

· The Group's successful issuance of €300 million of senior preferred notes.

Economic environment

· As the Cypriot operations account for 99% of gross loans and 100% of customer deposits, the Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. The sovereign risk ratings of the Cyprus Government improved considerably in recent years, reflecting expectations of a sustained decline in public debt as a ratio to GDP, expected further declines in non‑performing exposures and a more stable price environment following a protracted period of deflation and low inflation. The risk profile of the country deteriorated in 2020 as a result of the coronavirus pandemic and measures to mitigate its impact on the economy, but the rating outlook remains stable to positive reflecting expectations of a return to growth and stabilising underlying dynamics in public finances. Following the severe recession in 2020 there will be recovery in 2021, which will be partial, and it will take until 2022 for real GDP to return to its pre‑crisis levels.

· In July 2021, Moody's Investors Service ('Moody's') has upgraded the Government of Cyprus' long‑term issuer and senior unsecured ratings to Ba1 from Ba2. The outlook has been changed to stable from positive. The key drivers of Cyprus' rating upgrade were the reduction in Cyprus' exposure to event risks because of a decrease in banking sector risks, and the resilience of the economy to the pandemic shock and robust medium‑term GDP growth prospects being supported by sizeable European funds. Moody's expect the economy to recover robustly with an average GDP growth of 4.0% in 2021‑2022 reaching the pre‑pandemic level of economic activity again in 2022. In March 2021, S&P affirmed its rating (BBB‑) and its outlook to stable.

· With respect to BOC PCL's ratings, Moody's upgraded in July 2021 BOC PCL's long‑term deposit rating to 'B1' from 'B3', with the outlook on BOC PCL's long‑term deposit rating maintained positive. In January 2021, Fitch Ratings affirmed their long term issuer credit rating of BOC PCL of 'B ' and outlook of BOC PCL to negative. Negative outlook reflecting that risks remain skewed to the downside in the medium term, if recession proves deeper or the recovery weaker than Fitch's forecasts. In July 2020, S&P affirmed their long‑term issuer credit rating on BOC PCL of 'B+' and the short‑term issuer credit rating of 'B', with a stable outlook, expressing the view that the enhanced capital reserves and the good liquidity position of BOC PCL will allow it to withstand the current shock and absorb the effects of the increasing pressure on revenues and credit losses.

· The global and domestic macroeconomic conditions as a result of the COVID‑19 crisis are the primary risk factors for the Cyprus economy and the banking sector. Adverse developments regarding growth, fiscal policy, unemployment, tourism and real estate prices, could have a negative impact on the Group's capital adequacy and its liquidity. Management closely monitors the developments and the impact they may have on the Group's operations and financial performance.

In November 2020, the Group received communication from the ECB according to which no SREP decision (as amended in April 2020) would be issued for the 2020 SREP cycle and the 2019 SREP decision will remain in force, hence leaving the Group's capital requirements unchanged as well as other requirements established by the 2019 SREP decision (as amended in April 2020).

The minimum phased in CET1 requirement of the Group is set at 9.7%, comprising a 4.5% Pillar I requirement, a 1.7% P2R, the CCB of 2.5% (fully phased in as of 1 January 2019) and the O‑SII buffer of 1.0%.

The Group's Total Capital requirement is set at 14.5%, comprising of 8.0% Pillar I requirement (of which up to 1.50% could be in the form of Additional Tier 1 (AT1) capital and up to 2.0% in the form of Tier 2 (T2) capital), 3.0% P2R, the CCB of 2.5% and the O‑SII 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 are a point in time assessment and therefore are subject to change over time.

Moreover, on 12 March 2020, the ECB and the EBA also announced that banks are temporarily allowed to operate below the level of capital defined by P2G, the CCB and the CCyb. In July 2020, the ECB committed to allow banks to operate below P2G and the combined buffer requirement (CCB, CCyb and O‑SII buffer) until at least the end of 2022, without automatically triggering supervisory actions.

In addition, the EBA final guidelines on SREP and supervisory stress testing and the Single Supervisory Mechanism's (SSM) 2018 SREP methodology provide that own funds held for the purposes of Pillar II Guidance (P2G) cannot be used to meet any other capital requirements (Pillar I, Pillar II requirements or the combined buffer requirement), and therefore cannot be used twice. In line with the final 2019 SREP decision, these new provisions became effective as of 1 January 2020.

The CBC, in accordance with the Macroprudential Oversight of Institutions Law of 2015, sets, on a quarterly basis, the Countercyclical Capital Buffer (CCyB) level in accordance with the methodology described in this law. The CBC has set the level of the CCyB for Cyprus at 0% for the year 2020 and the six months up to June 2021. The CBC has also set the level of CCyB for Cyprus at 0% for the period 1 July 2021 to 30 September 2021.

In accordance with the provisions of this law, the CBC is also the responsible authority for the designation of banks that are O‑SIIs and for the setting of the O‑SII buffer requirement for these systemically important banks. BOC PCL has been designated as an O‑SII and the CBC set the O‑SII buffer for BOC PCL and the Group at 2.0%.

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.

The above minimum ratios apply for both BOC PCL and the Group.

The Group addresses the asset quality challenge through the operation of the Restructuring and Recoveries Division which is actively seeking to find innovative solutions to manage distressed exposures. The Group has been successful in engineering restructuring solutions across the spectrum of its loan portfolio. 

The Group completed its three‑year NPE Strategy plan which was submitted to the ECB on 31 March 2021. The NPE Strategy is in line with the NPEs evolution as per the Group's Financial Plan.

Group customer deposits totalled €16,801 million at 30 June 2021, compared to €16,533 million at 31 December 2020. At 30 June 2021 and 31 December 2020 all deposits were in Cyprus. As at 30 June 2021 Group customer deposits accounted for 69% of total assets (31 December 2020: 77%) and 76% of total liabilities (31 December 2020: 85%).

As at 30 June 2021 and 31 December 2020, the Group was in compliance with all regulatory liquidity requirements. As at 30 June 2021 and 31 December 2020 the Group's LCR and NSFR were in compliance with the minimum regulatory requirements of 100%.

Management has considered the potential impact of pending litigation and claims, investigations, regulatory and other matters against the Group, which include the bail‑in of depositors and the absorption of losses by the holders of equity and debt instruments of BOC PCL. The Group has obtained legal advice in respect of these claims.

Despite the fact that the Group has not dealt with claims of such nature in the past, on the basis of information available at present and on the basis of the law as it currently stands, in relation to such matters but also for other litigation, claims, regulatory and other matters, management does not expect these to have a material adverse impact on the financial position and capital adequacy of the Group. For additional information on pending litigation, claims, regulatory and other matters as well as the judgement exercised in concluding on the impact of these matters refer to Notes 6.4 and 25.

The preparation of the Consolidated Financial Statements requires the Company's Board of Directors and management to make judgements, estimates and assumptions that can have a material impact on the amounts recognised in the Consolidated Financial Statements and the accompanying disclosures, as well as the disclosures of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affecting future periods.

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are described below. The Group based its assumptions and estimates on parameters available when the Consolidated Financial Statements were prepared. Existing circumstances and assumptions about future developments may, however, change due to market changes or circumstances beyond the control of the Group. Such changes are reflected in the assumptions when they occur.

The most significant judgements, estimates and assumptions relate to the classification of financial instruments and the calculation of expected credit losses (ECL), the estimation of the net realisable value of stock of property and the provisions which are presented in Notes 6.1 to 6.4 below. Other judgements, estimates and assumptions are disclosed in Notes 5.5 to 5.13 of the annual consolidated financial statements for the year ended 31 December 2020.

The Group exercises judgement upon determining the classification of its financial assets, which relate to business models and future cash flows.

Judgement is also required to determine the appropriate level at which the assessment of business models needs to be performed. In general, the assessment for the classification of financial assets into the business models is performed at the level of each business line. Further, the Group exercises judgement in determining the effect of sales of financial instruments on its business model assessment.

The Group also applies judgement upon considering whether contractual features including interest rate could significantly affect future cash flows. Furthermore, judgement is required when assessing whether compensation paid or received on early termination of lending arrangements results in cash flows that are not SPPI.

The calculation of ECL requires management to apply significant judgement and make estimates and assumptions, involving significant uncertainty at the time these are made. Changes to these estimates and assumptions can result in significant changes to the timing and amount of ECL to be recognised. The Group's calculations are outputs of models, of underlying assumptions on the choice of variable inputs and their interdependencies.

Elements of ECL models that are considered accounting judgements and estimates include:

Assessment of significant increase in credit risk (SICR)

IFRS 9 does not include a definition of significant increase in credit risk. The Group assesses whether significant increase in credit risk has occurred since initial recognition using predominantly quantitative and in certain cases qualitative information. The determination of the relevant thresholds to determine whether a significant increase in credit risk has occurred, is based on statistical metrics and could be subject to management judgement. The relevant thresholds are set, monitored and updated on a yearly basis by the Risk Management Division and endorsed by the Group Provisions Committee.

Determining the probability of default (PD) at initial recognition requires management estimates in particular cases. Specifically in the case of exposures existing prior to the adoption of IFRS 9, a retrospective calculation of the PD is made in order to quantify the risk of each exposure at the time of the initial recognition. In certain cases estimates about the date of initial recognition might be required.

For the retail portfolio, the Group uses a PD at origination incorporating behavioural information (score cards) whereas, for the corporate portfolio, the Group uses the internal credit rating information. In determining the relevant PDs, management estimates are required with respect to the life‑time of revolving facilities. For revolving facilities a behavioural maturity model is utilised assigning an expected maturity based on product and customer behaviour.

Scenarios and macroeconomic factors

The Group determines the ECL, which is a probability weighted amount, by evaluating a range of possible outcomes. Management uses forward looking scenarios and assesses the suitability of weights used. These are based on management's assumptions taking into account macroeconomic, market and other factors. Changes in these assumptions and in other external factors could significantly impact ECL. Macroeconomic inputs and weights per scenario are monitored by the Economic Research department and are based on internal model analysis after considering external market data supplemented by expert judgement.

The outlook for the global economy has deteriorated markedly in 2020 as a result of the COVID‑19 pandemic and the lockdown measures to contain it that led to significant disruptions in economic activity. Worst outcomes were avoided by aggressive and excessively expansive monetary and fiscal policies. Economic activity continued to contract in the first quarter of 2021 with GDP falling by 2.1% year‑on‑year but recovered sharply in the second quarter of 2021 rising by 12.9%. The outlook is positive for the remainder of the year 2021, but uncertainties remain. The Group updated its forward looking scenarios, factoring in updated macroeconomic assumptions and other monetary and fiscal developments at the national and the EU level, for mitigating the consequences of the pandemic. While the outlook for the remaining of the year 2021 and the medium term is now positive, uncertainties remain, with the risk profile of the country having deteriorated. This has been the result of a combination of political, policy, cyclical and structural factors, and by the uncertainties in the external environment which remain high. The strength and shape of the economic recovery will depend on the upside and downside risks. The most serious downside risk is how prolonged the pandemic will be and potential complications regarding vaccination programmes.

The Group uses three different economic scenarios in the calculation of default probabilities and provisions. 

The tables below indicate the most significant macroeconomic variables as well as the scenarios used by the Group as at 30 June 2021 and 31 December 2020 respectively. The Group has used the 30‑50‑20 probability structure for the adverse, base and favourable scenarios respectively compared to the 25‑50‑25 structure derived using the method described in Note 2.19.5 of the annual consolidated financial statements for the year ended 31 December 2020. This reflects the management's view of specific characteristics of the Cyprus economy that render it more vulnerable to external and internal shocks. Despite the more positive outlook for 2021, given the added uncertainties and downside risks in the global economy as well as the local economy, related to the COVID‑19 pandemic, management decided to maintain an elevated weight on the adverse scenario.

The economy continues to face financial and macroeconomic risks, including a high public debt ratio and a relatively high level of NPEs that together maintain elevated vulnerabilities and limit the policy reaction space thus sustaining conditions, which can lead to a deeper recession in response to shocks than under normal times.

In the banking sector, there has been a steady and significant progress since the crisis of 2013‑2014. Private indebtedness and non‑performing exposures have declined sharply. The loan moratorium that expired at the end of December 2020 resulted in a high level of payment deferrals during the moratorium period in 2020. The second moratorium that was launched in January 2021 to last for the six months ended 30 June 2021, had stricter eligibility criteria and resulted in a considerably lower take up. However, the end of the moratoria on interest and principal payments may lead to pressures that may give rise to an increase in non‑performing exposures especially if the travel related sectors (most hit by the coronavirus pandemic) take longer to recover. Also, there is a significant economic structure risk given a very large external sector and high concentration to geographical areas. These factors, render the economy more susceptible to external shocks and weaken its resilience, and may, in management's view, not be fully captured in the weights as calculated using the method described in Note 2.19.5 of the annual consolidated financial statements for the year ended 31 December 2020. Hence management has decided to increase the weight of the adverse scenario to 30%, and correspondingly reduce the weight of the favourable scenario to 20%.

30 June 2021

Year

Scenario

Weight%

Real GDP(% change) 

Unemployment rate (% of labour force)

Consumer Price Index (average % change)

RICS House Price Index (average % change)

2021

Adverse

30.0

‑2.4

8.0

‑0.3

‑3.3

Baseline

50.0

3.5

7.8

1.0

1.9

Favourable

20.0

4.6

7.3

1.5

2.2

2022

Adverse

30.0

2.0

8.7

0.4

‑3.2

Baseline

50.0

3.4

7.3

1.8

3.6

Favourable

20.0

3.9

6.1

2.4

4.9

2023

Adverse

30.0

3.7

8.4

1.8

‑0.8

Baseline

50.0

3.3

6.7

1.8

3.3

Favourable

20.0

3.6

5.7

1.9

3.8

2024

Adverse

30.0

3.2

7.8

1.8

3.8

Baseline

50.0

2.8

6.2

1.8

3.1

Favourable

20.0

3.1

5.6

1.8

4.2

2025

Adverse

30.0

2.9

7.0

1.8

3.6

Baseline

50.0

2.6

5.7

1.8

2.9

Favourable

20.0

2.8

5.2

1.8

3.3

31 December 2020

Year

Scenario

Weight%

Real GDP(% change) 

Unemployment rate (% of labour force)

Consumer Price Index (average % change)

RICS House Price Index (average % change)

2021

Adverse

30.0

‑0.6

9.6

‑2.2

‑4.0

Baseline

50.0

4.0

7.4

‑0.8

‑2.3

Favourable

20.0

4.8

6.4

‑0.1

‑0.8

2022

Adverse

30.0

4.3

8.7

‑1.1

‑2.3

Baseline

50.0

3.9

6.2

0.8

0.3

Favourable

20.0

4.4

5.8

1.4

2.4

2023

Adverse

30.0

4.0

7.4

0.3

2.5

Baseline

50.0

3.4

5.7

1.4

4.1

Favourable

20.0

3.5

5.6

1.4

5.2

2024

Adverse

30.0

3.5

6.7

0.8

5.3

Baseline

50.0

3.0

5.7

1.6

5.3

Favourable

20.0

3.0

5.6

1.6

5.9

2025

Adverse

30.0

2.7

6.6

1.5

5.8

Baseline

50.0

2.7

5.7

1.9

5.5

Favourable

20.0

2.7

5.5

2.0

6.1

The adverse scenarios may outpace the base and favourable scenario after the initial shock has been adjusted to and the economy starts to expand from a lower base. Thus, in the adverse scenario GDP will follow a growth trajectory that will ultimately equal and surpass the baseline before converging. Property prices are determined by multiple factors with GDP growth featuring prominently. However, the relationship between GDP growth and property prices entails a lag. Thus, property prices will initially adjust less steeply than GDP, and will start to accelerate after the recovery in GDP has been entrenched. After this point, property prices will accelerate and will match and surpass the pace in the baseline scenario, before finally converging.

The baseline scenario was updated for 30 June 2021 reporting, considering available information and relevant developments until then. Economic activity declined during 2020 and remained weak in the first quarter of 2021 due to the continued implementation of lockdown measures. Economic activity rebounded strongly in the second quarter with real GDP rising by 12.9% year‑on‑year, seasonally adjusted. Real GDP contracted by 2.1% year‑on‑year and is expected to increase by 3.5% in 2021 as a whole. Inflation will remain relatively subdued rising to about 1% driven mainly by higher energy and commodity prices and temporary shortages as pandemic‑induced disruptions continue to constrain supply. Consumer prices are expected to accelerate in subsequent years but to remain below 2.0% annually. The unemployment rate may edge a little higher as government support is withdrawn and businesses cut costs but will remain low and return to a declining path from 2022 onwards. Property prices, having dropped only marginally in 2020 will rise modestly in 2021 as domestic demand for housing picks up, and accelerate higher in subsequent years, essentially capped by nominal GDP growth. 

The adverse scenario is consistent with assumptions for the COVID‑19 related disruptions under the baseline scenario but to a higher degree of severity. The Cypriot economy relies on services, particularly on tourism and travel. This makes the economy more exposed than other countries to travel restrictions and quarantine measures that have been adopted in Cyprus and across the globe. The hit to the Cyprus economy from falling external demand for travel and tourism services and the knock on effects to related sectors will be significantly more severe than under the baseline scenario. The accommodation and food services sector continues to be the most highly impacted and also manufacturing and construction that are more highly correlated with travel. Real GDP is expected to continue to contract in 2021, under the adverse scenario, by 2.4% following a steep contraction the year before. In the labour market the unemployment rate will rise more steeply to 7.9% as the government withdraws fiscal support and banks limit their lending to riskier sectors. The unemployment rate will continue to rise in 2022 as companies will be delaying new hires until recovery firms. Property prices will be affected more steeply and drop by about 3.3% on average in 2021‑2022 as both foreign and domestic demand drop.

Since 1 January 2018, the Group has reassessed the key economic variables used in the ECL models consistent with the implementation of IFRS 9. The Group uses actual values for the input variables. These values are sourced from the Cyprus Statistical Service, the Eurostat, the Central Bank of Cyprus for the residential property price index, and the European Central Bank for interest rates. Interest rates are also sourced from Bloomberg. In the case of property prices the Group additionally uses data from the Royal Institute of Chartered Surveyors. For the forward reference period, the Group uses the forecast values for the same variables, as prepared by the Bank's Economic Research Department. The results of the internal forecast exercises are consistent with publicly available forecasts from official sources including the European Commission, the International Monetary Fund, the European Central Bank and the Ministry of Finance of the Republic of Cyprus.

Qualitative adjustments or overlays are occasionally made when inputs calculated do not capture all the characteristics of the market. These are reviewed and adjusted, if considered necessary, by the Risk Management Division and endorsed by the Group Provisions Committee. Qualitative adjustments or overlays were applied to the positive future property value growth to restrict the level of future property price growth for loans and advances to customers which are secured by property collaterals.

The RICS indices, which are considered for the purposes of determining the real estate collateral value on realisation date have been used as the basis to estimate updated market values of properties supplemented by management judgement where necessary given the difficulty in differentiating between short term impacts and long term structural changes and the shortage of market evidence for comparison purposes and are capped accordingly in case of any future projected increase, whereas any future projected decrease is taken into account.

For Stage 3 customers, the calculation of individually assessed provisions is the weighted average of three scenarios: base, adverse and favourable. The base scenario focuses on the following variables, which are based on the specific facts and circumstances of each customer: the operational cash flows, the timing of recovery of collaterals and the haircuts from the realisation of collateral. The base scenario is used to derive additional either more favourable or more adverse scenarios. Under the adverse scenario operational cash flows are decreased by 50%, applied haircuts on real estate collateral are increased by 50% and the timing of recovery of collaterals is increased by 1 year with reference to the baseline scenario, whereas under the favourable scenario applied haircuts are decreased by 5%, with no change in the recovery period with reference to the baseline scenario. Assumptions used in estimating expected future cash flows (including cash flows that may result from the realisation of collateral) reflect current and expected future economic conditions and are generally consistent with those used in the Stage 3 collectively assessed exposures.

For collectively assessed customers the calculation is also the weighted average of three scenarios: base, adverse and favourable.

Assessment of loss given default (LGD)

A factor for the estimation of loss given default (LGD) is the timing and net recoverable amount from repossession or realisation of collaterals which mainly comprise real estate assets.

Assumptions have been made about the future changes in property values, as well as the timing for the realisation of collateral, taxes and expenses on the repossession and subsequent sale of the collateral as well as any other applicable haircuts. Indexation has been used as the basis to estimate updated market values of properties supplemented by management judgement where necessary given the difficulty in differentiating between short term impacts and long term structural changes and the shortage of market evidence for comparison purposes, while assumptions were made on the basis of a macroeconomic scenario for future changes in property prices, and are capped accordingly in case of any future projected increase, whereas any future projected decrease is taken into consideration.

At 30 June 2021 the weighted average haircut (including liquidity haircut and selling expenses) used in the collectively assessed provisions calculation for loans and advances to customers is approximately 32% under the baseline scenario (31 December 2020: approximately 32% excluding those classified as held for sale).

The timing of recovery from real estate collaterals used in the collectively assessed provisions calculation for loans and advances to customers has been estimated to be on average seven years under the baseline scenario (31 December 2020: average of seven years excluding those classified as held for sale).

For the calculation of individually assessed provisions, the timing of recovery of collaterals as well as the haircuts used are based on the specific facts and circumstances of each case. For specific cases judgement may also be exercised over staging during the individual assessment including cases where no specific model has been developed.

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

Any changes in these assumptions or a variance between assumptions made and actual results could result in significant changes in the amount of required credit losses of loans and advances to customers. 

Expected lifetime of revolving facilities

A behavioural maturity model for revolving facilities has been developed during 2020 based on BOC PCL's available historical data, where an expected maturity for each revolving facility based on the customer's profile is assigned.

Modelling adjustments

Forward looking models have been developed for ECL parameters PD, EAD, LGD for all portfolios and segments sharing similar characteristics. Model validation is performed by the independent validation unit within the Risk Management Division on an annual basis and involves several statistical tests that assess the stability and performance of the models. In certain cases, judgement is exercised in the form of management overlay by applying adjustments on the modelled parameters. Governance of these models lies with the Risk Management Division, where a strong governance process is in place around the determination of the impairment measurement methodology including inputs, assumptions and overlays. Any management overlays are prepared by the Risk Management Division, endorsed by the Provisions Committee and approved by the joint Risk and Audit Committee. 

ECL allowances also include off‑balance sheet credit exposures represented by guarantees given and by irrevocable commitments to disburse funds. Off‑balance sheet credit exposures of the individually assessed assets require assumptions on the probability, timing and amount of cash outflows. For the collectively assessed off‑balance sheet credit exposures, the allowance for provisions is calculated using the Credit Conversion Factor (CCF) model.

Overlays in the context of COVID‑19

Following the COVID‑19 pandemic, the Group considered the complexities of governmental support programmes and regulatory guidance on treatment of customer payment breaks by the ECL models. In this context, management has considered the data and measurement limitations arising from the extraordinary impact of COVID‑19 and addressed them through management overlays in relation to the significant credit risk deterioration, behavioural ratings and PD. 

SICR adjustment

Following an assessment performed for SICR for customers that had taken up the moratorium in 2020, a management overlay was applied, in order to capture any bias introduced in the customer's credit ratings by defining collective rules that can assess Stage 1 and Stage 2 misclassified customers, due to skewed outlook of the idiosyncratic risk. The exercise carried out compared the observed with the expected score/rating (adjusted for the days past due and arrears elements that did not apply during the moratorium period so as to assess if any customers exhibit severe deterioration/improvement). Additionally, stricter customers' credit ratings thresholds have been applied for customers in the hotels and catering industry sector. A staging overlay was then applied on these customers in order to classify them accordingly to Stage 2. The isolated impact of this overlay resulted in a transfer of loans of €165 million from Stage 1 to Stage 2 during the six months ended 30 June 2021. These overlays had an impact on the ECL of €1,516 thousand for the six months ended 30 June 2021.

Given the data available since the expiry of the moratorium, any exposures not in the hotels and catering industry sector, that were assessed as having experienced a SICR in 2020, and were classified to Stage 2 following overlays performed, were allowed to return to Stage 1, if no SICR was identified by the models, provided they met certain additional criteria such as retaining a good rating / had no arrears / have paid at least four capital instalments since the expiry of the moratorium. This overlay led to a transfer back to Stage 1 of €278 million exposures, resulting in the reversal of ECL of €1,043 thousand for the six months ended 30 June 2021.

Additionally, exposures that did not participate in the 2020 moratorium but were identified as having experienced a SICR during 2020 and therefore transferred to Stage 2, were allowed to migrate back to Stage 1 during the six months ended 30 June 2021 if they did not exhibit a SICR as at 30 June 2021. The impact on the ECL was €3,719 thousand reversal of ECL.

Probability of default and behavioural ratings adjustment

A PD overlay, maintained from 2020, was applied in order to avoid extreme values in the model predictions whilst ensuring that the moratorium will not cause a timeline misalignment between the model projected and observed 2021 defaults. The isolated impact of this overlay had an ECL impact of €11 million in 2020, and had the overlay not been applied in 2021, a corresponding release on ECL would arise.

The second PD overlay relates to the rating of Corporate customers and specifically customers that fall under high‑risk sectors, namely tourism, trade and manufacturing. The overlay applied practically maps all of these customers into high‑risk credit rating grades. The isolated impact of this overlay resulted in an ECL increase of €3,460 thousand during the six months ended 30 June 2021.

The PD overlay applied in 2020 relating to behavioural ratings, where a prudent logic was applied in order to prevent any moratorium‑biased rating to reflect an improved asset quality, was removed in 2021. This overlay did not allow any moratorium facilities to have improved ratings when compared to their corresponding February 2020 rating and resulted in an ECL increase of €5 million during 2020. The overlay was removed during 2021 and resulted in an ECL release of €5 million for the six months ended 30 June 2021.

The purpose of these overlays is to minimise potential cliff effects which might stem from the combination of uncertain volatile parameters such as possible lockdown, government support and behaviour of moratorium customers. 

Portfolio segmentation

The individual assessment is performed not only for individually significant assets but also for other exposures meeting specific criteria determined by management. The selection criteria for the individually assessed exposures are based on management judgement and are reviewed on a quarterly basis by the Risk Management Division and are adjusted or enhanced, if deemed necessary. During 2020, in response to the COVID‑19 pandemic, the selection criteria were expanded to include significant Stage 1 exposures within highly impacted sectors to assess potential increase in credit risk and significant exposures which transitioned from Stage 1 to Stage 2 to assess potential indications for unlikeliness to pay. These expanded selection criteria were also applied in the six months ended 30 June 2021.

In addition to individually assessed assets the Group also assesses assets collectively. The collectively assessed portfolio includes all loans which are not individually assessed. The Group categorises the exposures into sufficiently granular portfolio segments with shared risk characteristics. The granularity for the IFRS 9 segments is aligned with the Internal Rating Based (IRB) segmentation.

Further details on impairment allowances and related credit information are set out in Note 29.

Stock of property is measured at the lower of cost and net realisable value. The net realisable value is determined through valuation techniques, requiring significant judgement, which take into account all available reference points, such as expert valuation reports, current market conditions, the holding period of the asset, applying an appropriate illiquidity discount where considered necessary, and any other relevant parameters. Selling expenses are deducted from the realisable value. Depending on the value of the underlying asset and available market information, the determination of costs to sell may require professional judgement which involves a high degree of uncertainty due to the relatively low level of market activity.

More details on the stock of property are presented in Note 17.

The accounting policy for provisions is described in Note 2.36 of the annual consolidated financial statements for the year ended 31 December 2020. Judgement is required in determining whether a present obligation exists and in estimating the probability, timing and amount of any outflows. Provisions for pending litigation, claims, regulatory and other matters usually require a higher degree of judgement than other types of provisions. It is expected that the Group will continue to have a material exposure to litigation and regulatory proceedings and investigations relating to legacy issues in the medium term. The matters for which the Group determines that the probability of a future loss is more than remote will change from time to time, as will the matters as to which a reliable estimate can be made and the possible loss for such matters can be estimated. Actual results may prove to be significantly higher or lower than the estimated possible loss in those matters, where an estimate was made. In addition, loss may be incurred in matters with respect to which the Group believed the probability of loss was remote. 

For a detailed description of the nature of uncertainties and assumptions and the effect on the amount and timing of pending litigation, claims, regulatory and other matters refer to Note 25.

The Group's activities are mainly concentrated in Cyprus. Cyprus operations are organised into operating segments based on the line of business. As from 2021, the results of the overseas activities of the Group, namely Greece, Romania and Russia, which were previously grouped together and presented into segment 'Overseas', are now presented within segment 'Other', given the size of these operations which are in a run‑down mode in the last years. Further, the results of certain small subsidiaries of the Group have been re‑allocated from segment 'Other' to different segments based on their key activities as to better align with current management information. The impact of this alignment was not material to the presentation of the individual segments results. Comparative information in analysis by business line, analysis of total revenue and analysis of assets and liabilities were restated to account for these changes.

 The operating segments are analysed below:

· The Corporate, Small and medium‑sized enterprises and Retail business lines are managing loans and advances to customers. Categorisation of loans per customer group is detailed below.

· Global corporate is managing loans and advances to customers within the large corporate section, the Shipping centre, the International Corporate Lending, the International Syndicate and Project Finance.

· Restructuring and recoveries is the specialised unit which was set up to tackle the Group's loan portfolio quality and manages exposures to borrowers in distress situation through innovative solutions.

· International banking services specialises in the offering of banking services to the international corporate and non‑resident individuals, particularly international business companies whose ownership and business activities lie outside Cyprus. 

· Wealth management oversees the provision of private banking and wealth management, Market execution and Custody along with Asset Management and Investment Banking. The business line Wealth also includes subsidiary companies of the Group, whose activities relate to investment banking and brokerage, investment holding and management, administration and safekeeping of UCITS units.

· The Real Estate Management Unit manages properties acquired through debt‑for‑property swaps and properties acquired through the acquisition of certain operations of Laiki Bank in 2013, and executes exit strategies in order to monetise these assets. The business line REMU also includes other subsidiary property companies of the Group.

· Treasury is responsible for liquidity management and for overseeing operations to ensure compliance with internal and regulatory liquidity policies and provide direction as to the actions to be taken regarding liquidity availability.

· The Insurance business line is involved in both life and non‑life insurance business. 

· The business line 'Other' includes central functions of BOC PCL such as finance, risk management, compliance, legal, corporate affairs and human resources. These functions provide services to the operating segments. 'Other' includes also other subsidiary companies in Cyprus (excluding the insurance subsidiaries, property companies under REMU and subsidiary companies under Wealth) as well as the overseas activities of the Group.

BOC PCL broadly categorises its loans per customer group, using the following customer sectors:

· Retail - all physical person customers, regardless of the facility amount, and legal entities with facilities from BOC PCL of up to €260 thousand, excluding business property loans.

· SME - any company or group of companies (including personal and housing loans to the directors or shareholders of a company) with facilities from BOC PCL in the range of €260 thousand to €6 million and a maximum annual credit turnover of €10 million.

· Corporate - any company or group of companies (including personal and housing loans to the directors or shareholders of a company) with available credit lines with BOC PCL in excess of an aggregate principal amount of €6 million or having a minimum annual credit turnover of €10 million. These companies are either local‑larger corporations or international companies or companies in the shipping sector (lending also includes direct lending or through syndications).

Management monitors the operating results of each business segment separately for the purposes of performance assessment and resource allocation. Segment performance is evaluated based on profit after tax and non‑controlling interests. Inter‑segment transactions and balances are eliminated on consolidation and are made on an arm's length basis.

Operating segment disclosures are provided as presented to the Group Executive Committee.

Income and expenses associated with each business line are included for determining its performance. Transfer pricing methodologies are applied between the business lines to present their results on an arm's length basis. Income and expenses incurred directly by the business lines are allocated to the business lines as incurred. Indirect income and expenses are re‑allocated from the central functions to the business lines. For the purposes of the Cyprus analysis by business line, notional tax at the 12.5% Cyprus tax rate is charged/credited to profit or loss before tax of each business line.

The loans and advances to customers, the customer deposits and the related income and expense are generally included in the segment where the business is managed, instead of the segment where the transaction is recorded.

Corporate

Globalcorporate

Small and medium‑sized enterprises

Retail

Restructuring and recoveries

International banking services

Wealth management

REMU

Insurance

Treasury

Other

Total

Six months ended 30 June 2021

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

Net interest income/(expense)

27,082

27,739

15,061

38,734

30,070

4,127

220

(12,417)

(9)

8,179

13,427

152,213

Net fee and commission income/(expense)

6,926

5,385

4,445

20,764

7,690

26,846

2,773

(86)

(3,759)

953

11,920

83,857

Net foreign exchange gains/(losses)

238

101

233

812

30

2,699

1,341

- 

- 

1,160

(64)

6,550

Net (losses)/gains on financial instrument transactions and on disposal/dissolution of subsidiaries and associates

- 

(116)

-

- 

(3,035)

- 

(322)

6

(303)

(10,270)

(36)

(14,076)

Insurance income net of claims and commissions

- 

- 

-

- 

- 

- 

- 

- 

31,068

- 

- 

31,068

Net losses from revaluation and disposal of investment properties

- 

- 

-

- 

- 

- 

- 

(709)

- 

- 

(672)

(1,381)

Net gains on disposal of stock of property

- 

- 

-

- 

- 

- 

- 

7,180

- 

- 

192

7,372

Other income

1

2

6

177

32

1

100

3,284

30

- 

2,964

6,597

34,247

33,111

19,745

60,487

34,787

33,673

4,112

(2,742)

27,027

22

27,731

272,200

Staff costs

(2,604)

(1,473)

(2,992)

(30,147)

(8,015)

(6,222)

(1,993)

(1,838)

(5,396)

(739)

(39,447)

(100,866)

Special levy on deposits and other levies/contributions

(916)

(461)

(763)

(9,846)

(49)

(2,937)

(283)

- 

- 

- 

- 

(15,255)

Other operating (expenses)/income (excluding advisory and other restructuring costs)

(8,686)

(8,380)

(7,963)

(33,637)

(12,960)

(4,518)

(1,652)

(8,706)

(4,204)

(4,232)

14,791

(80,147)

Other operating expenses ‑ advisory and other restructuring costs

- 

- 

-

- 

(14,559)

- 

- 

(607)

- 

- 

(275)

(15,441)

22,041

22,797

8,027

(13,143)

(796)

19,996

184

(13,893)

17,427

(4,949)

2,800

60,491

Net gains/(losses) on derecognition of financial assets measured at amortised cost

34

1,187

658

219

(971)

(75)

1

- 

- 

- 

- 

1,053

Credit (losses)/gains to cover credit risk on loans and advances to customers

(1,666)

(4,089)

913

11,906

(55,320)

1,548

(70)

- 

- 

- 

(1,571)

(48,349)

Credit gains/(losses) of other financial instruments

- 

- 

-

- 

- 

- 

5

(91)

(184)

(57)

(3,487)

(3,814)

Impairment net of reversals of non‑financial assets

- 

- 

-

- 

- 

- 

- 

(6,742)

- 

- 

(656)

(7,398)

Share of loss from associates

- 

- 

-

- 

- 

- 

- 

- 

- 

- 

137

137

Profit/(loss) before tax

20,409

19,895

9,598

(1,018)

(57,087)

21,469

120

(20,726)

17,243

(5,006)

(2,777)

2,120

Income tax

(2,551)

(2,487)

(1,200)

127

7,136

(2,684)

(113)

895

(2,106)

626

1,389

(968)

Profit/(loss) after tax

17,858

17,408

8,398

(891)

(49,951)

18,785

7

(19,831)

15,137

(4,380)

(1,388)

1,152

Non‑controlling interests‑profit

- 

- 

-

- 

- 

- 

- 

- 

- 

- 

(413)

(413)

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

17,858

17,408

8,398

(891)

(49,951)

18,785

7

(19,831)

15,137

(4,380)

(1,801)

739

Corporate

Globalcorporate

Small and medium‑sized enterprises

Retail

Restructuring and recoveries

International banking services

Wealth management

REMU

Insurance

Treasury

Other

Total

Six months ended 30 June 2020 (restated)

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

Net interest income/(expense)

30,976

36,401

17,666

62,691

15,240

10,569

1,310

(19,363)

(29)

257

12,082

167,800

Net fee and commission income/(expense)

5,605

4,784

3,935

19,327

3,989

23,828

2,434

(123)

(3,100)

963

9,603

71,245

Net foreign exchange gains

282

124

257

836

55

2,896

1,499

- 

- 

3,869

725

10,543

Net gains/(losses) on financial instrument transactions and on disposal/dissolution of subsidiaries and associates

- 

3,740

-

- 

(733)

- 

419

(5)

(244)

1,943

(272)

4,848

Insurance income net of claims and commissions

- 

- 

-

- 

- 

- 

- 

- 

28,562

- 

353

28,915

Net gains/(losses) from revaluation and disposal of investment properties

- 

- 

-

- 

- 

- 

- 

111

- 

- 

(2,440)

(2,329)

Net gains on disposal of stock of property

- 

- 

-

- 

- 

- 

- 

2,639

- 

- 

37

2,676

Other income

1

1

7

52

112

1

318

6,812

(256)

1

994

8,043

36,864

45,050

21,865

82,906

18,663

37,294

5,980

(9,929)

24,933

7,033

21,082

291,741

Staff costs

(2,564)

(1,298)

(2,817)

(29,574)

(8,059)

(5,899)

(2,116)

(2,033)

(4,751)

(772)

(36,325)

(96,208)

Special levy on deposits and other levies/contributions

(1,000)

(659)

(707)

(9,427)

(78)

(3,155)

(297)

- 

- 

- 

- 

(15,323)

Other operating (expenses)/income (excluding advisory and other restructuring costs)

(5,113)

(3,631)

(6,444)

(38,899)

(12,874)

(5,405)

(1,396)

(4,735)

(4,055)

(6,152)

4,027

(84,677)

Other operating expenses ‑ advisory and other restructuring costs

(4)

- 

-

- 

(8,763)

- 

- 

(506)

- 

- 

(614)

(9,887)

28,183

39,462

11,897

5,006

(11,111)

22,835

2,171

(17,203)

16,127

109

(11,830)

85,646

Net (losses)/gains on derecognition of financial assets measured at amortised cost

(367)

1,850

402

(582)

363

(9)

4

- 

- 

- 

956

2,617

Credit (losses)/gains to cover credit risk on loans and advances to customers

(5,623)

(21,057)

(899)

2,210

(156,581)

9,910

(219)

- 

- 

- 

(11,452)

(183,711)

Credit (losses)/gains of other financial instruments

- 

- 

-

- 

- 

- 

(163)

31

(206)

188

(476)

(626)

Impairment net of reversals of non‑financial assets

- 

- 

-

- 

- 

- 

- 

(26,118)

- 

- 

(2,466)

(28,584)

Share of loss from associates

- 

- 

-

- 

- 

- 

- 

- 

- 

- 

(206)

(206)

Profit/(loss) before tax

22,193

20,255

11,400

6,634

(167,329)

32,736

1,793

(43,290)

15,921

297

(25,474)

(124,864)

Income tax

(2,774)

(2,532)

(1,425)

(829)

20,916

(4,092)

(224)

5,411

(1,736)

(37)

(16,937)

(4,259)

Profit/(loss) after tax

19,419

17,723

9,975

5,805

(146,413)

28,644

1,569

(37,879)

14,185

260

(42,411)

(129,123)

Non‑controlling interests‑loss

- 

- 

-

- 

- 

- 

- 

- 

- 

- 

3,505

3,505

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

19,419

17,723

9,975

5,805

(146,413)

28,644

1,569

(37,879)

14,185

260

(38,906)

(125,618)

Total revenue includes net interest income, net fee and commission income, net foreign exchange gains, net gains/(losses) on financial instrument transactions, insurance income net of claims and commissions, net gains/(losses) from revaluation and disposal of investment properties, net gains/(losses) on disposal of stock of property and other income. There was no revenue deriving from transactions with a single external customer that amounted to 10% or more of Group revenue.

Corporate

Globalcorporate

Small and medium‑sized enterprises

Retail

Restructuring and recoveries

International banking services

Wealth management

REMU

Insurance

Treasury

Other

Total

Six months ended 30 June 2021

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

Revenue from third parties

38,477

37,687

21,235

64,659

36,943

31,570

4,555

9,576

30,060

(18,244)

15,682

272,200

Inter‑segment (expense)/revenue

(4,230)

(4,576)

(1,490)

(4,172)

(2,156)

2,103

(443)

(12,318)

(3,033)

18,266

12,049

- 

Total revenue

34,247

33,111

19,745

60,487

34,787

33,673

4,112

(2,742)

27,027

22

27,731

272,200

Six months ended 30 June 2020 (restated)

Revenue from third parties

39,089

49,664

21,860

64,440

44,982

27,846

5,055

(3,191)

24,667

(5,178)

22,507

291,741

Inter‑segment (expense)/revenue

(2,225)

(4,614)

5

18,466

(26,319)

9,448

925

(6,738)

266

12,211

(1,425)

- 

Total revenue

36,864

45,050

21,865

82,906

18,663

37,294

5,980

(9,929)

24,933

7,033

21,082

291,741

Corporate

Globalcorporate

Small and medium‑sized enterprises

Retail

Restructuring and recoveries

International banking services

Wealth management

REMU

Insurance

Treasury

Other

Total

30 June 2021

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

€000

Assets