Bk. Cyprus Hldg Regulatory News (BOCH)

Board of Directors and Executivesas at 28 August 2017 

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. These forward-looking statements include, but are not limited to, statements relating to the Bank of Cyprus Holdings Public Limited Company Group (the Group) intentions, beliefs or current expectations and projections about the Group's future results of operations, financial condition, liquidity, performance, prospects, anticipated growth, provisions, impairments, 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. 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 from 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.

The definitions and explanation on Alternative Performance Measures Disclosures are presented in 'Definitions and explanations on Alternative Performance Measures Disclosures' of the Mid-Year Financial Report for the six months ended 30 June 2017.

The Mid-Year Financial Report for the six months ended 30 June 2017 is available at the Bank of Cyprus Holdings Public Limited Company Registered Office (at Ten Earlsfort Terrace, Dublin 2, D02 T380, Ireland) and on the Group's website www.bankofcyprus.com (Investor Relations/Financial Results).

Interim Management Report 

A. Analysis of Group Financial Results for the six months ended 30 June 2017

A.1 Group reorganisation

On 18 January 2017 Bank of Cyprus Holdings Public Limited Company (the Company) became the sole shareholder of Bank of Cyprus Public Company Ltd (BOC PCL). This reorganisation was treated as a reorganisation of an existing entity that has not changed the substance of the reporting entity.

The owners of BOC PCL before the reorganisation have the same absolute and relative interests in the net assets of the Group (being the Company, BOC PCL and its subsidiaries) immediately before and after the reorganisation, since the assets and liabilities of the Group and the BOC group (being BOC PCL and its subsidiaries) are the same immediately before and after the reorganisation. Hence, the Group is considered as a continuation of BOC group.

As this transaction did not result in any change of economic substance it also did not have any effect on the total equity of the Group. The Group's financial statements reflect the difference in the amounts of share capital, share premium and capital reduction reserves as an adjustment in equity.

A.2 Balance Sheet Analysis

A.2.1 Capital Base

Shareholders' equity totalled €2,543 million at 30 June 2017, compared to €3,071 million at 31 December 2016. The Common Equity Tier 1 capital (CET1) ratio (transitional basis) stood at 12.3% at 30 June 2017, compared to 14.5% at 31 December 2016. During the six months ended 30 June 2017 the CET1 ratio was negatively affected by the loss for the period and by the phase in of transitional adjustments mainly deferred tax assets, despite the reduction in risk weighted assets (RWA). Adjusting for Deferred Tax Assets, the CET1 ratio on a fully-loaded basis totalled 11.8% at 30 June 2017, decreased by 2.1 percentage points when compared to 13.9% at 31 December 2016. As at 30 June 2017, the Total Capital ratio stood at 13.8%, decreased by 0.8 percentage points when compared to 14.6% at 31 December 2016.

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

The Group continues to develop its processes to enable IFRS 9 to be implemented on 1 January 2018. The Group expects to be in a position to provide a robust estimate on the effect on its CET1 ratio later in the year, when the implementation programme, validation and testing is further advanced. The capital impact of any opening IFRS 9 adjustment to the provision stock is expected to be largely phased-in over a five year period in line with the proposal of the Council of the European Union. As a result, the effect of introducing IFRS 9 on CET1 in 2018 is expected to be small on a phased-in basis.

In January 2017, the Group raised €250 million of Tier 2 capital. The Group will continue, subject to market conditions, to examine opportunities to raise additional Tier 2 and/or AT1 bonds in the next 12 months. This will further strengthen the Group's capital base well ahead of the Minimum Required Eligible Liabilities ('MREL') and create greater versatility into the future.

A. Analysis of Group Financial Results for the six months ended 30 June 2017 (continued)

A.2 Balance Sheet Analysis (continued)

A.2.2 Funding and Liquidity

Funding

Funding from Central Banks

At 30 June 2017, BOC PCL's funding from central banks totalled €900 million, which relates wholly to ECB funding, compared to funding from central banks at 31 December 2016 of €850 million, which comprised Emergency Liquidity Assistance (ELA) funding of €200 million and ECB funding of €650 million. The ECB funding of €900 million at 30 June 2017 comprises €830 million through Targeted Longer-Term Refinancing Operations (TLTRO II), €40 million through Longer-Term Refinancing Operations (LTRO) and €30 million through the Main Refinancing Operations (MRO). 

BOC PCL has fully repaid ELA in January 2017.

Deposits

Group customer deposits totalled €16,584 million at 30 June 2017, compared to €16,510 million at 31 December 2016. During the six months ended 30 June 2017, deposits remained broadly stable, with the focus shifting towards the deposit mix and now more than fully fund the loan book. Cyprus deposits stood at €15,010 million at 30 June 2017, accounting for 91% of Group customer deposits. In constant exchange rates, Group customer deposits increased by €288 million and customer deposits in Cyprus increased by €143 million during the first six months of 2017. BOC PCL's deposit market share in Cyprus reached 31.3% at 30 June 2017. Customer deposits accounted for 75% of total assets at 30 June 2017. The Loan to Deposit ratio (L/D) stood at 90% at 30 June 2017, down from 95% at 31 December 2016, compared to a high of 151% at 31 March 2014.

Subordinated loan stock

In January 2017 BOC PCL tapped the debt capital markets and issued a €250 million unsecured and subordinated Tier 2 Capital Note.

Liquidity

As at 30 June 2017 the Group Liquidity Coverage Ratio (LCR) stood at 108% (compared to 49% at 31 December 2016) and is in compliance with the minimum regulatory requirement of 80% (which will increase to 100% by 1 January 2018). As at 30 June 2017, BOC PCL was not in compliance with the local regulatory liquidity requirements with respect to its operations in Cyprus. The Net Stable Funding Ratio (NSFR ratio) is currently expected to be introduced on 1 January 2018, with a minimum requirement of 100%. As at 30 June 2017 the Group's NSFR, on the basis of Basel 3 standards, was 102% (compared to 95% at 31 December 2016). After repayment of ELA in January 2017, the Group has been focusing on measures to improve its liquidity position so as to be in compliance with both LCR and NSFR.

A.2.3 Loans

Group gross loans totalled €19,505 million at 30 June 2017, compared to €20,130 million at 31 December 2016. Gross loans in Cyprus totalled €17,687 million at 30 June 2017 and accounted for 91% of Group gross loans. BOC PCL is the single largest credit provider in Cyprus with a 38.7% loan market share at 30 June 2017. Gross loans in the UK amounted to €1,434 million at 30 June 2017 and accounted for 7% of Group total gross loans. New loan originations for the Group reached €1,143 million for the six months ended 30 June 2017 (of which €845 million were granted in Cyprus and €298 million by the UK subsidiary), more than double the new lending in the corresponding period in the previous year.

At 30 June 2017, Group net loans and advances to customers totalled €14,913 million (31 December 2016: €15,649 million), including net loans and advances to customers with carrying value of €20 million which were classified as held for sale as at 30 June 2017 in line with IFRS 5.

A. Analysis of Group Financial Results for the six months ended 30 June 2017 (continued)

A.2 Balance Sheet Analysis (continued)

A.2.4 Loan portfolio quality

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

Loans in arrears for more than 90 days (90+ DPD) were reduced by €748 million in the first six months ended 30 June 2017. The decrease was the result of restructuring activity, debt for asset swaps and write offs. 90+ DPD stood at €7,561 million at 30 June 2017, accounting for 39% of gross loans (90+ DPD ratio), compared to 41% at 31 December 2016. The provisioning coverage ratio of 90+ DPD improved to 61% at 30 June 2017, compared to 54% at 31 December 2016. When taking into account tangible collateral at fair value, 90+ DPD loans are fully covered. The provisioning coverage ratio of 90+ DPD, calculated with reference to the contractual balances of customers, totalled 73% at 30 June 2017, compared to 67% as at 31 December 2016.

NPEs as defined by the European Banking Authority (EBA) were reduced by€1.3 billion or 12% during the six months ended 30 June 2017 to €9,752 million at 30 June 2017, accounting for 50% of gross loans, compared to 55% at 31 December 2016. This is the fourth consecutive quarter during which the quarterly reduction of NPEs exceeded the reduction of 90+ DPD mainly due to the curing of restructured performing NPEs that met the exit criteria following satisfactory performance post their restructuring. The Group expects the reduction in non-performing loans to continue and is in parallel actively exploring alternative avenues to accelerate this reduction. The provisioning coverage ratio of NPEs improved to 48% at 30 June 2017, up from 41% at 31 December 2016. When taking into account tangible collateral at fair value, NPEs are fully covered. The provisioning coverage ratio of NPEs, calculated with reference to the contractual balances of customers, stood at 60% at 30 June 2017, compared to 54% at 31 December 2016.

A. Analysis of Group Financial Results for the six months ended 30 June 2017 (continued)

A.2 Balance Sheet Analysis (continued)

A.2.5 Real Estate Management Unit (REMU)

The Real Estate Management Unit (REMU) on-boarded €229 million of assets via the execution of debt for asset swaps during the six months ended 30 June 2017. The focus for REMU is increasingly shifting from on-boarding of assets resulting from debt for asset swaps towards the disposal of these assets. The Group completed disposals of €140 million during the six months ended 30 June 2017. In addition the Group disposed of a property with carrying value €10 million, previously classified as investment property. Post 30 June 2017, the Group completed additional disposals of €35 million. As at 30 June 2017, assets held by REMU had a carrying value of €1.5 billion.

A.2.6 Non-core overseas exposures

The remaining non-core overseas net exposures (including both on-balance sheet and off-balance sheet exposures) at 30 June 2017 are as follows:

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

In addition to the above, at 30 June 2017 there were overseas exposures of €173 million in Greece (compared to exposures of €189 million in Greece and €57 million in Romania as at 31 December 2016), not identified as non-core exposures, since they are considered by management as exposures arising in the normal course of business. There were no overseas exposures not identified as non-core exposures in Romania as at 30 June 2017.

A. Analysis of Group Financial Results for the six months ended 30 June 2017 (continued)

A.3 Income Statement Analysis

A.3.1 Total income

Net interest income (NII) and net interest margin (NIM) for the six months ended 30 June 2017 amounted to €316 million and 3.37% respectively. NII was down by 12% compared to €360 million during the corresponding period in the prior year, reflecting the low interest rate environment and the lower volume of loans primarily as a result of the debt for asset swaps.

Average interest earning assets for the six months ended 30 June 2017 amounted to €18,952 million down by 6% on a yearly basis, largely due to debt for asset swaps.

Non-interest income for the six months ended 30 June 2017 amounted to €154 million, with recurring income comprising net fee and commission income of €88 million and net insurance income of €25 million. Non-interest income for the six months ended 30 June 2017 increased by 27% yoy, largely driven by the new and increased commission charges introduced in the fourth quarter of 2016. Except from insurance income which remained nearly constant compared to the corresponding period last year, the remaining component of non-interest income for the six months ended 30 June 2017 was a profit of €41 million which includes a net gain of €12 million on the disposal of assets by REMU.

Total income for the six months ended 30 June 2017 amounted to €470 million, compared to €482 million for the corresponding period last year (2% decrease yoy), with the reduction primarily reflecting the yoy reduction in NII.

A.3.2 Total expenses

Total expenses for the six months ended 30 June 2017 were €214 million, 52% of which related to staff costs (€111 million), 40% to other operating expenses (€85 million) and 8% to special levy and contribution to Single Resolution Fund (SRF) (€18 million).

The cost to income ratio for the six months ended 30 June 2017 was 46%. Excluding the special levy and contribution to the SRF, the cost to income ratio for the six months ended 30 June 2017 was 42%.

A.3.3 (Loss)/profit before tax, advisory, voluntary exit plan (VEP) and other restructuring costs

Operating profit for the six months ended 30 June 2017 was €256 million, compared to €280 million for the same period last year (down by 9% yoy). The decrease mainly reflects the lower net interest income and higher non-staff costs including contribution to the SRF.

Provision charge for the six months ended 30 June 2017 totalled €656 million, compared to €158 million for the same period last year following increased provisions which increased the provision coverage to 48%, close to the medium term target of 50%. The elevated provisioning levels reflect changes in BOC PCL's provisioning assumptions as a result of the Group's reconsideration of its strategy to more actively explore other innovative strategy solutions to further accelerate balance sheet de-risking. Following this, the annualised provisioning charge for the six months ended 30 June 2017 accounted for 4.2% of gross loans. An amount of c. €500 million reflecting the one-off effect of the change in the provisioning assumptions is included in the calculation of Cost of Risk but is not annualised.

At 30 June 2017, accumulated provisions, including fair value adjustment on initial recognition and provisions for off-balance sheet exposures, totalled €4,638 million (compared to €4,519 million at 31 December 2016) and accounted for 23.8% of gross loans (compared to 22.4% at 31 December 2016).

Impairments of other financial and non-financial assets for the six months ended 30 June 2017 totalled €36 million (compared to €22 million for the same period last year up by 67% yoy) and were primarily affected by impairment charges relating to legacy exposures and impairment losses of stock of properties in Greece and Romania.

A. Analysis of Group Financial Results for the six months ended 30 June 2017 (continued)

A.3 Income Statement Analysis (continued)

A.3.3 Loss before tax, advisory, voluntary exit plan (VEP) and other restructuring costs (continued)

Provisions for litigation and regulatory matters for the six months ended 30 June 2017 amounted to €35 million. The charge relates mainly to a fine imposed by the Cyprus Commission for the Protection of Competition, the increase in provision for litigation for securities issued by BOC PCL between 2007 and 2011 and redress provision for the UK operations. The fine related to complaints filed in 2010 relating to BOC PCL's alleged abuse of its dominant market position in its cards business.

A.3.4 (Loss)/profit after tax

The tax charge for the six months ended 30 June 2017 totalled €72 million, compared to €12 million in the corresponding period in the previous year. The increase is mainly due to the reduction of deferred tax asset by €62 million, following the increase in provision for impairment of loans and advances to customers and evaluation of the recoverability assessment of the deferred tax asset balance.

Loss after tax and before advisory, VEP and other restructuring costs for the six months ended 30 June 2017 totalled €540 million compared to a profit after tax and before advisory, VEP and other restructuring costs of €84 million for the same period last year.

Advisory, VEP and other restructuring costs for the six months ended 30 June 2017 totalled €14 million compared to €87 million for the same period last year (down by 84%). The elevated levels in the previous year relate mainly to the VEP.

Loss after tax attributable to the owners of the Company for the six months ended 30 June 2017 was €554 million compared to a profit after tax of €56 million for the corresponding period last year.

B. Operating Environment

After a protracted recession Cyprus returned to growth in 2015 and continued to expand in the subsequent period. Real GDP increased by 2.8% in 2016, and by 3.7% and 3.5% respectively on a seasonally adjusted basis, in the first and second quarters of 2017. The growth momentum is expected to be maintained over the medium term supported by private consumption, gradually increasing investment, declining unemployment and favourable developments in tourism and business services.

Tourism remains robust aided by geopolitical tensions in competing destinations. Arrivals had reached record levels of 3.2 million people in 2016 according to the Cyprus Statistical Service and continued to expand in the first seven months of the year, rising by about 15% from the same period the year before. In the labour market the unemployment rate declined significantly to 11% in the second quarter on a seasonally adjusted basis, according to Eurostat, compared with a peak of 16.6% in the first quarter of 2015. Consumer inflation turned modestly positive in the first seven months of the year rising by 1% after falling for four consecutive years according to data from the Cyprus Statistical Service. In property markets demand has been rising as evidenced by an increasing number of sales contracts. The Central Bank's Residential Property Price Index increased by 0.2% year-on-year in the first quarter of 2017 and increased by 0.3% on a quarter-on-quarter basis, from the fourth quarter 2016.

In the area of public finance, the general government budget has been near balance since 2014 excluding recapitalisation costs of the cooperative credit sector, and public debt relative to GDP had risen to 107.8% at the end of 2016 according to Eurostat. Cyprus has consistently outperformed its fiscal targets during and after the economic adjustment programme. According to Eurostat, the primary surplus in 2016 was 3% of GDP and the general government budget was also a surplus of 0.4% of GDP.

Overall, the outlook for the medium term remains favourable and an average of real GDP growth of 2.8% is expected in the period 2017-2019 according to the Ministry of Finance. Upside factors relate to a longer period of low oil prices, further improvement of economic fundamentals in the euro area and stronger investment spending as property prices are stabilising and as projects in tourism, energy and public works are being implemented.

B. Operating Environment (continued)

Downside risks to the outlook are associated with the still high levels of non-performing loans, and public debt ratio, and with a possible deterioration of the external environment for Cyprus. This may involve slower growth in the UK with a weakening of the pound as a result of uncertainty resulting from Brexit. The direct consequences on Cyprus from Brexit, will mostly emanate from tourist activity. The possible loss of UK tourist arrivals may be mitigated at least in part, by increases in arrivals of tourists from other destinations as airline connectivity improves. Political uncertainty in Europe triggered by a British exit or by the refugee crisis could also lead to increased economic uncertainty and undermine economic confidence.

In this context of a strengthening economy and narrowing imbalances, the Cyprus government benefited from a series of rating upgrades. Most recently in July 2017, Moody's Investors Service upgraded the long-term issuer rating of the Cyprus sovereign to Ba3 from B1 previously and maintained its outlook to positive. In March 2017, S&P Global Ratings upgraded the Cyprus sovereign to BB+ which is one notch below investment grade. The key drivers for rating upgrades have been stronger economic performance than expected, progress in the banking sector and consistent fiscal outperformance.

C. Business Overview

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

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

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

Management is also placing emphasis on diversifying income streams by boosting fee income from international transaction services, wealth management and insurance. The Group's insurance companies, EuroLife Ltd and General Insurance of Cyprus Ltd operating in the sectors of life and general insurance respectively, constitute a leading player in the insurance business in Cyprus, with such businesses providing a recurring income, further diversifying the Group's income streams. The insurance income net of insurance claims for the six months ended 30 June 2017 amounted to €25 million (at the same levels as the six months ended 30 June 2016), contributing to 16% of non-interest income.

In order to further improve its funding structure, BOC PCL is stepping up its efforts to grow lower cost deposits, and take advantage of the increased customer confidence towards BOC PCL, as well as improving macroeconomic conditions.

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

D. Outlook

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

· Materially reduce the level of delinquent loans

· Further improve the funding structure

· Maintain an appropriate capital position by internally generating capital

· Focus on the core Cyprus market and the UK operations

· Achieve a lean operating model

· Deliver value to shareholders and other stakeholders

D. Outlook (continued)

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

* An amount of provisions of c. €500 million reflecting the one-off effect of the change in the provisioning assumptions are included in the calculation of Cost of Risk but is not annualised.

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

*** The cost to income ratio for the six months ended 30 June 2017 excluding the special levy and contribution to the SRF was 42%, compared to 40% for the corresponding period last year.

E. Financial Results

Interim Condensed Consolidated Income Statement

In the Interim Consolidated Income Statement, within the Interim Condensed Consolidated Financial Statements for the six months ended 30 June 2017:

· Provision charge includes gain on derecognition of loans and advances to customers and changes in expected cash flows.

· Advisory, VEP and other restructuring costs of €14 million are presented within 'Other operating expenses' (corresponding period of 2016: €25 million within 'Other operating expenses' and €62 million within 'Staff costs').

· The net gain on disposal of non-core assets for the six months ended 30 June 2016 of €1 million and €58 million are presented within 'Other income' and 'Net gains on financial instrument transactions' respectively.

E. Financial Results (continued)

Interim Condensed Consolidated Balance Sheet

* p.p = percentage points, bps = basis points, 100 basis points (bps) = 1 percentage point

E. Financial Results (continued)

* p.p = percentage points, bps = basis points, 100 basis points (bps) = 1 percentage point

F. Going concern

The management has made an assessment of the Group's ability to continue as a going concern.

The conditions that existed during the six months ended 30 June 2017 and the developments up to the date of approval of these Financial Statements that have been considered in management's going concern assessment include, amongst others, the operating environment in Cyprus and of the Group (Note 5).

The management believes that the Group is taking all necessary measures to maintain its viability and the development of its business in the current economic environment.

The management, taking into consideration the factors described below and the uncertainties that existed at the reporting date, is satisfied that the Group has the resources to continue in business for the foreseeable future and, therefore, the going concern principle is appropriate for the reasons set out below, despite the fact that, as disclosed in Notes 5.2.3 and 29 of the Financial Statements, the Group is currently not in compliance with its liquidity regulatory requirements with respect to its operations in Cyprus and is therefore dependent on continuing regulatory forbearance which can be considered as a material uncertainty as to its ability to continue as a going concern. Following the repayment of ELA in January 2017 (31 December 2016: €200 million), the Group has achieved compliance with the Liquidity Coverage Ratio (LCR).

· Τhe Group's Common Equity Tier 1 (CET1) ratio at 30 June 2017 stands at 12.3% (transitional) and the total capital ratio at 13.8%, higher than the minimum required ratios (Note 5.2.1).

· The increase in the liquid assets of the Group and compliance with the LCR ratio requirements. The ELA funding was repaid in full on 5 January 2017 (Note 5.2.3).

· The increasing level of Group customer deposits (increase of €74 million during the six months ended 30 June 2017). At 30 June 2017 customer deposits stood at €16,584 million.

F. Going concern (continued)

· The Cyprus government rating has been repeatedly upgraded. In July 2017 Moody's Investors Service upgraded the long-term issuer rating of the Cyprus sovereign to Ba3 from B1 and maintained its outlook to positive. In March 2017 S&P Global Ratings upgraded the Cyprus sovereign to BB+ which is one notch below investment grade.

· BOC PCL regained access to the debt capital markets in January 2017 with the issuance of €250 million unsecured subordinated Tier 2 Capital Note.

G. Principal risks and uncertainties

Like other financial organisations, the Group is exposed and expects to continue to be exposed for the remaining of the financial year to risks, the most significant of which are credit risk, liquidity risk and market risk (arising from adverse movements in exchange rates, interest rates and security prices) and insurance risk.

Since the Group is considered as a continuation of the BOC group, detailed information relating to Group risk management is set out in Notes 43 to 46 of the Annual Consolidated Financial Statements of the BOC group for the year ended 31 December 2016 and in the Additional Risk and Capital Management Disclosures which form part of the 2016 Annual Financial Report of the BOC group.

Aside from the risks set out below and those described in Notes 27 to 29 of the Interim Condensed Consolidated Financial Statements and in the Additional Risks and Capital Management Disclosures including Pillar 3 semi-annual disclosures section of this Mid-Year Financial Report there has been no other significant change to the significant risks and uncertainties during the period or no change is expected for the remaining six months of the financial year.

The Group monitors and manages these risks through various control mechanisms.

Additionally, the Group is exposed to the risk of 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 generally acquired in debt satisfaction and is intended to be disposed of in line with the Group's strategy. Further information for stock of property is disclosed in Note 17 of the Interim Condensed Consolidated Financial Statements.

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 of these Interim Condensed Consolidated Financial Statements and in Note 5 of the Annual Consolidated Financial Statements of the BOC group for the year ended 31 December 2016.

H. Events after the reporting date

There are no material events which occurred after the reporting date.

I. Responsibility Statement

The members of the Board of Directors are responsible for preparing the Mid-Year Financial Report in accordance with International Accounting Standard (IAS) 34 'Interim Financial Reporting' as adopted by the European Union (EU), the Transparency (Directive 2004/109/EC) Regulations 2007 and the Transparency Rules of the Central Bank of Ireland.

Each of the members of the Board of Directors (who are listed on page 1 of the Mid-Year Financial Report) confirm that to the best of their knowledge and belief the Interim Condensed Consolidated Financial Statements for the period ended 30 June 2017 have been prepared in accordance with IAS 34 (adopted pursuant to the procedure provided for under Article 6 of Regulation EC No. 1606/2002 of the European Parliament and of the Council of 19 July 2002) and that they give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and that as required by the Transparency (Directive 2004/109/EC) Regulations 2007, the Mid-Year Financial Report includes a fair review of:

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

· a description of the principal risks and uncertainties for the remaining six months of the financial year (Notes 27 to 29); and

· details of any related party transactions that have materially affected the Group's financial position or performance in the six months ended 30 June 2017, or material changes to related parties transactions described in the Annual Consolidated Financial Statements of the BOC group for the year ended 31 December 2016.

The members of the Board of Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group's website.

Prof. Dr. Josef Ackermann

Chairman

John Patrick Hourican

Chief Executive Officer

28 August 2017

Prof. Dr. J. Ackermann Chairman Mr. J. P. Hourican Chief Executive Officer

Mr. I. Zographakis Director Mrs. E. Livadiotou Finance Director

Interim Consolidated Statement of Cash Flows

Non-cash transactions

Six months ended 30 June 2017

Repossession of collaterals

During the six months ended 30 June 2017, the Group acquired stock of property by taking possession of collaterals held as security for loans and advances to customers of €229,247 thousand (Note 17).

Six months ended 30 June 2016

Acquisition of S.Z. Eliades Leisure Ltd

During the six months ended 30 June 2016 the Group acquired a 70% interest in the share capital of S.Z. Eliades Leisure Ltd in exchange for the settlement of the majority of the borrowing due from S.Z. Eliades Leisure Ltd to BOC PCL, as part of the restructuring of its debt. The acquisition did not include any cash consideration. Further information is disclosed in Note 33.2.1.

Sale of shares held in Visa Europe Limited

During the six months ended 30 June 2016 the Group sold its shares held in Visa Europe Limited following the purchase of Visa Europe Limited by Visa Inc. The transaction in addition to the cash paid, involved the granting of preferred stock in Visa Inc. with a carrying value of approximately €8 million and a deferred cash component of a carrying value of approximately €4 million.

Repossession of collaterals

During the six months ended 30 June 2016, the Group acquired stock of property by taking possession of collaterals held as security for loans and advances to customers of €641,856 thousand.

1. Corporate information 

Bank of Cyprus Holdings Public Limited Company (the 'Company') was incorporated in the Republic of Ireland on 11 July 2016 as a public limited company in accordance with the provisions of the Companies Act 2014 of Ireland. The Company's name on incorporation was Aion Cyprus Public Limited Company and on 10 August 2016 it changed to Bank of Cyprus Holdings Public Limited Company. Its registered office for the period from 11 July 2016 to 20 March 2017 was at Arthur Cox, Earlsfort Centre, Earlsfort Terrace, Dublin 2, Ireland. On 20 March 2017 it was changed to Ten 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 Group (the 'Group') comprises the Company, its subsidiary BOC PCL and the subsidiaries of BOC PCL.

The Company was incorporated with the intention of becoming the holding company of the Group for the purposes of the Group's listing on the London Stock Exchange (LSE). The Company is tax resident in Cyprus. The principal activities of the BOC PCL and its subsidiary companies involve the provision of banking, financial, insurance services and management and disposal of property predominately acquired in debt satisfaction.

On 13 December 2016, at an Extraordinary General Meeting of the shareholders of BOC PCL and together with its subsidiaries, the 'BOC group', a scheme of arrangement between the Company, BOC PCL and the shareholders of BOC PCL has been approved. The scheme of arrangement which became effective on 18 January 2017 introduces the Company as the new holding company of the Group which is also the sole shareholder of BOC PCL.

On 19 January 2017 the shares of the Company were admitted to listing and trading on the LSE and the Cyprus Stock Exchange (CSE).

Interim Condensed Consolidated Financial Statements

The Interim Condensed Consolidated Financial Statements for the six months ended 30 June 2017 (the 'Financial Statements') include the financial statements of the Company and its subsidiaries. They were approved and authorised for issue by a resolution of the Board of Directors on 28 August 2017.

The 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.

2. Unaudited financial statements

The 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'.

3. Summary of significant accounting policies

3.1 Group reorganisation

As described in Note 1 above, on 18 January 2017 the Company became the sole shareholder of BOC PCL. This reorganisation was treated as a reorganisation of an existing entity that has not changed the substance of the reporting entity.

The owners of BOC PCL before the reorganisation have the same absolute and relative interests in the net assets of Group immediately before and after the reorganisation, since the assets and liabilities of the Group and the BOC group are the same immediately before and after the reorganisation. Hence, the Group is considered as a continuation of BOC group.

As this transaction did not result in any change of economic substance it also did not have any effect on the total equity of the Group. The Group's financial statements reflect the difference in the amounts of share capital, share premium and capital reduction reserves as an adjustment in equity.

3. Summary of significant accounting policies (continued)

3.2 Basis of preparation

The Financial Statements have been prepared on a historical cost basis, except for properties held for own use and investment properties, available-for-sale investments, derivative financial instruments and financial assets at fair value through profit or loss, 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 Financial Statements

The 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.

Comparative information

As described in Note 3.1 above, the Group is considered to be a continuation of the BOC group. As a result the Financial Statements, including comparative amounts, were prepared as if the Group existed at the beginning of the earlier period presented in the Financial Statements.

3.3 Statement of compliance

The Financial Statements have been prepared in accordance with the International Accounting Standard (IAS) applicable to interim financial reporting as adopted by the EU ('IAS 34'), the Transparency (Directive 2004/109/EC) Regulations 2007 and the related Transparency Rules of the Central Bank of Ireland.

The 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 period 11 July 2016 to 31 December 2016, upon which the auditors have expressed an unqualified opinion (with emphasis of matter on material uncertainty related to going concern), were published on 27 April 2017 and are expected to be delivered to the Registrar of Companies of Ireland within 28 days of 30 September 2017.

The 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 Public Company Ltd for the year ended 31 December 2016, prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, which are available at the Group's website (www.bankofcyprus.com).

3.4 Changes in accounting policies and disclosures

As described in Note 3.1 above, the Group is considered to be a continuation of the BOC group. A summary of the significant accounting policies of the Group is presented in Note 2 of the Annual Consolidated Financial Statements of BOC group for the year ended 31 December 2016.

Additionally, in January 2017 BOC PCL has issued subordinated loan stock as disclosed in Note 22. The subordinated loan stock is initially measured at the fair value of the consideration received, net of any issue costs. It is subsequently measured at amortised cost using the effective interest rate method, in order to amortise the difference between the cost at inception and the redemption value, over the period to the earliest date that BOC group has the right to redeem the subordinated loan stock.

Interest on subordinated loan stock is included in 'Interest expense' in the consolidated income statement.

3. Summary of significant accounting policies (continued)

3.4 Changes in accounting policies and disclosures (continued)

3.4.1 New and amended standards and interpretations

The accounting policies adopted for the preparation of the Financial Statements are consistent with those followed for the preparation of the Annual Consolidated Financial Statements of BOC group for the year ended 31 December 2016 as disclosed in Note 3.4. In addition, the Group has adopted the following new standards, amendments and interpretations, which did not have a material impact on the Financial Statements:

· Amendments to IAS 7: Disclosure Initiative

· Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for Unrealised Losses

· Annual Improvements IFRSs 2014-2016 Cycle issued by the International Accounting Standards Board (IASB), which is a collection of amendments to IFRSs. These improvements include:

· IFRS 12 Disclosure of Interests in Other Entities.

3.4.2 Standards and Interpretations that are issued but not yet effective

3.4.2.1 Standards and Interpretations issued by the IASB and adopted by the EU

IFRS 9 Financial Instruments

IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement and introduces new requirements for classification and measurement, impairment and hedge accounting. The standard is effective for annual periods beginning on or after 1 January 2018 with early adoption permitted.

Classification and measurement

The classification and measurement of financial assets will depend on the entity's business model for their management and their contractual cash flow characteristics and result in financial assets being measured at amortised cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss. The combined effect of the application of the business model and the contractual cash flow characteristics tests may result in some differences in the population of financial assets measured at amortised cost or fair value compared with IAS 39. The classification of financial liabilities is essentially unchanged, except that, for certain liabilities measured at fair value, gains or losses relating to changes in the entity's own credit risk are to be included in other comprehensive income.

Impairment

The impairment requirements apply to financial assets measured at amortised cost and FVOCI, lease receivables, certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or provision in the case of commitments and guarantees) is required for expected credit losses (ECL) resulting from default events that are possible within the next 12 months (12 month ECL), unless assets are deemed as purchased or originated credit impaired. In the event of a significant increase in credit risk, for assets deemed purchased or originated credit impaired and all credit-impaired assets, allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument (lifetime ECL).

The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period by considering the change in the risk of default occurring over the remaining life of the financial instrument.

Hedge accounting

IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting. The standard does not explicitly address macro hedge accounting strategies, which are being considered in a separate project. To remove the risk of any conflict between existing macro hedge accounting practice and the new general hedge accounting requirements, the standard includes an accounting policy choice to remain with IAS 39 hedge accounting.

Transition

The classification, measurement and impairment requirements are applied retrospectively by adjusting the balance sheet at the date of initial application, with no requirement to restate comparative periods. Hedge accounting is generally applied prospectively from that date. 

3. Summary of significant accounting policies (continued)

3.4 Changes in accounting policies and disclosures (continued)

3.4.2 Standards and Interpretations that are issued but not yet effective (continued)

3.4.2.1 Standards and Interpretations issued by the IASB and adopted by the EU (continued)

IFRS 9 Financial Instruments (continued)

IFRS 9 implementation project

An IFRS 9 implementation project is currently under way by the Group. The project is headed by the Group Chief Risk Officer and a Steering Committee was set up to monitor the project, comprising of members of the Executive Management team.

The project covers all aspects of IFRS 9 out of which the majority of the effort has concentrated on the development of methodologies for the calculation of impairment of customer loans and advances based on expected credit losses, since IFRS 9 moves away from the current incurred loss model to an expected credit loss model. This change requires more judgment in considering information for current and future provisioning. The expected credit losses model will also result in earlier recognition of credit losses and thus a higher provision charge because it includes not only credit losses already incurred, but also losses that are expected in the future. The Income Statement impact is also likely to be more volatile as expectations and judgements may change and/or due to movements within the three stages stipulated by the standard. The assessment of the impact of IFRS 9 is ongoing and may change upon its full application reflecting balance sheet dynamics at the time of adoption.

The Group expects to be in a position to provide a robust estimate of the IFRS 9 impact later in the year, when the implementation programme, validation and testing is further advanced. The capital impact of any opening IFRS 9 adjustment to the provision stock is expected to be largely phased-in over a five year period in line with the proposal of the Council of the European Union. As a result, the effect of introducing IFRS 9 on CET1 in 2018 is expected to be small on a phased-in basis.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 was issued in May 2014 and establishes a five-step model that will apply to revenue earned from a contract with a customer (with limited exceptions), regardless of the type of revenue transaction or the industry. The standard's requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the entity's ordinary activities (e.g., sales of property, plant and equipment or intangibles). Extensive disclosures will be required, including disaggregation of total revenue; information about performance obligations; changes in contract asset and liability account balances between periods and key judgements and estimates. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. Early adoption is permitted. The Group is in the process of assessing the impact of this standard on its results and financial position.

IFRS 15 Revenue from Contracts with Customers (Clarifications)

The objective of the Clarifications is to clarify the IASB's intentions when developing the requirements in IFRS 15 Revenue from Contracts with Customers, particularly the accounting of identifying performance obligations amending the wording of the 'separately identifiable' principle, of principal versus agent considerations including the assessment of whether an entity is a principal or an agent as well as applications of control principle and of licensing providing additional guidance for accounting of intellectual property and royalties. The Clarifications also provide additional practical expedients for entities that either apply IFRS 15 fully retrospectively or that elect to apply the modified retrospective approach. The Clarifications apply for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Group is in the process of assessing the impact of this standard on its results and financial position.

4. Going concern

The management has made an assessment of the Group's ability to continue as a going concern.

The conditions that existed during the six months ended 30 June 2017 and the developments up to the date of approval of these Financial Statements that have been considered in management's going concern assessment include, amongst others, the operating environment in Cyprus and of the Group (Note 5).

The management believes that the Group is taking all necessary measures to maintain its viability and the development of its business in the current economic environment.

4. Going concern (continued)

The management, taking into consideration the factors described below and the uncertainties that existed at the reporting date, is satisfied that the Group has the resources to continue in business for the foreseeable future and, therefore, the going concern principle is appropriate for the reasons set out below, despite the fact that, as disclosed in Notes 5.2.3 and 29 of the Financial Statements, the Group is currently not in compliance with its liquidity regulatory requirements with respect to its operations in Cyprus and is therefore dependent on continuing regulatory forbearance which can be considered as a material uncertainty as to its ability to continue as a going concern. Following the repayment of ELA in January 2017 (31 December 2016: €200 million), the Group has achieved compliance with the Liquidity Coverage Ratio (LCR).

· Τhe Group's Common Equity Tier 1 (CET1) ratio at 30 June 2017 stands at 12.3% (transitional) and the total capital ratio at 13.8%, higher than the minimum required ratios (Note 5.2.1).

· The increase in the liquid assets of the Group and compliance with the LCR ratio requirements. The ELA funding was repaid in full on 5 January 2017 (Note 5.2.3).

· The increasing level of Group customer deposits (increase of €74 million during the six months ended 30 June 2017). At 30 June 2017 customer deposits stood at €16,584 million.

· The Cyprus government rating has been repeatedly upgraded. In July 2017 Moody's Investors Service upgraded the long-term issuer rating of the Cyprus sovereign to Ba3 from B1 and maintained its outlook to positive. In March 2017 S&P Global Ratings upgraded the Cyprus sovereign to BB+ which is one notch below investment grade.

· BOC PCL regained access to the debt capital markets in January 2017 with the issuance of €250 million unsecured subordinated Tier 2 Capital Note.

5. Operating environment

5.1 Cyprus

After a protracted recession Cyprus returned to growth in 2015 and continued to expand in the subsequent period. Real Gross Domestic Product (GDP) increased by 2.8% in 2016, and by 3.7% and 3.5% respectively on a seasonally adjusted basis, in the first and second quarters of 2017. The growth momentum is expected to be maintained over the medium term supported by private consumption, gradually increasing investment, declining unemployment and favourable developments in tourism and business services.

Tourism remains robust aided by geopolitical tensions in competing destinations. Arrivals had reached record levels of 3,2 million people in 2016 according to the Cyprus Statistical Service and continued to expand in the first seven months of the year, rising by about 15% from the same period the year before. In the labour market the unemployment rate declined significantly to 11% in the second quarter on a seasonally adjusted basis, according to Eurostat, compared with a peak of 16.6% in the first quarter of 2015. Consumer inflation turned modestly positive in the first seven months of the year rising by 1% after falling for four consecutive years according to data from the Cyprus Statistical Service. In property markets demand has been rising as evidenced by an increasing number of sales contracts. The Central Bank's Residential Property Price Index increased by 0.2% year-on-year in the first quarter of 2017 and increased by 0.3% on a quarter-on-quarter basis from the fourth quarter 2016.

In the area of public finance, the general government budget has been near balance since 2014 excluding recapitalisation costs of the cooperative credit sector, and public debt relative to GDP had risen to 107.8% at the end of 2016 according to Eurostat. Cyprus has consistently outperformed its fiscal targets during and after the economic adjustment programme. According to Eurostat, the primary surplus in 2016 was 3% of GDP and the general government budget was also a surplus of 0.4% of GDP.

Overall, the outlook for the medium term remains favourable and an average of real GDP growth of 2.8% is expected in the period 2017-2019 according to the Ministry of Finance. Upside factors relate to a longer period of low oil prices, further improvement of economic fundamentals in the euro area and stronger investment spending as property prices are stabilising and as projects in tourism, energy and public works are being implemented.

5. Operating environment (continued)

5.1 Cyprus (continued)

Downside risks to the outlook are associated with the still high levels of non-performing loans, and public debt ratio and with a possible deterioration of the external environment for Cyprus. This may involve slower growth in the UK with a weakening of the pound as a result of uncertainty resulting from Brexit. The direct consequences on Cyprus from Brexit, will mostly emanate from tourist activity. The possible loss of UK tourist arrivals may be mitigated at least in part, by increases in arrivals of tourists from other destinations as airline connectivity improves. Political uncertainty in Europe triggered by a British exit or by the refugee crisis could also lead to increased economic uncertainty and undermine economic confidence.

In this context of a strengthening economy and narrowing imbalances, the Cyprus government benefited from a series of rating upgrades. Most recently in July 2017, Moody's Investors Service upgraded the long-term issuer rating of the Cyprus sovereign to Ba3 from B1 previously and maintained its outlook to positive. In March 2017, S&P Global Ratings upgraded the Cyprus sovereign to BB+ which is one notch below investment grade. The key drivers for rating upgrades have been stronger economic performance than expected, progress in the banking sector and consistent fiscal outperformance.

5.2 The Group

5.2.1 Regulatory capital ratios

The CET1 ratio of the Group at 30 June 2017 stands at 12.3% (transitional) and the total capital at 13.8%.

The minimum Pillar I total capital requirement is 8.0% and may be met, in addition to the 4.5% CET1 requirement, with up to 1.5% by Additional Tier 1 capital and with up to 2.0% by Tier 2 capital.

The Group is also subject to additional capital requirements for risks which are not covered by the Pillar I capital requirements (Pillar II add-ons). Following the enactment of the amendments in the Cypriot Banking Law in February 2017 regarding the gradual phase-in of the Capital Conservation Buffer (CCB) and based on the Supervisory Review and Evaluation Process (SREP) performed by the European Central Bank (ECB) in 2016, the Group's minimum CET1 capital ratio as from 1 January 2017 has been reduced to 9.50% compared to 10.75% fully phased-in of CCB (minimum CET1 capital ratio at 31 December 2016: 11.75% fully phased-in of CCB), comprising of a 4.5% Pillar I requirement, a 3.75% Pillar II requirement and a phased-in CCB of 1.25%. The ECB has also provided non-public guidance for an additional Pillar II CET1 buffer.

The overall Total Capital Ratio requirement as from 1 January 2017 following the amendments in the Cypriot Banking Law in February 2017 regarding the gradual phase-in of CCB, has been reduced to 13.00% compared to 14.25% (fully phased-in of CCB), comprising of a Pillar I requirement of 8% (of which up to 1.5% can be in the form of Additional Tier 1 capital and up to 2.0% in the form of Tier 2 capital), a Pillar II requirement of 3.75% (in the form of CET1), as well as a phased-in CCB of 1.25%.

The minimum CET1 requirement including Pillar II, applicable for the year 2016 was determined by the ECB at 11.75% in November 2015 and included CCB on a fully loaded basis.

The Group's capital position at 30 June 2017 exceeds both its Pillar I and its Pillar II add-on capital requirements. However, the Group's Pillar II add-on capital requirements are a point-in-time assessment and therefore are subject to change over time.

5.2.2 Asset quality

The Group's loans that are impaired or past due for more than 90 days (90+ DPD) have decreased by 9% during the six months ended 30 June 2017 and totalled €7,560 million at 30 June 2017, representing 39% of gross loans before fair value adjustment on initial recognition (Note 27). The provisioning coverage ratio improved to 61% compared to 54% at 31 December 2016. The Group non-performing exposures (NPEs), as defined by the European Banking Authority (EBA), totalled €9,752 million at 30 June 2017 and accounted for 50% of gross loans before fair value adjustment on initial recognition. The provisioning coverage ratio of NPEs totalled 48% at 30 June 2017 compared to 41% at 31 December 2016.

5. Operating environment (continued)

5.2 The Group (continued)

5.2.2 Asset quality (continued)

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. 90+ DPD have decreased by 42% since their peak of €13,003 million as at 31 December 2013. NPEs have decreased by 36% since their peak of €15,175 million as at 31 March 2015.

5.2.3 Liquidity

Group customer deposits totalled €16,584 million at 30 June 2017 compared to €16,510 million at 31 December 2016. Customer deposits in Cyprus reached €15,010 million at 30 June 2017 and €15,043 million at 31 December 2016. Customer deposits accounted for 75% of total assets as at 30 June 2017 (compared to 74% at 31 December 2016 and a low of 48% at 31 March 2014).

ELA was fully repaid on 5 January 2017. ELA is available to solvent Euro area credit institutions and although BOC PCL has received no specific assurance, management expects that BOC PCL will continue to have access to the central bank liquidity facilities, in line with applicable rules if it were to face a 'stress event' that gave rise to temporary liquidity problems. If a stress event were to occur in the future, BOC PCL would seek to utilise ELA funding, assuming it has sufficient available eligible collateral at the time.

The credit ratings of the Republic of Cyprus by the main credit rating agencies albeit improving, continue to be below investment grade. As a result, the ECB is not able to include Cyprus Government bonds in its asset purchase programme, or as eligible collateral for Eurosystem monetary operations, as was the case when the waiver for collateral eligibility due to the country being under an economic adjustment programme existed.

In January 2017 BOC PCL issued €250 million unsecured and subordinated Tier 2 Capital Note under BOC PCL's EMTN Programme. The note was priced at par, with a coupon of 9.25% (Note 22).

As at 30 June 2017 the LCR stood at 108% (compared to 49% at 31 December 2016) and is in compliance with the minimum regulatory requirement of 80%. As at 30 June 2017, BOC PCL was not in compliance with the local regulatory liquidity requirements with respect to its operations in Cyprus and is therefore dependent on continuing regulatory forbearance. The Net Stable Funding Ratio (NSFR ratio) is currently expected to be introduced on 1 January 2018, with a minimum requirement of 100%. As at 30 June 2017 the Group's NSFR, on the basis of Basel ΙΙΙ standards, was 102% (compared to 95% at 31 December 2016). After repayment of ELA in January 2017, the Group is focusing on measures to improve its liquidity position and remains on track to exceed the minimum requirement by 1 January 2018 with respect to LCR, which will increase to 100% as of that date, and NSFR.

5.2.4 Pending litigation, claims and regulatory matters

The management has considered the potential impact of pending litigation, claims and regulatory 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 novelty of the said claims and the uncertainties inherent in a unique situation, based on the information available at present and on the basis of the law as it currently stands, the management considers that the said claims are considered unlikely to have a material adverse impact on the financial position and capital adequacy of the Group (Note 23).

6. Significant judgements, estimates and assumptions

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 affected in future periods.

6. Significant judgements, estimates and assumptions (continued)

The key assumptions concerning the future and other key sources of estimation of 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 in the Annual Consolidated Financial Statements of BOC group for the year ended 31 December 2016, as detailed in the basis of preparation of these Financial Statements (Note 3.2).

The critical judgements, estimates and assumptions are set out below.

6.1 Provision for impairment of loans and advances to customers

The Group reviews its loans and advances to customers to assess whether a provision for impairment should be recorded in the consolidated income statement. In particular, management is required to estimate the amount and timing of future cash flows in order to determine the amount of provision required and the calculation of the impairment allowance involves the use of judgement. Such estimates are based on assumptions about a number of factors and therefore actual impairment losses may differ.

The carrying amount of the loan is reduced through the use of a provision account and the amount of the loss is recognised in the consolidated income statement. Loans together with the associated provisions are written off when there is no realistic prospect of future recovery. Partial write-offs, including non contractual write-offs, may also occur when it is considered that there is no realistic prospect for the recovery of the contractual cash flows. In addition, write-offs may reflect restructuring activity with customers and are part of the terms of the agreement and subject to satisfactory performance.

The Group may change certain estimates from period to period, however it is impracticable to estimate the effect of such individual estimates due to interdependencies between estimates and as the profile of the population of loans changes from period to period.

A very important factor for the estimation of provisions 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 the collateral, taxes and expenses on the repossession and subsequent sale of the collateral as well as any other applicable haircuts. Indexation has been used to estimate updated market values of properties, while assumptions were made on the basis of a macroeconomic scenario for future changes in property values. The Group at 30 June 2017, following a reconsideration of its strategy, to more actively explore other innovative strategic solutions to further accelerate balance sheet de-risking, has modified certain of its provisioning assumptions and estimates.

At 30 June 2017 the average haircut (including liquidity haircut and selling expenses) used in the collective provisions calculation is 32% (31 December 2016: average of 10% of the current market value of the property for those collaterals for which the increase in their value is capped to zero and 10% of the projected market value of the property for those collaterals for which their value is expected to drop).

The timing of recovery from real estate collaterals used in the collective provision calculation has been estimated to be on average 6 years (31 December 2016: average of 3 years except for customers in Debt Recovery, average of 6 years).

For the calculation of specific provisions, the timing of recovery of collaterals as well as the haircuts used were based on the specific facts and circumstances of each case.

In accordance with the Loan Impairment and Provisioning Procedures Directives of 2014 and 2015 of the Central Bank of Cyprus (CBC), the cumulative average future change in property values during the year has been capped to zero.

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

6. Significant judgements, estimates and assumptions (continued)

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

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

For individually significant assets, impairment allowances are calculated on an individual basis and all relevant considerations that have a bearing on the expected future cash flows are taken into account (for example, the business prospects for the customer, the realisable value of collateral, the Group's position relative to other claimants, the reliability of customer information and the likely cost and duration of the work-out process). The level of the impairment allowance is the difference between the value of the discounted expected future cash flows (discounted at the loan's original effective interest rate) and its carrying amount. Subjective judgements are made in the calculation of future cash flows. Furthermore, judgements change with time as new information becomes available or as work-out strategies evolve, resulting in frequent revisions to the impairment allowance as individual decisions are taken. Changes in these estimates would result in a change in the allowances and have a direct impact on the impairment charge.

In addition to provisions for impairment on an individual basis, the Group also makes collective impairment provisions. The Group adopts a formulaic approach for collective provisions, which includes assigning probabilities of default and loss given default for portfolios of loans. This methodology is subject to estimation uncertainty, partly because it is not practicable to identify losses on an individual loan basis because of the large number of loans in each portfolio. In addition, the use of historical information for probabilities of default and loss rates is supplemented with significant management judgement to assess whether current economic and credit conditions are such that the actual level of incurred losses is likely to be greater or less than that suggested by historical experience.

Impairment assessment also includes 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; otherwise the provision is calculated on a collective basis, taking into account the probability of loss for the portfolio in which the customer is included for on-balance sheet exposures impairment assessment. The Group may change certain estimates from period to period, however it is impracticable to estimate the effect of such individual estimates due to interdependencies between estimates and as the profile of the population of off-balance sheet exposure changes from period to period.

In normal circumstances, historical experience provides the most objective and relevant information from which to assess inherent loss within each portfolio. In certain circumstances, historical loss experience provides less relevant information about the incurred loss in a given portfolio at the reporting date, for example, where there have been changes in economic, regulatory or behavioural conditions such that the most recent trends in the portfolio risk factors are not fully reflected. In these circumstances, such risk factors are taken into account when calculating the appropriate levels of impairment allowances, by adjusting the provision for impairment derived solely from historical loss experience.

The total amount of the Group's provision for impairment of loans and advances is inherently uncertain because it is highly sensitive to changes in economic and credit conditions across a number of geographical areas.

Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered past due, but are treated as up to date loans for measurement purposes. Loans subject to collective impairment assessment whose terms have been renegotiated are taken into account in determining the inputs for collective impairment calculation. Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired. The carrying amounts of loans that have been classified as renegotiated retain this classification in accordance with the rules of the technical standard of the EBA.

6. Significant judgements, estimates and assumptions (continued)

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

Economic and credit conditions within geographical areas are influenced by many factors with a high degree of interdependency so that there is no one single factor to which the Group's loan impairment provisions as a whole are particularly sensitive. Different factors are applied in each country to reflect the local economic conditions, laws and regulations and the assumptions underlying this judgement are highly subjective. The methodology and the assumptions used in calculating impairment losses are reviewed regularly. It is possible that the actual results could be different from the assumptions made, resulting in a material adjustment to the carrying amount of loans and advances.

Further details on impairment allowances and related credit information are set out in Note 27.

6.2 Tax

The Group operates and is therefore subject to tax in various countries. Estimates are required in determining the provision for taxes at the reporting date. The Group recognises income tax liabilities for transactions and assessments whose tax treatment is uncertain. Where the final tax is different from the amounts initially recognised in the consolidated income statement, such differences will impact the income tax expense, the tax liabilities and deferred tax assets or liabilities of the period in which the final tax is agreed with the relevant tax authorities.

Deferred tax assets are recognised by the Group in respect of tax losses to the extent that it is probable that future taxable profits will be available against which the losses can be utilised. Judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax-planning strategies. These variables have been established on the basis of significant management judgement and are subject to uncertainty. It is possible that the actual future events could be different from the assumptions made, resulting in a material adjustment to the carrying amount of deferred tax assets.

6.3 Stock of property - estimation of net realisable value

Stock of property is measured at the lower of cost and net realisable value. The net realisable value is determined with reference to the fair value of properties adjusted for any impact of specific circumstances on the sale process of each property. 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 large degree of uncertainty due to the relatively low level of market activity.

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

6.4 Provisions

Judgement is involved in determining whether a present obligation exists and in estimating the probability, timing and amount of any outflows. Provisions for pending litigations, claims and regulatory 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 estimated possible loss for such matters. Actual results may prove to be significantly higher or lower than the estimate of 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 and claims refer to Note 23.

6.5 Exercise of significant influence

The Group determines whether it exercises significant influence on companies in which it has shareholdings of less 20% if other factors exist that demonstrate significant influence. In performing this assessment it considers its representation in the Board of Directors which gives rise to voting rights of more than 20% and participation in policy-making processes, including participation in decisions about dividends and other distributions.

7. Segmental analysis

The Group is organised into operating segments based on the geographic location of each unit. The main geographical locations that the Group operates in, are Cyprus and the United Kingdom. In addition, the Cyprus segment is further organised into operating segments based on the line of business.

The remaining Group's activities in Greece, Romania and Russia are separate operating segments for which information is provided to management but, due to their size, have been grouped for disclosure purposes into one segment, namely 'Other countries'.

The Group's activities in Cyprus, United Kingdom and other countries include mainly the provision of banking, financial and insurance services, as well as management of properties either held as stock or as investment property.

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.

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 originated, instead of the segment where the transaction is recorded. Loans and advances to customers which are originated in countries where the Group does not have operating entities are included in the segment where they are managed.

7. Segmental analysis (continued)

7. Segmental analysis (continued)

7. Segmental analysis (continued)

Analysis of total revenue

Total revenue includes net interest income, net fee and commission income, net foreign exchange gains, net gains on financial instrument transactions, insurance income net of claims and commissions, (losses)/gains from revaluation and disposal of investment properties, gains/(losses) on disposal of stock of property and other income.