Bk. Cyprus Hldg Regulatory News (BOCH)

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.

Non-IFRS performance measures

Bank of Cyprus Holdings Public Limited Company (the Company) management believes that the non-IFRS performance measures included in this document provide valuable information to the readers of the Mid-Year 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 Bank of Cyprus Holdings 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 performed measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well. Refer to 'Definitions and explanations on Alternative Performance Measures Disclosures' on pages 168 to 170 of the Mid-Year Financial Report for the six months ended 30 June 2018 for further information, reconciliations with Interim Condensed Consolidated Financial Statements and calculations of non-IFRS performance measures included throughout this document and the most directly comparable IFRS measures.

The Mid-Year Financial Report for the six months ended 30 June 2018 is available at the Bank of Cyprus Holdings Public Limited Company Registered Office (at 10 Earlsfort Terrace, Dublin 2, D02 T380, Ireland) and on the Group's website www.bankofcyprus.com (Investor Relations/Financial Results).

A. Financial Results

Interim Condensed Consolidated Income Statement

* including the Helix portfolio which has been classified as non-current assets and disposal groups held for sale

A. Financial Results (continued)

Interim Condensed Consolidated Balance Sheet

The Group has not restated comparative information for 2017 for financial instruments within the scope ofIFRS 9. Additionally, the recognition and measurement of credit losses under IFRS 9 differs from that under IAS 39. Therefore, the comparative information for 2017, which is reported under IAS 39 is not comparable to the information presented for 2018, which is reported under IFRS 9. New or amended interim disclosures are presented for the current period according to IFRS 9, where applicable, whereas comparative period disclosures are consistent with those made in the prior periods. Adjustments arising from the adoption of IFRS 9 have been recognised directly in equity as at 1 January 2018, as disclosed in Note 7 of these Interim Condensed Consolidated Financial Statements for the six months ended 30 June 2018.

A. Financial Results (continued)

The key balance sheet figures and ratios at 30 June 2018 include the Helix portfolio of a net book value of €1,239 million which has been classified as non-current assets and disposal groups held for sale.

The CET 1 (fully loaded) ratio for 30 June 2018, including the full impact of IFRS 9 and deferred tax assets amounts to 10.0%.

A. Financial Results (continued)

A.1 Unaudited reconciliation of Income Statement for the six months ended 30 June 2018 between statutory and underlying bases

• Loan provisions charge under the underlying basis includes an amount of €14 million relating to net gains on loans and advances to customers at fair value through profit or loss (FVPL) disclosed within 'Net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates' in these Interim Condensed Consolidated Financial Statements.

• Additionally, loan provisions charge under the underlying basis includes net gains on derecognition of financial assets measured at amortised cost and credit losses to cover credit risk on loans and advances to customers separately disclosed in the Interim Consolidated Income Statement in these Interim Condensed Consolidated Financial Statements.

• Loss relating to NPE sale (Helix) is disclosed separately under the underlying basis, as part of 'Credit losses to cover credit risk on loans and advances to customers' in these Interim Consolidated Income Statement.

• Reversal of provisions for litigation and regulatory matters of €5 million, advisory and other restructuring costs (excluding Helix) of €15 million (corresponding period €25 million) and restructuring costs relating to NPE sale (Helix) of €12 million are part of 'Other operating expenses' in these Interim Condensed consolidated Financial Statements.

A. Financial Results (continued)

A.2 Balance Sheet Analysis

A.2.1 Capital Base

Shareholders' equity totalled €2,198 million at 30 June 2018, compared to €2,586 million at 31 December 2017. The Common Equity Tier 1 capital (CET1) ratio (transitional basis) stood at 11.9% at 30 June 2018, compared to 12.7% at 31 December 2017. Adjusting for Deferred Tax Assets, the CET1 ratio on a fully-loaded basis (allowing for IFRS 9 transitional arrangements) totalled 11.5% at 30 June 2018, compared to 12.2% at 31 December 2017.

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 will be phased-in gradually. The amount that will be added each year will decrease based on a weighting factor until the impact of IFRS 9 is fully absorbed at the end of five years. For the year 2018 the impact on the capital ratios will be 5% of the impact on the impairment amounts from the initial application of IFRS 9. The CET1 ratio on a fully-loaded basis (including the full impact of IFRS 9 and deferred tax assets), amounts to 10.0% at 30 June 2018. On a transitional basis and on a fully phased-in basis after the five year period of transition is complete, the impact of IFRS 9 is expected to be manageable and within the Group's capital plans.

As at 30 June 2018, the Total Capital Ratio stood at 13.4%, compared to 14.2% at 31 December 2017.

The Group's capital ratios are above the minimum CET1 regulatory capital ratio of 9.375%, comprising a 4.50% Pillar I requirement, a 3.00% Pillar II requirement and a phased-in CCB of 1.875% and the overall Total Capital Ratio requirement of 12.875%, comprising a Pillar I requirement of 8.00% (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 3.00% (in the form of CET1), as well as a phased-in CCB of 1.875%. The European Central Bank (ECB) has also provided non-public guidance for an additional Pillar II CET1 buffer. As per the EBA final guidelines on Supervisory Review and Evaluation Process (SREP) and supervisory stress testing in July 2018 and the Single Supervisory Mechanism's (SSM) 2018 SREP methodology, CET1 held for purposes of Pillar II Capital Guidance (P2G) cannot be used to meet any other capital requirements. Such Pillar II add-ons derive from the Group's individual capital guidance, which is a point in time assessment made in the context of the SREP process and, accordingly, they may vary over time.

As per the EBA final guidelines on SREP and supervisory stress testing and the SSM 2018 SREP methodology issued in July 2018, CET1 held for purposes of P2G cannot be used to meet any other capital requirements (Pillar 1, P2R or the combined buffer requirements), and therefore cannot be used twice. In accordance with the EBA, the Guidelines will be applicable from 1 January 2019 but the final decision on their adoption remains on the discretion of the relevant competent authorities.

In accordance with the provisions of the Macroprudential Oversight of Institutions Law of 2015, the CBC is also the responsible authority for the designation of banks that are Other Systemically Important Institutions (O-SIIs) and for the setting of the O-SII buffer requirement for these systemically important banks. The Group has been designated as an O-SII and the CBC set the O-SII buffer for the Group at 2.0%. This buffer will be phased-in gradually, starting from 1 January 2019 at 0.5% and increasing by 0.5% every year thereafter, until being fully implemented (2.0%) on 1 January 2022.

Sale of Bank of Cyprus UK Limited (BOC UK)

In July 2018, BOC PCL signed an agreement to sell its wholly owned subsidiary bank in the UK, Bank of Cyprus UK Limited (BOC UK). The impact from this sale on the CET1 ratio had this transaction taken place at 30 June 2018 would have been an increase of approximately 10 bps relating to recycling of a related foreign currency gain of €17 million into CET1, previously recorded in the foreign currency translation reserve, which was not recognised in regulatory capital. The sale is expected to be completed by the end of 2018, subject to regulatory approvals. On completion, the CET1 ratio is expected to be further positively affected by c.75 bps (based on 30 June 2018 results) resulting mainly from the release of risk weighted assets.

A. Financial Results (continued)

A.2 Balance Sheet Analysis (continued)

A.2.1 Capital Base (continued)

Project Helix

The Group has reached an agreement for the sale of a portfolio (the 'Portfolio') of loans and advances to customers with a gross book value of €2.8 billion, of which €2,7 billion relate to non performing exposures (known as 'Project Helix', or the 'Transaction'). The Portfolio will be transferred to a licensed Cypriot Credit Acquiring Company (the 'CyCAC') by BOC PCL. The shares of the CyCAC will then be acquired by certain funds affiliated with Apollo Global Management LLC, (NYSE:APO) (together with its consolidated subsidiaries "Apollo"), the purchaser of the Portfolio. Funds managed by Apollo will provide equity capital in relation to the financing of the purchase of the Portfolio. The purchaser was selected following a competitive sale process.

The Portfolio has a net book value of €1.3 billion. At completion, BOC PCL will receive a gross cash consideration of c.€1.4 billion.

The completion of the Transaction remains subject to a number of conditions precedent, including mainly regulatory and other approvals, including the ECB agreeing to a Significant Risk Transfer (SRT) benefit from the Transaction. BOC PCL intends to participate in the senior debt in relation to such financing in an amount of €450 million, subject to regulatory approval.

The impact on the CET1 ratio at 30 June 2018 had this transaction taken place would have been a decrease of c.80 bps relating to the loss of the transaction of c.€135 million, including transaction costs (expected to decline to c.€105 million by the year end, as the time value of money unwinds).

Additional Tier 1 

The Company is currently in the process of finalising the terms with, and seeking binding commitments from investors in respect of a privately placed AT1 transaction, of an anticipated size of c.€200 million subject to market conditions. There can be no assurance that an AT1 transaction will take place or, if it does, the terms on which it will be implemented. A further announcement will be made in due course.

In preparation for a potential issuance of AT1 capital instruments, the Company will proceed (subject to approval by the shareholders and the Irish courts) with a capital reduction process which will result in the reclassification of up to €1.5 billion of the Company's share premium as distributable reserves. This will have the effect of eliminating the Company's accumulated losses of €0.5 billion as at 31 December 2017. The reduction of capital has been proposed as a special resolution for approval by shareholders at the Company's Annual General Meeting on 28 August 2018. The reduction of capital will not have any impact on regulatory capital or on the total equity position of the Company, BOC PCL or the Group.

The distributable reserves created will provide the basis for the calculation of distributable items under the Capital Requirements Regulation (EU) No. 575/2013 ('CRR'), which provides that coupons on AT1 capital instruments may only be funded from distributable items. Distributable items for the purposes of the CRR are determined, in part, by reference to distributable reserves. The Company is currently subject to a prohibition on dividend distributions. However, such prohibition will not apply to the payment of coupons on any AT1 capital instruments issued by the Company.

IFRS 9 - Financial Instruments

The Group applied IFRS 9 on 1 January 2018. The new accounting standard allows the impact on the implementation date, 1 January 2018, to be recognised through equity rather than the income statement.

The Group's IFRS 9 impact on transition resulted in a decrease of shareholders' equity of €308 million (€0.69 per share) and was primarily driven by credit impairment provision.

The Group elected to apply the European Union (EU) dynamic transitional arrangements for regulatory capital purposes which result in only 5% of the estimated IFRS 9 impact affecting the capital ratios during 2018. Allowing for IFRS 9 transitional arrangements the impact on Group capital ratios on 1 January 2018 was a reduction of c.9 bps.

A. Financial Results (continued)

A.2 Balance Sheet Analysis (continued)

A.2.1 Capital Base (continued)

IFRS 9 - Financial Instruments (continued)

On a transitional basis and on a fully phased-in basis after the five year period of transition is complete, the impact of IFRS 9 is expected to be manageable and within the Group's capital plans.

Default Definition

According to the European Banking Authority (EBA) guidelines that govern the CRR default definition, issued in January 2017, the default definition will gradually evolve to align with the Non-Performing Exposure (NPE) definition by 1 January 2021. The Group, in line with regulatory discussions, has proceeded with the early adoption of these changes to almost align the EBA CRR definition with the NPE definition as from 1 January 2018, resulting in an increase in RWA, equivalent to a decrease of c.50 bps on regulatory capital ratios.

A.2.2 Funding and Liquidity

Funding

Funding from Central Banks

At 30 June 2018, the BOC PCL's funding from central banks totalled €830 million, which relates wholly to ECB funding (compared to ECB funding of €930 million as at 31 December 2017), comprising solely of funding through Targeted Longer-Term Refinancing Operations (TLTRO II).

Deposits

Group customer deposits increased to €18,431 million at 30 June 2018, compared to €17,850 million at 31 December 2017. Deposits in Cyprus stood at €16,486 million at 30 June 2018, accounting for 89% of Group customer deposits. BOC PCL's deposit market share in Cyprus reached 35.1% at 30 June 2018. Customer deposits accounted for 78% of total assets at 30 June 2018. The Loans to Deposits ratio (L/D) stood at 77% at 30 June 2018, down from 82% at 31 December 2017, compared to a high of 151% at 31 March 2014. The 6% increase in local deposits during the six months ended 30 June 2018, offsets the 4% reduction in deposits of International Business Units (IBUs) in the same period.

Liquidity

At 30 June 2018, the Group Liquidity Coverage Ratio (LCR) stood at 199% (compared to 190% at 31 December 2017) and was in compliance with the minimum regulatory requirement of 100% (increased from a minimum requirement of 80% on 31 December 2017). 

The Net Stable Funding Ratio (NSFR) was not introduced on 1 January 2018, as opposed to what was expected. The minimum requirement of NSFR will be 100%. At 30 June 2018, the Group's NSFR, on the basis of the Basel ΙΙΙ standards, stood at 115% (compared to 111% at 31 December 2017).

In accordance with the CRR, the local regulatory liquidity requirements set by the Central Bank of Cyprus (CBC) were abolished on 1 January 2018. The CBC introduced a macroprudential measure in the form of a liquidity add-on imposed on top of the LCR requirement of BOC PCL, which became effective on 1 January 2018. The objective of the measure is to ensure that there will be a gradual release of the excess liquidity in the Cypriot banking system arising from the lower liquidity requirements under the LCR compared to the ones under the local regulatory liquidity requirements previously in place. The add-on applies stricter outflow and inflow rates on some of the parameters used in the calculation of the LCR, as well as additional liquidity requirements in the form of outflow rates on items that are not subject to outflow rates under the LCR. The measure was implemented in two stages, the first stage being applicable from 1 January 2018 until 30 June 2018 and the second stage from 1 July 2018 until 31 December 2018, with a reduction of 50% of the add-on rates from 1 July 2018. As a result of the relaxation of the add-on rates, the surplus liquidity of BOC PCL with respect to the LCR including the add-on, increased by approximately €800 million, to €1.4 billion on 1 July 2018. As at 30 June 2018, BOC PCL was in compliance with the LCR including the add-on, which stood at 114%.

A. Financial Results (continued)

A.2 Balance Sheet Analysis (continued)

A.2.3 Loans

Group gross loans and advances to customers totalled €18,312 million at 30 June 2018, compared to €18,755 million at 31 December 2017. Gross loans and advances to customers in Cyprus totalled €16,223 million at 30 June 2018 and accounted for 89% of Group gross loans and advances to customers. BOC PCL is the single largest credit provider in Cyprus with a market share of 38.6% at 30 June 2018. Gross loans and advances to customers in the UK amounted to €1,818 million at 30 June 2018 and accounted for 10% of Group total gross loans and advances to customers.

New loan originations for the Group reached €1,309 million at 30 June 2018 (of which €1,049 million were granted in Cyprus), exceeding new lending at 30 June 2017.

At 30 June 2018, the Group net loans and advances to customers totalled €13,001 million (compared to €14,602 million at 31 December 2017). In addition, at 30 June 2018, net loans and advances to customers of €1,239 million were classified as non-current assets held for sale in line with IFRS 5 and relate to Helix. There were no loans and advances to customers classified as held for sale in line with IFRS 5 at 31 December 2017.

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.

NPEs as defined by the EBA were reduced to €7,914 million at 30 June 2018, accounting for 43% of gross loans and advances to customers, compared to 47% at 31 December 2017, on the same basis (including the Helix portfolio which has been classified as non-current assets and disposal groups held for sale).

The provisioning coverage ratio of NPEs stood at 52% at 30 June 2018 (compared to 48% at 31 December 2017), on the same basis (including the Helix portfolio which has been classified as non-current assets and disposal groups held for sale).

When taking into account tangible collateral at fair value, NPEs are fully covered.

1 including the Helix portfolio of a net book value of €1,239 million which has been classified as non-current assets and disposal groups held for sale.

2 As at 31 December 2017 analysis was performed on an account basis. As at 30 June 2018, the analysis is performed on a customer basis.

The Group has recorded significant organic NPE reductions for thirteen consecutive quarters.

A. Financial Results (continued)

A.2 Balance Sheet Analysis (continued)

A.2.5 Real Estate Management Unit

The Real Estate Management Unit (REMU) on-boarded €220 million of assets (including construction cost) during the six months ended 30 June 2018 via the execution of debt for asset swaps. 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 €126 million during the six months ended 30 June 2018, resulting in a profit on disposal of €21 million for the six months ended 30 June 2018.

Following the incorporation of Cyreit Variable Capital Investment Company PLC (Cyreit), properties of carrying value €166 million were reclassified from the stock of properties (measured at the lower of cost and net realisable value under IAS 2) to investment properties (measured at fair value under IAS 40). These properties, which were subsequently classified as non-current assets and disposal groups held for sale, continue to be managed by REMU.

As at 30 June 2018, assets held by REMU had a carrying value of €1.5 billion. Stock of properties of €39 million was transferred to non-current assets held for sale as it was also included in the portfolio for the NPE sale.

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 2018 are as follows:

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

In accordance with the Group's strategy to exit from overseas non-core operations, the operations of the branch in Romania are expected to be terminated, subject to the completion of deregistration formalities with respective authorities. Most of the remaining assets and liabilities of the branch in Romania with third parties have been transferred to other entities of the Group.

In addition to the above, at 30 June 2018 there were overseas exposures of €154 million in Greece (compared to exposures of €168 million in Greece as at 31 December 2017), not identified as non-core exposures, since they are considered by management as exposures in the normal course of business. 

A. Financial Results (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 2018 amounted to €249 million and 2.51% respectively, including the Helix portfolio which has been classified as non-current assets and disposal groups held for sale. NII was down by 21% compared to €316 million during the corresponding period in the prior year, reflecting the lower volume on loans, pressure on lending rates and the cost of liquidity compliance.

Average interest earning assets for the six months ended 30 June 2018 including the Helix portfolio which has been classified as non-current assets and disposal groups held for sale amounted to €20,064 million, up by 6% on a yearly basis.

Non-interest income for the six months ended 30 June 2018 amounted to €183 million, up by 19% on a yearly basis. Non-interest income for the six months ended 30 June 2018 mainly comprised of net fee and commission income of €84 million, net foreign exchange income and net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates of €42 million, net insurance income of €25 million and net gains from revaluation and disposal of investment properties and on disposal of stock of properties of €21 million.

Net fee and commission income for the six months ended 30 June 2018 amounted to €84 million, compared to €88 million in the corresponding period last year, down by 5% on a yearly basis, mainly due to the implementation of IFRS 9 under which certain commission income types are not recognised for Stage 3 loans.

Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates of €42 million for the six months ended 30 June 2018, increased by 81% on a yearly basis, mainly due to the gains on disposal of bonds during the six months ended 30 June 2018 of €19 million.

Total income for the six months ended 30 June 2018 amounted to €432 million, compared to €470 million for the corresponding period last year (8% decrease on a yearly basis).

A.3.2 Total expenses

Total expenses for the six months ended 30 June 2018 were €218 million (compared to €214 million for the six months ended 30 June 2017), 53% of which related to staff costs (€116 million), 41% to other operating expenses (€90 million) and 6% to special levy and contribution to SRF (€12 million comprising the special levy of €11 million and contribution of SRF of €1 million).

Staff costs of €116 million for the six months ended 30 June 2018 were increased by 4% on a yearly basis, mainly due to the effect of the renewal of the annual collective agreement with the employees' union.

Other operating expenses for the six months ended 30 June 2018 were €90 million, increased by 5% on a yearly basis.

A.3.3 Profit/(loss) before tax and restructuring costs

Operating profit for the six months ended 30 June 2018 was €214 million, compared to €256 million for the same period last year (down by 16% on a yearly basis).

The loan provisions charge for the six months ended 30 June 2018 totalled €99 million, compared to €656 million for the same period last year (down by 85% on a yearly basis), as the previous year was affected by the additional provisions of c.€500 million taken during the six months ended 30 June 2017. The annualised provisioning charge for the six months ended 30 June 2018 accounted for 1.1% of gross loans and advances to customers, compared to a provisioning charge of 4.2% for the six months ended 30 June 2017. An amount of approximately €500 million reflecting the one-off effect of the change in the provisioning assumptions was included in the calculation of cost of risk for the six months ended 30 June 2017 but was not annualised.

A. Financial Results (continued)

A.3 Income Statement Analysis (continued)

A.3.3 Profit/(loss) before tax and restructuring costs (continued)

At 30 June 2018, accumulated expected credit losses on loans and advances to customers, including fair value adjustment on initial recognition and provisions for off-balance sheet exposures and including the Helix portfolio which has been classified as non-current assets and disposal groups held for sale, totalled €4,100 million (compared to €4,204 million at 31 December 2017) and accounted for 22.4% of gross loans and advances to customers on the same basis (compared to 22.4% at 31 December 2017).

Credit losses of other financial and impairments of non-financial assets for the six months ended 30 June 2018 totalled €13 million (compared to €36 million for the same period last year, down by 63% on a yearly basis).

Reversal for litigation and regulatory matters for the six months ended 30 June 2018 amounted to €5 million, compared to provisions of €35 million for the six months ended 30 June 2017. The charge for the six months ended 30 June 2017 related 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.

A.3.4 Loss after tax

The tax charge for the six months ended 30 June 2018 totalled €5 million compared to €72 million a year earlier, which included increased charge due to the reduction of the level of deferred tax assets of €62 million.

Profit after tax and before restructuring costs and before the NPE sale (Helix) for the six months ended 30 June 2018 was €108 million, compared to a loss after tax and before restructuring costs and for the six months ended 30 June 2017 of €540 million, reflecting the additional provisions of c.€500 million taken in the first half of 2017.

Profit after tax and before restructuring costs related to held for sale portfolio and loss from loans held for sale for the six months ended 30 June 2018 amounted to €93 million, compared to a loss of €554 million a year earlier, reflecting the additional provisions of approximately €500 million taken in the first half of 2017.

Loss after tax attributable to the owners of the Company for the six months ended 30 June 2018 was €54 million, compared to a loss of €554 million for the six months ended 30 June 2017.

B. Operating Environment

The recovery of Cyprus since 2014 is gaining momentum and the medium-term outlook remains favourable, driven by improving macroeconomic conditions, falling unemployment and broadening investments. At the same time, the Cypriot economy continues to face challenges primarily in relation to high public indebtedness and a high level of NPEs.

Real Gross Domestic Product (GDP) increased by 3.9% in 2017 and by 4.0% in the first half of 2018 year-on-year and seasonally adjusted (Cyprus Statistical Service, CSS). The main drivers of the growth were tourism, business services and increasing construction activity. On the expenditure side, growth is driven by domestic demand, namely private consumption and fixed investment. Net exports continued to make a negative contribution to growth since imports increased faster than exports.

Tourist arrivals increased by 14.6% in 2017 and continued to increase in 2018 up by 9.6% year-on-year in the first seven months (CSS). The unemployment rate dropped to 11% on average in 2017 and further to 9.4% in the first quarter and to 8.4% in the second quarter of 2018, seasonally adjusted the latter based on monthly estimates (Eurostat). Average consumer inflation was marginally positive at 0.5% in 2017 after four consecutive years of deflation and continued to rise in 2018, up by 0.6% in the first seven months of the year (CSS), driven by housing and transport costs.

GDP growth is expected to average about 4% per annum in 2018-2019 according to the IMF (Country Report, June 2018). The outlook over the medium term reflects positive underlying dynamics in relation to both public and private debt and improved conditions for the reduction of the high level of non-performing exposures aided by recent legislation improving the foreclosure and insolvency framework and facilitating the sale of non-performing exposures.

B. Operating Environment (continued)

In public finance, the budget surplus increased steeply to 1.8% of GDP in 2017 and is expected to remain substantial in 2018-2019 also averaging around 2.1% of GDP, according to the IMF and the European Commission (IMF country report June 2018; European Commission post programme surveillance report, Spring 2018).

The debt-to-GDP ratio dropped to 97.5% in 2017 and is expected to increase to about 106% in 2018 due to the Cyprus Government's (the Government) capital injection into the Cyprus Cooperative Bank (CyCB) (European Commission, post programme surveillance report, Spring 2018). However, it is expected that this will be a one-off increase that will not affect the underlying debt dynamics in any significant way. While total interest costs will increase as a result of the new bonds issued for the CyCB, it is expected that debt will remain affordable. In 2017, the primary surplus reached 5% of GDP where interest payments were 3.2% of GDP (CSS) or 8% of revenues, compared with 10.4% of revenues in 2013. Strong GDP growth and substantial budget surpluses will allow the debt-to-GDP ratio to drop again to near 100% in 2019 (European Commission).

In April 2018, in order to facilitate the sale of the CyCB, the Government issued Bonds by Private Placement for a total nominal amount of €2.35 billion maturing between 15 to 20 years (Public Debt Management Office, Newsletter, May 2018). The proceeds of the bond issuance and additional funds, were deposited at the State account held at CyCB, for a total of €2.5 billion. Subsequently the Government proceeded with an additional domestic issuance so that the total government bonds issued for the sale of CyCB reached €3.19 billion (total net effect on government debt, per Moody's Investors Service, Credit Opinion, 27 July 2018). The bonds issued in April were exchanged with new bonds maturing between 2018 and 2022, while the cash placement reached €351 million. Against the State's total deposit of €3.54 billion with CyCB, CyCB pledged assets comprising of NPEs, as well as other non-core assets with a total nominal value of approximately €8.34 billion (Public Debt Management Office, Newsletter, July 2018).

In parallel, the Cyprus Parliament passed amendments to the legislation that strengthens the foreclosure, tax and insolvency laws and facilitates the sale of NPEs (Sale of Loans Law), as well as introduced the Securitisation Law, all of which came into effect in July 2018. Also in July, the Government proposed ESTIA, a Scheme that aims to address NPEs backed by primary residence. The eligibility criteria of the Scheme aim to protect socially vulnerable borrowers and it is expected to act as a deterrent and enabler against debts of strategic defaulters.

In the context of a strengthening economy and improving macroeconomic conditions, the Cypriot sovereign has benefited from a series of upgrades. Most recently in July 2018, Moody's Investors Service upgraded Cyprus' sovereign rating to Ba2 from Ba3 and changed the outlook to stable from positive. The upgrade and stable outlook reflect the ongoing recovery and favourable developments in the banking system where the resolution of the CyCB through the sale of its healthy assets and liabilities, materially reduced systemic risks emanating from the banking sector. In April 2018, Fitch Ratings upgraded its Long-Term Issuer Default ratings to 'BB+' from 'BB' which is one notch below investment grade, maintaining its 'positive' outlook. In March 2018, S&P Global Ratings affirmed its long-term sovereign rating at BB+, also one notch below investment grade, and maintained its 'positive' outlook.

C. Business Overview

As the Cypriot operations account for 89% of gross loans and 89% 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. Most recently in July 2018, Standard and Poor's affirmed BOC PCL's 'B/B' long and short-term issuer credit ratings with a positive outlook. In March 2018, Fitch Ratings Limited affirmed their long-term issuer default rating of B- with stable outlook. BOC PCL currently has a long-term deposit rating from Moody's Investors Service of Caa1 with a positive outlook. The key drivers for the ratings were the improvement in BOC PCL's financial fundamentals, mainly in asset quality, and its funding position.

Tackling BOC PCL's loan portfolio quality is of utmost importance for the Group. The Group has been successful in engineering restructuring solutions across the spectrum of its loan portfolio, and expects the reduction of residual NPEs (post Helix) to continue at a revised pace of c.€200 million per quarter, as portfolio size and business line mix is expected to change radically. In parallel, the Group continues to actively explore alternative avenues to further accelerate this reduction via structured solutions.

Project Helix

The Group has reached an agreement for the sale of a portfolio of loans and advances to customers with a gross book value of €2.8 billion, of which €2,7 billion relate to non performing exposures. The Portfolio has a net book value of €1.3 billion. At completion, BOC PCL will receive a gross cash consideration of c.€1.4 billion. Further information is disclosed in section A2.1 of the Interim Management Report and in Note 37 of these Interim Condensed Consolidated Financial Statements.

ESTIA

In July 2018, the Government announced a scheme aimed at addressing NPEs backed by primary residence, known as ESTIA. This scheme is expected to address up to €0.9 billion of retail core NPEs, subject to eligibility criteria and participation rate. This Estia-eligible portfolio refers to the potentially eligible portfolio based on BOC PCL's available data. Eligibility criteria relate primarily to the open market value (OMV) of the residence, total income and net wealth of the household. These will act as a clear definition of socially protected borrowers, acting as an enabler against strategic defaulters. In accordance with the scheme, the eligible loans are to be restructured to the lower of contractual and open market value, and the Government to subsidise one third of the instalment. The terms of the scheme are subject to finalisation.

Sale of Bank of Cyprus UK Limited (BOC UK)

In July 2018, the Company signed an agreement to sell its wholly owned subsidiary bank in the UK. The sale is expected to be completed by the end of 2018, subject to regulatory approvals. The sale consideration of £103 million (c.€ 117 million) is subject to customary purchase price adjustments for the period up to completion. The consideration is payable in cash, of which half is deferred over 24 months from completion, without any performance conditions attached. The accounting profit from the sale is estimated at c.€3 million. The impact from this sale on the CET1 ratio had this transaction taken place at 30 June 2018 would have been an increase of c.10 bps relating to recycling of a related foreign currency gain of €17 million into CET1, previously recorded in the foreign currency translation reserve, which was not recognised in regulatory capital. On completion, the CET1 ratio is expected to be further positively affected by c.70 bps (based on 30 June 2018 results) resulting mainly from the release of risk weighted assets. The decision to sell the BOC UK is in line with the Group's strategy of delivering value for shareholders and focusing principally on supporting the growing Cypriot economy. Further to this transaction, the Group and BOC UK will sign a cooperation agreement, which will see both organisations cooperating in a number of key areas going forward, including continuity of servicing for existing customers. Following completion, BOC UK is expected to be rebranded to 'Cynergy Bank', a name chosen to reflect the bank's Cypriot heritage, combined with a modern and energetic focus.

C. Business Overview (continued)

Other

The strategic focus of the Group is to reshape its business model to grow in the core Cypriot market through prudent new lending. BOC PCL's capital position is strengthened and 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.

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), the European Bank for Reconstruction and Development (EBRD) and the Cyprus Government.

Management is also placing emphasis on diversifying income streams by optimizing 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, are leading players 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 2018 amounted to €25 million, up by 3% yoy, contributing to 14% of non-interest income.

In order to further improve 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, as well as improving macroeconomic conditions.

BOC PCL is committed to a modernisation agenda designed to transform its business model in order to ensure it can compete efficiently and better service the needs of its customers. To facilitate momentum in delivering changes through an accelerated multi-year Digital Transformation Programme, BOC PCL continues to be working with IBM, its Strategic Digital Transformation Partner. In collaboration with IBM, BOC PCL aims to use market leading digital innovation to improve efficiency and agility across the Group in order to provide a significantly superior experience to its customers.

D. Outlook

The Group is making meaningful progress on its strategic objectives of creating a stronger, safer and a more Cypriot focused institution to support 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 optimise the funding structure

· Maintain an appropriate capital position by internally generating capital

· Focus on the core Cypriot market

· Achieve a lean operating model

· Deliver value to shareholders and other stakeholders

D. Outlook (continued)

The operating performance of the Group has remained resilient. Clearly, Helix and the disposal of BOC UK will meaningfully change the shape of the Group, although the final impact depends on the timing of necessary approvals which remain uncertain. However, these actions collectively are expected to result in a stronger, safer, more focused Bank of Cyprus, evidenced by expectations that the on-going cost of risk is expected to be below 1%.

The smaller NPE portfolio along with the changed mix of the residual NPEs means that the pace of NPE reduction is now expected to be around €200 mn per quarter. Furthermore, our capital ratios will be strengthened as a result of these corporate actions.

Updated 2019 and Medium Term Guidance will be communicated with full year 2018 results. The pro-forma for Helix and UK sale are disclosed on investors' presentation for first half of 2018.

F. Going concern

The Directors have 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 2018 and the developments up to the date of approval of these Financial Statements that have been considered in the going concern assessment include, amongst others, the operating environment in Cyprus and of the Group (Note 5 of these Interim Condensed Consolidated Financial Statements).

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

The Directors, taking into consideration the conditions presented in Note 5 of these Interim Condensed Consolidated Financial Statements and the factors described below are satisfied that the Group has the resources to continue in business for a period of at least 12 months from the date of approval of these Financial Statements, and therefore the going concern principle is appropriate for the reasons set out below.

· The Common Equity Tier 1 (CET1) ratio and the total capital ratio stood at 11.9% and 13.4% respectively at 30 June 2018, on a transitional basis, higher than the minimum required ratios (Note 5.2.1 of these Interim Condensed Consolidated Financial Statements).

· The corporate capital accretive actions, currently in progress, which are expected to improve the key financial fundamentals of the Group, mainly in asset quality and capital (Note 37 of these Interim Condensed Consolidated Financial Statements).

· With respect to the project on the sale of loans and advances to customers classified as held for sale (Note 37.2 of these Interim Condensed Consolidated Financial Statements) management acknowledges that the completion of the project remains subject to a number of conditions precedent, including mainly regulatory and other approvals, including the ECB agreeing to a Significant Risk Transfer (SRT) benefit from the transaction. Based on management's expectation, considering its assessment and information available to date is that, the conditions required by the ECB will be met.

· The IFRS 9 impact on a transitional and on a fully phased-in basis, is manageable and within the Group's capital plan.

· The increasing level of Group customer deposits (increase of €582 million during the six months ended 30 June 2018). Customer deposits stood at €18,431 million at 30 June 2018.

· The significant improvement in the Group liquidity position and its liquidity ratios. The Group is in compliance with the Liquidity Coverage Ratio (LCR) and the LCR add-on, which was introduced by the CBC as a macroprudential measure and is applicable from 1 January 2018 (Notes 5.2.3 and 30 of these Interim Condensed Consolidated Financial Statements).

· The continued organic reduction (thirteen consecutive quarters) of Group non-performing exposures (NPEs), which have decreased to €8 billion at 30 June 2018 compared to €9 billion in December 2017 and €10 billion in June 2017 (Note 5.2.2 of these Interim Condensed Consolidated Financial Statements).

· In the context of a strengthening economy and improving macroeconomic conditions, the Cypriot sovereign has benefited from a series of upgrades. Most recently in July 2018, Moody's Investors Service upgraded Cyprus' sovereign rating to Ba2 from Ba3 and changed the outlook to stable from positive. The upgrade and stable outlook reflect the ongoing recovery and favourable developments in the banking system where the resolution of the Cyprus Cooperative Bank (CyCB) through the sale of its healthy assets and liabilities, reduced systemic risks emanating from the banking sector. In April 2018, Fitch Ratings upgraded its Long-Term Issuer Default ratings to 'BB+' from 'BB', which is one notch below investment grade, maintaining its 'positive' outlook. In March 2018, S&P Global Ratings affirmed its long-term sovereign rating at BB+, also one notch below investment grade, and maintained its 'positive' outlook.

G. Principal risks and uncertainties

Like other financial organisations, the Group is exposed and expects to continue to be exposed for the remainder of the financial year 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.

Detailed information relating to Group risk management is set out in Notes 44 to 47 of the Annual Consolidated Financial Statements of the Company for the year ended 31 December 2017 and in the Additional Risk and Capital Management Disclosures which form part of the 2017 Annual Financial Report of the Group.

Aside from the risks set out below and those described in Notes 28 to 30 of these 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 and no change is expected for the remaining six months of the financial year.

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

The Group is also exposed to litigation risk, arising from claims, investigations and regulatory matters. Further information is disclosed in Note 24 of these Interim Condensed Consolidated Financial Statements.

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 predominately acquired in exchange of debt and is intended to be disposed of in line with the Group's strategy. Further information for stock of property is disclosed in Note 18 of these 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 Company for the year ended 31 December 2017.

H. Events after the reporting date

The events after the reporting period are disclosed in Note 37 of these Interim Condensed Consolidated Financial Statements.

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 these Interim Condensed Consolidated Financial Statements for the period ended 30 June 2018 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 these Interim Condensed Consolidated Financial Statements;

· a description of the principal risks and uncertainties for the remaining six months of the financial year (Notes 28 to 30 of these Interim Condensed Consolidated Financial Statements); 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 2018, or material changes to related parties transactions described in the Annual Consolidated Financial Statements of the Company for the year ended 31 December 2017.

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 2018

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

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

Non-cash transactions

Repossession of collaterals

During the six months ended 30 June 2018, the Group acquired stock of property by taking possession of collaterals held as security for loans and advances to customers of €210,241 thousand (six months ended 30 June 2017: €229,247 thousand) (Note 18).

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. 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, financial services, insurance services and management and disposal of property predominately acquired in exchange of debt.

The shares of the Company are listed and traded on the London Stock Exchange (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 2018 (the Financial Statements) include the financial statements of the Company, BOC PCL and its subsidiaries. They were approved and authorised for issue by a resolution of the Board of Directors on 28 August 2018.

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 Basis of preparation

The 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, financial assets (including loans and advances to customers and investments) at fair value through profit or loss, and derivative financial instruments 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.

The Group elected as a policy choice permitted under IFRS 9, to continue to apply hedge accounting in accordance with IAS 39.

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

The Group has not restated comparative information for 2017 for financial instruments within the scope ofIFRS 9. Additionally, the recognition and measurement of credit losses under IFRS 9 differs from that under IAS 39. Therefore, the comparative information for 2017, which is reported under IAS 39 is not comparable to the information presented for 2018, which is reported under IFRS 9. New or amended interim disclosures are presented for the current period according to IFRS 9, where applicable, whereas comparative period disclosures are consistent with those made in the prior periods. Adjustments arising from the adoption of IFRS 9 have been recognised directly in equity as at 1 January 2018, as disclosed in Note 7.

3. Summary of significant accounting policies (continued)

3.1 Basis of preparation (continued)

Comparative information (continued)

Reclassifications to comparative information were made to conform to current year presentation. Specifically, investments previously classified in 'Life insurance business assets attributable to policyholders' totalling €91,190 thousand were reclassified to 'Investments' and an amount of €2,402 thousand was reclassified from 'Prepayments, accrued income and other assets' to 'Life insurance assets attributable to policyholders'.

Additionally, negative interest income on loans and advances to banks and central banks amounting to €2,421 thousand was reclassified from 'Interest income' to 'Interest expense'.

The changes in presentation did not have an impact on the financial performance of the Group for the period.

3.2 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 year ended 31 December 2017, upon which the auditors have expressed an unqualified opinion, were published on 27 March 2018 and are expected to be delivered to the Registrar of Companies of Ireland within 28 days from 30 September 2018.

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 Holdings Group for the year ended 31 December 2017, 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).

3.3 Changes in accounting policies and disclosures

The accounting policies adopted are consistent with those followed for the preparation of the Annual Consolidated Financial Statements for the year ended 31 December 2017, except for the adoption of new and amended standards and interpretations as explained in Note 3.3.1.

3.3.1 New and amended standards and interpretations

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

· IFRS 9 Financial Instruments

· IFRS 15 Revenue from contracts with customers

· IFRS 15 Revenue from contracts with customers (clarifications)

· IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance contracts (amendments)

The impact of adoption of IFRS 9 Financial Instruments and IFRS 15 Revenue from contracts with customers is described below. The amendments to IFRS 4 did not have any impact on the Financial Statements. New or amended interim disclosures have been provided for the current period, where applicable, and comparative period disclosures are consistent with those made in the prior year.

IFRS 9 Financial Instruments

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

3. Summary of significant accounting policies (continued)

3.3 Changes in accounting policies and disclosures (continued)

3.3.1 New and amended standards and interpretations (continued)

IFRS 9 Financial Instruments (continued)

Impact of IFRS 9

The Group's IFRS 9 impact on transition including the insurance subsidiaries of the Group, is disclosed inNote 7. The new accounting processes, internal controls, governance framework, judgements and estimation techniques will continue to be refined and undergo validation.

Transition

The classification, measurement and impairment requirements were applied retrospectively by adjusting the balance sheet at the date of initial application, and as permitted by IFRS 9 the Group did not restate comparative information for prior periods. As a result, the comparative information for 2017 pursuant to IAS 39 is reported in compliance with the accounting and measurement methods disclosed in the Annual Financial Report 2017 in Notes 2.14, 2.15 and 2.16. The impact on the implementation date, 1 January 2018, was recognised as an adjustment on equity. No deferred tax asset was recognised on IFRS 9 impact upon transition.

Update to significant accounting policies from the adoption of IFRS 9

Initial recognition of financial instruments

The policy on initial recognition of financial instruments has remained the same as described in Note 2.14 of the Annual Consolidated Financial Statements for the year ended 31 December 2017.

Classification and measurement

The classification and measurement of financial assets depends on how these are managed as part of the Business Models the Group operates under and their contractual cash flow characteristics (whether the cash flows represent solely payments of principle and interest (SPPI)). These factors determine whether the financial assets are measured either at amortised cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVPL).

Financial instruments measured at amortised cost

Financial instruments are measured at amortised cost if they meet both of the following conditions:

· The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows.

· The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

This classification relates to cash and balances with central banks, loans and advances to banks, loans and advances to customers that pass the SPPI test, debt securities held under the 'Hold to collect' business model and other financial assets. These financial assets are measured at amortised cost using the effective interest rate method (EIR) less allowances for expected credit losses (ECL).

3. Summary of significant accounting policies (continued)

3.3 Changes in accounting policies and disclosures (continued)

3.3.1 New and amended standards and interpretations (continued)

IFRS 9 Financial Instruments (continued)

Update to significant accounting policies from the adoption of IFRS 9 (continued)

Classification and measurement (continued)

Financial instruments measured at FVOCI with gains or losses recycled to profit or loss on derecognition

Financial instruments are measured at FVOCI if they meet both of the following conditions:

· The financial asset is held within a business model the objective of which is achieved by both collecting contractual cash flows and selling financial assets.

· The contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI on the principal amount outstanding.

This classification relates to debt securities held under the 'Hold to collect and sell' business model that pass the SPPI criterion. FVOCI instruments are subsequently measured at fair value with unrealised gains and losses recognised in other comprehensive income. Upon derecognition, any accumulated balances in other comprehensive income are reclassified to the consolidated income statement and reported within 'Net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates'. The interest income, foreign exchange differences and ECL are recognised in the consolidated income statement in the respective lines.

Financial instruments measured at FVPL

Equity investments are measured at fair value through profit and loss. On transition to IFRS 9 and on initial recognition thereafter, there is an option to make an irrevocable election for equity investments not held for trading and that meet the definition of Equity under IAS 32 'Financial Instruments: Presentation', to be measured at fair value through other comprehensive income. This election is made on an instrument-by-instrument basis. Fair value gains or losses on these equity instruments are recognised in other comprehensive income and are not recycled to profit or loss upon derecognition but are transferred directly to retained earnings. Dividends on equity instruments are recognised in the consolidated income statement and reported within 'Other income'.

All other financial assets are measured at FVTPL with changes recognised in the consolidated income statement in 'Net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates'.

Financial assets managed on a fair value basis and those that are held for trading are measured at fair value through profit and loss. These include financial assets acquired principally for trading, assets mandatorily measured on a fair value basis and derivatives, except to the extent that they are designated in a hedging relationship, in which case the IAS 39 hedge accounting requirements continue to apply.

Business model assessment

The Group assesses the business model at a portfolio level. The portfolio level is determined at the aggregation level that reflects how the Group manages its financial assets and is based on observable factors which include:

• how the performance of the business model and the financial assets held within that business model are evaluated and reported to the Group's key management personnel.

• the risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way in which those risks are managed.

• how managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected).

• expected frequency, value and timing of sales are also important aspects of the Group's assessment.

If cash flows after initial recognition are realised in a way that is different from the Group's original expectations, the Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward.

On transition to IFRS 9, business models were determined on the date of initial application based on facts and circumstances that existed on 1 January 2018 and re-assessed at each reporting date.

3. Summary of significant accounting policies (continued)

3.3 Changes in accounting policies and disclosures (continued)

3.3.1 New and amended standards and interpretations (continued)

IFRS 9 Financial Instruments (continued)

Update to significant accounting policies from the adoption of IFRS 9 (continued)

Classification and measurement (continued)

SPPI assessment

The Group assesses whether the individual financial assets' cash flows represent solely payments of principal and interest on the principal amount outstanding (SPPI test). For the purposes of this assessment, principal is defined as the fair value of the financial asset on initial recognition. Interest is defined as consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as a profit margin. In assessing whether contractual cash flows are SPPI, the Group considers the terms that could change the contractual cash flows so that they would not meet the condition for SPPI, and be inconsistent to a basic lending arrangement, including: (i) contingent and leverage features, (ii) interest rates which are beyond the control of the Group or variable interest rate consideration, (iii) features that could modify the time value of money, (iv) prepayment and extension options, (v) non-recourse arrangements and (vi) convertible features.

In addition, where the contractual terms of a financial asset introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial asset will be measured at FVPL. These include certain loans and advances to customers and certain debt securities. These financial assets are measured at fair value with changes recognised in the consolidated income statement, in 'Net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates'. The related interest income and expense is recognised in 'Income similar to interest income' and 'Expense similar to interest expense' respectively.

Financial liabilities

Financial liabilities continue to be measured at amortised cost except those held for trading and derivative financial liabilities. In addition, the possibility exists of applying the fair value option. The remeasurement effect for financial liabilities designated in the fair value option resulting from the Group's own credit risk is recognised in other comprehensive income. Financial liabilities held for trading and derivative liabilities are reported in the balance sheet in a separate line item and measured at fair value through profit or loss.

Interest income and similar income

Interest income is recognised in the consolidated income statement by applying the effective interest rate(EIR) to the gross carrying amount of financial asset other than credit-impaired assets.

When a financial asset becomes credit-impaired and is therefore classified as Stage 3, interest income is calculated by applying the EIR to the net amortised cost of the financial asset. If the financial asset cures and is no longer credit-impaired, the Group reverts to calculating interest income on the gross carrying amount.

Interest revenue on purchased or originated credit-impaired (POCI) financial assets is recognised using the Credit Adjusted Effective Interest Rate (CAEIR) calculated at initial recognition. The CAEIR is applied on the amortised cost of the financial asset, being the gross carrying amount of the financial asset less any loss allowance.

Interest income from financial assets at amortised cost and financial assets at FVOCI are presented separately within the caption 'Interest income', with interest income on financial instruments at FVTPL presented in 'Income similar to interest income'. All form part of the 'Net Interest Income'.

The Group holds loans and advances to banks and central banks with negative interest rates. The Group discloses interest on these assets as interest expense.

Reclassification of financial assets and liabilities

The Group does not reclassify its financial assets subsequent to their initial recognition apart from exceptional circumstances in which the Group acquires, disposes of, or terminates a business line. Financial liabilities are never reclassified.

3. Summary of significant accounting policies (continued)

3.3 Changes in accounting policies and disclosures (continued)

3.3.1 New and amended standards and interpretations (continued)

IFRS 9 Financial Instruments (continued)

Update to significant accounting policies from the adoption of IFRS 9 (continued)

Impairment

IFRS 9 uses a forward looking ECL model, requiring judgement, estimates and assumptions in determining the level of ECLs. The impairment requirements apply to financial assets that are not measured at FVPL. ECLs are recorded for all financial assets measured at amortised cost and FVOCI, lease receivables, loan commitments and financial guarantee contracts. Under IFRS 9, no impairment loss is recognised on equity investments.

At initial recognition, impairment allowance (or provision in the case of commitments and guarantees) is required for 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 (POCI). Subsequently, in the event of a significant increase in credit risk occurs since initial recognition, impairment allowance is required resulting from all possible default events over the expected life of the financial instrument (lifetime ECL), otherwise the allowance is based on the 12 months ECL.

The Group classifies its financial assets into Stage 1, Stage 2, Stage 3 and POCI for ECL measurement as described below:

Stage 1: Financial assets which have not had a significant increase in credit risk since initial recognition are considered to be Stage 1 and 12-month ECL is recognised.

Stage 2: Financial assets that are considered to have experienced a significant increase in credit risk since initial recognition are considered to be Stage 2 and lifetime losses are recognised.

Stage 3: Financial assets which are considered to be credit-impaired (refer to following section of the note on how the Group defines credit-impaired and default) and lifetime losses are recognised.

POCI: Purchased or originated financial assets are financial assets that are credit-impaired on initial recognition. POCI assets include loans purchased or originated at a deep discount that reflect incurred credit losses.

ECL is recognised in profit or loss with a corresponding ECL allowance reported as a decrease in the carrying value of financial assets measured at amortised cost on the balance sheet. For financial assets measured at fair value through OCI the carrying value is not reduced, but the accumulated amount of impairment allowance is recognised in OCI. For off-balance sheet instruments, accumulated provisions for ECL are reported in 'Accruals, deferred income and other liabilities', except in the case of loan commitments where ECL on the loan commitment is recognised together with the loss allowance of the relevant on balance-sheet exposure, as the Group cannot separately identify the ECL on the loan commitment from those on the on-balance sheet exposure component. ECL for the period is recognised within the consolidated income statement in 'Credit losses to cover credit risk on loans and advances to customers'.

The Group calculates 12-month ECLs and lifetime ECLs either on an individual basis or collective basis, depending on the nature of the underlying portfolio of financial instruments.

The individual assessment is performed for individually significant assets and also for exposures based on other criteria (such as exposures of key management personnel). A risk based approach is used on the selection criteria of the individually assessed population such as NPE or forborne exposures above a certain amount, decrease of a certain percentage on the yearly credit turnover and decrease of a certain percentage on assigned collaterals.

The ECL is calculated on an individually assessed basis and all relevant considerations of 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).

3. Summary of significant accounting policies (continued)

3.3 Changes in accounting policies and disclosures (continued)

3.3.1 New and amended standards and interpretations (continued)

IFRS 9 Financial Instruments (continued)

Update to significant accounting policies from the adoption of IFRS 9 (continued)

Impairment (continued)

All customer exposures that are not individually assessed, are assessed on a collective basis. For the purposes of calculating ECL, exposures are grouped into granular portfolios/segments with shared risk characteristics. The granularity is based on different levels of segmentation which, among other factors include customer type, exposure class and portfolio type.

Key impairment concepts

Impairment under IFRS 9 introduces a number of key concepts as described below.

Significant increase in credit risk

IFRS 9 requires that in the event of a significant increase in credit risk since initial recognition, the calculation basis of the loss allowance would change from 12 month ECLs to lifetime ECLs.

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

Significant credit risk increase for loans and advances to customers

The Group uses the lifetime probability of default (PDs) as the quantitative metric in order to assess transition from Stage 1 to Stage 2 for all portfolios, by considering whether the lifetime PD at the reporting date exceeds the lifetime PD at origination by using an established relative threshold. The Group considers an exposure to have significant increase in credit risk by comparing the PD at the reporting date with the PD at initial recognition to compute the increase in regards to the corresponding threshold. The Group applies the thresholds presented in the table below to each portfolio/segment, based on the following characteristics: customer type, product type and rating at origination. The threshold is then assigned to each facility according to the facilities portfolio/segment.

For exposures which are subject to individual impairment assessment, the following qualitative factors in addition to the ones incorporated in the PD calculation, are considered:

· significant change in collateral value or guarantee or financial support provided by shareholders/directors,

· significant adverse changes in business, financial and/or economic conditions in which the borrower operates.

Exposures originated during the period but for which no rating exists at the reporting date are considered to have suffered a significant increase in credit risk and transition to Stage 2.

3. Summary of significant accounting policies (continued)

3.3 Changes in accounting policies and disclosures (continued)

3.3.1 New and amended standards and interpretations (continued)

IFRS 9 Financial Instruments (continued)

Update to significant accounting policies from the adoption of IFRS 9 (continued)

Impairment (continued)

Significant credit risk increase for loans and advances to customers (continued)

The Group also considers, as a backstop criterion, that a significant increase in the credit risk occurs when contractual payments are more than 30 days past due (past due materiality is applied). Loans that meet this condition are classified in Stage 2. In cases where certain exposures are past due for more than 30 days if certain materiality limits are not met (such as arrears less than €500 or one installment in arrears in the case of retail exposures and arrears less than €1,000 or greater than 10% of the funded balances on all exposures other than retail), then the transfer to Stage 2 does not take place.

Significant credit risk increase for financial instruments other than loans and advances to customers

Low credit risk simplification is adopted for debt security instruments, loans and advances to banks and balances with central banks with external credit ratings that are rated as investment grade. The assessment of low credit risk is based on both the external credit rating and the internal scoring (which considers latest available information on the instrument and issuer). The combination of the two provides an adjusted credit rating. An adjusted rating which remains investment grade is considered as having low credit risk.

For debt securities, loans and advances to banks and balances with central banks which are below investment grade, the low credit risk exemption does not apply and therefore an assessment of significant credit deterioration takes place, by comparing their credit rating at origination with the credit rating on the reporting date. Significant deterioration in credit risk is considered to have occurred when the adjusted rating of the exposures drops to such an extent that the new rating relates to a riskier category (i.e. from a non-investments grade to speculative and then to highly speculative).

All financial assets are transferred out of Stage 2 into Stage 1, if their credit risk is no longer considered to be significantly increased since initial recognition based on the assessments described above.

Credit impaired and definition of default

The Group considers loans and advances to customers that meet the non performing exposure (NPE) definition as per European Banking Authority (EBA) standards to be in default and hence Stage 3 (credit-impaired). Therefore such loans have ECL calculated on a lifetime basis and are considered to be in default for credit risk management purposes.

According to the EBA standards and European Central Bank's (ECB) Guidance to Banks on Non Performing Loans (which was published in March 2017), NPEs are defined as those exposures that satisfy one of the following conditions:

(i) The borrower is assessed as unlikely to pay its credit obligations in full without the realisation of the collateral, regardless of the existence of any past due amount or of the number of days past due.

(ii) Defaulted or impaired exposures as per the approach provided in the Capital Requirement Regulation (CRR), which would also trigger a default under specific credit adjustment, distress restructuring and obligor bankruptcy.

(iii) Material exposures as set by the Central Bank of Cyprus (CBC), which are more than 90 days past due.

(iv) Performing forborne exposures under probation for which additional forbearance measures are extended.

(v) Performing forborne exposures under probation that present more than 30 days past due within the probation period.

When a specific part of the exposures of a customer that fulfil the NPE criteria set out above are greater than 20% of the gross carrying amount of all on balance sheet exposures of that customer, then the total customer exposure is classified as non-performing; otherwise only the specific part of the exposure is classified as non-performing.

3. Summary of significant accounting policies (continued)

3.3 Changes in accounting policies and disclosures (continued)

3.3.1 New and amended standards and interpretations (continued)

IFRS 9 Financial Instruments (continued)

Update to significant accounting policies from the adoption of IFRS 9 (continued)

Impairment (continued)

Credit impaired and definition of default (continued)

Exposures cease to be considered as NPEs and in such case are transferred out of Stage 3, only when all of the following conditions are met:

(i) The extension of forbearance measures does not lead to the recognition of impairment or default.

(ii) One year has passed since the forbearance measures were extended.

(iii) Following the forbearance measures and according to the post-forbearance conditions, there is no past due amount or concerns regarding the full repayment of the exposure.

(iv) No Unlikely-to-Pay criteria exist for the debtor.

(v) The debtor has made post-forbearance payments of a not-insignificant amount of capital (different capital thresholds exist according to the facility type).

At the time an account exits Stage 3, the rating at origination is compared to the rating at the reporting date. If the rating at the reporting date is higher than the rating at the origination date then the loan is transferred to Stage 1, otherwise it is transferred to Stage 2.

Debt securities, loans and advances to banks and balances with central banks are considered defaulted and transferred to Stage 3 if the issuers have failed to pay either interest or principal (Grade C in accordance with Moody's rating agency). In addition a number of other criteria are considered such as adverse changes in business, financial and economic conditions as well as external market indicators (credit spreads, credit default swap (CDS) prices).

Scenarios and forward-looking inputs

The Group uses reasonable and supportable information, including forward-looking information, in the calculation of ECLs. ECLs are the unbiased probability-weighted credit losses determined by evaluating a range of possible outcomes and considering future economic conditions. ECLs are calculated for three macroeconomic scenarios, baseline, downside and upside and the output is the weighted average ECL based on the assigned probability of each scenario (Note 28).

Macroeconomic scenarios impact both the probability of default (PD) and the loss given default (LGD). Specifically, forward looking information is embedded in the PDs based on regression equations derived on the basis of historical data. Using statistical analysis, the most significant macro-variables have been selected in order to predict accurately the expected default rates.

In regards to the LGD, the forward looking information is incorporated via the property indices for the types of properties (housing, commercial, industrial). In particular, for each collateral a forward looking projection of the realisable value is calculated before discounting back to reporting date to quantify the expected cash shortfall.

3. Summary of significant accounting policies (continued)

3.3 Changes in accounting policies and disclosures (continued)

3.3.1 New and amended standards and interpretations (continued)

IFRS 9 Financial Instruments (continued)

Update to significant accounting policies from the adoption of IFRS 9 (continued)

Impairment (continued)

Scenarios and forward-looking inputs (continued)

The table below indicates the most significant macroeconomic variables as well as the scenarios used by the Group.

The RICS indices, which are considered for the purposes of determining the real estate collateral value on realisation date are capped at the reporting date value, in case of any projected increase, whereas any projected decrease is taken into account. As a result the indexed value for all collaterals is less or equal to their corresponding open market value as of the reporting date.

This process involves consideration of a variety of external actual and forecast information (International Monetary Fund (IMF), European Commission, Economist Intelligence Unit (EIU), Moody's Analytics) which is complemented by economic expert judgement.

Predicted relationships between the key indicators and default and loss rates on the portfolios of financial assets have been developed based on an analysis of historical data over the past 5 years.

Qualitative adjustments or overlays are occasionally made when inputs calculated do not capture all the characteristics of the market at the reporting date.

Inputs into measurement of ECL

The Group calculates ECLs based on a three-weighted scenarios to measure the expected cash flows shortfalls, discounted at an approximation to the EIR as calculated at initial recognition. A cash shortfall is the difference between the cash flows that are due in accordance with the contract and the cash flows expected to be received.

3. Summary of significant accounting policies (continued)

3.3 Changes in accounting policies and disclosures (continued)

3.3.1 New and amended standards and interpretations (continued)

IFRS 9 Financial Instruments (continued)

Update to significant accounting policies from the adoption of IFRS 9 (continued)

Impairment (continued)

Inputs into measurement of ECL (continued)

The Group calculates ECL using the following three components:

• exposure at default (EAD),

• loss given default (LGD) and

• probability of default (PD)

EAD represents the expected exposure in the event of a default during the life of a financial instrument. EAD methodology is differentiated for the following categories: revolving and non-revolving exposures. In case of revolving exposures, the projected EAD is the carrying value plus the credit conversion factor applied on the undrawn amount. The credit conversion factor model is derived based on empirical data from the last 5 years.

For non-revolving exposures the term is based on the contractual term of the exposure and both on-balance sheet and off-balance sheet exposures are amortised in accordance with the principal contractual payment schedule of each exposure. In regards to the credit-impaired exposures, the EAD is equal to the on balance sheet amount as at the reporting date.

PD represents the probability an exposure has to default and is calculated based on statistical rating models, calculated per segment level and taking into consideration each individual's exposure rating as well as forward looking information based on macroeconomic inputs.

For each exposure, lifetime PD represents the probability of default within the lifetime horizon and is based on the underlying models of marginal probability of default through the cycle (MPD TTC), MPD individual, MPD point in time and Marginal Probability of Paid-off (MPP). In particular, the first element, MPD TTC is constructed per segment, illustrating the probability of default status depending on number of months since the origination date. The PD for each month since the originated date is calculated under the condition that exposures survived until the prior month. The MPD individual is allocated to linked individual exposures through a scaling factor constructed based on the current individual risk assessment, which is represented by the Group's PD per rating grade. MPD is adjusted to reflect the current and forward looking information based on the macroeconomic inputs. Finally, the MPP Component is the curve that shows the probability of full payment of a particular exposure based on specific period in months since the open date of the exposure. MPP is estimated for each particular segment and depends on the contractual terms of the exposure. For revolving facilities where there is no contractual survival maturity, one curve per segment is developed. The combination of these four models give rise to a PD value for each month for the lifetime of the exposure.

LGD represents an estimate of the loss if default occurs at a given time. It is usually expressed as a percentage of the EAD. It takes into account parameters such as historical loss and/or recovery rates as well as the collateral value which is discounted to the present value determining the amount of the expected shortfall.

The structure of the LGD model considers the following:

• Curing where the probability of cure model was derived based on historical observations.

• Non-curing including cash recovery or realisation of collaterals either voluntarily i.e. debt for asset swap or through forced sale, auctions and foreclosure and receivership.

ECL measurement period

The period for which lifetime losses are determined is based on the contractual life of a financial instrument. For non-revolving exposures the expected lifetime is the period from the reporting date to the termination date of the facility.

For revolving facilities, credit cards and corporate and retail overdrafts BOC PCL has the right to cancel and/or reduce the facilities with two months' notice. The BOC PCL does not limit its exposure to credit losses to the contractual notice period, but instead the next review date is used for determining the measurement period over which to calculate ECLs.

3. Summary of significant accounting policies (continued)

3.3 Changes in accounting policies and disclosures (continued)

3.3.1 New and amended standards and interpretations (continued)

IFRS 9 Financial Instruments (continued)

Update to significant accounting policies from the adoption of IFRS 9 (continued)

Financial guarantees, letters of credit and undrawn loan commitments

The Group issues financial guarantees to its customers, consisting of letters of credit, letters of guarantee and acceptances. Financial guarantees are initially recognised at fair value, in 'Accruals, deferred income and other liabilities'. Subsequently, the Group's liability under each guarantee is measured at the higher of: (a) the amount initially recognised reduced by the cumulative amortised premium which is periodically recognised in the consolidated income statement in 'Fee and commission income' in accordance with the terms of the guarantee, and (b) the amount of ECL provision (refer to item Impairment in this Note).

ECL resulting from financial guarantees is recorded in 'Credit losses to cover credit risk on loans and advances to customers'. The balance of the liability for financial guarantees that remains is recognised in 'Fee and commission income' in the consolidated income statement when the guarantee is fulfilled, cancelled or expired.

Undrawn loan commitments and letters of credits are commitments under which, over the duration of the commitment the Group is required to provide a loan with pre-specified terms to the customer. From 1 January 2018 these contracts are in scope of the ECL requirements. Corresponding ECL are presented within 'Accruals, deferred income and other liabilities' on the Group's balance sheet except in the case of loan commitments where ECL on the loan commitment is recognised together with the loss allowance of the relevant on balance-sheet exposure as the Group cannot separately identify the ECL on the loan commitment from those on the on-balance sheet exposure component. ECL relating to these other loan commitments is recorded in 'Credit losses to cover credit risk on loans and advances to customers' in the consolidated income statement.

When a customer draws on a commitment, the resulting loan is presented within (i) financial assets at fair value held for trading, consistent with the associated derivative loan commitment, (ii) financial assets at fair value not held for trading, following loan commitments designated at fair value through profit or loss or (iii) loans and advances to customers, when the associated loan commitment is not fair valued through profit or loss.

Financial instruments modifications and derecognition

The contractual terms of a financial instrument may be modified due to various reasons, either due to commercial renegotiations or due to distressed restructurings with a view to maximise recovery.

In the event that the terms and conditions of a financial asset are renegotiated or otherwise modified, the Group considers whether the modification results in derecognition of the existing financial asset and the recognition of a new financial asset. A derecognition of a financial asset (or part of a financial asset) and a recognition of a new financial asset would occur where there has been a substantial modification on the revised terms to the original cash flows.

Judgement is required to assess whether a change in the contractual terms is substantial enough to lead to derecognition. The Group considers a series of factors of both qualitative and quantitative nature when making such judgements on a modification in the contractual cash flows, including change in the currency, change in counterparty introduction of an equity feature and other.

Where the modification does not result in derecognition, the Group recognises a modification gain or loss, based on the modified cash flows discounted at the original EIR and the existing gross carrying value of the financial asset.

Modifications to, and exchanges of, financial liabilities are treated as extinguishments and derecognised, when the revised terms are substantially different to the original term.

In the case of a new financial asset classified at amortised cost or FVOCI, an assessment is performed on whether it should be classified as Stage 1 or POCI for ECL measurement.

3. Summary of significant accounting policies (continued)

3.3 Changes in accounting policies and disclosures (continued)

3.3.1 New and amended standards and interpretations (continued)

IFRS 9 Financial Instruments (continued)

Update to significant accounting policies from the adoption of IFRS 9 (continued)

Write off

The Group reduces the gross carrying amount of a financial asset when there is no reasonable expectation of recovering it. In such case, financial assets are written off either partially or in full. Write off refers to both contractual and non-contractual write offs.

If the amount of write-offs is greater than the amount of accumulated loss allowance, the difference is first treated as an addition to the allowance that is then applied against the gross carrying amount. Recoveries, in part or in full, of amounts previously written-off are credited to the consolidated income statement.

Hedge accounting

The Group elected, as a policy choice permitted by IFRS 9, to continue to apply hedge accounting in accordance with IAS 39. The Group implements the amended IFRS 7 hedge disclosure requirements.

IFRS 15 Revenue from Contracts with Customers

On January 1 2018, the Group adopted IFRS 15 'Revenue from Contracts with Customers', which specifies how and when revenue is recognised and applies to all contracts with customers, except those which are in scope of other standards such as income recognition related to financial instruments in scope of IFRS 9. IFRS 15 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 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 Group's ordinary activities (e.g. sales of equipment or intangibles).

IFRS 15 specifies that variable consideration is only recognised when the related performance obligation has been satisfied and to the extent that it is highly probable that a significant reversal will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

IFRS 15 also provides guidance on when revenues and expenses should be presented on a gross or net basis and establishes a cohesive set of disclosure requirements for information on the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers.

The Standard also requires entities to provide users of financial statements with more informative and relevant disclosures. IFRS 15 did not have a material impact on the Group's consolidated financial statements.

4. Going concern

The Directors have 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 2018 and the developments up to the date of approval of these Financial Statements that have been considered in the going concern assessment include, amongst others, the operating environment in Cyprus and of the Group (Note 5).

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

The Directors, taking into consideration the conditions presented in Note 5 and the factors described below are satisfied that the Group has the resources to continue in business for a period of at least 12 months from the date of approval of these Financial Statements, and therefore the going concern principle is appropriate for the reasons set out below.

· The Common Equity Tier 1 (CET1) ratio and the total capital ratio stood at 11.9% and 13.4% respectively at 30 June 2018, on a transitional basis, higher than the minimum required ratios (Note 5.2.1).

· The corporate capital accretive actions, currently in progress, which are expected to improve the key financial fundamentals of the Group, mainly in asset quality and capital (Note 37).

4. Going concern (continued)

· With respect to the project on the sale of loans and advances to customers classified as held for sale (Note 37.2) management acknowledges that the completion of the project remains subject to a number of conditions precedent, including mainly regulatory and other approvals, including the ECB agreeing to a Significant Risk Transfer (SRT) benefit from the transaction. Based on management's expectation, considering its assessment and information available to date is that, the conditions required by the ECB will be met.

· The IFRS 9 impact on a transitional and on a fully phased-in basis, is manageable and within the Group's capital plan.

· The increasing level of Group customer deposits (increase of €582 million during the six months ended 30 June 2018). Customer deposits stood at €18,431 million at 30 June 2018.

· The significant improvement in the Group liquidity position and its liquidity ratios. The Group is in compliance with the Liquidity Coverage Ratio (LCR) and the LCR add-on, which was introduced by the CBC as a macroprudential measure and is applicable from 1 January 2018 (Notes 5.2.3 and 30).

· The continued organic reduction (thirteen consecutive quarters) of Group non-performing exposures (NPEs), which have decreased to €8 billion at 30 June 2018 compared to €9 billion in December 2017 and €10 billion in June 2017 (Note 5.2.2).

· In the context of a strengthening economy and improving macroeconomic conditions, the Cypriot sovereign has benefited from a series of upgrades. Most recently in July 2018, Moody's Investors Service upgraded Cyprus' sovereign rating to Ba2 from Ba3 and changed the outlook to stable from positive. The upgrade and stable outlook reflect the ongoing recovery and favourable developments in the banking system where the resolution of the Cyprus Cooperative Bank (CyCB) through the sale of its healthy assets and liabilities, reduced systemic risks emanating from the banking sector. In April 2018, Fitch Ratings upgraded its Long-Term Issuer Default ratings to 'BB+' from 'BB', which is one notch below investment grade, maintaining its 'positive' outlook. In March 2018, S&P Global Ratings affirmed its long-term sovereign rating at BB+, also one notch below investment grade, and maintained its 'positive' outlook.

5. Operating environment

5.1 Cyprus

The recovery of Cyprus since 2014 is gaining momentum and the medium-term outlook remains favourable, driven by improving macroeconomic conditions, falling unemployment and broadening investments. At the same time, the Cypriot economy continues to face challenges primarily in relation to high public indebtedness and a high level of NPEs.

Real Gross Domestic Product (GDP) increased by 3.9% in 2017 and by 4.0% in the first half of 2018 year-on-year and seasonally adjusted (Cyprus Statistical Service, CSS). The main drivers of the growth were tourism, business services and increasing construction activity. On the expenditure side, growth is driven by domestic demand, namely private consumption and fixed investment. Net exports continued to make a negative contribution to growth since imports increased faster than exports.

Tourist arrivals increased by 14.6% in 2017 and continued to increase in 2018, up by 9.6% year-on-year in the first seven months (CSS). The unemployment rate dropped to 11% on average in 2017 and further to 9.4% in the first quarter and to 8.4% in the second quarter of 2018, seasonally adjusted the latter based on monthly estimates (Eurostat). Average consumer inflation was marginally positive at 0.5% in 2017 after four consecutive years of deflation and continued to rise in 2018, up by 0.6% in the first seven months of the year (CSS), driven by housing and transport costs.

GDP growth is expected to average about 4% per annum in 2018-2019 according to the IMF (Country Report, June 2018). The outlook over the medium term reflects positive underlying dynamics in relation to both public and private debt and improved conditions for the reduction of the high level of non-performing exposures aided by recent legislation improving the foreclosure and insolvency framework and facilitating the sale of non-performing exposures.

In public finance, the budget surplus increased steeply to 1.8% of GDP in 2017 and is expected to remain substantial in 2018-2019 also averaging around 2.1% of GDP, according to the IMF and the European Commission (IMF country report June 2018; European Commission post programme surveillance report, Spring 2018).

5. Operating environment (continued)

5.1 Cyprus (continued)

The debt-to-GDP ratio dropped to 97.5% in 2017 and is expected to increase to about 106% in 2018 due to the Cyprus Government's (the Government) capital injection into the Cyprus Cooperative Bank (CyCB) (European Commission, post programme surveillance report, Spring 2018). However, it is expected that this will be a one-off increase that will not affect the underlying debt dynamics in any significant way. While total interest costs will increase as a result of the new bonds issued for the CyCB, it is expected that debt will remain affordable. In 2017, the primary surplus reached 5% of GDP where interest payments were 3.2% of GDP (CSS) or 8% of revenues, compared with 10.4% of revenues in 2013. Strong GDP growth and substantial budget surpluses will allow the debt-to-GDP ratio to drop again to near 100% in 2019 (European Commission).

In April 2018, in order to facilitate the sale of the CyCB, the Government issued Bonds by Private Placement for a total nominal amount of €2.35 billion maturing between 15 to 20 years (Public Debt Management Office, Newsletter, May 2018). The proceeds of the bond issuance and additional funds, were deposited at the State account held at CyCB, for a total of €2.5 billion. Subsequently the Government proceeded with an additional domestic issuance so that the total government bonds issued for the sale of CyCB reached €3.19 billion (total net effect on government debt, per Moody's Investors Service, Credit Opinion, 27 July 2018). The bonds issued in April were exchanged with new bonds maturing between 2018 and 2022, while the cash placement reached €351 million. Against the State's total deposit of €3.54 billion with CyCB, CyCB pledged assets comprising of NPEs, as well as other non-core assets with a total nominal value of approximately €8.34 billion (Public Debt Management Office, Newsletter, July 2018).

In parallel, the Cyprus Parliament passed amendments to the legislation that strengthens the foreclosure, tax and insolvency laws and facilitates the sale of NPEs (Sale of Loans Law), as well as introduced the Securitisation Law, all of which came into effect in July 2018. Also in July, the Government proposed ESTIA, a Scheme that aims to address NPEs backed by primary residence. The eligibility criteria of the Scheme aim to protect socially vulnerable borrowers and it is expected to act as a deterrent and enabler against debts of strategic defaulters.

In the context of a strengthening economy and improving macroeconomic conditions, the Cypriot sovereign has benefited from a series of upgrades. Most recently in July 2018, Moody's Investors Service upgraded Cyprus' sovereign rating to Ba2 from Ba3 and changed the outlook to stable from positive. The upgrade and stable outlook reflect the ongoing recovery and favourable developments in the banking system where the resolution of the CyCB through the sale of its healthy assets and liabilities, materially reduced systemic risks emanating from the banking sector. In April 2018, Fitch Ratings upgraded its Long-Term Issuer Default ratings to 'BB+' from 'BB' which is one notch below investment grade, maintaining its 'positive' outlook. In March 2018, S&P Global Ratings affirmed its long-term sovereign rating at BB+, also one notch below investment grade, and maintained its 'positive' outlook.

5.2 The Group

5.2.1 Regulatory capital ratios

The CET1 ratio of the Group at 30 June 2018 stands at 11.9% and the total capital ratio at 13.4% on a transitional basis.

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).

The Group's minimum phased-in CET1 capital ratio requirement for 2017 was 9.50%, comprised of a 4.50% Pillar I requirement, a 3.75% Pillar II requirement and the Capital Conservation Buffer (CCB) of 1.25%. Following the Supervisory Review and Evaluation Process (SREP) performed by the ECB in 2017 and based on the confirmation received in December 2017, the Pillar II requirement applicable from 1 January 2018, has been reduced to 3.00% from 3.75%. As a result, the Group's minimum phased-in CET1 capital ratio has been reduced to 9.375% from 9.50%, comprising of a 4.50% Pillar I requirement, a 3.00% Pillar II requirement and the CCB of 1.875% applicable as from 1 January 2018. The ECB has also provided revised lower non-public guidance for an additional Pillar II CET1 buffer.

5. Operating environment (continued)

5.2 The Group (continued)

5.2.1 Regulatory capital ratios (continued)

The overall Total Capital Ratio Requirement for 2017 was 13.00%, comprising of a Pillar I requirement of 8.00% (of which up to 1.50% can be in the form of Additional Tier 1 capital and up to 2.00% in the form of Tier 2 capital), a Pillar II requirement of 3.75% (in the form of CET1) and the CCB of 1.25% applicable for 2017. Following the 2017 SREP, the overall Total Capital Ratio Requirement has been reduced to 12.875% from 13.00%, comprising of 8.00% Pillar I requirement, a 3.00% Pillar II requirement and the CCB of 1.875% applicable as from 1 January 2018.

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

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 will be phased-in gradually. The amount that will be added each year will decrease based on a weighting factor until the impact of IFRS 9 is fully absorbed at the end of the five-years. For the year 2018 the impact on the capital ratios will be 5% of the impact on the impairment amounts from the initial application of IFRS 9.

The capital position of the Group and BOC PCL at 30 June 2018 exceeds both their Pillar I and their Pillar II add-on capital requirements. However, the 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 NPEs, as defined by the European Banking Authority (EBA), including loans and advances to customers which have been classified as non-current assets held for sale totalled €8,022 million at 30 June 2018 and accounted for 44% of gross loans before fair value adjustment on initial recognition. The provisioning coverage ratio of NPEs totalled 52% at 30 June 2018 compared to 48% at 31 December 2017.

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. NPEs have decreased by 47% since their peak of €15,175 million as at 31 March 2015.

5.2.3 Liquidity

Group customer deposits totalled €18,431 million at 30 June 2018 compared to €17,850 million at 31 December 2017. Customer deposits in Cyprus reached €16,486 million at 30 June 2018 and €15,983 million at 31 December 2017. Customer deposits accounted for 78% of total assets as at 30 June 2018 (compared to 76% at 31 December 2017 and a low of 48% at 31 March 2014).

Post repayment of the ELA in January 2017, the Group focused on measures to improve its liquidity position in order to comply with the regulatory liquidity requirements. As at 30 June 2018, the Group was in compliance with all regulatory liquidity requirements. As at 30 June 2018 the LCR stood at 199% for the Group (compared to 190% at 31 December 2017) and was in compliance with the minimum regulatory requirement of 100% applicable as from 1 January 2018. As at 30 June 2018, the Group's Net Stable Funding Ratio (NSFR), on the basis of the Basel ΙΙΙ standards, was 115% (compared to 111% at 31 December 2017). The NSFR was not introduced on 1 January 2018 as per expectations.

On 1 January 2018, the local regulatory requirements, set by the CBC, were abolished as per Article 412(5) of EU Regulation No 575/2013. 

In December 2017, the CBC introduced a macroprudential measure in the form of a liquidity add-on that was imposed on top of the LCR of BOC PCL and which became effective on 1 January 2018. The objective of the measure is to ensure that there will be a gradual release of the excess liquidity in the Cyprus banking system arising from the lower liquidity requirements under the LCR compared to the ones under the local regulatory liquidity requirements previously in place. The add-on applies stricter outflow and inflow rates on some of the parameters used in the calculation of the LCR, as well as additional liquidity requirements in the form of outflow rates on items that are not subject to any outflow rates under the LCR. The measure is implemented in two stages. The first stage requires stricter outflow and inflow rates which are applicable from 1 January 2018 until 30 June 2018.

5. Operating environment (continued)

5.2 The Group (continued)