Bk. Cyprus Hldg Regulatory News (BOCH)

Interim Financial Report 2020- Part 1

Bank of Cyprus Holdings

BANK OF CYPRUS HOLDINGS GROUP

Ιnterim Financial Report

Six months ended 30 June 2020

Contents Page

Board of Directors and Executives 1

Forward Looking Statements and Notes 2

Interim Management Report 3

Consolidated Condensed Interim Financial statements

Interim Consolidated Income Statement 36

Interim Consolidated Statement of Comprehensive Income 37

Interim Consolidated Balance Sheet 38

Interim Consolidated Statement of Changes in Equity 39

Interim Consolidated Statement of Cash Flows 41

Notes to the Consolidated Condensed Interim Financial Statements

1.  Corporate information 43

2.  Unaudited financial statements 43

3.  Summary of significant accounting policies 43

4.  Going concern 45

5.  Operating environment 47

6.  Significant and other judgements, estimates and assumptions 48

7.  Segmental analysis 55

8.  Net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates 63

9.  Staff costs and other operating expenses 63

10. Credit losses of financial instruments and impairment of non-financial assets 65

11. Income tax 65

12. Earnings per share 69

13. Investments 69

14. Derivative financial instruments 70

15. Fair value measurement 71

16. Loans and advances to customers 78

17. Stock of property 78

18. Prepayments, accrued income and other assets 80

19. Non-current assets and disposal groups held for sale 80

20. Funding from central banks 82

21. Customer deposits 83

22. Subordinated loan stock 83

23. Accruals, deferred income, other liabilities and other provisions 84

24. Share capital 84

25. Pending litigation, claims, regulatory and other matters 86

26. Contingent liabilities 92

27. Cash and cash equivalents 92

28. Analysis of assets and liabilities by expected maturity 93

29. Risk management - Credit risk 94

30. Risk management - Market risk 135

31. Risk management - Liquidity risk and funding 135

32. Capital management 139

33. Related party transactions 140

34. Group companies 143

35. Acquisitions and disposals of subsidiaries 146

36. Investments in associates and joint venture 147

37. Events after the reporting period 149

Independent review report to the Bank of Cyprus Holdings Public Limited Company 150

Additional Risk and Capital Management Disclosures, including Pillar III semi-annual disclosures 152

Definitions and explanations of Alternative Performance Measures Disclosures 206

Board of Directors and Executives

as at 27 August 2020

Forward Looking Statements and Notes

This document contains certain forward looking statements which can usually be identified by terms used such as 'expect', 'should be', 'will be' and similar expressions or variations thereof or their negative variations, but their absence does not mean that a statement is not forward looking. Examples of forward- looking statements include, but are not limited to, statements relating to the Bank of Cyprus Holdings Group's (the Group) near term and longer term future capital requirements and ratios, intentions, beliefs or current expectations and projections about the Group's future results of operations, financial condition, expected impairment charges, the level of the Group's assets, liquidity, performance, prospects, anticipated growth, provisions, impairments, business strategies and opportunities. By their nature, forward-looking statements involve risk and uncertainty because they relate to events, and depend upon circumstances, that will or may occur in the future. Factors that could cause actual business, strategy and/or results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by the Group include, but are not limited to: general economic and political conditions in Cyprus and other European Union (EU) Member States, interest rate and foreign exchange fluctuations, legislative, fiscal and regulatory developments and information technology, litigation and other operational risks. 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 Interim Financial Report as they enable the readers to identify a more consistent basis for comparing the Group's performance between financial periods and provide more detail concerning the elements of performance which management is most directly able to influence or are relevant for an assessment of the Group. They also reflect an important aspect of the way in which the operating targets are defined and performance is monitored by the Group's management. However, any non-IFRS performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as the key measures of the 30 June position. Refer to 'Definitions and explanations on Alternative Performance Measures Disclosures' on pages 206 to 217 of the Interim Financial Report for the six months ended 30 June 2020 for further information, reconciliations with Consolidated Condensed Interim Financial Statements and calculations of non-IFRS performance measures included throughout this document and the most directly comparable IFRS measures.

The Interim Financial Report for the six months ended 30 June 2020 is available on the Group's website www.bankofcyprus.com (Investor Relations/Financial Results).

INTERIM MANAGEMENT REPORT

Group financial results on the underlying basis

Commentary on underlying basis

The financial information presented below provides an overview of the Group financial results for the six months ended 30 June 2020 on the 'underlying basis' which the management believes best fits the true measurement of the performance and position of the Group. Reconciliations between statutory basis and underlying basis are included in section 'Reconciliation of the Income Statement for the six months ended

30 June 2020 between statutory and underlying basis' below and in 'Definitions and explanations on

Alternative Performance Measures Disclosures' of the Interim Financial Report for the six months ended 30

June 2020 to allow for the comparability of the underlying basis to statutory information.

With the respect to the 'Balance Sheet Analysis', please note the following in relation to the disclosure of pro forma figures and ratios with respect to Project Helix 2. In August 2020 the Group reached an agreement with funds affiliated with Pacific Investment Management Company LLC (PIMCO), for the sale of a portfolio of loans with gross book value as at 30 June 2020 of approximately €898 million on the underlying basis, known as Project Helix 2. Further details on the transaction are provided in 'Loan Portfolio quality' discussed under the 'Balance Sheet Analysis' section below.

All relevant figures are based on 30 June 2020 financial results, unless otherwise stated. Numbers on a pro forma basis are based on the 30 June 2020 underlying basis figures and are adjusted for Project Helix 2 and assume completion of the transaction, which remains subject to customary regulatory and other approvals. Where numbers are provided on a pro forma basis this is stated.

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

NPE sales: NPE sales refer to sales of portfolios completed in each period and contemplated sale transactions, as well as potential further NPE sales, at each reporting date, irrespective of whether or not they meet the held for sale classification criteria at the reporting dates. They include both Project Helix and Project Helix 2, as well as other portfolios.

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

Project Helix 2: Project Helix 2 refers to the portfolio of loans with a gross book value of €898 million as at

30 June 2020 for which an agreement for sale was reached on 3 August 2020.

Group financial results on the underlying basis (continued)

The main financial highlights for the six months ended 30 June are set out below:

Consolidated Condensed Interim Income Statement on the underlying basis

Group financial results on the underlying basis (continued)

Consolidated Condensed Interim Income Statement on the underlying basis (continued)

1The financial information is extracted from the published accounts. This information should be read with the information included in the accompanied Consolidated Condensed Interim Financial Statements.

2The interest income, non-interest income, staff costs, other operating expenses and loan credit losses related to Project Helix are disclosed under 'Provisions/net loss relating to NPE sales, including restructuring expenses' in the underlying basis in order to separate out the impact of this non-recurring transaction.

3'Provisions/net loss relating to NPE sales, including restructuring expenses' refer to the net loss on transactions completed during each period, net loan credit losses on transactions under consideration and for potential further sales at each reporting date, as well as the restructuring costs relating to these trades. For further details refer to section 'Income Statement Analysis/(Loss)/profit after tax (attributable to the owners of the Company)'.

4Including the NPE portfolios classified as 'Non-current assets and disposal groups held for sale'.

The following changes were made in the underlying basis, when compared with previous disclosures for the six months ended 30 June 2019:

Reclassifications effected to comparative information were made so that advisory and other restructuring costs for the six months ended 30 June 2019 of approximately €1.5 million (relating to Project Helix 2 loan portfolio, which was classified as held for sale as at 30 June 2020), were reclassified as non-recurring items within 'Provisions/net loss relating to NPE sales, including restructuring expenses΄ in the underlying basis.

Reclassifications to current period information for items relating to the NPE sales are disclosed under non recurring items within 'Provisions/net loss relating to NPE sales, including restructuring expenses' under the underlying basis. These are disclosed in Section 'Reconciliation of the Income Statement for the six months ended 30 June 2020 between statutory basis and underlying basis'.

Group financial results on the underlying basis (continued)

Consolidated Condensed Interim Balance Sheet underlying basis

Group financial results on the underlying basis (continued)

Consolidated Condensed Interim Balance Sheet underlying basis (continued)

1The financial information above is extracted from the published accounts. This information should be read together with the information included in the accompanied Consolidated Condensed Interim Financial Statements.

2Pro forma: Pro forma for the agreement for the sale of NPEs of €0.9 billion (known as Project Helix 2); calculations on a pro forma basis assume completion of Project Helix 2, which is subject to customary regulatory and other approvals.

3As reported: Including the NPE portfolios classified as 'Non-current assets and disposal groups held for sale'.

4The CET fully-loaded ratio as at 30 June 2020 (including the full impact of IFRS 9) amounts to 12.6% and

12.7% pro forma for Project Helix 2, compared to 13.1% as at 31 December 2019.

Group financial results on the underlying basis (continued)

Reconciliation  of  the  Income  Statement  for  the  six  months  ended  30  June  2020  between statutory and underlying basis

\* This is the loss after tax (attributable to the owners of Company), before the 'Provisions/net loss relating to NPE sales, including restructuring expenses' (for further details refer to section 'Income Statement Analysis/(Loss)/profit after tax attributable to the owners of the Company').

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

NPE sales

· Total expenses include restructuring costs of €4 million and operating expenses of €12 million mainly relating to the sale of portfolios of NPEs and are presented within 'Provisions/net loss relating to NPE sales, including restructuring expenses' under the underlying basis.

· Loan credit losses under the statutory basis include the loan credit losses relating to Project Helix

2 of €68 million, additional loan credit losses of €21 million within the context of IFRS 9 as a result of potential further NPE sales in the future and €2 million additional credit losses on an NPE portfolio (other than Project Helix 2) classified as held for sale; these are disclosed under non- recurring items within 'Provisions/net loss relating to NPE sales, including restructuring expenses' under the underlying basis.

Other reclassifications

· Advisory and other restructuring costs of approximately €6 million included in 'Other operating expenses' under the statutory basis, are separately presented under the underlying basis since they represent one-off items.

· Provisions for litigation, claims, regulatory and other matters amounting to €4 million included in

'Other operating expenses' under the statutory basis, are separately presented under the underlying basis, since they mainly relate to cases that arose outside the normal activities of the Group.

Group financial results on the underlying basis (continued)

Reconciliation  of  the  Income  Statement  for  the  six  months  ended  30  June  2020 between statutory and underlying basis (continued)

· Net gains on loans and advances to customers at FVPL of €3 million included in 'Loan credit losses' under the underlying basis are included in 'Net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates' under the statutory basis. Their classification under the underlying basis is done as such in order to align them to the net losses on loans and advances to customers at amortised cost.

Balance Sheet Analysis

Capital Base

Total equity excluding non-controlling interests totalled €2,095 million at 30 June 2020, compared to

€2,260 million at 31 December 2019. Shareholders' equity totalled €1,875 million at 30 June 2020, compared to €2,040 million at 31 December 2019.

The Common Equity Tier 1 capital (CET1) ratio on an IFRS 9 transitional basis stood at 14.3% at 30 June

2020 (and 14.4% pro forma for Project Helix 2 sale agreement signed in the third quarter of 2020 (referred to as pro forma for Project Helix 2)), compared to 14.8% at 31 December 2019.

During the six months ended 30 June 2020 the CET1 ratio was negatively affected by approximately 70 bps relating to both the loan credit losses recorded as a result of the anticipated Project Helix 2 agreement and net loss relating to all other items under the 'Provisions/net loss on NPE sales, including restructuring expenses', and positively impacted by approximately 50 bps relating to the amendments to the capital regulations introduced in June 2020 as a response to COVID-19 with regards to the extension of the IFRS 9 transitional period and the acceleration of changes to the SME supporting factor (which reduces RWAs).

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

The CET1 ratio on a fully loaded basis (including the full impact of IFRS 9) amounted to 12.6% as at 30

June 2020 (and 12.7% pro forma for Project Helix 2) compared to 13.1% at 31 December 2019. On a transitional basis and on a fully phased in basis, after the transition period is complete, and also considering the relaxations announced by the ECB, the impact of IFRS 9 is expected to be manageable and within the Group's capital plans.

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

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

Group financial results on the underlying basis (continued)

Balance Sheet Analysis (continued)

Capital Base (continued)

Based on the final 2019 SREP decision received in December 2019, the Group's minimum phased-in CET1 capital ratio was set at 11.0% (comprising a 4.5% Pillar I requirement, a 3.0% Pillar II requirement (in the form of CET1), the Capital Conservation Buffer of 2.5% (fully phased-in as of 1 January 2019) and the Other Systemically Important Institution Buffer of 1.0%) and the overall Total Capital requirement at 14.5%, comprising an 8.0% Pillar I requirement (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 3.0% Pillar II requirement (in the form of CET1), the Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer of 1.0%. The ECB has also  provided  non-public  guidance  for  an  additional  Pillar  II CET1  buffer.  Pillar  II add-on  capital requirements derive from the context of the SREP, which is a point in time assessment, and are therefore subject to change over time. The final 2019 SREP decision became effective on 1 January 2020. In the context of ECB's capital easing measures for COVID-19, BOC PCL received an amendment to the December

2019 SREP decision effective as of 12 March 2020, reducing the Group's minimum phased-in CET1 capital ratio  to  9.7%  (comprising  a  4.5%  Pillar  I requirement,  a  1.7%  Pillar  II requirement,  the  Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer of 1.0%), following the frontloading of the new rules on the Pillar II Requirement composition, to allow banks to use Additional Tier

1 (AT1) capital and Tier 2 (T2) capital to meet Pillar II Requirements and not only by CET1, initially scheduled to come into effect in January 2021. The Total SREP capital requirement remains unchanged at

14.5%.

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

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

The European Banking Authority (EBA) final guidelines on SREP and supervisory stress testing and the Single Supervisory Mechanism's (SSM) 2018 SREP methodology provide that own funds held for the purposes of Pillar II Guidance cannot be used to meet any other capital requirements (Pillar I, Pillar II requirements or the combined buffer requirement), and therefore cannot be used twice. Following the annual SREP performed by the ECB in 2019 and based on the final 2019 ECB decision received in December

2019, the new provisions are effective from January 2020.

Based on the SREP decisions of prior years, the Company and BOC PCL were under a regulatory prohibition for equity dividend distribution and therefore no dividends were declared or paid during years 2019 and

2018. Following the 2019 SREP decision, the Company and BOC PCL are still under equity dividend distribution prohibition. This prohibition does not apply if the distribution is made via the issuance of new ordinary shares to the shareholders, which are eligible as CET1 capital. No prohibition applies to the payment of coupons on any AT1 capital instruments issued by the Company or BOC PCL.

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

Group financial results on the underlying basis (continued)

Balance Sheet Analysis (continued)

Capital Base (continued) Share Premium reduction BOC PCL

BOC PCL will proceed (subject to approvals by the ECB and the Court of Cyprus) with a capital reduction process which will result in the reclassification of approximately up to €619 million of the BOC PCL's share premium balance as distributable reserves, which shall be available for distribution to the shareholders of BOC PCL. The reduction of capital will not have any impact on regulatory capital or the total equity position of BOC PCL or the Group.

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

Company

The Company will proceed (subject to approval by the ECB and the Irish High Court) with a capital reduction process which will result in the reclassification of up to €700 million of the Company's share premium as distributable reserves. The capital reduction has been approved at the Company's Annual General Meeting in May 2020. The capital reduction will not have any impact on regulatory capital or the total equity position of the Company, BOC PCL or the Group.

The distributable reserves provide the basis for the calculation of distributable items under the CRR, which provides that coupons on AT1 capital instruments may only be funded from distributable items.

Project Helix 2

In August 2020, the Group reached an agreement for the sale of a portfolio of loans with gross book value of approximately €898 million (of which €886 million relate to non-performing exposures) as at 30 June

2020, known as Project Helix 2. The impact of this transaction on the Group's CET1 ratio at 30 June 2020 is a decrease of approximately 50 bps relating to the loan credit losses in relation to the anticipated agreement of €68 million, including transaction costs. At completion, currently expected in the first half of

2021, the transaction is expected to have a negative impact of 36 bps on the Group's CET1 ratio. Upon the full payment of the deferred consideration and without taking into consideration any positive impact from the earnout, depending on the performance of the portfolio, the transaction is expected to have an overall positive capital impact of 10 bps on the Group's CET1 ratio.

All relevant figures and pro forma calculations are based on 30 June 2020 financial results, unless otherwise stated. Calculations on a pro forma basis assume completion of the transaction, which remains subject to customary regulatory and other approvals.

Further NPE sales in the future

The Group remains committed to assess the potential to accelerate the decrease in NPEs through further NPE sales in the future and in the context of IFRS 9, BOC PCL recognised additional loan credit losses of €21 million in the first half of 2020 and as at 30 June 2020, resulting in a decrease on the Group's CET1 ratio of approximately 14 bps. On completion of an NPE trade, the Group's capital ratios would benefit from any associated RWAs reduction, subject to regulatory approval.

Group financial results on the underlying basis (continued)

Balance Sheet Analysis (continued)

Capital Base (continued)

Legislative amendments for the conversion of DTA to DTC

Legislative amendments allowing for the conversion of specific deferred tax assets (DTA) into deferred tax credits (DTC) were adopted by the Cyprus Parliament on 1 March 2019 and published on the Official Gazette of the Republic on 15 March 2019. The law amendments cover the utilisation of income tax losses transferred from Laiki Bank to BOC PCL in March 2013. The introduction of CRD IV in January 2014 and its subsequent phasing-in led to a more capital-intensive treatment of this DTA for BOC PCL. The law amendments resulted in an improved regulatory capital treatment, under CRR, of the DTA amounting to approximately €285 million or a CET1 uplift of approximately 190 bps in March 2019.

The Group understands that, in response to concerns raised by the European Commission with regard to the provision of state aid arising out of the treatment of such tax losses, the Cyprus Government is considering the adoption of modifications to the Law, potentially including requirements for an additional annual fee over and above the 1.5% annual guarantee fee already acknowledged, to maintain the conversion of such DTAs into tax credits. In anticipation of such modifications the Group recorded an additional amount of €13 million by way of an estimated additional fee (for the years 2018 and 2019), bringing the total guarantee fee recognised for the year 2019 to €19 million.

Project Helix

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

Sale of investment in CNP Cyprus Insurance Holdings Ltd

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

Voluntary Staff Exit Plan

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

Implications on capital from the Outbreak of COVID-19

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

Group financial results on the underlying basis (continued)

Balance Sheet Analysis (continued)

Capital Base (continued)

In the context of the ECB's capital easing measures for COVID-19, BOC PCL received an amendment to the December 2019 SREP decision effective as of 12 March 2020, reducing the Group's minimum phased in CET1 capital ratio to 9.7%, following the frontloading of the new rules on the Pillar II Requirement composition, to allow banks to use Additional Tier 1 (AT1) capital and Tier 2 (T2) capital to meet Pillar II Requirements and not only by CET1, initially scheduled to come into effect in January 2021. The Total SREP capital requirement remains unchanged. In addition, the ECB allows banks to operate temporarily below the level of Pillar II Guidance (P2G), the capital conservation buffer (CCB) and the countercyclical buffer. The CBC has set the level of the countercyclical buffer for Cyprus at 0% for the six months up to 30 June 2020 and the year 2019. The CBC has also set the level of the countercyclical buffer for Cyprus at 0% for the period 1 July 2020 to September 2020. In July 2020, the ECB committed to allow banks to operate below the P2G and the combined buffer requirement until at least end of 2022, without automatically triggering supervisory actions.

In addition, in April 2020, the CBC decided to delay the phasing-in of the 1 January 2021 and 1 January

2022 of the O-SII buffer (0.5% for BOC PCL) by 12 months. Consequently, the O-SII buffer will be fully phased-in on 1 January 2023, instead of 1 January 2022 as originally set.

Moreover, in June 2020, Regulation (EU) 2020/873, in response to the COVID-19 pandemic, came into force, bringing forward some of the capital relieving measures that were due to come into force at a later stage and introducing modifications as part of the wider efforts of competent authorities to provide the support necessary to the institutions. The main adjustments affecting the Group's own funds relate to accelerating the implementation of the new SME discount factor under CRR II in June 2020, instead of June

2021, extending the IFRS 9 transitional arrangements and introducing further relief measures to CET1, advancing the application of prudential treatment of software assets as amended by CRR II, and introducing temporary treatment of unrealized gains and losses to exposures to central governments, regional governments or local authorities, measured at fair value through other comprehensive income.

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

44 bps.

The amendments to the existing IFRS 9 transitional arrangements relate to the extension of the transitional period for the recalculation of the transitional adjustment on credit losses on Stages 1 and 2 loans (dynamic component). A 100% add-back of IFRS 9 provisions is allowed for the years 2020 and 2021 reducing to

75% in 2022, to 50% in 2023 and to 25% in 2024. The calculation at each reporting period is to be made against Stage 1 and Stage 2 provisions as at 1 January 2020, instead of 1 January 2018. The calculation of the static component has not been amended. These amendments became effective in June 2020 and added to capital 8 bps as at 30 June 2020.

In relation to the prudential treatment of intangibles, software assets will no longer need to be deducted in full in CET1 calculations, subject to certain criteria. This change shall apply when the associated EBA regulatory technical standard is approved and shall become effective.

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

Since 30 June 2020, and up to 17 August 2020, the mark-to market valuation of the debt securities in the portfolio held at FVOCI remained broadly flat. Any change is recognised directly in equity i.e. through Other Comprehensive Income (OCI).

Group financial results on the underlying basis (continued)

Balance Sheet Analysis (continued)

Capital Base (continued)

Furthermore, on 17 August 2020, the Group held Cyprus sovereign debt securities of a nominal amount of

€740 million (compared to €715 million on 30 June 2020 and €477 million on 31 December 2019 ), of which

€336 million is held at FVOCI portfolio  (compared to €337 million on 30 June 2020 and €342 million on 31

December 2019) and €404 million is held at amortised cost portfolio (compared to €378 million on 30 June

2020 and €135 million on 31 December 2019). The increase in the first half of 2020 is mainly due to the

Group's participation in the issuance of 52-week treasury bills of the Cyprus Government in April 2020.

Regulations and Directives

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

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

Bank Recovery and Resolution Directive (BRRD)

Minimum Requirement for Own Funds and Eligible Liabilities (MREL)

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

In May 2020, BOC PCL received formal notification from the CBC in its capacity as National Resolution Authority, of the final decision by the Single Resolution Board (SRB), for the binding minimum requirement for own funds and eligible liabilities (MREL) for BOC PCL, determined as the preferred resolution point of entry. The MREL requirement was set at 28.36% of risk weighted assets as of 30 June 2019 and must be met by 31 December 2025. This MREL requirement would be equivalent to 18.54% of total liabilities and own funds (TLOF) as at 30 June 2019. The MREL requirement is in line with BOC PCL's expectations, and largely in line with its funding plans.

This decision is based on the current legislation, it is expected to be updated annually and could be subject to subsequent changes by the resolution authorities, especially considering the developments of the BRRD and its transposition into the local legislation.

The MREL ratio of BOC PCL as at 30 June 2020, calculated according to SRB's eligibility criteria currently in effect, and based on BOC PCL's internal estimate stood at 18.21% of RWAs (31 December 2019: 18.54%).

Group financial results on the underlying basis (continued)

Balance Sheet Analysis (continued)

Funding and liquidity

Funding

Funding from Central Banks

At 30 June 2020, BOC PCL's funding from central banks amounted to €1 billion, which relates to ECB funding, comprising solely of funding through the Targeted Longer-Term Refinancing Operations (TLTRO III) obtained during the six months ended 30 June 2020. At 31 December 2019, BOC PCL had no funding from central banks. In June 2020, BOC PCL borrowed €1 billion from the fourth TLTRO III operation, despite its comfortable liquidity position, given the favourable borrowing rate, in combination with the relaxation of collateral terms.

Deposits

Customer deposits totalled €16,303 million at 30 June 2020, compared to €16,692 million at 31 December

2019, reduced by 2% since the year end.

The deposit market share in Cyprus for BOC PCL reached 35.0% as at 30 June 2020, compared to 35.1% as at 31 December 2019. Customer deposits accounted for 76% of total assets and 85% of total liabilities at

30 June 2020, compared to 79% of total assets and 89% of total liabilities at 31 December 2019.

The net Loans to Deposit ratio (L/D) stood at 64% as at 30 June 2020, compared to 64% at 31 December

2019. The L/D ratio had reached a peak of 151% as at 31 March 2014.

Subordinated Loan Stock

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

Liquidity

At 30 June 2020 the Group Liquidity Coverage Ratio (LCR) stood at 257%, compared to 208% at 31

December 2019, and was in compliance with the minimum regulatory requirement of 100%.

The liquidity surplus in LCR at 30 June 2020 amounted to €3.9 billion, compared to €3.2 billion at 31

December 2019. The increase in the six months ended 30 June 2020 is driven by the borrowing of €1 billion

TLTRO III in June 2020.

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

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

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

·  The ECB will allow banks to operate below the defined level of 100% of the LCR until at least end-

2021.

Group financial results on the underlying basis (continued)

Balance Sheet Analysis (continued)

Funding and liquidity (continued)

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