Bk. Cyprus Hldg Regulatory News (BOCH)

Interim Financial Report 2020- Part 2

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 Discl

Consolidated Condensed Interim Financial Statements for the six months ended 30 June 2020

Interim Consolidated Income Statement

* For information on restatement of comparatives refer to Note 3.1.

Interim Consolidated Statement of Comprehensive Income

Interim Consolidated Balance Sheet

Interim Consolidated Statement of Changes in Equity

Interim Consolidated Statement of Changes in Equity

Interim Consolidated Statement of Cash Flows

Interim Consolidated Statement of Cash Flows

Non cash transactions

Repossession of collaterals

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

June 2019: €126,480 thousand).

Disposal of Project Helix

During the six months ended 30 June 2019 and upon the disposal of Project Helix, the Group participated in a senior debt in relation to the financing of the Project Helix amounting to €45 million.

Acquisition of equity investments

During the six months ended 30 June 2019 the Group acquired equity investments amounting to €6,529 thousand as a result of its loan restructuring activities. The Group elected to classify this equity participation at FVOCI.

Notes to the Consolidated Condensed Interim Financial

Statements

1.  Corporate information

Bank of Cyprus Holdings Public Limited Company (the Company) was incorporated in Ireland on 11 July

2016, as a public limited company under company number 585903 in accordance with the provisions of the Companies Act 2014 of Ireland (Companies Act 2014). Its registered office is 10 Earlsfort Terrace, Dublin 2, D02 T380, Ireland.

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

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

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

Stock Exchange (CSE).

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

Consolidated Condensed Interim Financial Statements

The Consolidated Condensed Interim Financial Statements of the Company for the six months ended 30

June 2020 (the Consolidated Financial Statements) were authorised for issue by a resolution of the Board of

Directors on 27 August 2020.

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

2.  Unaudited financial statements

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

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

3.  Summary of significant accounting policies

3.1  Basis of preparation

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

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 Consolidated Financial Statements

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

3.  Summary of significant accounting policies (continued)

3.1  Basis of preparation (continued)

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

Comparative information

Comparative information was restated as follows:

· 'Fee and commission income' and 'Fee and commission expense' as restated, include elimination of intragroup amounts between 'Fee and commission income' and 'Fee and commission expense' amounting to €1,499 thousand, in line with the respective restatement made in Note 10 of the annual consolidated financial statements for the year ended 31 December 2019, in order to reflect the impact in the six-month comparative period in these Consolidated Financial Statements.

·  Levy in the form of a guarantee fee relating to the revised income tax legislation, Income Tax Law

Amendment 28 (I) of 2019 enacted on 1 March 2019, of €6,255 thousand has been reclassified from

'Fee and commission expense' to 'Special levy on deposits on credit institutions in Cyprus, contribution to Single Resolution Fund and other levies'. The restatement was made in line with the presentation in the annual consolidated financial statements for the year ended 31 December 2019, when the levy in the form of a guarantee fee was presented for the first time in the line of 'Special levy on deposits on credit institutions in Cyprus, contribution to Single Resolution Fund and other levies'.

· Segmental analysis (Note 7) was restated due to the reorganisational and reporting change in BOC PCL and the set-up of Global corporate as a new business line, as from October 2019. The restatement  was  made  in  line  with  the  presentation  made for the first time  in the annual consolidated financial statements for the year ended 31 December 2019 and in order to reflect the impact in the six-month comparative period in these Consolidated Financial Statements.

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

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

3.2  Statement of compliance

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

The Consolidated Financial Statements do not comprise statutory financial statements for the purposes of the Companies Act 2014 of Ireland. The Company's statutory financial statements for the purposes of Chapter 4 of Part 6 of the Companies Act 2014 of Ireland for the year ended 31 December 2019, upon which the auditors have expressed an unqualified opinion, were published on 28 April 2020 and are expected to be delivered to the Registrar of Companies of Ireland within 28 days from 30 September 2020.

The Consolidated Financial Statements do not include all the information and disclosures required for the annual financial statements and should be read in conjunction with the Annual Consolidated Financial Statements  of  Bank  of  Cyprus  Holdings  Group  for  the  year ended  31  December 2019,  prepared  in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, which are available at the Group's website (www.bankofcyprus.com).

3.  Summary of significant accounting policies (continued)

3.3  Changes in accounting policies, presentation 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 2019, 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 applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2020. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

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

·  Conceptual Framework in IFRS standards

·  IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Change in Accounting

Estimates and Errors: Definition of 'material' (amendments)

·  IFRS 3: Business Combinations (amendments)

The Amendments to IFRS 9, IAS 39 and IFRS 7 relating to Interest Rate Βenchmark Reform mandatorily take effect from 1 January 2020, but early adoption was permitted. The Group has elected to early adopt the interest rate benchmark reform amendments as described in Note 2.2.2 of the annual consolidated financial statements for the year ended 31 December 2019.

The Conceptual Framework and the amendments to IAS 1, IAS 8 and IFRS 3 did not have any material impact on the Consolidated Financial Statements.

4.  Going concern

The Directors have made an assessment of the Group's ability to continue as a going concern for a period of

12 months from the date of approval of these Consolidated Financial Statements. The Directors believe that the Group is taking all necessary measures to maintain its viability and the development of its business in the current economic environment.

In making this assessment, the Directors considered the Group's business, financial projections and the significant transactions that took place during 2020 and up to the date of approval of these Consolidated Condensed Interim Financial Statements, primarily the agreement for the sale of non-performing loans Project Helix 2. The Directors have also considered the impact of COVID-19 outbreak on the Group's activities  and  the  uncertainties  and  disruption  created  in  the  operating  environment  in  Cyprus and worldwide.

Following the COVID-19 outbreak in early 2020, the Group prepared a reforecast plan, whereby the Group incorporated considerations of the impact of the COVID-19 outbreak on the Group's capital and liquidity position in the context of the emerging developments in the economy, the Cyprus government economic relief measures and the amended regulatory requirements, including the measures taken by the regulators and other authorities following the COVID-19 outbreak. This included the development of macroeconomic scenarios, base and adverse, which are severe yet plausible scenarios. The scenarios developed take into consideration the following drivers and implications:

· Government guidance and policy response to the crisis

· Capital and liquidity relief measures as well as other supervisory actions

· Lost output and productivity as a consequence of travel restrictions and social distancing

· Impact on employment levels and relevant unemployment rates

· Impact on relevant economic variables, the most significant of which include residential and commercial property prices, national output and lending volumes

4.  Going concern (continued)

· Other considerations such as the possible prudential charge, if any, that BOC PCL may be requested to take in order to address the findings of the onsite inspection and review on the value of the Group's foreclosed assets completed by the ECB with reference date 30 June 2019. It is noted that no decision has been communicated to BOC PCL at this stage.

The Directors have concluded that the Group, the Company and BOC PCL have the ability to continue to operate as a going concern for a period of 12 months from the date of approval of these Consolidated Financial Statements.

Given the evolving nature of the COVID-19 pandemic crisis, the Group will continue to update its macroeconomic scenarios and assess the potential impact on the Group's financial performance and position as well as capital and liquidity position.

Capital

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

· The Common Equity Tier 1 (CET1) ratio and the Total Capital ratio on a transitional basis at 30

June 2020 are higher than the SREP requirements (Note 5.1).

· The Group's capital position which allows further risk reduction and recalibration of the cost base.

The Group remains focused to implement the actions contemplated in the Financial and Capital Plan previously submitted to the ECB, albeit over a longer timeframe as a result of the COVID-19 outbreak.

· The capital relief measures announced by the ECB, the EBA, the CBC, the Cyprus Government and the Eurogroup in order to allow the banks to absorb the impact of the COVID-19 outbreak and support the real economy, as well as the regulatory forbearance as allowed by the Guidelines issued in April 2020 by the EBA.

· The measures taken by the Group to protect its employees and the activation of the Group's

Business Continuity Plan ensuring that critical operations are not interrupted.

Funding and liquidity

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

· The Group is in compliance with the Liquidity Coverage Ratio (LCR) and is significantly above the

minimum requirements.

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

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

Economic environment

· As the Cypriot operations account for 99% of gross loans and 100% of customer deposits, the Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. Although the sovereign risk ratings of the Cyprus Government improved considerably in recent years, reflecting expectations of a sustained decline in public debt as a ratio to Gross Domestic Product (GDP), expected further declines in non-performing exposures and a more stable  price  environment  following  a  protracted  period  of  deflation  and low  inflation, the pandemic is estimated to lead to a deep recession in 2020 before recovery and take shape in

2021.

· In July 2020,  Standard & Poor's (S&P) estimated that real GDP of the Cypriot economy will shrink by 7.5% in 2020, followed by a 5.5% recovery in 2021, as it will take time for sectors that are vital to the Cypriot economy, such as tourism, to recover from the COVID-19 pandemic. Similarly in July 2020, Moody's issued an annual credit analysis for the Cyprus Government, according to which Moody's expect the economy to contract by 7.5% this year, with the impact of the outbreak of COVID-19 concentrated in the first half of the year, and the economy to return to healthy growth rates from 2021 (GDP growth rate for 2021 expected at 6%).

· In April 2020, Fitch Ratings affirmed its rating and revised its outlook to stable, reflecting the significant impact the COVID-19 pandemic might have on the Cyprus economy and fiscal position.

4.  Going concern (continued)

· With respect to the BOC PCL's ratings, in July 2020, S&P affirmed their long-term issuer credit rating on BOC PCL of 'B+' and the short-term issuer credit rating of 'B', with a stable outlook, expressing the view that the enhanced capital reserves and the good liquidity position of BOC PCL will allow it to withstand the current shock and absorb the effects of the increasing pressure on revenues and credit losses. In April 2020, Fitch Ratings revised their outlook of BOC PCL to negative, reflecting the significant impact the outbreak of COVID-19 might have on the Cyprus economy and consequently BOC PCL.

· The global and domestic macroeconomic conditions as a result of the COVID-19 crisis are the primary risk factors for the Cyprus economy and the banking sector in Cyprus. The Group continues to closely monitor developments in and the effects of COVID-19 on both the global and Cypriot economy as there continues to be much uncertainty related to COVID-19, in particular, the risk of a second wave and the timeline for a vaccine to become widely available. As a result, the longer term impacts of COVID-19 on the economy and the Group's financial performance remain uncertain. In the context of efforts to relieve individuals and businesses most affected by the coronavirus and its associated restrictive measures, the Cyprus government has announced a package of tax and other relief measures. At the same time, the ECB and the CBC are taking a number of measures to enhance the liquidity of the credit institutions and also facilitate the gradual absorption of the effects on the capital adequacy ratios.

5.  Operating environment

5.1  Regulatory capital ratios

Following the annual Supervisory Review and Evaluation Process (SREP) performed by the ECB in 2019 the Group's minimum phased-in CET1 capital ratio and Total Capital Ratio remained unchanged for 2020 compared to 2019, when ignoring the phasing-in of the Other Systemically Important Institution (O-SII) buffer.

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

The Group's minimum phased-in CET1 capital ratio for 2020 was set to 11.0% (2019: 10.5%), comprising a

4.5% Pillar I requirement, a 3.0% Pillar II requirement (P2R), the Capital Conservation Buffer (CCB) of

2.5% (fully phased-in as of 1 January 2019) and the O-SII buffer of 1.0% (2019: 0.5%). The Group's Total Capital requirement is 14.5% (2019: minimum phased-in Total capital ratio of 14.0%), comprising an 8.0% Pillar I requirement (of which up to 1.5% could 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, the CCB of 2.5% and the O-SII buffer of 1.0% (2019: 0.5%). The ECB has also provided non-public guidance for an additional Pillar II CET1 buffer.

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). However, the Pillar II add-on capital requirements are a point in time assessment and therefore are subject to change over time.

In April 2020, following the measures announced by the ECB on mitigating COVID 19 impact, BOC PCL received  a  decision  from  the  ECB  amending  the  composition  of  the  Pillar  II additional  own  funds requirement. Compared to the 2019 final SREP decision received in December 2019 which required Pillar II Requirements to be met in full with CET1, this decision (effective from 12 March 2020) brought earlier the rules on the composition of Pillar II Requirements (P2R), originally scheduled to come into force in January

2021 with CRD V, allowing banks to use Additional Tier 1 (AT1) capital and Tier 2 (T2) capital to meet the Pillar  II  Requirements.  As  a  result,  the  minimum  phased in CET1 requirement decreased to  9.7%, comprising a 4.5% Pillar I requirement, a 1.7% Pillar II requirement, the CCB of 2.5% (fully phased in as of

1 January 2019) and the O SII buffer of 1.0%. There is no change on the Total Capital requirement.

5.  Operating environment (continued)

5.1  Regulatory capital ratios (continued)

As part of the measures announced by the ECB, in March 2020, to mitigate the implications of COVID-19 impact, banks are allowed to operate temporarily below the capital level defined by the Pillar II Guidance and the CCB. In July 2020 the ECB announced that this measure will stay in place at least until the end-

2022. In April 2020 the ECB temporarily reduced banks capital requirements for market risk. This measure will be reviewed by the ECB after six months. In April 2020 the CBC announced that the phasing-in of the O-SII buffer of 1 January 2021 and 1 January 2022 (0.5% for BOC PCL)  will delay by one year. The O-SII buffer will be fully phased in on 1 January 2023, instead of 1 January 2022 as originally set.

The above minimum ratios apply for both BOC PCL and the Group. BOC PCL is 100% subsidiary of the Company and its principal activities are the provision of banking, financial services, insurance services and management and disposal of property predominately acquired in exchange of debt.

5.2  Asset quality

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

The Group will be revisiting its NPE strategy for the years 2021-2023 in the context of the upcoming business plan.

5.3  Liquidity

Group customer deposits totalled €16,303 million at 30 June 2020, compared to €16,692 million at 31

December 2019.  At 30 June 2020 and 31 December 2019 all deposits were in Cyprus. As at 30 June 2020

Group customer deposits accounted for 76% of total assets (31 December 2019: 79%) and 85% of total liabilities (31 December 2019: 89%).

As at 30 June 2020 and 31 December 2019, the Group was in compliance with all regulatory liquidity requirements. As at 30 June 2020 and 31 December 2019 the LCR was in compliance with the minimum regulatory requirements of 100% applicable as from 1 January 2018. In addition the Group monitors the NSFR which will become a regulatory indicator when CRR II is enforced with the limit set at 100%.

5.4  Pending litigation, claims, regulatory and other matters

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

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

6.  Significant and other judgements, estimates and assumptions

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

6.  Significant and other judgements, estimates and assumptions (continued)

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

The most significant judgements, estimates and assumptions relate to classification of financial instruments and calculation of expected credit losses (ECL), estimation of the net realisable value of stock of property and  provisions  which  are  presented  in  Notes  6.1  to  6.4  below. Other  judgements,  estimates  and assumptions are disclosed in Notes 5.5 to 5.13 of the annual Consolidated Financial Statements for the year ended 31 December 2019.

6.1  Classification of financial assets

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